-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NtdX/L9JvQgirkl7zf43QBGmAlOoqW39va+KgnoApkyGjjpmnr/u5eSz36xfjzt2 gC5aPBzb3wlOObDDLm75+A== 0000940944-05-000153.txt : 20060808 0000940944-05-000153.hdr.sgml : 20060808 20050729165027 ACCESSION NUMBER: 0000940944-05-000153 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 20050529 FILED AS OF DATE: 20050729 DATE AS OF CHANGE: 20060202 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DARDEN RESTAURANTS INC CENTRAL INDEX KEY: 0000940944 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 593305930 STATE OF INCORPORATION: FL FISCAL YEAR END: 0529 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13666 FILM NUMBER: 05985489 BUSINESS ADDRESS: STREET 1: 5900 LAKE ELLENOR DR CITY: ORLANDO STATE: FL ZIP: 32809 BUSINESS PHONE: 4072454000 MAIL ADDRESS: STREET 1: 5900 LAKE ELLENOR DRIVE CITY: ORLANDO STATE: FL ZIP: 32809 FORMER COMPANY: FORMER CONFORMED NAME: GENERAL MILLS RESTAURANTS INC DATE OF NAME CHANGE: 19950313 10-K 1 form10k_72905.txt FORM10K 2005 7-29-05 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ----------------------- FORM 10-K ----------------------- (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 29, 2005 / / 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'stelephone 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 --------------------- ----------------------- 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 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. [X] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] Aggregate market value of Common Stock held by non-affiliates of the Registrant, based on the closing price of $27.41 per share as reported on the New York Stock Exchange on November 28, 2004: $4,342,876,554. Number of shares of Common Stock outstanding as of July 1, 2005: 154,403,570 (excluding 117,030,318 shares held in the Company's treasury). DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for its Annual Meeting of Shareholders on September 21, 2005, to be filed with the Securities and Exchange Commission no later than 120 days after May 29, 2005, are incorporated by reference into Part III, and portions of the Registrant's Annual Report to Shareholders for the fiscal year ended May 29, 2005 are incorporated by reference into Parts I and II of this Report. DARDEN RESTAURANTS, INC. FORM 10-K FISCAL YEAR ENDED MAY 29, 2005 TABLE OF CONTENTS PART I Page - ------ ---- Item 1. Business........................................................ 1 Item 2. Properties...................................................... 15 Item 3. Legal Proceedings............................................... 15 Item 4. Submission of Matters to a Vote of Security Holders............. 16 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder MattersAnd Issuer Purchases of Equity Securities................ 16 Item 6. Selected Financial Data......................................... 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 17 Item 7A. Quantitative and Qualitative Disclosures About Market Risk...... 17 Item 8. Financial Statements and Supplementary Data..................... 17 Item 9. Changes in and Disagreements with Accountants on Accounting And Financial Disclosure........................................ 18 Item 9A. Controls and Procedures......................................... 18 Item 9B. Other Information............................................... 18 PART III Item 10. Directors and Executive Officers of the Registrant.............. 18 Item 11. Executive Compensation.......................................... 19 Item 12. Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters....................... 19 Item 13. Certain Relationships and Related Transactions.................. 20 Item 14. Principal Accountant Fees and Services.......................... 20 PART IV Item 15. Exhibits and Financial Statement Schedules...................... 21 Signatures ................................................................ 22 PART I Item 1. BUSINESS Introduction Darden Restaurants, Inc. is the largest publicly held casual dining restaurant company in the world,1 and served over 300 million meals during fiscal 2005. As of May 29, 2005, we operated 1,381 restaurants in the United States and Canada. In the United States, we operated 1,344 restaurants in 49 states (the exception being Alaska), including 648 Red Lobster(R), 557 Olive Garden(R), 32 Bahama Breeze(R), 104 Smokey Bones Barbeque & Grill (R) and three Seasons 52(R) 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 1,381 restaurants open on May 29, 2005, 838 were located on owned sites and 543 were located on leased sites. In Japan, as of May 29, 2005, we licensed 37 Red Lobster restaurants to an unaffiliated Japanese corporation that operates the restaurants under an Area Development and Franchise Agreement. Darden Restaurants, Inc. is a Florida corporation incorporated in March 1995, and is the parent company of GMRI, Inc., also a Florida corporation. GMRI, Inc. and our other subsidiaries own the operating assets of the restaurants. GMRI, Inc. 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. We make our 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 Restaurants, Inc., GMRI, Inc. and our respective subsidiaries. We have a 52/53 week fiscal year ending on the last Sunday in May. Our 2005 fiscal year, which ended on May 29, 2005, and our 2003 fiscal year, which ended on May 25, 2003, each had 52 weeks. Our 2004 fiscal year, which ended on May 30, 2004, had 53 weeks. The following description of our business should be read in conjunction with the information in our Management's Discussion and Analysis of Financial Condition and Results of Operations incorporated by reference in Item 7 of this Form 10-K and our consolidated financial statements incorporated by reference in Item 8 of this Form 10-K. 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 2005 decreased by one and increased by 20, respectively, as compared to the end of fiscal 2004. Red Lobster has grown from six restaurants in operation at the end of fiscal 1970 to 679 restaurants in North America by the end of fiscal 2005. Olive Garden, an internally developed concept, opened its first restaurant in Orlando, Florida in fiscal 1983, and by the end of fiscal 2005 had expanded to 563 restaurants 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 2005, there were 32 Bahama Breeze restaurants. - ----------------------------- 1 Source: Nation's Restaurant News, "Special Report: Top 100," June 27, 2005 (based on U.S. revenues from company-owned restaurants). 1 Smokey Bones is also an internally developed concept featuring barbeque and other grilled favorites served in an inviting mountain-lodge setting that features televised sports. The first restaurant was opened in fiscal 2000 in Orlando, Florida. At the end of fiscal 2005, there were 104 Smokey Bones restaurants. In February 2003, we opened a new test restaurant in Orlando, Florida called Seasons 52. 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. At the end of fiscal 2005, there were three Seasons 52 restaurants. 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 Breeze Bones 52 Restaurants (1) ($ in Millions) (2)(3) ---- ------- ------- ------ ----- -- --------------- ---------------------- 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 2004 680 543 32 69 1 1,325 5,003.4 2005 679 563 32 104 3 1,381 5,278.1 2 (1) 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. (2) 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. Total company sales from 1970 through fiscal 1995 were included in the consolidated operations of our former parent company, General Mills, Inc., prior to our spin-off as a separate publicly traded corporation in May 1995. (3) 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 2005. Sales incentives for fiscal years prior to 1998 have not been reclassified.
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." We believe we can achieve this goal by continuing to build on our historical strength as a multi-brand casual dining company, which is grounded in our commitment to combining the following areas: o A strong culture that inspires and engages our people with firmly held values, a clear mission, and a core purpose to nourish and delight everyone we serve; o Competitively superior leadership; o Brand management excellence; o Restaurant operating excellence; and o Restaurant support excellence. Our strategic framework also includes two points that we believe separate us from our competition. We are committed to: o Being a multi-brand restaurant company that is bound together by common operating practices and a unifying culture which serves to make us stronger than the sum of our parts; and o Obtaining insights from our guests and employees to create powerful, broadly appealing brands and to develop successful people. 3 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. Most dinner entree prices range from $8.50 to $28.75, with certain lobster items available by the pound or at market price. Most lunch entree prices range from $5.99 to $11.75. The price of each entree includes salad, side items and our signature Cheddar Bay biscuits. During fiscal 2005, the average check per person was $17.00 to $18.00, with alcoholic beverages accounting for approximately 8.2 percent of Red Lobster's sales. Red Lobster maintains approximately 101 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. 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 $7.95 to $18.95, and most lunch entree prices range from $5.95 to $9.75. The price of each entree also includes as much fresh salad or soup and breadsticks as a guest desires. During fiscal 2005, the average check per person was $14.00 to $15.00, with alcoholic beverages accounting for approximately 8.7 percent of Olive Garden's sales. Olive Garden maintains approximately 35 different dinner menus and 25 lunch menus across its trade areas to reflect geographic differences in consumer preferences, prices and selections, as well as two children's menus. Bahama Breeze Bahama Breeze is a restaurant that brings guests the feeling of a Caribbean escape. It offers the food, drinks and atmosphere one might find in the islands. The menu features distinctive, Caribbean-inspired fresh seafood, chicken and steaks as well as signature specialty drinks. 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. While the concept continued to be well received by guests, its financial performance did not meet our overall expectations. Bahama Breeze closed six restaurants and wrote down the carrying value of four others during the fourth quarter of fiscal 2004, reducing to 32 the total number of restaurants in operation. In addition to closing some underperforming restaurants in fiscal 2004, we made changes designed to improve the sales, financial performance and long-term potential of Bahama Breeze. These changes include implementing lunch operations, creating a new, more approachable dinner menu and reducing the size of a typical Bahama Breeze building and the related capital investment. We have postponed any new restaurant expansion at Bahama Breeze while we evaluate the new prototype, which opened during the fourth quarter of fiscal 2004, and the other business building enhancements. Most dinner entree prices at Bahama Breeze range from $9.00 to $20.00, and most lunch entree prices range from $7.00 to $11.00. During fiscal 2005, the average check per person was $22.00 to $23.00, with alcoholic beverages accounting for approximately 25 percent of Bahama Breeze's sales. Bahama Breeze maintains six different dinner lunch and dinner menus to reflect geographic differences in consumer preferences, prices and selections, as well as a children's menu. Smokey Bones Smokey Bones features barbequed pork, beef and chicken, as well as other grilled favorites, all served in a lively yet comfortable mountain-lodge setting that features televised sports. We opened the first Smokey Bones in 4 September 1999, and began national expansion of the concept in fiscal 2002. Smokey Bones has been well received by consumers and continues to expand rapidly. We opened 35 new Smokey Bones restaurants during fiscal 2005, and had 104 restaurants in operation at the end of the fiscal year. We plan to open 25 to 30 new Smokey Bones restaurants in fiscal 2006. We believe that Smokey Bones has strong expansion potential and is capable of achieving future annual sales of $500 million or more. Most Smokey Bones dinner entree prices range from $9.29 to $14.99, and most lunch entree prices range from $6.49 to $8.49. During fiscal 2005, the average check per person was $14.00 to $15.00, with alcoholic beverages accounting for approximately 11.2 percent of Smokey Bones' sales. Smokey Bones maintains approximately 12 different dinner menus and 12 lunch menus across its trade areas to reflect geographic differences in consumer preferences, prices and selections, as well as a children's menu. Recent and Planned Growth During fiscal 2005, we opened 55 new restaurants (excluding the relocation of existing restaurants to new sites and the rebuilding of restaurants at existing sites) and closed three restaurants. In addition, we had four restaurants closed temporarily at the end of fiscal 2005 that we expect to reopen during fiscal 2006. This resulted in a net increase of 56 restaurants in fiscal 2005. We plan to open approximately 52-68 new Red Lobster, Olive Garden, Smokey Bones and Seasons 52 restaurants during fiscal 2006 (excluding relocations and rebuilds). Our actual and projected new openings by concept (excluding relocations and rebuilds) are shown below. Actual New Projected New Restaurant Openings Restaurant Openings Fiscal 2005 Fiscal 2006 ----------- ----------- Red Lobster........................... 1 5-10 Olive Garden.......................... 17 20-25 Bahama Breeze......................... 0 0 Smokey Bones.......................... 35 25-30 Seasons 52............................ 2 2-3 ---- ------- Totals............................ 55 52-68 The actual number of openings for each of our concepts will depend on many factors, including 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. 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 have continued to test new ideas and concepts, and also to evaluate potential acquisition candidates to assess whether they would satisfy our strategic and financial objectives. 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 approximately 180 days on average after permits are obtained and the site is acquired. The following table illustrates the approximate average capital investment, size and dining capacity of the one Red Lobster, 17 Olive Garden and 35 Smokey Bones restaurants that were opened during fiscal 2005 (excluding relocations, rebuilds and conversions of existing restaurants). 5 Capital Square Dining Dining Investment(1) Feet(2) Seats(3) Tables(4) ------------- ------- -------- --------- Red Lobster................. $3,348,000 5,656 165 46 Olive Garden................ $3,673,000 7,665 213 59 Smokey Bones................ $3,446,000 7,590 223 51 (1) Includes net present value of leases as well as working capital benefits, but excludes internal overhead. (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. 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 2005, we permanently closed three and relocated two Red Lobster restaurants, and rebuilt two and relocated four Olive Garden restaurants. During fiscal 2005, we also wrote down the carrying value of two Olive Garden restaurants, one Red Lobster restaurant and one Smokey Bones restaurant. The Smokey Bones restaurant was closed subsequent to fiscal 2005 while the two Olive Garden restaurants and one Red Lobster restaurant continued to operate. These write-downs were a result of less-than-optimal locations. We continue to evaluate our site locations in order to minimize the risk of future asset impairment charges. 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, restricted stock or stock units, 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 three to five additional managers, depending on the operating complexity and sales volume of the restaurant. Each restaurant also employs approximately 50-180 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 three largest concepts, Red Lobster, Olive Garden and Smokey Bones, restaurant general managers report to directors. At Red Lobster and Olive Garden, each director was responsible for six to 11 restaurants at the end of fiscal 2005, which is our target range for each director at established operating companies. At Smokey Bones, each director was responsible for four to seven restaurants at the end of fiscal 2005. 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, are 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 up to three weeks after the opening. They are re-deployed as appropriate to enable a smooth transition to the restaurant's operating staff. 6 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 food safety evaluation by Darden personnel at least annually. We require our suppliers to maintain sound manufacturing practices and operate with the comprehensive HACCP food safety programs in place. Since 1976, we have required routine microbiological testing of 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. 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 approximately 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 procurement offices in Singapore and Toronto, our only purchasing offices outside of Orlando, to source products directly from Asia and Canada. While the supply of certain seafood species is volatile, we believe 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 sales. Controlled inventories of specified products are distributed to all restaurants through independent national distribution companies. Our supplier diversity program is an integral part of our purchasing efforts. Through this program, we identify minority and women-owned vendors and assist them in establishing supplier relationships with us. We are committed to the development and growth of minority and women-owned enterprises, and in fiscal 2005 we spent approximately 6.6 percent and 2.2 percent, respectively, of our purchasing dollars with those firms. Advertising and Marketing We believe we have developed significant marketing and advertising capabilities. Our size enables us to be a leading advertiser in the casual dining segment of the restaurant industry. Red Lobster and Olive Garden leverage the efficiency of national network television advertising and supplement it with local television advertising. Bahama Breeze and Smokey Bones do not use national 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 coupon programs, as appropriate, to attract customers. We have developed and consistently use sophisticated consumer marketing research techniques to monitor customer satisfaction and evolving expectations. 7 Employees At the end of fiscal 2005, we employed approximately 150,100 persons. Of these employees, approximately 1,300 were corporate or restaurant concept personnel located in our restaurant support center in Orlando, Florida, approximately 6,030 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 percent 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 12 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. Information Technology We strive for leadership in the restaurant business by using technology as a competitive advantage and as an enabler of our strategy. 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. Several years ago, we implemented a suite of web-enabled and fully integrated financial and human resource (including payroll and benefits) systems. We also implemented a high-speed data network connecting all restaurants to all current and anticipated future applications. In the past year, we have been developing and piloting a next generation technology platform for our restaurant point of sale system. We expect to deploy the new platform, including new hardware and software, to all restaurant concepts over the next three years. 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 that our current systems and practice of implementing regular updates 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. 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 and locally-owned restaurants for customers, management and hourly personnel and suitable real estate sites. We 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," "Information Technology" and "Forward-Looking 8 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 Barbeque & Grill(R) and Seasons 52(R) 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 37 Red Lobster restaurants in Japan as of May 29, 2005. 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 2005, our sales were highest in the spring and winter, followed by summer, and lowest in the fall. During fiscal 2004 and 2003, our sales were highest in the spring, lowest in the fall, and comparable during winter and summer. Holidays, severe weather and similar conditions may impact sales volumes seasonally in some operating regions. 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. During fiscal 2005, approximately 9.2 percent of our sales were 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 2005 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 2005, 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 9 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 of the Registrant Our executive officers as of July 29, 2005 are listed below. Joe R. Lee, age 64, has been our Chairman of the Board since April 1995. He served as our Chief Executive Officer from December 1994 until November 2004. 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 company, 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. Clarence Otis, Jr., age 49, has been our Chief Executive Officer since November 2004, and a Director since September 2004. Mr. Otis was our Executive Vice President from March 2002 until November 2004 and President of Smokey Bones Barbeque & Grill from December 2002 until November 2004. He served as our Senior Vice President from December 1999 until April 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. From 1991 to 1995, he was employed by Chemical Securities, Inc. (now J.P. Morgan Securities, Inc.), an investment banking firm, where he had been Managing Director and Manager of Public Finance. Andrew H. (Drew) Madsen, age 49, has been our President and Chief Operating Officer since November 2004, and a Director since September 2004. Mr. Madsen was our Senior Vice President and President of Olive Garden from March 2002 until November 2004, and Executive Vice President of Marketing for Olive Garden from December 1998 to March 2002. 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 held various positions at James River Corporation (now part of Georgia-Pacific Corporation, a diversified paper and building products manufacturer), including Vice President and General Manager for the Dixie consumer products unit. Blaine Sweatt, III, age 57, 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 company. James (J.J.) Buettgen, age 45, has been our Senior Vice President and President of Smokey Bones Barbeque & Grill since November 2004. From August 2004 until assuming his current position he was our Senior Vice President and President-designate of Smokey Bones. From July 2003 until August 2004, he was President of Big Bowl Asian Kitchen, a casual dining company owned by Brinker International, Inc., a restaurant operator, and from October 2002 until June 2003 he was Senior Vice President of Marketing and Brand Development for Brinker. From 1999 to 2002, he was Senior Vice Present of Marketing and Sales for Disneyland Resorts, a division of the Walt Disney Company, where he helped launch Disney's California Adventure theme park, and from 1998 to 1999 was Senior Vice President of Marketing for Hollywood Entertainment Group, a video retailer. He held several marketing posts with our former parent company, General Mills, Inc., a manufacturer and marketer of consumer food products, from 1989 through 1994, and served first as director and then as Vice President of Marketing for Olive Garden from 1994 until 1998. Laurie B. Burns, age 43, 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 10 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 54, has been our Senior Vice President and 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 60, has been our Senior Vice President, Corporate Controller since December 1999, and will retire on July 29, 2005. 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. Kim Lopdrup, age 47, has been our Senior Vice President and President of Red Lobster since May 2004. He joined us in November 2003 as Executive Vice President of Marketing for Red Lobster. From 2001 until 2002, he served as Executive Vice President and Chief Operating Officer for North American operations of Burger King Corporation, an operator and franchiser of fast food restaurants. From 1985 until 2001, he worked for Allied Domecq Quick Service Restaurants ("ADQSR"), a franchiser of quick service restaurants including Dunkin' Donuts, Baskin-Robbins and Togo's Eateries, where he held progressively more responsible positions in marketing, strategic and general management roles, eventually serving as Chief Executive Officer of ADQSR International. Daniel M. Lyons, age 52, 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, an international marketer of food and beverage products, holding increasingly more responsible positions including Vice President Human Resources for the North American Breakfast Food Division. Barry Moullet, age 47, has been our Senior Vice President, Supply Chain & Development since August 2003. He served as our Senior Vice President Purchasing, Distribution and Food Safety from June 1999 until August 2003. 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, KFC Corporation and the Pillsbury Company. Dave Pickens, age 50, has been our Senior Vice President and President of Olive Garden since December 2004. He joined us in 1973 as a Red Lobster hourly employee, and progressed from manager trainee to regional operations manager, director of operations, and ultimately was promoted to a division Senior Vice President of Operations for Red Lobster. He joined Olive Garden in 1995 as Senior Vice President of Operations for the Orlando division and was promoted to Executive Vice President of Operations in September 1999, where he served until his promotion to President of Olive Garden in December 2004. C. Bradford Richmond, age 46, will become our Senior Vice President, Corporate Controller effective August 1, 2005, succeeding Stephen Helsel who is retiring. He currently is Senior Vice President Finance, Strategic Planning and Controller of Red Lobster, a position he has held since January 2003, and previously was Senior Vice President, Finance and Controller at Olive Garden from August 1998 to January 2003. He joined us in 1982 as a food and beverage analyst for Casa Gallardo, a restaurant concept formerly owned and operated by us, and from June 1985 to August 1998 held progressively more responsible finance and marketing analyst positions with our York Steak House, Red Lobster and Olive Garden operating companies in both the United States and Canada. Paula J. Shives, age 54, 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 53, has been our Senior Vice President, Corporate Affairs since 1994. He joined General Mills, Inc., a manufacturer and marketer of consumer food products and our former parent company, in 1984 as Manager of Government Affairs for Red Lobster. He served as Vice President of Government and 11 Community Relations for General Mills Restaurants, Inc. from 1987 until assuming his current position in December 1994. Cautionary Factors That Could Affect Our Results Described below are 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. Intense Competition. The casual dining sector of the restaurant industry is intensely competitive with respect to pricing, service, location, personnel and type and quality of food, and there are many well-established competitors. We compete within each market with national and regional restaurant chains and locally-owned restaurants. We also face growing competition as a result of the trend toward convergence in grocery, deli and restaurant services, particularly in the supermarket industry which offers "convenient meals" in the form of improved entrees and side dishes from the deli section. We compete primarily on the quality, variety and value perception of menu items. The number and location of restaurants, type of concept, 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 with respect to all of these factors. If we are unable to continue to compete effectively, our business, financial condition and results of operations would be adversely affected. Economic and Business Factors. Our business results depend on a number of industry-specific and general economic factors, many of which are beyond our control. The casual dining sector of the restaurant industry is affected by changes in national, regional and local economic conditions, seasonal fluctuation of sales volumes, consumer preferences, including changes in consumer tastes and dietary habits and the level of consumer acceptance of our restaurant concepts, and consumer spending patterns. The performance of individual restaurants may also be adversely affected by factors such as demographic trends, severe weather, traffic patterns and the type, number and location of competing restaurants. In addition, general economic conditions, such as recessionary economic cycles, a protracted economic slowdown, a worsening economy or industry-wide cost pressures, could affect consumer behavior and spending for restaurant dining occasions and lead to a decline in sales and earnings. Furthermore, we cannot predict the effects of actual or threatened armed conflicts or terrorist attacks, efforts to combat terrorism, military action against any foreign state or group located in a foreign state or heightened security requirements on the economy or consumer confidence in the United States. Any of these events could also affect consumer spending patterns or result in increased costs for us due to security measures. Unfavorable changes in the above factors or in other business and economic conditions affecting our customers could increase our costs, reduce traffic in some or all of our restaurants or impose practical limits on pricing, any of which could lower our profit margins and have a material adverse affect on our financial condition and results of operations. Price and Availability of Food, Ingredients and Utilities. Our results of operations depend significantly on our ability to anticipate and react to changes in the price and availability of food, ingredients, utilities and other related costs over which we may have little control. Operating margins for our restaurants are subject to changes in the price and availability of food commodities, including shrimp, lobster, crab and other seafood, as well as beef, pork, chicken, cheese and produce. The introduction of or changes to tariffs on imported shrimp or other food products could increase our costs and possibly impact the supply of those products. We are subject to the general risks of inflation. In addition, possible shortages or interruptions in the supply of food items caused by inclement weather or other conditions beyond our control could adversely affect the availability, quality and cost of the items we buy. Our restaurants' operating margins are also affected by fluctuations in the price of utilities such as natural gas, whether as a result of inflation or otherwise, on which the restaurants depend for their energy supply. Our inability to anticipate and respond effectively to an adverse change in any of these factors could have a significant adverse effect on our results of operations. 12 Labor and Insurance Costs. Our restaurant operations are subject to federal and state laws governing such matters as minimum wages, working conditions, overtime and tip credits. We have a substantial number of employees who are paid wage rates at or slightly above the minimum wage. As federal and state minimum wage rates increase, we may need to increase not only the wages of our minimum wage employees but also the wages paid to employees at wage rates that are above minimum wage. Labor shortages and increased employee turnover could also increase our labor costs. If competitive pressures or other factors prevent us from offsetting increased labor costs by increases in prices, our profitability may decline. In addition, the current premiums that we pay for our insurance (including workers' compensation, general liability, health, and directors' and officers' liability) may increase at any time, thereby further increasing our costs. The dollar amount of claims that we actually experience under our workers' compensation and general liability insurance, for which we carry high per-claim deductibles, may also increase at any time, thereby further increasing our costs. Increased advertising and marketing costs. If our competitors increase their spending on advertising and promotion, if our advertising, media or marketing expenses increase, or if our advertising and promotion become less effective than that of our competitors, we could experience a material adverse effect on our results of operations. Higher-than-anticipated Costs to Open or Close Restaurants. Our revenues and expenses can be impacted significantly by the number and timing of the opening of new restaurants and the closing, relocating and remodeling of existing restaurants. We incur substantial pre-opening expenses each time we open a new restaurant and other expenses when we close, relocate or remodel existing restaurants. The expenses of opening, closing, relocating or remodeling any of our restaurants, may be higher than anticipated. An increase in such expenses could have an adverse effect on our results of operations. Litigation. Our business is subject to the risk of litigation by employees, consumers, suppliers, shareholders or others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. The outcome of litigation, particularly class action lawsuits and regulatory actions, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to such lawsuits may remain unknown for substantial periods of time. The cost to defend future litigation may be significant. There may also be adverse publicity associated with litigation that could decrease customer acceptance of our services, regardless of whether the allegations are valid or whether we are ultimately found liable. As a result, litigation may adversely affect our business, financial condition and results of operations. Unfavorable Publicity. Multi-unit restaurant businesses such as ours 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 concerns. Negative publicity may also result from actual or alleged violations by our restaurants of "dram shop" laws which generally provide an injured party with recourse against an establishment that serves alcoholic beverages to an intoxicated party who then causes injury to himself or to a third party. Regardless of whether the allegations or complaints are valid, unfavorable publicity relating to a limited number of our restaurants, or only to a single restaurant, could adversely affect public perception of the entire brand. Adverse publicity and its effect on overall consumer perceptions of food safety could have a material adverse effect on our business. Lack of Suitable Locations. The success of our restaurants depends in large part on their location. As demographic and economic patterns change, current locations may not continue to be attractive or profitable. Possible declines in neighborhoods where our restaurants are located or adverse economic conditions in areas surrounding those neighborhoods could result in reduced revenues in those locations. In addition, desirable locations for new restaurant openings or for the relocation of existing restaurants may not be available at an acceptable cost when we identify a particular opportunity 13 for a new restaurant or relocation. The occurrence of one or more of these events could have a significant adverse effect on our revenues and results of operations. Government Regulations. The restaurant industry is subject to extensive federal, state and local laws and regulations, including those relating to building and zoning requirements and those relating to the preparation and sale of food. 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 and requirements. We are also subject to licensing and regulation by state and local authorities relating to health, sanitation, safety and fire standards and liquor licenses, federal and state laws governing our relationships with employees (including the Fair Labor Standards Act and applicable minimum wage requirements, overtime, family leave, tip credits, working conditions, safety standards 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. In addition, we are subject to a variety of federal, state and local laws and regulations relating to the use, storage, discharge, emission, and disposal of hazardous materials. The impact of current laws and regulations, the effect of future changes in laws or regulations that impose additional requirements and the consequences of litigation relating to current or future laws and regulations could increase our compliance and other costs of doing business and therefore have an adverse effect on our results of operations. Failure to comply with the laws and regulatory requirements of federal, state and local authorities could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability. Failure to Achieve Growth Objectives. As part of our business strategy, we intend to continue to expand our current portfolio of restaurant concepts and to develop or acquire additional concepts that can be expanded profitably. This strategy involves numerous risks, and we may not be able to achieve our growth objectives. We may not be able to open all of our planned new restaurants, and the new restaurants that we open may not be profitable or as profitable as our existing restaurants. New restaurants typically experience an adjustment period before sales levels and operating margins normalize, and even sales at successful newly-opened restaurants generally do not make a significant contribution to profitability in their initial months of operation. The opening of new restaurants can also have an adverse effect on sales levels at existing restaurants. There are additional risks involved with expanding newer concepts (such as Bahama Breeze and Smokey Bones) that have not yet proven their long-term viability. Furthermore, we may not be able to develop or acquire additional concepts that are as profitable as our existing restaurants. Growth through acquisitions may involve additional risks. For example, we may pay too much for a concept relative to the actual economic return, be required to borrow funds to make our acquisition (which would increase our interest expense) or be unable to integrate an acquired concept into our operations. The ability to open and profitably operate restaurants is subject to various risks, such as the identification and availability of suitable and economically viable locations, the negotiation of acceptable lease or purchase terms for new locations, the need to obtain all required governmental permits (including zoning approvals and liquor licenses) on a timely basis, the need to comply with other regulatory requirements, the availability of necessary contractors and subcontractors, the ability to meet construction schedules and budgets, the ability to manage union activities such as picketing or hand billing which could delay construction, increases in labor and building materials costs, the availability of financing at acceptable rates and terms, changes in 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. At each potential location, we compete with other restaurants and retail businesses for desirable development sites, construction contractors, management personnel, hourly employees and other resources. If we are unable to successfully manage these risks, we could face increased costs and lower than anticipated revenues and earnings in future periods. Cautionary Statement Regarding Forward-Looking Statements This report may contain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Darden Restaurants, Inc. and its subsidiaries. Statements preceded by, followed by or that include words such as "may," "will," "expect," "intend," "anticipate," 14 "continue," "estimate," "project," "believe," "plan" or similar expressions are intended to identify some of the forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are included, along with this statement, for purposes of complying with the safe harbor provisions of that Act. These forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the risks and uncertainties described in this report, including under the heading "Cautionary Factors That Could Affect Our Results," and the documents incorporated by reference in this report. We undertake no obligation to update publicly or revise any forward-looking statements for any reason, whether as a result of new information, future events or otherwise. Item 2. PROPERTIES As of May 29, 2005, we operated 1,381 restaurants (including 679 Red Lobster, 563 Olive Garden, 32 Bahama Breeze, 104 Smokey Bones and three Seasons 52 restaurants) in the following locations: Alabama (22) Iowa (14) Nevada (12) South Dakota (3) Arizona (29) Kansas (11) New Hampshire (5) Tennessee (34) Arkansas (11) Kentucky (17) New Jersey (29) Texas (111) California (96) Louisiana (12) New Mexico (11) Utah (13) Colorado (26) Maine (4) New York (51) Vermont (1) Connecticut (9) Maryland (24) North Carolina (32) Virginia (45) Delaware (4) Massachusetts (11) North Dakota (4) Washington (25) Florida (146) Michigan (52) Ohio (84) West Virginia (7) Georgia (59) Minnesota (24) Oklahoma (18) Wisconsin (20) Hawaii (1) Mississippi (8) Oregon (12) Wyoming (2) Idaho (6) Missouri (31) Pennsylvania (69) Canada (37) Illinois (57) Montana (2) Rhode Island (3) Indiana (47) Nebraska (8) South Carolina (22) Of our 1,381 restaurants open on May 29, 2005, 838 were located on owned sites and 543 were located on leased sites. The 543 leases are classified as follows: Land-Only Leases (we own buildings and equipment)............ 423 Ground and Building Leases................................... 68 Space/In-Line/Other Leases................................... 52 ---- Total............................................... 543 ==== 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. Of the 15 buildings that make up our executive offices, culinary center and training facilities in Orlando, Florida, we own 11 and lease four. 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, Net" and Note 12 "Leases" under Notes to Consolidated Financial Statements in our 2005 Annual Report to Shareholders, incorporated herein by reference. Item 3. LEGAL PROCEEDINGS We are subject to private lawsuits, administrative proceedings and claims that arise in the ordinary course of our business. A number of these lawsuits, proceedings and claims may exist at any given time. These matters 15 typically involve claims from guests, employees and others related to operational issues common to the restaurant industry, and can also involve infringement of, or challenges to, our trademarks. While the resolution of a lawsuit, proceeding or claim may have an impact on our financial results for the period in which it is resolved, we believe that the final disposition of the lawsuits, proceedings and claims in which we are currently involved, either individually or in the aggregate, will not have a material adverse effect on our financial position, results of operations or liquidity. Like other restaurant companies and retail employers, we have been faced in a few states with allegations of purported class-wide wage and hour violations. The following is a brief description of the more significant of these matters. In view of the inherent uncertainties of litigation, the outcome of any unresolved matter described below cannot be predicted at this time, nor can the amount of any potential loss be reasonably estimated. In March 2002 and March 2003, two purported class action lawsuits were brought against us in the Superior Court of Orange County, California by three current and former hourly restaurant employees alleging violations of California labor laws with respect to providing meal and rest breaks. Although we continue to believe we provided the required meal and rest breaks to our employees, to avoid potentially costly and protracted litigation, we agreed during the second quarter of fiscal 2005 to settle both lawsuits and a similar case filed in Sacramento County, for approximately $9.5 million. Terms of the settlement, which do not include any admission of liability by us, have received preliminary judicial approval, but completion of the settlement may not occur for several months. We recorded settlement expenses associated with these lawsuits of approximately $4.5 million during fiscal 2005 and approximately $5.0 million during fiscal 2004, which are included in selling, general and administrative expenses. The settlement amounts of these lawsuits are included in other current liabilities at May 29, 2005. In August 2003, three former employees in Washington filed a similar purported class action in Washington State Superior Court in Spokane County alleging violations of Washington labor laws with respect to providing rest breaks. The Court stayed the action and ordered the plaintiffs into our mandatory arbitration program; the plaintiffs' motion for reconsideration was not granted, and their appeal of the denial of reconsideration was also not granted. We believe we provided the required meal and rest breaks to our employees, and we intend to vigorously defend our position in this case. Beginning in 2002, a total of five purported class action lawsuits have been filed in Superior Courts of California (two each in Los Angeles County and Orange County, and one in Sacramento County) in which the plaintiffs allege that they and other current and former service managers, beverage and hospitality managers and culinary managers were improperly classified as exempt employees under California labor laws. The plaintiffs seek unpaid overtime wages and penalties. Two of the cases have been removed to arbitration under our mandatory arbitration program, and we are seeking to cause the remaining cases to be stayed pending resolution of the earliest-filed cases. We believe we properly classified these employees as exempt under California law and we intend to vigorously defend against all claims in these lawsuits. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The principal United States market on which our common shares are traded is the New York Stock Exchange, where our shares are traded under the symbol DRI. As of July 25, 2005, there were approximately 40,602 record holders of our common shares. The information concerning the dividends and high and low intraday sales prices for our common shares traded on the New York Stock Exchange for each full quarterly period during fiscal 2004 and 2005 contained in Note 19, "Quarterly Data (Unaudited)" in our 2005 Annual Report to Shareholders is incorporated herein by reference. We have not sold any securities during the last fiscal year that were not registered under the Securities Act of 1933. 16 The table below provides information concerning our repurchase of shares of our common stock during the fourth quarter of fiscal 2005. Since commencing our repurchase program in December 1995, we have repurchased a total of 120,584,871 shares under authorizations from our Board of Directors to repurchase an aggregate of 137,400,000 shares.
- --------------------------- ---------------- ------------ ---------------------- -------------------- Total Number of Maximum Number of Shares Purchased as Shares that Total Number Average Part of Publicly May Yet be of Shares Price Paid Announced Plans or Purchased Under the Period Purchased(1) per Share Programs Program (2) - --------------------------- ---------------- ------------ ---------------------- -------------------- February 28, 2005 through April 3, 2005 1,571,038 $30.27 1,571,038 19,745,811 - --------------------------- ---------------- ------------ ---------------------- -------------------- April 4, 2005 through May 1, 2005 1,450,725 $30.86 1,450,725 18,295,086 - --------------------------- ---------------- ------------ ---------------------- -------------------- May 2, 2005 through May 29, 2005 1,479,957 $31.29 1,479,957 16,815,129 - --------------------------- ---------------- ------------ ---------------------- -------------------- Total 4,501,720 $30.80 4,501,720 16,815,129 - --------------------------- ---------------- ------------ ---------------------- -------------------- (1) All of the shares purchased during the fourth quarter of fiscal 2005 were purchased as part of our repurchase program, the authority for which was increased to an aggregate of 137.4 million shares by our Board of Directors on September 28, 2004, and announced publicly in a press release issued the same day. There is no expiration date for our program. The number of shares purchased includes shares withheld for taxes on vesting of restricted stock, and shares delivered or deemed to be delivered to us on tender of stock in payment for the exercise price of options. These shares are included as part of our repurchase program and deplete the repurchase authority granted by our Board. The number of shares repurchased excludes shares we reacquired pursuant to tax withholding on option exercises or forfeiture of restricted stock. (2) Repurchases are subject to prevailing market prices, may be made in open market or private transactions, and may occur or be discontinued at any time. There can be no assurance that we will repurchase any shares. The figures in this column include the additional 22 million shares that were authorized to be repurchased by our Board on September 28, 2004.
Item 6. SELECTED FINANCIAL DATA The information for fiscal 2001 through 2005 contained in the Five-Year Financial Summary in our 2005 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" in our 2005 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" in our 2005 Annual Report to Shareholders is incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Report of Independent Registered Public Accounting Firm, Consolidated Statements of Earnings, Consolidated Balance Sheets, Consolidated Statements of Changes in Stockholders' Equity and Accumulated Other 17 Comprehensive Income (Loss), Consolidated Statements of Cash Flows, and Notes to Consolidated Financial Statements in our 2005 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 29, 2005, 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 29, 2005. During the fiscal quarter ended May 29, 2005, 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. The annual report of our management on internal control over financial reporting, and the attestation report of KPMG LLP, our independent registered public accounting firm, regarding our internal control over financial reporting in our 2005 Annual Report to Shareholders, are incorporated herein by reference. Item 9B. OTHER INFORMATION. Not applicable. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information contained in the sections entitled "Who Are This Year's Nominees?", "What Board Committees Do You Have?" and "Section 16(a) Beneficial Ownership Reporting Compliance" in our definitive Proxy Statement for our 2005 Annual Meeting of Shareholders is incorporated herein by reference. Information regarding executive officers is contained in Part I above under the heading "Executive Officers of the Registrant." All of our employees are subject to our Code of Business Conduct and Ethics. Appendix A to the 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 at www.darden.com and are available in print free of charge to any shareholder who requests them. We will disclose any amendments to or waivers of these Codes for directors, executive officers or senior financial officers on our website. We also have adopted a set of Corporate Governance Guidelines and charters for all of our Board Committees, including the Audit, Compensation, and Nominating and Governance Committees. The Corporate Governance Guidelines and committee charters are available on our website at www.darden.com and in print free of charge to any shareholder who requests them. Written requests for our Code of Business Conduct and Ethics, Corporate Governance Guidelines and committee charters should be addressed to Darden Restaurants, Inc., 5900 Lake Ellenor Drive, Orlando, FL 32809, Attention: Corporate Secretary. 18 Item 11. EXECUTIVE COMPENSATION The information contained in the sections entitled "How Are Directors Compensated?"; "Summary Compensation Table"; "Option Grants In Last Fiscal Year"; "Stock Option Exercises And Holdings"; "Long-Term Incentive Plans - Awards In Last Fiscal Year"; "Do Executive Officers Currently Participate In A Defined Benefit Retirement Plan?"; "Do Executive Officers Currently Participate In Any Non-Qualified Deferred Compensation Plan?"; "Do Executive Officers Have Any Change-In-Control Arrangements?"; "Do Any Of The Executive Officers Have Employment Agreements?"; and "Compensation Committee Interlocks And Insider Participation" in our definitive Proxy Statement for our 2005 Annual Meeting of Shareholders, 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" and "Security Ownership Of Management" in our definitive Proxy Statement for our 2005 Annual Meeting of Shareholders, 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 29, 2005 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") and Employee Stock Purchase Plan.
- ------------------------------- ---------------------------- ---------------------------- ---------------------------- (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 (1) rights equity compensation plans (excluding securities reflected in column (a)) - ------------------------------- ---------------------------- ---------------------------- ---------------------------- Equity compensation plans approved by security holders (2) 17,409,311 $16.49 9,470,683 (3) - ------------------------------- ---------------------------- ---------------------------- ---------------------------- Equity compensation plans not approved by security holders (4) 3,205,053 $18.89 90,134 (5) - ------------------------------- ---------------------------- ---------------------------- ---------------------------- Total 20,614,364 $16.86 9,560,817 - ------------------------------- ---------------------------- ---------------------------- ---------------------------- (1) Includes deferred compensation obligations that may be paid out in common stock. (2) Includes the 2002 Plan, 1995 Plan and Employee Stock Purchase Plan. (3) In addition to grants of options, warrants or rights, includes up to 7,627,934 shares of common stock or other stock-based awards, including up to 1,018,510 shares of restricted stock, that may be issued under the 2002 Plan, and up to 1,842,749 shares of common stock that may be issued under the Employee Stock Purchase Plan. Does not include shares under the 1995 Plan, because no new awards may be made under that plan. (4) Includes the 2000 Plan, Director Stock Plan and Director Compensation Plan. (5) In addition to grants of options, warrants or rights, includes up to 90,134 shares of common stock that may be issued under the Director Compensation Plan. Does not include shares under the 2000 Plan or Director Stock Plan because no new awards may be made under those plans.
19 The 2000 Plan The 2000 Plan provided for the issuance of up to 5,400,000 shares of common stock out of our treasury as non-qualified stock options, restricted stock or restricted stock units. No awards could be made under the 2000 Plan after January 1, 2004, but options and other awards granted prior to that time remain outstanding and will vest in accordance with their terms. Only our employees other than executive officers were eligible to receive awards under the 2000 Plan. The purpose of the 2000 Plan was 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 could not be less than the fair market value of the underlying stock on the date of grant, and no option could have a term of more than ten years. The options currently outstanding under the 2000 Plan generally vest one to four years after the date of grant and expire ten years from the date of grant. 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, restricted stock units or stock awards. 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 one to three years after 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. The Director Stock Plan was approved by our Board of Directors. No awards may be made under the Director Stock Plan after September 30, 2005. 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 and 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. No awards may be made under the Director Compensation Plan after September 30, 2005. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained in the sections entitled "Do You Provide Loans For Executive Officers To Meet Their Share Ownership Guidelines?" and "Are There Any Other Relationships Or Related Transactions Between Us And Our Management?" in our definitive Proxy Statement for our 2005 Annual Meeting of Shareholders, is incorporated herein by reference. Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information contained in the section entitled "Independent Registered Public Accounting Firm Fees And Services" in our definitive Proxy Statement for our 2005 Annual Meeting of Shareholders, is incorporated herein by reference. 20 PART IV Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) 1. Financial Statements: Consolidated Statements of Earnings for the fiscal years ended May 29, 2005, May 30, 2004 and May 25, 2003. Consolidated Balance Sheets at May 29, 2005 and May 30, 2004. Consolidated Statements of Changes in Stockholders' Equity and Accumulated Other Comprehensive Income (Loss) for the fiscal years ended May 29, 2005, May 30, 2004 and May 25, 2003. Consolidated Statements of Cash Flows for the fiscal years ended May 29, 2005, May 30, 2004 and May 25, 2003. Notes to Consolidated Financial Statements. 2. Financial Statements Schedules: Not applicable. 3. Exhibits: The exhibits listed in the accompanying Exhibit Index are filed as part of this Form 10-K and incorporated herein by reference. 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. The Exhibit Index specifically identifies with an asterisk each management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K. We will furnish copies of any exhibit listed on the Exhibit Index upon request upon the payment of a reasonable fee to cover our expenses in furnishing such exhibits. 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: July 29, 2005 DARDEN RESTAURANTS, INC. By: /s/ Clarence Otis, Jr. ---------------------------------------- Clarence Otis, Jr., 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 dates indicated. Signature Title Date /s/ Joe R. Lee* Director, July 29, 2005 - ------------------------------------ Chairman of the Board Joe R. Lee /s/ Clarence Otis, Jr. Chief Executive Officer July 29, 2005 - ------------------------------------ (Principal executive officer) Clarence Otis, Jr. and Director /s/ Linda J. Dimopoulos Senior Vice President July 29, 2005 - ------------------------------------ and Chief Financial Officer 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/ David H. Hughes* Director - ------------------------------------ David H. Hughes /s/ Charles A. Ledsinger, Jr. * Director - ------------------------------------ Charles A. Ledsinger, Jr. /s/ William M. Lewis, Jr. * Director - ------------------------------------ William M. Lewis, Jr. /s/ Andrew H. Madsen* Director - ------------------------------------ Andrew H. Madsen /s/ Cornelius McGillicuddy, III* ** Director - ------------------------------------ Cornelius McGillicuddy, III /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 July 29, 2005 ** 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 as amended May 26, 2005. 3(b) Bylaws as amended July 21, 2003 (incorporated by reference to Exhibit 3(b) to our Annual Report on Form 10-K for the fiscal year ended May 25, 2003). 4(a) Rights Agreement dated as of May 16, 2005 between us and Wachovia Bank, National Association, as Rights Agent (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed May 16, 2005). 4(b) Indenture dated as of January 1, 1996, between us and Wells Fargo Bank, National Association (as successor to Wells Fargo Bank Minnesota, National Association, formerly known as Norwest Bank Minnesota, National Association) (incorporated by reference to Exhibit 4.1 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. *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 (incorporated by reference to Exhibit 10(f) to our Annual Report on Form 10-K for the fiscal year ended May 25, 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 (incorporated by reference to Exhibit 10(h) to our Annual Report on Form 10-K for the fiscal year ended May 25, 2003). *10(i) Benefits Trust Agreement dated as of October 3, 1995, between us and Wells Fargo Bank, National Association (as successor to Wells Fargo Bank Minnesota, National Association, formerly known as Norwest Bank Minnesota, National Association) (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 (incorporated by reference to Exhibit 10(l) to our Annual Report on Form 10-K for the fiscal year ended May 25, 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 17, 2003, among Darden Restaurants, Inc. and the banks named therein (incorporated herein by reference to Exhibit 10 to our Quarterly Report on Form 10-Q for the quarter ended November 23, 2003). 10(o) First Amendment dated as of February 4, 2004, to Credit Agreement dated as of October 17, 2003, among Darden Restaurants, Inc. and the banks listed therein (incorporated herein by reference to Exhibit 10(a) to our Quarterly Report on Form 10-Q for the quarter ended February 22, 2004). *10(p) Form of Non-Qualified Stock Option Award Agreement under the Darden Restaurants, Inc. 2002 Stock Incentive Plan (incorporated herein by reference to Exhibit 10(a) to our Current Report on Form 8-K filed June 21, 2005). *10(q) Form of Restricted Stock Award Agreement under the Darden Restaurants, Inc. 2002 Stock Incentive Plan. *10(r) Form of Restricted Stock Units Award Agreement (U.S.) under the Darden Restaurants, Inc. 2002 Stock Incentive Plan (incorporated herein by reference to Exhibit 10(c) to our Current Report on Form 8-K filed June 21, 2005). *10(s) Form of Restricted Stock Units Award Agreement (Canada) under the Darden Restaurants, Inc. 2002 Stock Incentive Plan (incorporated herein by reference to Exhibit 10(d) to our Current Report on Form 8-K filed June 21, 2005). *10(t) Form of Darden Stock Units Award Agreement (U.S.) under the Darden Restaurants, Inc. 2002 Stock Incentive Plan (incorporated herein by reference to Exhibit 10(e) to our Current Report on Form 8-K filed June 21, 2005). *10(u) Form of Darden Stock Units Award Agreement (Canada) under the Darden Restaurants, Inc. 2002 Stock Incentive Plan (incorporated herein by reference to Exhibit 10(f) to our Current Report on Form 8-K filed June 21, 2005). *10(v) Darden Restaurants, Inc. Performance Criteria for 2006 Annual Cash Bonus under the Management and Professional Incentive Plan (incorporated herein by reference to Exhibit 10 to our Quarterly Report on Form 10-Q for the quarter ended February 27, 2005). 25 *10(w) Letter Agreement dated October 7, 2004, between Joe Lee and Darden Restaurants, Inc. (incorporated herein by reference to Exhibit 10(a) to our Quarterly Report on Form 10-Q for the quarter ended August 29, 2004). 12 Computation of Ratio of Consolidated Earnings to Fixed Charges. 13 Portions of 2005 Annual Report to Shareholders. 21 Subsidiaries of Darden Restaurants, Inc. 23 Consent of Independent Registered Public Accounting Firm. 24 Powers of Attorney. 31(a) Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31(b) Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32(a) Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32(b) Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. - ------------ * 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. 26 EX-3.(I) 3 form10k_exhibit3a.txt FORM 10K EXHIBIT3A 7-29-05 EXHIBIT 3(a) ARTICLES OF INCORPORATION OF DARDEN RESTAURANTS, INC. * * * * * * ARTICLE I The name of this Corporation is Darden Restaurants, Inc. ARTICLE II The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the Florida Business Corporation Act, as the same exists or may hereafter be amended ("Florida Law"). ARTICLE III The total number of shares, without par value, that the Corporation shall have authority to issue is five hundred twenty-five million (525,000,000), of which five hundred million (500,000,000) shares shall be Common Shares and twenty-five million (25,000,000) shares shall be Preferred Shares. (1) Provisions Relating to Common Shares (a) Each Common Share shall have one vote, and, except as provided by resolution or resolutions adopted by the Board of Directors providing for the issue of any series of Preferred Shares, the exclusive voting power for all purposes shall be vested in the holders of the Common Shares. (b) No holder of Common Shares as such shall have any preemptive right to subscribe to or acquire (i) unissued or treasury shares of the Corporation of any class, (ii) securities of the Corporation convertible into or carrying a right to acquire or subscribe to shares of any class or (iii) any other obligations, warrants, rights to subscribe to shares or other securities of the Corporation of any class, in each case whether now or hereafter authorized. (c) Subject to the provisions of law and to the provisions of any Preferred Shares that may be outstanding from time to time, dividends may be paid on the Common Shares at such times and in such amounts as the Board of Directors may deem advisable. (d) In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of Common Shares shall be entitled, after payment or provision for payment of the debts and other liabilities of the Corporation and the amounts to which holders of Preferred Shares shall be entitled, to the remaining net assets of the Corporation. (2) Provisions Relating to Preferred Shares (a) The Preferred Shares may be issued from time to time in one or more series, each of such series to have such designations, preferences, limitations and special rights as are stated and expressed herein and in the resolution or resolutions providing for the issue of such series adopted by the Board of Directors as hereinafter provided. (b) Authority is hereby expressly granted to the Board of Directors, subject to the provisions of this Article III, to divide the Preferred Shares into one or more series and with respect to each series to fix and determine by resolution or resolutions providing for the issue of such series: (i) The number of shares to constitute such series and the distinctive designation thereof; (ii) The dividend rate or rates to which shares of such series shall be entitled and the restrictions, limitations and conditions upon the payment of such dividends, the date or dates from which dividends shall accumulate and the quarterly dates on which dividends, if declared, shall be payable; (iii) Whether or not the shares of such series shall be redeemable, the limitations and restrictions with respect to such redemptions, the manner of selecting shares of such series for redemption if less than all shares are to be redeemed, and the amount, if any, in addition to any accrued dividends thereon which the holder of shares of such series shall be entitled to receive upon the redemption thereof, which amount may vary at different redemption dates and may be different with respect to shares redeemed through the operation of any retirement or sinking fund and with respect to shares otherwise redeemed; (iv) The amount in addition to any accrued dividends thereon which the holders of shares of such series shall be entitled to receive upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation, which amount may vary depending on whether such liquidation, dissolution or winding up is voluntary or involuntary and, if voluntary, may vary at different dates (the amount so payable upon such involuntary liquidation, dissolution or winding up, 2 exclusive of accrued dividends, being hereinafter sometimes called the "involuntary liquidation value"); (v) Whether or not the shares of such series shall be subject to the operation of a purchase, retirement or sinking fund, and, if so, whether such purchase, retirement or sinking fund shall be cumulative or non-cumulative, the extent to and the manner in which such fund shall be applied to the purchase or redemption of the shares of such series for retirement or to other corporate purposes and the terms and provisions relative to the operation thereof; (vi) Whether or not the shares of such series shall be convertible into, or exchangeable for, shares of any other class or classes, or of any other series of the same class and, if so convertible or exchangeable, the price or prices or the rate or rates of conversion or exchange and the method, if any, of adjusting the same; (vii) The voting powers, if any, of such series; and (viii) Any other preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof as shall not be inconsistent with this Section (2). (c) All shares of any one series of Preferred Shares shall be identical with each other in all respects, except that shares of any one series issued at different times may differ as to the dates from which dividends thereon shall be cumulative; and all series of Preferred Shares shall rank equally and be identical in all respects, except as permitted by the foregoing provisions of Section (2)(b) of this Article III. (d) No holder of Preferred Shares as such shall have any preemptive right to subscribe to or acquire (i) unissued or treasury shares of the Corporation of any class, (ii) securities of the Corporation convertible into or carrying a right to acquire or subscribe to shares of any class or (iii) any other obligations, warrants, rights to subscribe to shares or other securities of the Corporation of any class, in each case whether now or hereafter authorized. (3) Provisions Relating to All Classes of Shares The Preferred Shares and Common Shares may be issued by the Corporation from time to time for such consideration as may be determined from time to time by the Board of Directors subject to, and in accordance with the full discretion conferred upon the Board of Directors by, Florida Law. Any and all shares for which the consideration so determined shall have been paid or delivered shall be deemed fully paid shares and shall not be liable for any further call or assessment thereon; and the holders of such shares shall not be liable for any further payments in respect of such shares. 3 ARTICLE IV (1) (a) In addition to any affirmative vote required by law or otherwise, and except as expressly provided in this Article IV, the affirmative vote of not less than 66 2/3% of the Voting Securities, excluding the Voting Securities beneficially owned by a Related Person who is party to the Business Combination, shall be required for the approval or authorization of any Business Combination. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law, in these Articles of Incorporation or in any agreement with any national securities exchange or otherwise. (b) The provisions of subsection (1)(a) of this Article IV shall not apply to any Business Combination involving only (x) the acquisition or issuance by the Corporation or a Subsidiary of securities of the Corporation in a transaction in which all holders of securities of the same class or series (other than a Related Person) are entitled to participate on identical terms and the Related Person is entitled to participate, if at all, on terms not more favorable than the terms upon which the other holders of securities of the same class or series are entitled to participate; provided that any such acquisitions or issuance is not made pursuant to an agreement or understanding with the Related Person; or (y) the acquisition of goods or services by or from the Corporation or a Subsidiary on terms no less favorable to the Corporation or such Subsidiary, as the case may be, than the terms on which such goods or services may be acquired in the ordinary course of business by or from a Person unaffiliated with the Corporation. (c) The provisions of subsection (1)(a) of this Article IV shall not apply to any Business Combination, and such Business Combination shall require only such affirmative vote, if any, as is required by law or otherwise, if such Business Combination shall have been approved by a majority (whether such approval is made prior or subsequent to the acquisition of beneficial ownership of the Voting Securities that caused the Related Person to become a Related Person) of the Disinterested Directors. (d) The provisions of subsection (1)(a) of this Article IV shall not apply to any Business Combination, and such Business Combination shall require only such affirmative vote, if any, as is required by law or otherwise, if all of the following conditions are met: (i) The Business Combination shall provide for consideration to be received by all holders of Common Shares in exchange for all their Common Shares, and the aggregate amount of cash and the Fair Market Value as of the date of consummation of the Business Combination of consideration other than cash, to be received per share by holders of Common Shares in such Business Combination shall be at least equal to the higher of the amounts determined under clauses (A) and (B) below (subject to appropriate adjustment for any 4 recapitalization, stock dividend, stock split, combination of shares or similar event): (A) if applicable, the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by or on behalf of the Related Person for any Common Shares within the two-year period immediately prior to the Announcement Date; and (B) the Fair Market Value per share of the Common Shares on the Announcement Date or on the Determination Date, whichever is higher; (ii) If the Business Combination provides for consideration to be received by holders of any class or series of Voting Securities other than Common Shares, whether or not the Related Person has previously acquired any shares of such class or series, the aggregate amount of cash and the Fair Market Value as of the date of consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of such class or series shall be at least equal to the higher of the amount determined under clauses (A) and (B) below (subject to appropriate adjustment for any recapitalization, stock split, stock dividend, combination of shares or similar event): (A) if applicable, the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by or on behalf of the Related Person for any share of such class or series in connection with the acquisition by the Related Person of beneficial ownership of shares of such class or series within the two-year period immediately prior to the Announcement Date; and (B) the Fair Market Value per share of such class or series on the Announcement Date or on the Determination Date, whichever is higher; (iii) The consideration to be received by holders of a particular class or series of outstanding Voting Securities (including Common Shares) shall be in cash or in the same form as previously has been paid by or on behalf of the Related Person in connection with its direct or indirect acquisition of beneficial ownership of shares of such class or series of Voting Securities. If the consideration so paid for shares of any class or series of Voting Securities varied as to form, the form of consideration for such class or series of Voting Securities shall be either cash or the form used to acquire beneficial ownership of the largest number of shares of such class or series of stock previously acquired by the Related Person; and 5 (iv) After such Related Person has become a Related Person, such Related Person shall not have received the benefit, directly or indirectly (except proportionately as a shareholder of the Corporation), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation, whether in anticipation of or in connection with such Business Combination or otherwise. (2) If any vote of holders of Voting Securities is required for the adoption or approval of any Business Combination, a proxy or information statement describing the Business Combination and complying with the requirements of the 1934 Act shall be mailed at a date determined by the Disinterested Directors to all shareholders of the Corporation whether or not such statement is required under the 1934 Act. The statement shall contain any recommendations as to the advisability of the Business Combination which the Disinterested Directors, or any of them, may choose to state and, if deemed advisable by the Disinterested Directors, an opinion of an investment banking firm as to the fairness of the terms of such Business Combination. Such firm shall be selected by the Disinterested Directors and paid a fee for its services by the Corporation as approved by the Disinterested Directors. (3) For purposes of this Article IV: (a) "Affiliate" and "beneficial owner" are used herein as defined in Rule 12b-2 and Rule 13d-3, respectively, under the Securities Exchange Act of 1934 as in effect on the date of adoption of this Article IV by the shareholders of the Corporation (the "1934 Act"). The term "Affiliate" as used herein shall exclude the Corporation, but shall include the definition of "Associate" as contained in Rule 12b-2. (b) "Announcement Date", with respect to any Business Combination, is the first public announcement of the proposed Business Combination. (c) A "Business Combination" is (i) a merger or consolidation of the Corporation or any of its subsidiaries with a Related Person; (ii) the sale, lease, exchange, pledge, transfer or other disposition (A) by the Corporation or any of its subsidiaries of all or a Substantial Part of the Corporation's Assets to a Related Person, or (B) by a Related Person of any of its assets, except in the ordinary course of business, to the Corporation or any of its subsidiaries; (iii) the issuance of shares or other securities of the Corporation or any of its subsidiaries to a Related Person, other than on a pro rata basis to all holders of Voting Securities of the same class held by the Related Person pursuant to a share split, share dividend or distribution of warrants or rights; (iv) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of a Related Person; (v) any reclassification of securities, recapitalization, merger or consolidation or other transaction which has the effect, directly or indirectly, of increasing the proportionate share of any Voting Securities beneficially owned by a Related Person; or (vi) any agreement, contract or other arrangement providing for any of the foregoing transactions. 6 (d) "Determination Date", with respect to any Related Person, is the date on which the Related Person became a Related Person. (e) A "Disinterested Director" is a member of the Board of Directors of the Corporation (other than the Related Person) who was a director prior to the time the Related Person became a Related Person, or any director who was recommended for election by the Disinterested Directors. Any action to be taken by theDisinterested Directors shall require the affirmative vote of a majority of the Disinterested Directors. (f) "Fair Market Value" is (a) in the case of shares, the highest closing sale price per share during the 30-day period immediately preceding the date in question of such shares on the principal United States securities exchange registered under the Exchange Act on which such shares are listed; or, if such shares are not listed on any such exchange, the highest closing bid quotation per share with respect to such shares during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotation System or any similar system then in use; or if no such quotations are available, the fair market value per share on the date in question of such shares as determined by at least two-thirds of the Disinterested Directors in good faith; and (b) in the case of property other than shares, the fair market value of such property on the date in question as determined in good faith by at least two-thirds of the Disinterested Directors. (g) A "Person" is a natural person or a legal entity of any kind, together with any Affiliate of such person or entity, or any person or entity with whom such person, entity or an Affiliate has any agreement or understanding relating to acquiring, voting or holding Voting Securities. (h) A "Related Person" is (i) any Person which, together with its Affiliates, is the beneficial owner of an aggregate of 10% or more of the Common Shares or of the total voting power of all outstanding Voting Securities, (ii) any officer, director or employee of a Related Person, (iii) any Person which, together with its Affiliates, shall become, in a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933, the beneficial owner of Voting Securities of which a Related Person was the beneficial owner at any time during the two years prior to the time such Person or Affiliate became such beneficial owner and (iv) any Affiliate of any such Person, provided, that the term "Related Person" shall not include the Corporation; any savings, employee stock ownership or other employee benefit plan of the Corporation or any trustee or fiduciary when acting in such capacity with respect to any such employee benefit plan of the Corporation; or any subsidiary all the capital stock of or equity interest in which is owned by the Corporation, by one or more such subsidiaries or by the Corporation and one or more such subsidiaries. (i) A "Substantial Part of the Corporation's Assets" shall mean assets of the Corporation or any of its subsidiaries in an amount equal to 20% or more of the fair market value, as determined by the Disinterested Directors, of the total consolidated 7 assets of the Corporation and its subsidiaries taken as a whole as of the end of its most recent fiscal year ended prior to the time the determination is made. (j) "Voting Securities" means all outstanding Common Shares and all other outstanding securities of the Corporation, if any, which are then entitled to vote generally in the election of directors or which have been designated as Voting Securities by a majority of the Disinterested Directors. ARTICLE V The street address of the Corporation's initial principal office is 5900 Lake Ellenor Drive, Orlando, Florida 32809. The registered agent for said Corporation is CT Corporation System, 1200 South Pine Island Road, Plantation, FL 33324. ARTICLE VI The name and address of the sole incorporator are: Name Mailing Address --------- ------------------ Joe R. Lee 5900 Lake Ellenor Drive Orlando, Florida 32809 The power of the sole incorporator as such shall terminate upon the filing of the Articles of Incorporation. ARTICLE VII The names and mailing addresses of the persons who are to serve as initial directors until the first annual meeting of shareholders or until their successors are elected and qualified are: Name Mailing Address ------- -------------------- Joe R. Lee 5900 Lake Ellenor Drive Orlando, Florida 32809 Ronald N. Magruder 5900 Lake Ellenor Drive Orlando, Florida 32809 Jeffrey J. O'Hara 5900 Lake Ellenor Drive Orlando, Florida 32809 8 Blaine Sweatt 5900 Lake Ellenor Drive Orlando, Florida 32809 ARTICLE VIII The following provisions are inserted for the regulation and conduct of the affairs of the Corporation, but it is expressly provided that the same are intended to be and shall be construed to be in furtherance and not in limitation or exclusion of the powers conferred by law: (1) Subject always to such bylaws as may be adopted from time to time by the shareholders, the Board of Directors is expressly authorized to adopt, alter, amend and repeal the bylaws of the Corporation, but any bylaw adopted by the Board of Directors may be altered, amended or repealed by the shareholders. The bylaws or any particular bylaw may fix a greater quorum or voting requirement for shareholders (or voting groups of shareholders) than is required by the Florida Law. (2) All corporate powers of the Corporation shall be managed by or under the authority of, and its business and affairs shall be managed under the direction of, its Board of Directors. Directors need not be shareholders. The bylaws may prescribe the number of directors, not less than three; may provide for the increase or reduction thereof but not less than three; and may prescribe the number necessary to constitute a quorum, which number may be less than a majority of the whole Board of Directors, but not less than the number required by law. Whenever a vacancy occurs on the Board of Directors, including a vacancy resulting from an increase in the number of directors, it may be filled only by the affirmative vote of a majority of the remaining directors, though less than a quorum of the board of directors. (3) The Corporation hereby elects not to be governed by Section 607.0901 (relating to affiliated transactions) or by Section 607.0902 (relating to control share acquisitions) of the Florida Law, and the provisions of such statutes shall not apply to the Corporation. ARTICLE IX (1) A director of the Corporation shall not be personally liable for monetary damages to the Corporation, its shareholders or any other person for any statement, vote, decision or failure to act, regarding corporate management or policy, to the fullest extent permitted by Florida Law. (2) (a) Each person (and the heirs, executors or administrators of such person) who was or is a party or is threatened to be made a party to, or is involved in, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, whether formal or informal and whether or not such action, suit or proceeding is brought by or in the right of the Corporation, by reason 9 of the fact that such person is or was a director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall be indemnified and held harmless by the Corporation to the fullest extent permitted by Florida Law. The right to indemnification conferred in this Article IX shall also include the right to be paid by the Corporation the expenses incurred in connection with any such proceeding in advance of its final disposition to the fullest extent permitted by Florida Law. The right to indemnification conferred in this Article IX shall be a contract right. (b) The Corporation may, by action of its Board of Directors, provide indemnification to such of the directors, officers, employees and agents of the Corporation to such extent and to such effect as the Board of Directors shall determine to be appropriate and permitted by Florida Law. (3) The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity or arising out of such person's status as such, whether or not the Corporation would have the power to indemnify him against such liability under Florida Law. (4) The rights and authority conferred in this Article IX shall not be exclusive of any other right which any person may otherwise have or hereafter acquire. (5) Neither the amendment nor repeal of this Article IX, nor the adoption of any provision of the Articles of Incorporation or the bylaws of the Corporation, nor, to the fullest extent permitted by Florida Law, any modification of law, shall eliminate or reduce the effect of this Article IX in respect of any acts or omissions occurring prior to such amendment, repeal, adoption or modification. ARTICLE X No director of the Corporation may be removed from office by the shareholders except (i) for cause and (ii) by the affirmative vote, at a special meeting of shareholders held for that purpose, of not less than 66 2/3% of the shareholders entitled to vote for the election of directors (or, if a director is elected by a voting group of shareholders, 66 2/3% of the shareholders entitled to vote for the election of such director). Upon any such removal, the term of the director who shall have been so removed shall forthwith terminate and there shall be a vacancy in the Board of Directors to be filled in such manner as shall be provided herein and by the bylaws of the Corporation. 10 ARTICLE XI A special meeting of shareholders of the Corporation shall be held (a) on call of its Board of Directors or the person or persons authorized to do so by the bylaws, or (b) if the holders of not less than 50% of all the votes entitled to be cast on any issue proposed to be considered at the proposed special meeting sign, date and deliver to the Corporation's Secretary one or more written demands for the meeting describing the purpose or purposes for which it is to be held. Nothwithstanding the foregoing, whenever holders of one or more series of Preferred Shares shall have the right, voting separately as a class or series, to elect directors, such holders may call, pursuant to the terms of the resolution or resolutions adopted by the Board of Directors pursuant to Article III, special meetings of holders of such Preferred Shares. ARTICLE XII Subject to the provisions of Articles III and XIII hereof, the Corporation reserves the right to amend, alter, change or repeal any provision contained in the Articles of Incorporation in the manner now or hereafter prescribed by statute, and, with the sole exception of those rights and powers conferred under Article IX hereof, all rights and powers conferred herein upon the shareholders, directors and officers, if any are granted subject to this reservation. ARTICLE XIII (1) Any action required or permitted to be taken by shareholders of the Corporation may be taken only upon the vote of shareholders at an annual or special meeting of shareholders duly noticed and called in accordance with Florida Law, and no such action may be taken without a meeting by written consent of shareholders. (2) No amendment to the Articles of Incorporation shall amend, alter, change or repeal any of the provisions of Article IV, X, XI or this Article XIII hereof unless such amendment shall receive the affirmative vote of not less than 66 2/3% of the Voting Securities, excluding the Voting Securities of any Related Person, as defined in Article IV. IN WITNESS WHEREOF, I have hereunto signed by name this 29th day of March, 1995. /s/ Joe R. Lee ----------------------- Joe R. Lee 11 ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION OF DARDEN RESTAURANTS, INC. The undersigned does hereby certify, on behalf of Darden Restaurants, Inc. (the "Corporation"), that pursuant to the authority contained in the Corporation's Articles of Incorporation (the "Articles of Incorporation"), and in accordance with the provisions of Section 607.0602(4) of the Florida Business Corporation Act (the "Act") and pursuant to a special meeting of the Board of Directors of the Corporation in accordance with Section 607.0820 of the Act, the Board of Directors of the Corporation duly adopted and approved on May 16, 2005 resolutions providing for the creation of a series of preferred stock to be designated as "Series A Participating Cumulative Preferred Stock," and pursuant to Section 607.0602(4) of the Act and Section (2) of Article III of the Articles of Incorporation, there being no shareholder action required, Article III of the Articles of Incorporation is hereby amended by adding the following new Section (4) to create such preferred shares having the preferences, limitations and relative rights as follows: "(4) SERIES A PARTICIPATING CUMULATIVE PREFERRED STOCK Section 1. Designation and Amount. The shares of such series shall be designated as "Series A Participating Cumulative Preferred Stock" (the "Series A Preferred Stock") and the number of shares constituting the Series A Preferred Stock shall be 2,000,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of Series A Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series A Preferred Stock. Section 2. Dividends and Distributions. (A) Subject to the rights of the holders of any shares of any series of Preferred Stock (or any similar stock) ranking prior and superior to the Series A Preferred Stock with respect to dividends, the holders of shares of Series A Preferred Stock, in preference to the holders of Common Stock, without par value (the "Common Stock"), of the Corporation, and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of February, May, August and November in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount 12 per share (rounded to the nearest cent) equal to the greater of (a) $1.00 or (b) subject to the provision for adjustment hereinafter set forth, 1,000 times the aggregate per share amount of all cash dividends, and 1,000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in paragraph (A) of this Section immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. 13 Section 3. Voting Rights. In addition to any other voting rights required by law, the holders of shares of Series A Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the shareholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein, in any other Articles of Amendment creating a series of Preferred Stock or any similar stock, or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of shareholders of the Corporation. (C) Except as set forth herein, or as otherwise provided by law, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 4. Certain Restrictions. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; (ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; 14 (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or (iv) redeem or purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein, in the Articles of Incorporation, or in any other Articles of Amendment creating a series of Preferred Stock or any similar stock or as otherwise required by law. Section 6. Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received $1,000.00 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of shares of Series A Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 1,000 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (2) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares 15 of Common Stock, then in each such case the aggregate amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under the proviso in clause (1) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 1,000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. No Redemption. The shares of Series A Preferred Stock shall not be redeemable. Section 9. Rank. The Series A Preferred Stock shall rank, with respect to the payment of dividends and the distribution of assets, junior to all other series of any other class of the Corporation's Preferred Stock. Section 10. Fractional Shares. Series A Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Preferred Stock. Section 11. Amendment. The Articles of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Series A Preferred Stock, voting together as a single class." 16 IN WITNESS WHEREOF, the undersigned officer of the Corporation has executed the foregoing Articles of Amendment to the Corporation's Articles of Incorporation this 26th day of May, 2005. By: /s/Clarence Otis, Jr. -------------------------------- Clarence Otis, Jr. Chief Executive Officer 17 EX-10 4 form10k_exhibit10d.txt FORM 10K EXHIBIT 10D 7-29-05 EXHIBIT 10(d) SUPPLEMENTAL PENSION PLAN OF DARDEN RESTAURANTS, INC. SUPPLEMENTAL PENSION PLAN OF DARDEN RESTAURANTS, INC. Effective as of the Distribution Date, Darden Restaurants, Inc. hereby adopts the Supplemental Pension Plan of Darden Restaurants, Inc. for the exclusive benefit of its employees, pursuant to authorization of the Board of Directors of Darden Restaurants, Inc. ARTICLE I INTRODUCTION Section 1.1 Name of Plan. The name of the Plan is the "Supplemental Pension Plan of Darden Restaurants, Inc." It is also referred to as the "Supplemental Plan" or the "Plan." Section 1.2 Purpose of Plan. The purpose of this Plan is to accept a transfer of liabilities from the Supplemental Retirement Plan of General Mills, Inc., as in effect on the Distribution Date, with respect to individuals who are employees of Darden Restaurants, Inc. or one of its affiliates as of such date. Section 1.3 Effective Date. The effective date of the Plan is the Distribution Date. This Plan, except as may otherwise be specifically provided herein, shall not apply to Participants who separated from active service prior to the Distribution Date. 1 ARTICLE II DEFINITIONS Section 2.1 Base Plan shall mean one of the following defined benefit pension plans sponsored by the Company or General Mills, Inc. which are qualified under the provisions of Code Section 401: (a) Retirement Plan for Employees of Darden Restaurants. Inc., and (b) Retirement Income Plan of General Mills, Inc. based on the provisions of such plan as in effect immediately prior to the Distribution Date. With respect to Participants in this Plan who were (i) employed as Presidents of a General Mills Restaurants, Inc. division as of May 31, 1994, and (ii) not eligible for any benefit accrual under the terms of the Base Plan in which they participated for the period from January 1, 1989 through May 31, 1994, benefits accrued under the terms of this Plan shall be equal to the entire benefit which would have accrued to such individuals under the applicable Base Plan for this period. The form and timing of such payments shall be subject to all provisions of this Plan. Section 2.2 Board shall mean the Board of Directors of Darden Restaurants, Inc. Section 2.3 Change of Control shall mean the occurrence of any of the following events: (a) any person (including a group as defined in Section 13(d)(3) of the Securities Exchange Act of 1934) becoming, directly or indirectly, the beneficial owner of twenty percent (20%) or more of the shares of stock of Darden Restaurants, Inc. entitled to vote for the election of directors. (b) as a result of or in connection with any cash tender offer, exchange offer, merger or other business combination, sale of assets or contested election, or combination of the foregoing, the persons who were directors of the Company just prior to such event shall cease to constitute a majority of the Company's Board of Directors; or (c) the stockholders of the Company approve an agreement providing for a transaction in which the Company will cease to be an independent publicly-owned corporation or a sale or other disposition of all or substantially all of the assets of the Company occurs. Section 2.4 Code shall mean the Internal Revenue Code of 1986, as it may be amended from time to time. Section 2.5 Company shall mean Darden Restaurants, Inc. and any of its subsidiaries or affiliated business entities as shall be authorized to participate in the Plan by the Board, or its delegate. Section 2.6 Compensation Committee shall mean the Compensation Committee of the Board. 2 Section 2.7 Deferred Cash Award shall mean the cash amount deferred by an individual prior to January 1, 1995, under any formal plan of deferred compensation sponsored by the Company or one of its affiliates. A Deferred Cash Award shall not include: (a) the amount of any base salary deferred during calendar year 1986; (b) any interest or investment increment applied to the amount of the cash award which is deferred; or (c) any cash amount deferred by any person under any individual contract or arrangement with the Company or any of its affiliates. Section 2.8 Distribution Date shall mean the date as defined in the Information Statement distributed to shareholders of General Mills, Inc. in connection with the distribution of Darden Restaurants, Inc. Section 2.9 ERISA shall mean the Employee Retirement Income Security Act of 1974, as it may be amended from time to time. Section 2.10 Maximum Benefit shall mean the maximum annual benefit payable in dollars permitted to be either accrued or paid to a participant of any Base Plan, as determined under all applicable provisions of the Code and ERISA, specifically taking into account the limitations of Code Sections 401(a)17 and 415, and any applicable regulations thereunder. It is specifically intended that the Maximum Benefit, as defined herein, shall take into account changes in the dollar limits under Code Sections 401(a)17 and 415, and benefits payable from this Plan and the Base Plan shall be adjusted accordingly. In addition, if a Base Plan limits the accrued benefits of any Participant by restricting the application of future changes in such dollar limits with respect to such Participant, benefits payable under this Plan shall nevertheless be determined on the full amount that would have been permissible absent such restrictions under the Base Plan. Section 2.11 Minor Amendment Committee shall mean the Minor Amendment Committee appointed by the Compensation Committee. Section 2.12 Participant shall mean an individual who is a participant in the Company's Management Incentive Plan or who is eligible to defer compensation under a formal deferred compensation program maintained by the Company, and who was: (a) an active participant in one or more Base Plans on and after January 1, 1976 and whose accrued benefits, determined on the basis of the provisions of such Base Plans without regard to the Maximum Benefit, would exceed the Maximum Benefit; or b) An individual with a Deferred Cash Award, which, if included as compensation under any Base Plans in which such individual is a participant, would result in a greater accrued benefit under the provisions of such Base Plans. An eligible individual shall remain a Participant under this Supplemental Plan until all amounts payable on his or her behalf from this Plan have been paid. Section 2.13 Defined Terms. Capitalized terms which are not defined herein shall have the meaning ascribed to them in the relevant Base Plan. 3 ARTICLE III BENEFITS Section 3.1 Effect of Retirement. Upon the Normal, Early, or Late Retirement of a Participant, as provided under a Base Plan, such Participant shall be entitled to a benefit equal to the amount determined in accordance with the provisions of the Base Plan without regard to the limitations of the Maximum Benefit, including as compensation for purposes of such calculation any Deferred Cash Award (as if actually paid at the time of the award), reduced by the lesser of the Participant's actual accrued benefit under such Base Plan or the Maximum Benefit. Section 3.2 Spouse's Pension. Upon the death of a Participant whose surviving spouse is eligible for a Spouse's Pension under a Base Plan, such surviving spouse shall be entitled to a benefit under this Supplemental Plan, determined in accordance with the provisions of the Base Plan without regard to the limitations of the Maximum Benefit, and including as compensation for purposes of such calculation any Deferred Cash Award (as if actually paid at the time of the award), reduced by the lesser of the actual Spouse's Pension payable under such Base Plan or the Maximum Benefit. Section 3.3 Effect of Termination Prior to Retirement Eligibility. If a Participant terminates employment with the Company and is entitled to a Vested Deferred Pension under a Base Plan, such Participant shall be entitled to a benefit equal to the amount determined in accordance with the provisions of the Base Plan without regard to the limitations of the Maximum Benefit, including as compensation for purposes of such calculation any Deferred Cash Award (as if actually paid at the time of the award), reduced by the lesser of the Participant's actual accrued benefit under such Base Plan or the Maximum Benefit. Section 3.4 Benefits Prior to Separation from Service. A Participant's benefit under this Supplemental Plan may increase or decrease, before or after Retirement or termination, as a result of changes in the formula under any Base Plan, the Maximum Benefit, or changes in the earnings used to calculate benefits under a Base Plan formula. Any benefit accrued under this Supplemental Plan as a result of a Participant's Deferred Cash Award shall be payable only if, and to the extent that on the date of his or her termination of employment, both of the following conditions are satisfied: (a) The Participant has a vested accrued benefit under the applicable Base Plan, and (b) A Deferred Cash Award was made during a year which is used in the calculation of Final Average Earnings under this Supplemental Plan on the date of termination. Section 3.5 Form of Payment. Any benefit amount payable under the Supplemental Plan to a married Participant shall be adjusted and paid in the form of a joint and 100% to survivor annuity. Any benefit amount payable under the Supplemental Plan to an unmarried Participant shall be paid in the form of a single life annuity. Notwithstanding the above, a married Participant may request, subject to the approval of the Minor Amendment Committee, to have such benefit amounts adjusted and paid as a joint and 50% to survivor annuity or as a single life annuity. Further, any Participant may request, subject to the approval of the Minor Amendment Committee, that any benefit amount be paid in a single sum payment in cash, effective as of the first day monthly benefits would otherwise begin. Any request for an alternate form of benefit that is granted may be made at any time before benefits would otherwise begin. The Minor Amendment Committee may approve or reject any such request in its sole discretion Any joint and survivor annuity shall be the actuarial equivalent of a single life annuity based on the following factors, determined using the ages of the Participant and spouse on the effective date of the payment: 4 (a) The formula for the joint and 100% to survivor factor is: .868 + .005 (65 - X) + .005 (Y - X), where X is equal to the Participant's age and Y is equal to the age of the spouse. (b) The formula for the joint and 50% to survivor factor is: .928 + .003 (65 - X) + .003 (Y - X), where X is equal to the Participant's age and Y is equal to the age of the spouse. For the purpose of calculating any lump sum payment, the interest rate and mortality table used shall be the same as used under the Retirement Plan for Employees of Darden Restaurants, Inc. at the time the lump sum payment is made. Section 3.6 Time of Payment. The payment of benefits determined under the provisions of the Supplemental Plan shall commence on the first day of the month coincident with or next following the date upon which a Participant (or surviving spouse) first becomes eligible to commence receiving benefits under the Base Plan or Plans, regardless of the time benefits actually commence under the Base Plan. Notwithstanding any other provisions of the Supplemental Plan to the contrary, the Minor Amendment Committee may, in its sole discretion, direct that payments be made before such payments are otherwise due, if, for any reason (including but not limited to, a change in the tax or revenue laws of the United States of America, a published ruling or similar announcement issued by the Internal Revenue Service, a regulation issued by the Secretary of the Treasury or his delegate, or a decision by a court of competent jurisdiction involving a Participant or Beneficiary), it believes that a Participant or Beneficiary has recognized or will recognize income for federal income tax purposes with respect to amounts that are or will be payable under the Supplemental Plan before they are to be paid. In making this determination, the Minor Amendment Committee shall take into account the hardship that would be imposed on the Participant or Beneficiary by the payment of federal income taxes under such circumstances. Section 3.7 Effect of Changes in the Maximum Benefit. In the event the dollar amount of the Maximum Benefit increases as a result of federal legislation, the benefits of any Participant payable under the Supplemental Plan, whether or not in pay status, shall be recalculated to take into account the higher Maximum Benefit payable from the applicable Base Plan. If payments have already commenced under the provisions of the applicable Base Plan and the Supplemental Plan, benefit amounts under both Plans shall be adjusted to reflect the higher Maximum Benefit, by increasing the amount paid under the Base Plan and decreasing the amount paid under the Supplemental Plan, as soon as administratively possible after such a change. Notwithstanding the above, if a Base Plan is terminated, no adjustments shall be made to benefits payable under the Supplemental Plan with respect to changes in the Maximum Benefit after the date of termination of the Base Plan. Section 3.8 Participants Formerly on Leave from General Mills, Inc. to the Company. Participants in this Plan (i) who were active participants in the Retirement Income Plan of General Mills, Inc. ("RIP") on "leave of absence status" to General Mills Restaurants, Inc. and (ii) whose leaves were canceled effective as of May 31, 1991, may be entitled to additional benefits under this Plan as described below. In addition to any benefits that such a Participant may be entitled to under the provisions of this Article III, this Plan shall also pay the difference, if any, between the total benefits the Participant is entitled to from the Base Plan in which he or she is participating at the time of termination and this Plan and the annuity value of each FlexComp Award made to the Participant, and the total benefits the Participant would have been entitled to from the RIP and this Plan, had the Participant continued to participate in the RIP until the date of the Participant's termination of employment or Retirement. 5 The annuity value of a FlexComp Award shall be equal to the life only benefit that would be payable, determined using the same interest rate and mortality assumptions described in Section 3.5, under (a) or (b) below: (a) If the Participant elected to defer receipt of the FlexComp Award to Retirement or termination of employment, and the full amount deferred has remained in the FlexComp Plan until the date of the Participant's Retirement or termination, the value of such FlexComp Award at such time. (b) With respect to any other FlexComp Award, a "hypothetical" value of such FlexComp Award shall be calculated based on the amount actually received by the Participant, assuming that such amount was held in the FlexComp Plan from the date of payment to the Participant until termination or Retirement, and as if said amount was credited with interest at the rate of the Fixed Fund specified in the FlexComp Plan. 6 ARTICLE IV PLAN ADMINISTRATION Section 4.1 Compensation Committee. The Supplemental Plan shall be administered by the Compensation Committee, and the Compensation Committee shall have full authority to interpret the Supplemental Plan. Such interpretations of the Compensation Committee shall be final and binding on all parties, including the Participants, their beneficiaries, surviving spouses and the Company. Section 4.2 Delegated Duties. The Compensation Committee shall have the authority to delegate the duties and responsibilities of administering the Supplemental Plan, maintaining records, issuing such rules and regulations as it deems appropriate, and making the payments hereunder to such employees or agents of the Company as it deems proper. Section 4.3 Amendment and Termination. The Board, or if specifically delegated, its delegate, may amend, modify or terminate the Supplemental Plan at any time, provided, however, that no such amendment, modification or termination shall adversely affect any accrued benefit under the Supplemental Plan to which a Participant, or the Participant's Beneficiary, is entitled under Article III prior to the date of such amendment or termination, and in which such Participant, or the Participant's Beneficiary, would have been vested if such benefit had been provided under the applicable Base Plan, unless the Participant, or the Participant's Beneficiary, becomes entitled to an amount equal to the cash value of such benefit under another plan, program or practice adopted by the Company. Notwithstanding the above, no amendment, modification, or termination which would affect benefits accrued under this Supplemental Plan prior to such amendment, modification or termination may occur after a Change in Control without the written consent of a majority of the Participants determined as of the day before such Change in Control. Each year the Compensation Committee shall notify, in writing, those individuals who have any accrued benefits under the Supplemental Plan. Section 4.4 Payments. The Company will pay all benefits arising under this Supplemental Plan and all costs, charges and expenses relating thereto. The benefits payable under this Supplemental Plan to each Participant shall not be greater that what would have been paid in the aggregate under the Base Plan (i) in the absence of federal limitations on benefit amounts and (ii) if amounts deferred had been paid to the Participant when earned. Section 4.5 Arbitration. (a) Any controversy or claim arising out of or relating to this Plan, or any alleged breach of the terms or conditions contained herein, shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the "AAA") as such rules may be modified herein. (b) An award rendered in connection with an arbitration pursuant to this Section shall be final and binding and, judgment upon such an award may be entered and enforced in any court of competent jurisdiction. (c) The forum for arbitration under this Plan shall be Orlando, Florida,and the governing law for such arbitration shall be laws of the State of Florida. 7 (d) Arbitration under this Section shall be conducted by a single arbitrator selected jointly by the Company and the Participant (the "Complainant"). If within thirty (30) days after a demand for arbitration is made, the Company and the Complainant are unable to agree on a single arbitrator, three arbitrators shall be appointed. Each party shall select one arbitrator and those two arbitrators shall then select a third neutral arbitrator which thirty (30) days after their appointment. In connection with the selection of the third arbitrator, consideration shall be given to familiarity with executive compensation plans and experience in dispute resolution between parties, as a judge or otherwise. If the arbitrators selected by the parties cannot agree on the third arbitrator, they shall discuss the qualifications of such third arbitrator with the AAA prior to selection of such arbitrator, which selection shall be in accordance with the Commercial Arbitration Rules of the AAA. (e) If an arbitrator cannot continue to serve, a successor to an arbitrator selected by a party shall be also selected by the same party, and a successor to a neutral arbitrator shall be selected as specified in subsection (d) of this Section. A full rehearing will be held only if the neutral arbitrator is unable to continue to serve or if the remaining arbitrators unanimously agree that such a rehearing is appropriate. (f) The arbitrator or arbitrators shall be guided, but not bound, by the Federal Rules of Evidence and by the procedural rules, including discovery provisions, of the Federal Rules of Civil Procedure. Any discovery shall be limited, to information directly relevant to the controversy or claim in arbitration. (g) The parties shall each be responsible for their own costs and expenses, except for the fees and expenses of the arbitrators, which shall be shared equally by the Company and the Complainant. Section 4.6 Non-Assignability of Benefits. Neither any benefit payable hereunder nor the right to receive any future benefit payable under the Supplemental Plan may be anticipated, alienated, sold, transferred, assigned, pledged, encumbered, or subjected to any charge or legal process, and if any attempt is made to do so, or a person eligible for any benefits becomes bankrupt, the interest under the Supplemental Plan of the person affected may be terminated by the Compensation Committee which, in its sole discretion, may cause the same to be held or applied for the benefit of one or more of the dependents of such person or make any other disposition of such benefits that it deems appropriate. Section 4.7 Applicable Law. All questions pertaining to the construction, validity and effect of the Supplemental Plan shall be determined in accordance with the laws of the United States and the laws of the State applicable to the Base Plan covering the Participant. 8 EX-10 5 form10k_exhibit10q.txt FORM 10K EXHIBIT 10Q 7-29-05 EXHIBIT 10(q) DARDEN RESTAURANTS, INC. 2002 STOCK INCENTIVE PLAN RESTRICTED STOCK AWARD AGREEMENT This Restricted Stock Award Agreement is between Darden Restaurants, Inc., a Florida corporation (the "Company"), and you, the person named in the attached Award Certificate who is an employee of the Company or one of its Affiliates. This Agreement is effective as of the date of grant set forth in the attached Award Certificate (the "Grant Date"). The Company wishes to award to you a number of shares of the Company's Common Stock, no par value (the "Common Stock"), subject to certain restrictions as provided in this Agreement, in order to carry out the purpose of the Company's 2002 Stock Incentive Plan (the "Plan"). Accordingly, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and you hereby agree as follows: 1. Award of Restricted Stock. ------------------------- The Company hereby grants to you, effective as of the Grant Date, an Award of Restricted Stock for that number of shares of Common Stock set forth in the attached Award Certificate (the "Shares"), on the terms and conditions set forth in this Agreement and the Award Certificate and in accordance with the terms of the Plan. 2. Rights with Respect to the Shares. --------------------------------- With respect to the Shares, you shall be entitled to exercise the rights of a shareholder of Common Stock of the Company, including the right to vote the Shares and the right to receive cash dividends thereon as provided in Section 8 of this Agreement, unless and until the Shares are forfeited pursuant to Section 5 hereof. Your rights with respect to the Shares shall remain forfeitable at all times prior to the date or dates on which such rights become vested, and the restrictions with respect to the Shares lapse, in accordance with Section 3, 4 or 5 hereof. 3. Vesting. ------- (a) Subject to the terms and conditions of this Agreement, the Shares shall vest, and the restrictions with respect to the Shares shall lapse, on the date or dates and in the amount or amounts set forth in the attached Award Certificate if you remain continuously employed by the Company or an Affiliate of the Company until the respective vesting dates. (b) If, but only if, the Award Certificate attached to this Restricted Stock Award Agreement states that the Expiration Date of the Restricted Period is subject to acceleration based on Company performance, then the following provisions will apply: (i) The Shares shall vest, and the restrictions on the Shares shall lapse, annually following the end of each of the first five fiscal years ending after the Grant Date, in an amount equal to twice the Darden Annual Sales Growth Rate (as defined below) for the applicable fiscal year, rounded to the nearest whole number, provided that the Darden Annual Return on Capital (as defined below) for that fiscal year exceeds the Return on Capital Threshold (as defined below) for that fiscal year. (ii) For purposes of this Agreement, "Darden Annual Sales Growth Rate" for the applicable fiscal year means the percentage computed by (x) subtracting the consolidated sales for the Company for the fiscal year immediately preceding the applicable fiscal year (as reflected in the Company's annual audited financial statements for such year) from the consolidated sales for the Company for the applicable fiscal year (as reflected in the Company's annual audited financial statement for such year), (y) dividing the amount computed pursuant to clause (x) by the consolidated sales for the Company for the fiscal year immediately preceding the applicable fiscal year (as reflected in the Company's annual audited financial statements for such year) and (z) multiplying the amount computed pursuant to clause (y) by 100. Following the end of the second through fifth fiscal years ending after the Grant Date, the Darden Annual Sales Growth Rate shall be determined on a cumulative basis for the combined years covered by the calculation, adjusted to reflect the amount of the Darden Annual Sales Growth Rate, if any, that has previously resulted in the accelerated vesting of Shares pursuant to this Section 3(b). (iii) For purposes of this Agreement, "Darden Annual Return on Capital" for the applicable fiscal year means the Company's return on capital for that year as computed by the Company's accounting department, and the term "Return on Capital Threshold" for the applicable fiscal year means the median return on capital as computed by the Company's accounting department for the competitive set of companies selected by the Committee for the prior year. If the Darden Annual Return on Capital does not exceed the Return on Capital Threshold for the applicable fiscal year, then no Shares shall vest pursuant to this Section 3(b) for that year. (iv) The calculations under this Section 3(b) shall be made on or before the June 30 immediately following the end of the applicable fiscal year and any accelerated vesting resulting from such calculations shall be effective as of that June 30. (v) The Committee administering the Plan shall have the authority to make any determinations regarding questions arising from the application of the provisions of this Section 3(b), which determination shall be final, conclusive and binding on you and the Company. 4. Change of Control. ----------------- Notwithstanding the vesting provisions contained in Section 3 above, but subject to the other terms and conditions in this Agreement, upon the occurrence of a Change of Control (as defined below) you shall become immediately and unconditionally vested in all Shares and the restrictions with respect to all of the Shares shall lapse. For purposes of this Agreement, "Change of Control" shall mean any of the following events: 2 (a) any person (including a group as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) becomes, directly or indirectly, the beneficial owner of 20% or more of the shares of the Company entitled to vote for the election of directors; (b) as a result of or in connection with any cash tender offer, exchange offer, merger or other business combination, sale of assets or contested election, or combination of the foregoing, the persons who were directors of the Company just prior to such event cease to constitute a majority of the Company's Board of Directors; or (c) the consummation of a transaction in which the Company ceases to be an independent publicly-owned corporation or the consummation of a sale or other disposition of all or substantially all of the assets of the Company. 5. Early Vesting; Forfeiture; Automatic Conversion to Restricted Stock ------------------------------------------------------------------------ Units; Deposit Shares. - --------------------- (a) If you cease to be employed by the Company or an Affiliate of the Company prior to the vesting of the Shares pursuant to Section 3 or 4 hereof, your rights to all of the unvested Shares shall be immediately and irrevocably forfeited, including the right to vote such Shares and the right to receive cash dividends on such Shares, except that: (i) if the Company or an Affiliate of the Company terminates your employment involuntarily and not for cause (as determined by the Committee administering the Plan) prior to the vesting of the Shares pursuant to Section 3 or 4 hereof, and your combined age and years of service with the Company or an Affiliate of the Company equal at least 70, then any Shares that have not vested on the date of your termination of employment but that would have vested within two years from the date of termination if your employment had continued shall become immediately vested on the date of your termination of employment; (ii) if you retire on or after age 55 with 10 years of service with the Company or an Affiliate of the Company prior to the vesting of the Shares pursuant to Section 3 or 4 hereof, subject to Sections 5 (c) and 5 (d) below, you will continue to vest in the Shares of Restricted Stock as set forth in the Award Certificate; or (iii) if you die prior to the vesting of the Shares pursuant to Section 3, 4 or 5 hereof, the Shares will vest on a pro rata basis on the date of your death, based on the number of full months from the Grant Date to the date of your death. No transfer by will or the applicable laws of descent and distribution of any Shares which vest by reason of your death shall be effective to bind the Company unless the Committee administering the Plan shall have been furnished with written notice of such transfer and a copy of the will or such other evidence as the Committee may deem necessary to establish the validity of the transfer. (b) If the Award Certificate attached to this Restricted Stock Award Agreement states that this Restricted Stock Award has been awarded subject to the Darden Restaurants, Inc. Management and Professional Incentive Plan (the "MIP"), then this Restricted Stock Award and the related Shares shall be cancelled, forfeited and returned to the Company unless all of the 3 requirements set forth in the MIP for the year to which the grant of this Restricted Stock Award relates are satisfied. (c) If the Award Certificate attached to this Restricted Stock Award Agreement states that the Expiration Date of the Restricted Period is not subject to acceleration based on Company performance, and if, as determined in January of each year, you will attain the age of 55 with 10 years of service with the Company or an Affiliate of the Company during the one-year period beginning on the last business day of January of that year (the "Automatic Conversion Date") and ending on the last business day of January of the following year, then (i) as of the Automatic Conversion Date, your rights to all of the Shares that are unvested on the Automatic Conversion Date shall be immediately and irrevocably forfeited, including the right to vote such Shares and the right to receive cash dividends on such Shares, and (ii) you shall automatically receive, effective as of the Automatic Conversion Date, an award of restricted stock units under the Plan for that number of units equal to the number of Shares so forfeited, dated as of the Grant Date, with the same vesting schedule as provided in this Agreement and containing such other terms and conditions as are set forth in or established under the Plan. (d) If the Award Certificate attached to this Restricted Stock Award Agreement states that the Expiration Date of the Restricted Period is subject to acceleration based on Company performance, and if, as determined in January of each year, you will attain the age of 55 with 10 years of service with the Company or an Affiliate of the Company during the one-year period beginning on the last business day of January of that year (the "Deposit Date") and ending on the last business day of January of the following year, then you may elect to place on deposit with the Company one personally owned share of Common Stock (the "Deposit Shares") for every two Shares that are unvested on the Deposit Date. If you withdraw any or all of the Deposit Shares before the Shares have vested, two Shares that are unvested will be forfeited for each Deposit Share withdrawn. The Company will release to you one Deposit Share for every two Shares that vest following the Deposit Date. In lieu of physical deposit of Share certificates with the Company, the Company may accept such other form or evidence of deposit as it deems appropriate. 6. Restriction on Transfer. ----------------------- Until the Shares vest pursuant to Section 3, 4 or 5 hereof, none of the Shares may be sold, assigned, transferred, pledged, attached or otherwise encumbered, and no attempt to transfer the Shares, whether voluntary or involuntary, by operation of law or otherwise, shall vest the transferee with any interest or right in or with respect to the Shares. 7. Issuance and Custody of Certificates. ------------------------------------ (a) The Company shall cause the Shares to be issued in your name, either by book-entry registration or issuance of a stock certificate or certificates, which certificate or certificates shall be held by the Company. The Shares shall be restricted from transfer and shall be subject to an appropriate stop-transfer order. If any certificate is issued, the certificate shall bear an appropriate legend referring to the restrictions applicable to the Shares. 4 (b) If any certificate is issued, you shall be required to execute and deliver to the Company a stock power or stock powers relating to the Shares as a condition to the receipt of this Award of Restricted Stock. (c) After any Shares vest pursuant to Section 3, 4 or 5 hereof, and following payment of the applicable withholding taxes pursuant to Section 9 hereof, the Company shall promptly cause such vested Shares (less any shares withheld to pay taxes), free of the restrictions and/or legend described in Section 7(a) hereof, to be delivered, either by book-entry registration or in the form of a certificate or certificates, registered in your name or in the names of your legal representatives, beneficiaries or heirs, as the case may be. 8. Distributions and Adjustments. ----------------------------- (a) If any Shares vest subsequent to any change in the number or character of the Common Stock of the Company (through any stock dividend or other distribution, recapitalization, stock split, reverse stock split, reorganization, merger, consolidation split-up, spin-off, combination, repurchase or exchange of shares or otherwise), you shall then receive upon such vesting the number and type of securities or other consideration which you would have received if such Shares had vested prior to the event changing the number or character of the outstanding Common Stock. (b) Any additional shares of Common Stock of the Company, any other securities of the Company and any other property (except for cash dividends or other cash distributions) distributed with respect to the Shares prior to the date or dates the Shares vest shall be subject to the same restrictions, terms and conditions as the Shares to which they relate and shall be promptly deposited with the Secretary of the Company or a custodian designated by the Secretary. (c) Any cash dividends or other cash distributions payable with respect to the Shares shall be distributed to you at the same time cash dividends or other cash distributions are distributed to shareholders of the Company generally. 9. Taxes. ----- (a) You acknowledge that you will consult with your personal tax advisor regarding the income tax consequences of the grant of the Shares, payment of dividends on the Shares, the vesting of the Shares and any other matters related to this Agreement. In order to comply with all applicable federal, state or local income tax laws or regulations, the Company may take such action as it deems appropriate to ensure that all applicable federal, state or local payroll, withholding, income or other taxes, which are your sole and absolute responsibility, are withheld or collected from you. (b) In accordance with the terms of the Plan, and such rules as may be adopted by the Committee administering the Plan, you may elect to satisfy any applicable tax withholding obligations arising from the receipt of, or the lapse of restrictions relating to, the Shares by (i) delivering cash (including check, draft, money order or wire transfer made payable to the order of the Company), (ii) having the Company withhold a portion of the Shares otherwise to be delivered having a Fair Market Value equal to the amount of such taxes, or (iii) delivering to the 5 Company shares of Common Stock having a Fair Market Value equal to the amount of such taxes. The Company will not deliver any fractional Share but will pay, in lieu thereof, the Fair Market Value of such fractional Share. Your election must be made on or before the date that the amount of tax to be withheld is determined. 10. General Provisions. ------------------ (a) Interpretations. This Agreement is subject in all respects to the terms of the Plan. A copy of the Plan is available upon your request. Terms used herein which are defined in the Plan shall have the respective meanings given to such terms in the Plan, unless otherwise defined herein. In the event that any provision of this Agreement is inconsistent with the terms of the Plan, the terms of the Plan shall govern. Any question of administration or interpretation arising under this Agreement shall be determined by the Committee administering the Plan, and such determination shall be final, conclusive and binding upon all parties in interest. (b) No Right to Employment. Nothing in this Agreement or the Plan shall be construed as giving you the right to be retained as an employee of the Company or any Affiliate of the Company. In addition, the Company or an Affiliate of the Company may at any time dismiss you from employment, free from any liability or any claim under this Agreement, unless otherwise expressly provided in this Agreement. (c) Securities Matters. The Company shall not be required to deliver any Shares until the requirements of any federal or state securities or other laws, rules or regulations (including the rules of any securities exchange) as may be determined by the Company to be applicable are satisfied. (d) Headings. Headings are given to the sections and subsections of this Agreement solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of this Agreement or any provision hereof. (e) Governing Law. The internal law, and not the law of conflicts, of the State of Florida will govern all questions concerning the validity, construction and effect of this Agreement. (f) Notices. You should send all written notices regarding this Agreement or the Plan to the Company at the following address: Darden Restaurants, Inc. Supervisor, Stock Compensation Plans 5900 Lake Ellenor Drive Orlando, FL 32809 (g) Award Certificate. This Restricted Stock Award Agreement is attached to and made a part of an Award Certificate and shall have no force or effect unless such Award Certificate is duly executed and delivered by the Company to you. * * * * * * * * 6 EX-12 6 form10k_exhibit12.txt FORM 10K EXHIBIT 12 7-29-05 EXHIBIT 12 DARDEN RESTAURANTS, INC. COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS TO FIXED CHARGES (Dollar Amounts in Thousands)
Fiscal Year Ended ----------------------------------------------------------------------------------------------------------------------- May 29, 2005 May 30, 2004 May 25, 2003 May 26, 2002 May 27, 2001 ----------------------------------------------------------------------------------------------------------------------- Consolidated Earnings from Operations before Income Taxes ....................$ 423,917 $ 332,776 $ 337,603 $ 355,435 $ 294,654 Plus Fixed Charges: Gross Interest Expense.................. 47,657 47,710 47,566 41,493 35,196 40% of Restaurant and Equipment Minimum Rent Expense................ 24,849 22,608 21,536 20,600 19,352 --------- --------- --------- --------- --------- Total Fixed Charges...........$ 72,506 $ 70,318 $ 69,102 $ 62,093 $ 54,548 Less Capitalized Interest.................. (3,182) (3,500) (3,470) (3,653) (3,671) --------- --------- --------- --------- ---------- Consolidated Earnings from Operations before Income Taxes Available to Cover Fixed Charges.....................$ 493,241 $ 399,594 $ 403,325 $ 413,875 $ 345,531 ========= ========= ========= ========= ========= Ratio of Consolidated Earnings to Fixed Charges ................................ 6.80 5.68 5.84 6.67 6.33 ========= =========== ============ ============ =========== -----------------------------------------------------------------------------------------------------------------------
EX-13 7 form10k_exhibit13mda.txt FORM 10K EXHIBIT 13 MD&A 7-29-05 Exhibit 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion and analysis below for the Company should be read in conjunction with our consolidated financial statements and related notes found elsewhere in this report. For financial reporting, we operate on a 52/53 week fiscal year ending on the last Sunday in May. Our 2005 fiscal year, which ended on May 29, 2005, and our 2003 fiscal year, which ended on May 25, 2003, each had 52 weeks. Our 2004 fiscal year, which ended on May 30, 2004, had 53 weeks. We have included in this discussion certain financial information for fiscal 2004 on a 52-week basis in order to assist investors in making comparisons to our 2005 and 2003 fiscal years. OVERVIEW OF OPERATIONS Our business operates in the casual dining segment of the restaurant industry, primarily in the United States. At May 29, 2005, we operated 1,381 Red Lobster, Olive Garden, Bahama Breeze, Smokey Bones Barbeque & Grill and Seasons 52 restaurants in the United States and Canada and licensed 37 Red Lobster restaurants in Japan. We own and operate all of our restaurants in the United States and Canada, with no franchising. Our sales were $5.28 billion in fiscal 2005 and $5.00 billion in fiscal 2004, a 5.5 percent increase. On a 52-week basis, after reducing fiscal 2004 sales by the $90 million contributed by the additional 53rd operating week, our sales increased 7.4 percent in fiscal 2005. Net earnings for fiscal 2005 were $291 million ($1.78 per diluted share) compared with net earnings for fiscal 2004 of $227 million ($1.34 per diluted share). Net earnings for fiscal 2005 increased 27.9 percent and diluted net earnings per share increased 32.8 percent compared to fiscal 2004. The net earnings increase in fiscal 2005 reflected Red Lobster's substantial progress in some important areas. A primary driver was substantially improved operations behind Red Lobster's new "simply great" operating discipline, which allowed the brand to simultaneously improve both guest satisfaction and operating efficiency. Red Lobster finished fiscal 2005 with three consecutive quarters of U.S. same-restaurant sales and guest count growth, and year-over-year operating profit growth. Olive Garden also delivered strong performance in fiscal 2005. Driven by U.S. same-restaurant sales increases in each quarter of fiscal 2005, which resulted in 43 consecutive quarters of same-restaurant sales growth, Olive Garden had a double-digit operating profit increase, record annual operating profit and record return on sales. Bahama Breeze also contributed to net earnings growth in fiscal 2005 as a result of operating improvements in a number of areas and the closing and write down of underperforming restaurants in fiscal 2004. Smokey Bones' continued investment in expansion, combined with high rib costs and the write down in the carrying value of one restaurant, resulted in a modestly greater operating loss in fiscal 2005 than in fiscal 2004. In fiscal 2006, we expect a net increase of between 55 to 65 restaurants. We expect combined U.S. same-restaurant sales growth in fiscal 2006 of between two percent and four percent at Red Lobster and Olive Garden. We also expect Bahama Breeze to have minimal effect on consolidated net earnings growth in fiscal 2006 as we continue to invest in positioning the business for successful, renewed growth. And, in fiscal 2006, we expect Smokey Bones to open 25 to 30 new restaurants while implementing menu enhancements to broaden its appeal. As a result, we anticipate approximately $0.04 to $0.06 per diluted share improvement in Smokey Bones' impact on our consolidated net earnings. On a consolidated basis, we anticipate low double-digit diluted net earnings per share growth in fiscal 2006. Our mission is to be the best in casual dining, now and for generations. We believe we can achieve this goal by continuing to build on our historical strength as a multi-brand casual dining company, which is grounded in our commitment to combining the following: o A strong culture that inspires and engages our people, with firmly held values, a clear mission and a core purpose to nourish and delight everyone we serve; o Competitively superior leadership; o Brand management excellence; o Restaurant operating excellence; and o Restaurant support excellence 1 From a financial perspective, we seek to increase profits by leveraging our fixed and semi-fixed costs with sales from new restaurants and increased guest traffic and sales at existing restaurants. To evaluate our operations and assess our financial performance, we monitor a number of operating measures, with a special focus on two key factors: o Same-restaurant sales - which are a year-over-year comparison of each period's sales volumes for restaurants that are open more than 16 months; and o Restaurant operating margins - which are restaurant sales less restaurant-level cost of sales (food and beverage costs, restaurant labor and other restaurant expenses). Increasing same-restaurant sales can increase restaurant operating margins because these incremental sales provide better leverage of our fixed and semi-fixed costs. Same-restaurant sales increases can be generated by increases in guest traffic, increases in the average guest check, or a combination of the two. The average guest check can be impacted by menu price changes and by the mix of menu items sold. For each operating company, we gather daily sales data and regularly analyze the guest traffic counts and the mix of menu items sold to assist in developing menu pricing, product offerings and promotional strategies. We view same-restaurant guest counts as an indication of the long-term health of an operating company, while increases in average check and menu mix may contribute more significantly to near-term profitability. We continually focus on balancing our pricing and product offerings with other initiatives to generate sustainable same-restaurant sales growth. We compute same-restaurant sales using restaurants open at least 16 months because new restaurants experience an adjustment period before sales levels and operating margins normalize. Sales at newly opened restaurants generally do not make a significant contribution to profitability in their initial months of operation. Our sales and expenses can be impacted significantly by the number and timing of the opening of new restaurants and the closing, relocation and remodeling of existing restaurants. Pre-opening expenses each period reflect the costs associated with opening new restaurants in current and future periods. There are significant risks and challenges that could impact our operations and ability to increase sales and earnings. The casual dining restaurant industry is intensely competitive and sensitive to economic cycles and other business factors, including changes in consumer tastes and dietary habits. Other risks and uncertainties include the price and availability of food, ingredients and utilities; labor and insurance costs; higher-than-anticipated costs to open or close restaurants; litigation; unfavorable publicity relating to food safety or other concerns; lack of suitable locations; government regulations; and factors that could impact our growth objectives, including the construction cost increases, construction delays and other factors. 2 RESULTS OF OPERATIONS FOR FISCAL 2005, 2004 AND 2003 The following table sets forth selected operating data as a percentage of sales for the 52-week periods ended May 29, 2005 and May 25, 2003 and the 53-week period ended May 30, 2004. All information is derived from the consolidated statements of earnings for the periods indicated.
Fiscal Years ------------------------------------------------------------------------------------------------------------------ 2005 2004 2003 ------------------------------------------------------------------------------------------------------------------ Sales......................................................... 100.0% 100.0% 100.0% Costs and expenses: Cost of sales: Food and beverage........................................ 30.2 30.5 31.1 Restaurant labor......................................... 32.1 32.0 31.9 Restaurant expenses...................................... 15.3 15.5 15.3 ------ ------ ------ Total cost of sales, excluding restaurant depreciation and amortization of 3.8%, 3.9% and 3.8%, 77.6% 78.0% 78.3% respectively........................................ Selling, general and administrative........................ 9.5 9.4 9.3 Depreciation and amortization.............................. 4.0 4.2 4.1 Interest, net.............................................. 0.8 0.9 0.9 Asset impairment and restructuring charges, net............ 0.1 0.9 0.1 ------ ------ ------ Total costs and expenses......................... 92.0% 93.4% 92.7% ------ ------ ------ Earnings before income taxes.................................. 8.0 6.6 7.3 Income taxes.................................................. 2.5 2.1 2.4 ------ ------ ------ Net earnings.................................................. 5.5% 4.5% 4.9% ====== ====== ====== ------------------------------------------------------------------------------------------------------------------
SALES Sales were $5.28 billion in fiscal 2005, $5.00 billion in fiscal 2004 and $4.65 billion in fiscal 2003. The 5.5 percent increase in company-wide sales for fiscal 2005 was primarily due to a net increase of 56 company-owned restaurants compared to fiscal 2004 and same-restaurant sales increases at Olive Garden. These sales increases were partially offset by the additional operating week in fiscal 2004. After reducing fiscal 2004 sales by the $90 million contributed by the additional operating week, sales would have been $4.91 billion for fiscal 2004 on a 52-week basis, resulting in a 7.4 percent increase in fiscal 2005. Red Lobster sales were $2.44 billion in both fiscal 2005 and fiscal 2004. U.S. same-restaurant sales for Red Lobster increased 0.9 percent (on a 52-week basis) due to a 1.9 percent increase in average check offset partially by a 1.0 percent decrease in same-restaurant guest counts. Average annual sales per restaurant for Red Lobster were $3.6 million in fiscal 2005. Olive Garden sales of $2.40 billion were 8.5 percent above last year. U.S. same-restaurant sales for Olive Garden increased 7.2 percent (on a 52-week basis) due to a 5.3 percent increase in same-restaurant guest counts and a 1.9 percent increase in average check. Average annual sales per restaurant for Olive Garden were $4.4 million in fiscal 2005. Olive Garden has enjoyed 43 consecutive quarters of U.S. same-restaurant sales increases. Bahama Breeze sales of $164 million were 7.2 percent below last year. Same-restaurant sales for Bahama Breeze decreased 1.6 percent (on a 52-week basis) for fiscal 2005. Bahama Breeze also had six fewer restaurants in operation during fiscal 2005. Average annual sales per restaurant for Bahama Breeze were $5.1 million in fiscal 2005. Smokey Bones sales of $269 million were 54.6 percent above last year. Same-restaurant sales for Smokey Bones increased 1.1 percent (on a 52-week basis) for fiscal 2005. Average annual sales per restaurant were $3.1 million, with appreciable variation by region. Smokey Bones opened 35 new restaurants during fiscal 2005. 3 The 7.5 percent increase in company-wide sales for fiscal 2004 versus fiscal 2003 was primarily due to a net increase of 54 company-owned restaurants compared to fiscal 2003, same-restaurant sales increases at Olive Garden and the additional operating week in fiscal 2004. After reducing fiscal 2004 sales by the $90 million contributed by the additional operating week, total sales increased 5.5 percent from fiscal 2003. These sales increases were partially offset by decreased U.S. same-restaurant sales at Red Lobster. While Red Lobster's sales of $2.44 billion were 0.1 percent above fiscal 2003, its U.S. same-restaurant sales decreased 3.5 percent (on a 52-week basis) due to a 6.5 percent decrease in same-restaurant guest counts, partially offset by a 3.0 percent increase in average check. Average annual sales per restaurant for Red Lobster were $3.6 million in fiscal 2004 (on a 52-week basis). Olive Garden sales of $2.21 billion were 11.1 percent above fiscal 2003. U.S. same-restaurant sales for Olive Garden increased 4.6 percent (on a 52-week basis) due to a 3.0 percent increase in average check and a 1.6 percent increase in same-restaurant guest counts. Average annual sales per restaurant for Olive Garden were $4.1 million in fiscal 2004 (on a 52-week basis). Bahama Breeze sales of $176 million were 28 percent above fiscal 2003. Bahama Breeze opened four new restaurants during fiscal 2004, including its new prototype restaurant in Pittsburgh, PA. Bahama Breeze also closed six restaurants during the fourth quarter of fiscal 2004 as a result of a comprehensive analysis performed during the fourth quarter of fiscal 2004 that examined restaurants not meeting our minimum return-on-investment thresholds and certain other operating performance criteria. Average annual sales per restaurant (excluding the six closed restaurants) were $5.2 million (on a 52-week basis). Smokey Bones sales of $174 million were 87 percent higher in fiscal 2004 than in fiscal 2003, its average annual sales per restaurant were $3.2 million (on a 52-week basis) and it opened 30 new restaurants during fiscal 2004. COSTS AND EXPENSES Total costs and expenses were $4.85 billion in fiscal 2005, $4.67 billion in fiscal 2004 and $4.32 billion in fiscal 2003. Total costs and expenses in fiscal 2005 were 92.0 percent of sales, a decrease from 93.4 percent of sales in fiscal 2004 and 92.7 percent of sales in fiscal 2003. Food and beverage costs increased $67 million, or 4.4 percent, from $1.53 billion to $1.59 billion in fiscal 2005 compared to fiscal 2004. Food and beverage costs increased $78 million, or 5.4 percent, from $1.45 billion to $1.53 billion in fiscal 2004 compared to fiscal 2003. As a percent of sales, food and beverage costs decreased from the prior year in fiscal 2005 primarily as a result of favorable changes in promotional and menu mix of sales and pricing changes, which were partially offset by higher dairy, beef, chicken and seafood costs. As a percent of sales, food and beverage costs decreased from the prior year in fiscal 2004 primarily as a result of pricing changes and favorable changes in promotional and menu mix of sales, which was partially offset by higher seafood costs and by crab usage and additional plate accompaniments at Red Lobster during its crab promotion in the first quarter of fiscal 2004. Other commodity costs, such as chicken and shrimp, decreased modestly in fiscal 2004. Restaurant labor increased $95 million, or 5.9 percent, from $1.60 billion to $1.70 billion in fiscal 2005 compared to fiscal 2004. Restaurant labor increased $116 million, or 7.8 percent, from $1.49 billion to $1.60 billion in fiscal 2004 compared to fiscal 2003. As a percent of sales, restaurant labor increased in fiscal 2005 primarily as a result of a modest increase in wage rates and higher manager bonuses at Olive Garden and Red Lobster as a result of their increased operating performance in fiscal 2005. These factors were only partially offset by the favorable impact of higher sales volumes. As a percent of sales, restaurant labor increased in fiscal 2004 from fiscal 2003 primarily as a result of a modest increase in wage rates at Red Lobster and Olive Garden and higher manager bonuses at Olive Garden as a result of its increased operating performance in fiscal 2004. These factors were only partially offset by the favorable impact of higher sales volumes and lower health insurance costs as a result of fewer claims. Restaurant expenses (which include lease, property tax, credit card, utility, workers' compensation, insurance, new restaurant pre-opening and other restaurant-level operating expenses) increased $31 million, or 4.1 percent, from $775 million to $806 million in fiscal 2005 compared to fiscal 2004. Restaurant expenses increased $61 million, or 8.6 percent, from $714 million to $775 million in fiscal 2004 compared to fiscal 2003. As a percent of sales, restaurant expenses decreased in fiscal 2005 primarily due to decreased insurance, workers' compensation and new restaurant pre-opening costs, which were partially offset by increased utility expenses and repairs and maintenance expenses. Restaurant expenses were also favorably impacted by higher sales volumes. As a percent of sales, restaurant expenses increased in fiscal 2004 from fiscal 2003 primarily due to increased utility, workers' compensation, insurance and new restaurant pre-opening costs. These cost increases were only partially offset by the favorable impact of higher sales volumes in fiscal 2004. Selling, general and administrative expenses increased $25 million, or 5.4 percent, from $472 million to $497 million in fiscal 2005 compared to fiscal 2004. Selling, general and administrative expenses increased $40 million, 4 or 9.4 percent, from $432 million to $472 million in fiscal 2004 compared to fiscal 2003. As a percent of sales, selling, general and administrative expenses increased in fiscal 2005 primarily as a result of increased bonus costs, which were partially offset by decreased marketing expenses as a percent of sales and the favorable impact of higher sales volumes. As a percent of sales, selling, general and administrative expenses increased in fiscal 2004 from fiscal 2003 primarily due to increased employee benefit costs, an increased contribution to the Darden Restaurants, Inc. Foundation and an increase in litigation related costs, which were only partially offset by the favorable impact of higher sales volumes. Depreciation and amortization expense increased $3 million, or 1.5 percent, from $210 million to $213 million in fiscal 2005 compared to fiscal 2004. Depreciation and amortization expense increased $19 million, or 9.8 percent, from $191 million to $210 million in fiscal 2004 compared to fiscal 2003. As a percent of sales, depreciation and amortization decreased in fiscal 2005 primarily as a result of the continued use of fully depreciated, well maintained, equipment and the favorable impact of higher sales volumes, which were only partially offset by new restaurant and remodel activities. This benefit was only partially offset by increased repairs and maintenance costs incurred in fiscal 2005. As a percent of sales, depreciation and amortization increased in fiscal 2004 primarily as a result of new restaurant and remodel activities, which were only partially offset by the favorable impact of higher sales volumes. Net interest expense decreased $1 million, or 1.2 percent, from $44 million to $43 million in fiscal 2005 compared to fiscal 2004. Net interest expense increased $1 million, or 2.5 percent, from $43 million to $44 million in fiscal 2004 compared to fiscal 2003. As a percent of sales, net interest expense decreased in fiscal 2005 primarily as a result of higher interest income in fiscal 2005 and the favorable impact of higher sales volumes. As a percent of sales, net interest expense in fiscal 2004 was comparable to fiscal 2003, reflecting lower interest income in fiscal 2004, offset by the favorable impact of higher sales volumes. During fiscal 2005, 2004 and 2003, we recognized asset impairment charges in the amount of $1 million, $6 million and $5 million, respectively, related to the relocation and rebuilding of certain restaurants. Asset impairment credits related to the sale of assets that were previously impaired amounted to $3 million, $1 million and $1 million in fiscal 2005, 2004 and 2003, respectively. During fiscal 2005, we also recorded charges of $6 million for the write-down of carrying value of two Olive Garden restaurants, one Red Lobster restaurant and one Smokey Bones restaurant. The Smokey Bones restaurant was closed subsequent to fiscal 2005 while the two Olive Gardens and one Red Lobster continued to operate. In addition to the asset impairment charges described above, during the fourth quarter of fiscal 2004, we recorded a $36.5 million pre-tax ($22.4 million after-tax) charge for long-lived asset impairments associated with the closing of six Bahama Breeze restaurants and the write-down of the carrying value of four other Bahama Breeze restaurants, one Olive Garden restaurant and one Red Lobster restaurant, which continued to operate. We also recorded a $1.1 million pre-tax ($0.7 million after-tax) restructuring charge primarily related to severance payments made to certain restaurant employees and exit costs associated with the closing of the six Bahama Breeze restaurants. During fiscal 2004, certain changes were made at Bahama Breeze to improve its sales, financial performance and overall long-term potential, including the addition of lunch at most restaurants and introduction of a new dinner menu. The decision to close certain Bahama Breeze restaurants and write down the carrying value of others was based on our on-going review of each individual restaurant's performance against our expectations and the restaurant's ability to successfully implement these changes. Based on our review of the other 28 Bahama Breeze restaurants, we believe their locations and ability to execute these and future initiatives will reduce the likelihood that additional impairment charges will be required. The write-down of the carrying value of one Olive Garden restaurant and one Red Lobster restaurant was a result of less-than-optimal locations. We will continue to evaluate all of our locations to minimize the risk of future asset impairment charges. INCOME TAXES The effective income tax rates for fiscal 2005, 2004 and 2003 were 31.4 percent, 31.7 percent and 33.1 percent, respectively. The rate decrease in fiscal 2005 and fiscal 2004 was primarily a result of favorable resolutions of prior year tax matters and an increase in FICA tax credits for employee-reported tips. 5 NET EARNINGS AND NET EARNINGS PER SHARE Net earnings for fiscal 2005 were $291 million ($1.78 per diluted share) compared with net earnings for fiscal 2004 of $227 million ($1.34 per diluted share) and net earnings for fiscal 2003 of $226 million ($1.27 per diluted share). Net earnings for fiscal 2005 increased 27.9 percent and diluted net earnings per share increased 32.8 percent compared to fiscal 2004. The increase in net earnings and diluted net earnings per share were primarily due to decreases in food and beverage costs, restaurant expenses and depreciation and amortization expenses as a percent of sales, which were only partially offset by increases in restaurant labor expenses and selling, general and administrative expenses as a percent of sales. Fiscal 2004 net earnings were also impacted by the $38 million pre-tax ($23 million after-tax) asset impairment and restructuring charges recognized related to the closing of six Bahama Breeze restaurants and the write down of another four Bahama Breeze restaurants, one Olive Garden restaurant and one Red Lobster restaurant. The increase in diluted net earnings per share was also due to a reduction in the average diluted shares outstanding from fiscal 2004 to fiscal 2005 primarily as a result of our continuing repurchase of our common stock. Net earnings for fiscal 2004 increased 0.5 percent and diluted net earnings per share increased 5.5 percent compared to fiscal 2003. The increase in net earnings was primarily due to decreases in food and beverage costs as a percent of sales, which were largely offset by increases in restaurant labor, restaurant expenses, selling, general and administrative expenses and depreciation and amortization expense as a percent of sales and the asset impairment and restructuring charges recognized during fiscal 2004 related to the closing of six Bahama Breeze restaurants and write down of another four Bahama Breeze restaurants, one Olive Garden restaurant and one Red Lobster restaurant. The increase in diluted net earnings per share is primarily due to a reduction in the average diluted shares outstanding from fiscal 2003 to fiscal 2004 primarily as a result of our continuing repurchase of our common stock. SEASONALITY Our sales volumes fluctuate seasonally. During fiscal 2005, our sales were highest in the spring and winter, followed by the summer, and lowest in the fall. During fiscal 2004 and 2003, our sales were highest in the spring, lowest in the fall, and comparable during winter and summer. Holidays, severe weather and similar conditions may impact sales volumes seasonally in some operating regions. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year. IMPACT OF INFLATION We do not believe inflation had a significant overall effect on our operations during fiscal 2005, 2004 and 2003. We believe we have historically been able to pass on increased operating costs through menu price increases and other strategies. CRITICAL ACCOUNTING POLICIES We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires us 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 sales and expenses during the reporting period. Actual results could differ from those estimates. Critical accounting policies are those we believe are both most important to the portrayal of our financial condition and operating results and require our 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. We consider the following policies to be most critical in understanding the judgments that are involved in preparing our consolidated financial statements. 6 Land, Buildings and Equipment Land, buildings and equipment are recorded at cost less accumulated depreciation. Building components are depreciated over estimated useful lives ranging from seven to 40 years using the straight-line method. Leasehold improvements, which are reflected on our consolidated balance sheets as a component of buildings, are amortized over the lesser of the expected lease term, including cancelable option periods, or the estimated useful lives of the related assets using the straight-line method. Equipment is depreciated over estimated useful lives ranging from two to 10 years, also using the straight-line method. Accelerated depreciation methods are generally used for income tax purposes. Our accounting policies regarding land, buildings and equipment, including leasehold improvements, include our judgments regarding the estimated useful lives of these assets, the residual values to which the assets are depreciated or amortized, the determination of what constitutes expected lease term 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 reported depreciation and amortization expense if different assumptions were used. As discussed further below, these judgments may also impact our need to recognize an impairment charge on the carrying amount of these assets as the cash flows associated with the assets are realized. Leases We are obligated under various lease agreements for certain restaurants. We recognize rent expense on a straight-line basis over the expected lease term, including cancelable option periods as described below. Within the provisions of certain of our leases, there are rent holidays and/or escalations in payments over the base lease term, as well as renewal periods. The effects of the holidays and escalations have been reflected in rent expense on a straight-line basis over the expected lease term, which includes cancelable option periods when it is deemed to be reasonably assured that we would incur an economic penalty for not exercising the option. The lease term commences on the date when we have the right to control the use of the leased property, which is typically before rent payments are due under the terms of the lease. Many of our leases have renewal periods totaling five to 20 years, exercisable at our option and require payment of property taxes, insurance and maintenance costs in addition to the rent payments. The consolidated financial statements reflect the same lease term for amortizing leasehold improvements as we use to determine capital versus operating lease classifications and in calculating straight-line rent expense for each restaurant. Percentage rent expense is generally based upon sales levels and is accrued at the point in time we determine that it is probable that such sales levels will be achieved. Our judgments related to the probable term for each restaurant affect the classification and accounting for leases as capital versus operating, the rent holidays and escalation in payments that are included in the calculation of straight-line rent and the term over which leasehold improvements for each restaurant facility are amortized. These judgments may produce materially different amounts of depreciation, amortization and rent expense than would be reported if different assumed lease terms were used. Impairment of Long-Lived Assets Land, buildings and equipment and certain other assets, including capitalized software costs and liquor licenses, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future undiscounted net cash flows expected to be generated by the assets. Identifiable cash flows are measured at the lowest level for which they are largely independent of the cash flows of other groups of assets and liabilities, generally at the restaurant level. If these assets are determined to be impaired, the amount of impairment recognized is the amount by which the carrying amount of the assets exceeds their fair value. Fair value is generally determined by appraisals or sales prices of comparable assets. Restaurant sites and certain other assets to be disposed of are reported at the lower of their carrying amount or fair value, less estimated costs to sell. Restaurant sites and certain other assets to be disposed of are included in assets held for sale when certain criteria are met. These criteria include the requirement that the likelihood of disposing of these assets within one year is probable. Assets whose disposal is not probable within one year remain in land, buildings and equipment until their disposal is probable within one year. 7 The judgments we make related to the expected useful lives of long-lived assets and our ability to realize undiscounted cash flows in excess of the carrying amounts of these assets are affected by factors such as the ongoing maintenance and improvements of the assets, changes in economic conditions and changes in usage or operating performance. As we assess the ongoing expected cash flows and carrying amounts of our long-lived assets, significant adverse changes in these factors could cause us to realize a material impairment charge. In the fourth quarter of fiscal 2004, we recognized asset impairment charges of $37 million ($23 million after-tax) for the closing of six Bahama Breeze restaurants and the write-down of four other Bahama Breeze restaurants, one Olive Garden restaurant and one Red Lobster restaurant based on an evaluation of expected cash flows. During fiscal 2005, we recognized asset impairment charges of $6 million ($4 million after-tax) for the write-down of two Olive Garden restaurants, one Red Lobster restaurant and one Smokey Bones restaurant based on an evaluation of expected cash flows. The Smokey Bones restaurant was closed subsequent to fiscal 2005 while the two Olive Garden restaurants and one Red Lobster restaurant continued to operate. Insurance Accruals Through the use of insurance program deductibles and self-insurance, we retain a significant portion of expected losses under our workers' compensation, employee medical and general liability programs. However, we carry insurance for individual claims that generally exceed $0.25 million for workers' compensation and general liability claims. Accrued liabilities have been recorded based on our estimates of the anticipated ultimate costs to settle all claims, both reported and not yet reported. Our accounting policies regarding these insurance programs include our judgments and independent actuarial assumptions regarding economic conditions, the frequency or severity of claims and claim development patterns and claim reserve, management and settlement practices. Unanticipated changes in these factors may produce materially different amounts of reported expense under these programs. Income Taxes We estimate certain components of our provision for income taxes. These estimates include, among other items, depreciation and amortization expense allowable for tax purposes, allowable tax credits for items such as taxes paid on reported employee tip income, effective rates for state and local income taxes and the tax deductibility of certain other items. Our estimates are based on the best available information at the time that we prepare the provision. We generally file our annual income tax returns several months after our fiscal year-end. Income tax returns are subject to audit by federal, state and local governments, generally years after the returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws. LIQUIDITY AND CAPITAL RESOURCES Cash flows generated from operating activities provide us with a significant source of liquidity, which we use to finance the purchases of land, buildings and equipment and to repurchase shares of our common stock. Since substantially all our sales are for cash and cash equivalents and accounts payable are generally due in five to 30 days, we are able to carry current liabilities in excess of current assets. In addition to cash flows from operations, we use a combination of long-term and short-term borrowings to fund our capital needs. We manage our business and our financial ratios to maintain an investment grade bond rating, which allows flexible access to financing at reasonable costs. Currently, our publicly issued long-term debt carries "Baa1" (Moody's Investors Service), "BBB+" (Standard & Poor's) and "BBB+" (Fitch) ratings. Our commercial paper has ratings of "P-2" (Moody's Investors Service), "A-2" (Standard & Poor's) and "F-2" (Fitch). These ratings are as of the date of this annual report and have been obtained with the understanding that Moody's Investors Service, Standard & Poor's and Fitch will continue to monitor our credit and make future adjustments to these ratings to the extent warranted. The ratings may be changed, superseded, or withdrawn at any time. Our commercial paper program is our primary source of short-term financing. At May 29, 2005, there were no borrowings outstanding under the program. To support our commercial paper program, we have a credit facility under a Credit Agreement dated October 17, 2003, as amended, with a consortium of banks, including Wachovia Bank, N.A., as administrative agent, under which we can borrow up to $400 million. The credit facility allows us to borrow at interest rates based on a spread over (i) LIBOR or (ii) a base rate that is the higher of the prime rate, or 8 one-half of one percent above the federal funds rate, at our option. The interest rate spread over LIBOR is determined by our debt rating. The credit facility expires on October 17, 2008 and contains various restrictive covenants, including a leverage test that requires us to maintain a ratio of consolidated total debt to consolidated total capitalization of less than 0.55 to 1.00 and a limitation of $25 million on priority debt, subject to certain exceptions. The credit facility does not, however, contain a prohibition on borrowing in the event of a ratings downgrade or a "material adverse change," as defined in the Credit Agreement. None of these covenants are expected to impact our liquidity or capital resources. At May 29, 2005, we were in compliance with all covenants under the Credit Agreement. At May 29, 2005, our long-term debt consisted principally of: (1) $150 million of unsecured 5.75 percent medium-term notes due in March 2007, (2) $75 million of unsecured 7.45 percent medium-term notes due in April 2011, (3) $100 million of unsecured 7.125 percent debentures due in February 2016 and (4) an unsecured, variable rate $27 million commercial bank loan due in December 2018 that is used to support two loans from us to the Employee Stock Ownership Plan portion of the Darden Savings Plan. We also have $150 million of unsecured 8.375 percent senior notes due in September 2005 and $150 million of unsecured 6.375 percent notes due in February 2006 included in current liabilities, which we plan to repay through the issuance of unsecured debt securities in fiscal 2006. Through a shelf registration on file with the Securities and Exchange Commission (SEC), we may issue up to an additional $125 million of unsecured debt securities from time to time. The debt securities may bear interest at either fixed or floating rates and may have maturity dates of nine months or more after issuance. A summary of our contractual obligations and commercial commitments at May 29, 2005, is as follows (in thousands):
- ---------------------------- ----------------------------------------------------------------------------------------- Payments Due by Period - ---------------------------- ----------------------------------------------------------------------------------------- Contractual Less than 1-3 3-5 More than 5 Obligations Total 1 Year Years Years Years - ---------------------------- ---------------- ----------------- ------------------ ----------------- ----------------- Long-term debt (1) $ 799,260 $338,025 $185,396 $ 26,163 $249,676 - ---------------------------- ---------------- ----------------- ------------------ ----------------- ----------------- Operating leases 419,543 68,301 119,710 88,464 143,068 - ---------------------------- ---------------- ----------------- ------------------ ----------------- ----------------- Purchase obligations(2) 579,008 562,930 14,492 1,586 -- - ---------------------------- ---------------- ----------------- ------------------ ----------------- ----------------- Benefit obligations (3) 160,178 13,407 28,061 30,345 88,365 - ---------------------------- ---------------- ----------------- ------------------ ----------------- ----------------- Total contractual obligations $1,957,989 $982,663 $347,659 $146,558 $481,109 - ---------------------------- ---------------- ----------------- ------------------ ----------------- -----------------
- -------------------------- ------------------------------------------------------------------------------------------- Amount of Commitment Expiration per Period - -------------------------- ------------------------------------------------------------------------------------------- Total Amounts Other Commercial Committed Less than 1-3 3-5 More than 5 Commitments 1 Year Years Years Years - -------------------------- --------------- ------------------ ------------------ ----------------- ------------------- Standby letters of credit (4) $86,506 $86,506 $ -- $ -- $ -- - -------------------------- --------------- ------------------ ------------------ ----------------- ------------------- Guarantees (5) 1,768 499 719 345 205 - -------------------------- --------------- ------------------ ------------------ ----------------- ------------------- Total commercial commitments $88,274 $87,005 $719 $345 $205 - -------------------------- --------------- ------------------ ------------------ ----------------- ------------------- 1) Includes interest payments associated with existing long-term debt, including the current portion. Variable-rate interest payments associated with the ESOP loan were estimated based on the interest rate in effect at May 29, 2005 (3.42 percent). Excludes issuance discount of $763. 2) Includes commitments for food and beverage items and supplies, capital projects and other miscellaneous commitments. 3) Includes expected payments associated with our defined benefit plans, postretirement benefit plan and our non-qualified deferred compensation plan through fiscal 2015. 4) Includes letters of credit for $72,677 of workers' compensation and general liabilities accrued in our consolidated financial statements; also includes letters of credit for $4,495 of lease payments included in contractual operating lease obligation payments noted above. 5) Consists solely of guarantees associated with leased properties that have been assigned to third parties. We are not aware of any non-performance under these arrangements that would result in us having to perform in accordance with the terms of the guarantees.
9 As disclosed in Exhibit 12 to this Form 10-K, our fixed-charge coverage ratio, which measures the number of times each year that we earn enough to cover our fixed charges, amounted to 6.8 times and 5.7 times for the fiscal years ended May 29, 2005 and May 30, 2004, respectively. Our adjusted debt to adjusted total capital ratio (which includes 6.25 times the total annual restaurant minimum rent ($62.1 million and $56.5 million for the fiscal years ended May 29, 2005 and May 30, 2004, respectively) and 3.00 times the total annual restaurant equipment minimum rent ($0.0 million and $0.1 million for the fiscal years ended May 29, 2005 and May 30, 2004, respectively) as components of adjusted debt and adjusted total capital) was 45 percent and 46 percent at May 29, 2005 and May 30, 2004, respectively. We use the lease-debt equivalent in our adjusted debt to adjusted total capital ratio as we believe its inclusion better represents the optimal capital structure that we target from period to period. Based on these ratios, we believe our financial condition is strong. The composition of our capital structure is shown in the following table. (In millions, except ratios) May 29, 2005 May 30, 2004 ------------------------------------------------------------------------------- CAPITAL STRUCTURE ------------------------------------------------------------------------------- Short-term debt $ -- $ 15 Current portion of long-term debt 300 -- Long-term debt 350 653 Stockholders' equity 1,273 1,175 ------------------------------------------------------------------------------- Total capital $ 1,923 $ 1,843 =============================================================================== ADJUSTMENTS TO CAPITAL ------------------------------------------------------------------------------- Short-term debt $ -- $ 15 Current portion of long-term debt 300 -- Long-term debt 350 653 Lease-debt equivalent 385 353 ------------------------------------------------------------------------------- Adjusted debt $ 1,035 $ 1,021 Stockholders' equity 1,273 1,175 ------------------------------------------------------------------------------- Adjusted total capital $ 2,308 $ 2,196 =============================================================================== CAPITAL STRUCTURE RATIOS ------------------------------------------------------------------------------- Debt to total capital ratio 34% 36% Adjusted debt to adjusted total capital ratio 45% 46% =============================================================================== Net cash flows provided by operating activities were $583 million, $525 million and $509 million in fiscal 2005, 2004 and 2003, respectively. Net cash flows provided by operating activities include net earnings of $291 million, $227 million and $226 million in fiscal 2005, 2004 and 2003, respectively. Fiscal 2004 net earnings included a $36.5 million pre-tax ($22.4 million after-tax) charge for long-lived asset impairments associated with the closing of six Bahama Breeze restaurants and the write-down of the carrying value of four other Bahama Breeze restaurants, one Olive Garden restaurant and one Red Lobster restaurant, which continued to operate. Net cash flows provided by operating activities also reflect income tax payments of $111 million, $92 million and $65 million in fiscal 2005, 2004 and 2003, respectively. The increase in tax payments in fiscal 2005 and 2004 resulted primarily from accelerated deductions allowable for depreciation of certain capital expenditures in fiscal 2004 and 2003, which lowered our income tax payments in those fiscal years. These accelerated deductions were allowable for only a portion of fiscal 2005 capital expenditures. In fiscal 2005, however, the impact of the reduction in accelerated depreciation deductions was partially offset by an increase in income tax benefits associated with the exercise of employee stock options. Net cash flows used in financing activities were $264 million, $194 million and $193 million in fiscal 2005, 2004 and 2003, respectively. Net cash flows used in financing activities included our repurchase of 11.3 million shares of our common stock for $312 million in fiscal 2005, compared to 10.7 million shares for $235 million in fiscal 2004 and 10.7 million shares for $213 million in fiscal 2003. Our Board of Directors has authorized us to repurchase up to 137.4 million shares of our common stock. At May 29, 2005 a total of 120.6 million shares have been repurchased under the authorization. The repurchased common stock is reflected as a reduction of stockholders' equity. We received proceeds from the issuance of common stock upon the exercise of stock options of $75 million, 10 $40 million and $34 million in fiscal 2005, 2004 and 2003, respectively. Net cash flows used in financing activities also included dividends paid to stockholders of $13 million, $13 million and $14 million in fiscal 2005, 2004 and 2003, respectively. Net cash flows used in investing activities were $313 million, $343 million and $420 million in fiscal 2005, 2004 and 2003, respectively. Net cash flows used in investing activities included capital expenditures incurred principally for building new restaurants, replacing equipment and remodeling existing restaurants. Capital expenditures were $329 million in fiscal 2005, compared to $354 million in fiscal 2004 and $423 million in fiscal 2003. The decreased expenditures in fiscal 2005 and 2004 resulted primarily from decreased spending associated with building fewer new restaurants and fewer remodels. We estimate that our fiscal 2006 capital expenditures will approximate $350 million to $375 million. Net cash flows provided by operating activities for fiscal 2003 included a $20 million contribution to our defined benefit pension plans, which enabled the plans to maintain a fully funded status as of the plans' February 28, 2003 annual valuation date. Approximately $0.1 million was required to fund our defined benefit pension plans in fiscal 2005 and fiscal 2004. Our defined benefit and other postretirement benefit costs and liabilities are calculated using various actuarial assumptions and methodologies prescribed under the Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards (SFAS) No. 87, "Employers' Accounting for Pensions" and No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions". We use certain assumptions including, but not limited to, the selection of a discount rate, expected long-term rate of return on plan assets and expected health care cost trend rates. We set the discount rate assumption annually for each plan at its valuation date to reflect the yield of high quality fixed-income debt instruments, with lives that approximate the maturity of the plan benefits. At May 29, 2005, our discount rate was 5.75 percent. The expected long-term rate of return on plan assets and health care cost trend rates are based upon several factors, including our historical assumptions compared with actual results, an analysis of current market conditions, asset allocations and the views of leading financial advisers and economists. Based on our analysis during fiscal 2003, we lowered our defined benefit plans' expected long-term rate of return on plan assets for fiscal 2004 from 10.4 percent to 9.0 percent. The change in our defined benefit plans' expected long-term rate of return on plan assets decreased earnings before income taxes by approximately $2 million in fiscal 2004. At May 29, 2005, our expected health care cost trend rates ranged from 11.0 percent to 12.0 percent for fiscal 2006, depending on the medical service category. The rates gradually decrease to 5.0 percent through fiscal 2011 and remain at that level thereafter. The expected long-term rate of return on plan assets component of our net periodic benefit cost is calculated based on the market-related value of plan assets. Our target asset allocation is 35 percent U.S. equities, 30 percent high-quality, long-duration fixed-income securities, 15 percent international equities, 10 percent private equities and 10 percent real assets. We monitor our actual asset allocation to ensure that it approximates our target allocation and believe that our long-term asset allocation will continue to approximate our target allocation. Our historical ten-year rate of return on plan assets, calculated using the geometric method average of returns, is approximately 10.9 percent as of May 29, 2005. We have an unrecognized net actuarial loss for the defined benefit plans and postretirement benefit plan as of May 29, 2005 of $59 million and $4 million, respectively. The unrecognized net actuarial loss represents changes in the amount of the projected benefit obligation and plan assets resulting from differences in the assumptions used and actual experience. The amortization of the unrecognized net actuarial loss component of our fiscal 2006 net periodic benefit cost for the defined benefit plans and postretirement benefit plan is expected to be approximately $5 million and $0.2 million, respectively. We believe our defined benefit and postretirement benefit plan assumptions are appropriate based upon the factors discussed above. However, other assumptions could also be reasonably applied that could differ from the assumptions used. A quarter percentage point change in the defined benefit plans' discount rate and the expected long-term rate of return on plan assets would increase or decrease earnings before income taxes by $0.7 million and $0.4 million, respectively. A quarter percentage point change in our postretirement benefit plan discount rate would increase or decrease earnings before income taxes by $0.1 million. A one percentage point increase in the health care cost trend rates would increase the accumulated postretirement benefit obligation (APBO) by $4 million at May 29, 2005 and the aggregate of the service cost and interest cost components of net periodic postretirement benefit cost by $0.6 million for fiscal 2005. A one percentage point decrease in the health care cost trend rates 11 would decrease the APBO by $3 million at May 29, 2005 and the aggregate of the service cost and interest cost components of net periodic postretirement benefit cost by $0.5 million for fiscal 2005. These changes in assumptions would not significantly impact our funding requirements. We are not aware of any trends or events that would materially affect our capital requirements or liquidity. We believe that our internal cash-generating capabilities, borrowings available under our shelf registration for unsecured debt securities and short-term commercial paper program should be sufficient to finance our capital expenditures, debt maturities, stock repurchase program and other operating activities through fiscal 2006. OFF-BALANCE SHEET ARRANGEMENTS We are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, sales or expenses, results of operations, liquidity, capital expenditures or capital resources. FINANCIAL CONDITION Our total current assets were $407 million at May 29, 2005, compared to $346 million at May 30, 2004. The increase resulted primarily from increases in inventories of $37 million that resulted from opportunistic product purchases made during fiscal 2005. Our total current liabilities were $1.04 billion at May 29, 2005, compared to $0.68 billion at May 30, 2004. The increase in current liabilities is primarily due to the reclassification of the $150 million of unsecured 8.375 percent senior notes due in September 2005 and the $150 million of unsecured 6.375 percent notes due in February 2006 from long-term debt to current liabilities. Accounts payable of $191 million at May 29, 2005 increased from $175 million, primarily due to the timing of our inventory and capital expenditures at the end of fiscal 2005. Other current liabilities of $254 million at May 29, 2005 increased from $228 million at May 30, 2004, primarily due to a $20 million increase in liabilities associated with our non-qualified deferred compensation plan. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to a variety of market risks, including fluctuations in interest rates, foreign currency exchange rates, compensation and commodity prices. To manage this exposure, we periodically enter into interest rate, foreign currency exchange, equity forwards and commodity instruments for other than trading purposes (see Notes 1 and 9 of the Notes to Consolidated Financial Statements). We use 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. At May 29, 2005, our potential losses in future net earnings resulting from changes in foreign currency exchange rate instruments, commodity instruments and floating rate debt interest rate exposures were approximately $6 million over a period of one year (including the impact of the interest rate swap agreements discussed in Note 9 of the Notes to Consolidated Financial Statements). The value at risk from an increase in the fair value of all of our long-term fixed rate debt, over a period of one year, was approximately $17 million. The fair value of our long-term fixed rate debt during fiscal 2005 averaged $668 million, with a high of $677 million and a low of $655 million. Our 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. FUTURE APPLICATION OF ACCOUNTING STANDARDS In December 2004, the FASB issued SFAS No. 123 (Revised), "Share-Based Payment." SFAS No. 123R revises SFAS No. 123, "Accounting for Stock-Based Compensation" and generally requires the cost associated with employee services received in exchange for an award of equity instruments be measured based on the grant-date fair value of the award and recognized in the financial statements over the period during which employees are required to provide service in exchange for the award. SFAS No. 123R also provides guidance on how to determine the grant-date fair value for awards of equity instruments as well as alternative methods of adopting its requirements. SFAS No. 123R is effective for annual reporting periods beginning after June 15, 2005. As disclosed in Note 1 of Notes to Consolidated Financial Statements, based on the current assumptions and calculations used, had we recognized compensation expense based on the fair value of awards of equity instruments, net earnings would have been reduced by approximately $18 million, $15 million and $17 million for fiscal 2005, 2004 and 2003, respectively. We have 12 not yet determined the method of adoption or the effect of adopting SFAS No. 123R and have not determined whether the adoption will result in future amounts similar to the current pro forma disclosures under SFAS No. 123. FORWARD-LOOKING STATEMENTS Certain statements included in this report and other materials filed or to be filed by us with the SEC (as well as information included in oral or written statements made or to be made by us) may contain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995, as codified in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Words or phrases such as "believe," "plan," "will," "expect," "intend," "estimate," and "project," and similar expressions are intended to identify forward-looking statements. All of these statements, and any other statements in this report that are not historical facts, are forward-looking. Examples of forward-looking statements include, but are not limited to, projections regarding: our growth plans and the number and type of expected new restaurant openings and related capital expenditures; same-restaurant sales growth; expected diluted net earnings per share growth; expected trends that might impact capital requirements and liquidity; expected contributions to our defined benefit pension plans; and the impact of litigation on our financial position. These forward-looking statements are based on assumptions concerning important factors, risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, could cause the actual results to differ materially from those expressed in the forward-looking statements. These factors, risks and uncertainties include, but are not limited to: o the intensely competitive nature of the restaurant industry, especially pricing, service, location, personnel and type and quality of food; o economic and business factors, both specific to the restaurant industry and generally, including changes in consumer preferences, demographic trends, weather conditions, a protracted economic slowdown or worsening economy, industry-wide cost pressures and public safety conditions, including actual or threatened armed conflicts or terrorist attacks; o the price and availability of food, ingredients and utilities, including the general risk of inflation; o labor and insurance costs, including increased labor costs as a result of federal and state-mandated increases in minimum wage rates and increased insurance costs as a result of increases in our current insurance premiums; o increased advertising and marketing costs; o higher-than-anticipated costs to open, close, relocate or remodel restaurants; o litigation by employees, consumers, suppliers, shareholders or others, regardless of whether the allegations made against us are valid or we are ultimately found liable; o unfavorable publicity relating to food safety or other concerns; o a lack of suitable new restaurant locations or a decline in the quality of the locations of our current restaurants; o federal, state and local regulation of our business, including laws and regulations relating to our relationships with our employees, zoning, land use, environmental matters and liquor licenses; and o growth objectives, including lower-than-expected sales and profitability of newly-opened restaurants, our expansion of newer concepts that have not yet proven their long-term viability, our ability to develop new concepts, risks associated with growth through acquisitions, and our ability to manage risks relating to the opening of new restaurants, including real estate development and construction activities, union activities, the issuance and renewal of licenses and permits, the availability of funds to finance growth and our ability to hire and train qualified personnel. 13 REPORT OF MANAGEMENT RESPONSIBILITIES The management of Darden Restaurants, Inc. is responsible for the fairness and accuracy of the consolidated financial statements. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, using management's best estimates and judgments where appropriate. The financial information throughout this report is consistent with our consolidated financial statements. Management has established a system of internal controls that provides reasonable assurance that assets are adequately safeguarded and transactions are recorded accurately, in all material respects, in accordance with management's authorization. We maintain a strong audit program that independently evaluates the adequacy and effectiveness of internal controls. Our internal controls provide for appropriate segregation of duties and responsibilities and there are documented policies regarding utilization of our assets and proper financial reporting. These formally stated and regularly communicated policies set high standards of ethical conduct for all employees. The Audit Committee of the Board of Directors meets at least quarterly to determine that management, internal auditors and the independent registered public accounting firm are properly discharging their duties regarding internal control and financial reporting. The independent registered public accounting firm, internal auditors and employees have full and free access to the Audit Committee at any time. KPMG LLP, an independent registered public accounting firm, is retained to audit our consolidated financial statements. Their report follows. /s/ Clarence Otis, Jr. Clarence Otis, Jr. Chief Executive Officer 14 MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). The Company's internal control over financial reporting is designed to provide reasonable assurance to the Company's management and Board of Directors regarding the preparation and fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Management assessed the effectiveness of the Company's internal control over financial reporting as of May 29, 2005. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Management has concluded that, as of May 29, 2005, the Company's internal control over financial reporting was effective based on these criteria. The Company's independent registered public accounting firm, KPMG LLP, has issued an audit report on our assessment of our internal control over financial reporting, which follows. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING The Board of Directors and Stockholders Darden Restaurants, Inc. We have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that Darden Restaurants, Inc. maintained effective internal control over financial reporting as of May 29, 2005 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Darden Restaurants, Inc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. 15 Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that Darden Restaurants, Inc. maintained effective internal control over financial reporting as of May 29, 2005 is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Darden Restaurants, Inc. maintained, in all material respects, effective internal control over financial reporting as of May 29, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Darden Restaurants, Inc. and subsidiaries as of May 29, 2005 and May 30, 2004, and the related consolidated statements of earnings, changes in stockholders' equity and accumulated other comprehensive income (loss), and cash flows for each of the years in the three-year period ended May 29, 2005, and our report dated July 28, 2005 expressed an unqualified opinion on those consolidated financial statements. /s/ KPMG LLP Orlando, FL July 28, 2005 16 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Darden Restaurants, Inc. We have audited the accompanying consolidated balance sheets of Darden Restaurants, Inc. and subsidiaries as of May 29, 2005 and May 30, 2004, and the related consolidated statements of earnings, changes in stockholders' equity and accumulated other comprehensive income (loss), and cash flows for each of the years in the three-year period ended May 29, 2005. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Darden Restaurants, Inc. and subsidiaries as of May 29, 2005 and May 30, 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended May 29, 2005 in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Darden Restaurants, Inc.'s internal control over financial reporting as of May 29, 2005 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated July 28, 2005 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting. /s/ KPMG LLP Orlando, Florida July 28, 2005 17 CONSOLIDATED STATEMENTS OF EARNINGS
Fiscal Year Ended ------------------------------------------------------------------------------------------------------------------- (In thousands, except per share data) May 29, 2005 May 30, 2004 May 25, 2003 ------------------------------------------------------------------------------------------------------------------- Sales $5,278,110 $5,003,355 $4,654,971 Costs and expenses: Cost of sales: Food and beverage 1,593,709 1,526,875 1,449,162 Restaurant labor 1,695,805 1,601,258 1,485,046 Restaurant expenses 806,314 774,806 713,699 ------------------------------------------------------------------------------------------------------------------- Total cost of sales, excluding restaurant depreciation and amortization of $198,422, $195,486 and $177,127, respectively $4,095,828 $3,902,939 $3,647,907 Selling, general and administrative 497,478 472,109 431,722 Depreciation and amortization 213,219 210,004 191,218 Interest, net 43,119 43,659 42,597 Asset impairment and restructuring charges, net 4,549 41,868 3,924 ------------------------------------------------------------------------------------------------------------------- Total costs and expenses $4,854,193 $4,670,579 $4,317,368 ------------------------------------------------------------------------------------------------------------------- Earnings before income taxes 423,917 332,776 337,603 Income taxes 133,311 105,603 111,624 ------------------------------------------------------------------------------------------------------------------- Net earnings $ 290,606 $ 227,173 $ 225,979 =================================================================================================================== Net earnings per share: Basic $ 1.85 $ 1.39 $ 1.33 Diluted $ 1.78 $ 1.34 $ 1.27 =================================================================================================================== Average number of common shares outstanding: Basic 156,700 163,500 170,300 Diluted 163,400 169,700 177,400 ===================================================================================================================
See accompanying notes to consolidated financial statements. 18 CONSOLIDATED BALANCE SHEETS
------------------------------------------------------------------------------------------------------------------- (In thousands) May 29, 2005 May 30, 2004 ------------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 42,801 $ 36,694 Receivables 36,510 30,258 Inventories 235,444 198,781 Prepaid expenses and other current assets 28,927 25,316 Deferred income taxes 63,584 55,258 ------------------------------------------------------------------------------------------------------------------- Total current assets $ 407,266 $ 346,307 Land, buildings and equipment, net 2,351,454 2,250,616 Other assets 179,051 183,425 ------------------------------------------------------------------------------------------------------------------- Total assets $ 2,937,771 $ 2,780,348 =================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 191,197 $ 174,624 Short-term debt -- 14,500 Accrued payroll 114,602 103,327 Accrued income taxes 52,404 48,753 Other accrued taxes 43,825 38,440 Unearned revenues 88,472 75,513 Current portion of long-term debt 299,929 -- Other current liabilities 254,178 228,324 ------------------------------------------------------------------------------------------------------------------- Total current liabilities $ 1,044,607 $ 683,481 Long-term debt, less current portion 350,318 653,349 Deferred income taxes 114,846 132,690 Deferred rent 130,872 122,879 Other liabilities 24,109 12,661 ------------------------------------------------------------------------------------------------------------------- Total liabilities $ 1,664,752 $ 1,605,060 ------------------------------------------------------------------------------------------------------------------- Stockholders' equity: Common stock and surplus, no par value. Authorized 500,000 shares; issued 271,102 and 264,907 shares, respectively; outstanding 154,391 and 158,431 shares, respectively $ 1,703,336 $ 1,584,115 Preferred stock, no par value. Authorized 25,000 shares; none issued and outstanding -- -- Retained earnings 1,405,754 1,127,653 Treasury stock, 116,711 and 106,476 shares, at cost, respectively (1,784,835) (1,483,768) Accumulated other comprehensive income (loss) (8,876) (10,173) Unearned compensation (41,685) (41,401) Officer notes receivable (675) (1,138) ------------------------------------------------------------------------------------------------------------------- Total stockholders' equity $ 1,273,019 $ 1,175,288 ------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 2,937,771 $ 2,780,348 ===================================================================================================================
See accompanying notes to consolidated financial statements. 19 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
- -------------------------------------------------------------------------------------------------------------------------------- Common Accumulated Officer Total Stock Other and Retained Treasury Comprehensive Unearned Notes Stockholders' (In thousands, except per share data) Surplus Earnings Stock Income (Loss) Compensation Receivable Equity - -------------------------------------------------------------------------------------------------------------------------------- Balance at May 26, 2002 $1,474,054 $ 700,986 $(1,044,915) $(12,414) $(46,108) $(1,997) $1,069,606 - -------------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net earnings -- 225,979 -- -- -- -- 225,979 Other comprehensive income (loss): Foreign currency adjustment -- -- -- 1,995 -- -- 1,995 Change in fair value of derivatives, net of tax of $0 -- -- -- 2 -- -- 2 Minimum pension liability adjustment,net of tax benefit of $141 -- -- -- (229) -- -- (229) ----------- Total comprehensive income 227,747 Cash dividends declared ($0.08 per share) -- (13,501) -- -- -- -- (13,501) Stock option exercises (3,133 shares) 27,261 -- 1,652 -- -- -- 28,913 Issuance of restricted stock (148 shares), net of forfeiture adjustments 4,429 -- 600 -- (5,029) -- -- Earned compensation -- -- -- -- 3,579 -- 3,579 ESOP note receivable repayments -- -- -- -- 4,710 -- 4,710 Income tax benefits credited to equity 16,385 -- -- -- -- -- 16,385 Purchases of common stock for treasury (10,746 shares) -- -- (213,311) -- -- -- (213,311) Issuance of treasury stock under Employee Stock Purchase Plan and other plans (280 shares) 3,828 -- 1,681 -- -- -- 5,509 Repayment of officer notes, net -- -- -- -- -- 418 418 - -------------------------------------------------------------------------------------------------------------------------------- Balance at May 25, 2003 $1,525,957 $ 913,464 $(1,254,293) $(10,646) $(42,848) $(1,579) $1,130,055 - -------------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net earnings -- 227,173 -- -- -- -- 227,173 Other comprehensive income (loss): Foreign currency adjustment -- -- -- 337 -- -- 337 Change in fair value of derivatives, net of tax of $51 -- -- -- 205 -- -- 205 Minimum pension liability adjustment,net of tax benefit of $45 -- -- -- (69) -- -- (69) ---------- Total comprehensive income 227,646 Cash dividends declared ($0.08 per share) -- (12,984) -- -- -- -- (12,984) Stock option exercises (3,464 shares) 30,972 -- 3,685 -- -- -- 34,657 Issuance of restricted stock (409 shares), net of forfeiture adjustments 7,605 -- 173 -- (7,778) -- -- Earned compensation -- -- -- -- 4,198 -- 4,198 ESOP note receivable repayments -- -- -- -- 5,027 -- 5,027 Income tax benefits credited to equity 15,650 -- -- -- -- -- 15,650 Purchases of common stock for treasury (10,749 shares) -- -- (235,462) -- -- -- (235,462) Issuance of treasury stock under Employee Stock Purchase Plan and other plans (357 shares) 3,931 -- 2,129 -- -- -- 6,060 Repayment of officer notes -- -- -- -- -- 441 441 - -------------------------------------------------------------------------------------------------------------------------------- Balance at May 30, 2004 $1,584,115 $1,127,653 $(1,483,768) $(10,173) $(41,401) $(1,138) $1,175,288 - -------------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net earnings -- 290,606 -- -- -- -- 290,606 Other comprehensive income (loss): Foreign currency adjustment -- -- -- 1,450 -- -- 1,450 Change in fair value of derivatives, net of tax of $1,503 -- -- -- (243) -- -- (243) Minimum pension liability adjustment,net of tax benefit of $56 -- -- -- 90 -- -- 90 -------- Total comprehensive income 291,903 Cash dividends declared ($0.08 per share) -- (12,505) -- -- -- -- (12,505) Stock option exercises (6,615 shares) 62,464 -- 7,081 -- -- -- 69,545 Issuance of restricted stock (378 shares), net of forfeiture adjustments 9,535 -- -- -- (9,535) -- -- Earned compensation -- -- -- -- 7,464 -- 7,464 ESOP note receivable repayments -- -- -- -- 3,393 -- 3,393 Income tax benefits credited to equity 42,996 -- -- -- -- -- 42,996 Purchases of common stock for treasury (11,343 shares) -- -- (311,686) -- -- -- (311,686) Issuance of treasury stock under Employee Stock Purchase Plan and other plans (296 shares) 4,226 -- 1,932 -- -- -- 6,158 Issuance of treasury stock under Employee Stock Ownership Plan (50 shares) -- -- 1,606 -- (1,606) -- -- Repayment of officer notes -- -- -- -- -- 463 463 - -------------------------------------------------------------------------------------------------------------------------------- Balance at May 29, 2005 $1,703,336 $1,405,754 $(1,784,835) $ (8,876) $(41,685) $ (675) $1,273,019 ================================================================================================================================
See accompanying notes to consolidated financial statements. 20 CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended ------------------------------------------------------------------------------------------------------------------- (In thousands) May 29, 2005 May 30, 2004 May 25, 2003 ------------------------------------------------------------------------------------------------------------------- Cash flows - operating activities Net earnings $ 290,606 $ 227,173 $ 225,979 Adjustments to reconcile net earnings to cash flows: Depreciation and amortization 213,219 210,004 191,218 Asset impairment charges, net 4,549 40,756 4,282 Restructuring charge (credit) -- 1,112 (358) Amortization of unearned compensation and loan costs 11,041 7,599 6,901 Change in current assets and liabilities 28,967 2,207 36,046 Contribution to defined benefit pension plans and postretirement plan (575) (257) (20,203) Loss on disposal of land, buildings and equipment 1,164 104 2,456 Change in cash surrender value of trust-owned life insurance (3,451) (6,106) 2,441 Deferred income taxes (24,722) 16,688 32,026 Change in deferred rent 7,993 7,583 10,098 Change in other liabilities 11,920 1,490 1,051 Income tax benefits credited to equity 42,996 15,650 16,385 Non-cash compensation expense 1,006 861 758 Other, net (1,471) 547 (445) ------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities $ 583,242 $ 525,411 $ 508,635 ------------------------------------------------------------------------------------------------------------------- Cash flows - investing activities Purchases of land, buildings and equipment (329,238) (354,326) (423,273) Increase in other assets (1,931) (5,128) (8,100) Purchase of trust-owned life insurance -- -- (6,000) Proceeds from disposal of land, buildings and equipment 18,028 16,197 7,641 Proceeds from maturities of short-term investments -- -- 10,000 ------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities $(313,141) $(343,257) $(419,732) ------------------------------------------------------------------------------------------------------------------- Cash flows - financing activities Proceeds from issuance of common stock 74,697 39,856 33,664 Dividends paid (12,505) (12,984) (13,501) Purchases of treasury stock (311,686) (235,462) (213,311) ESOP note receivable repayments 3,393 5,027 4,710 (Decrease) increase in short-term debt (14,500) 14,500 -- Repayment of long-term debt (3,393) (5,027) (4,710) ------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities $(263,994) $(194,090) $(193,148) ------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 6,107 (11,936) (104,245) Cash and cash equivalents - beginning of year 36,694 48,630 152,875 ------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents - end of year $ 42,801 $ 36,694 $ 48,630 =================================================================================================================== Cash flows from changes in current assets and liabilities Receivables (5,533) (279) 66 Inventories (36,663) (25,137) (1,231) Prepaid expenses and other current assets (4,463) (190) (8,523) Accounts payable 16,573 (1,027) 15,927 Accrued payroll 11,275 17,352 (1,961) Accrued income taxes 3,651 (19,222) (529) Other accrued taxes 5,385 3,371 4,595 Unearned revenues 12,959 2,815 16,066 Other current liabilities 25,783 24,524 11,636 ------------------------------------------------------------------------------------------------------------------- Change in current assets and liabilities $ 28,967 $ 2,207 $ 36,046 ===================================================================================================================
See accompanying notes to consolidated financial statements. 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except per share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Operations and Principles of Consolidation The consolidated financial statements include the operations of Darden Restaurants, Inc. and its wholly owned subsidiaries. We own and operate various restaurant concepts located in the United States and Canada, with no franchising. We also license 37 restaurants in Japan. All significant intercompany balances and transactions have been eliminated in consolidation. Fiscal Year Our fiscal year ends on the last Sunday in May. Fiscal 2005 and 2003 both consisted of 52 weeks of operation. Fiscal 2004 consisted of 53 weeks of operation. Cash Equivalents Cash equivalents include highly liquid investments such as U.S. treasury bills, taxable municipal bonds and money market funds that have a maturity of three months or less. Amounts receivable from credit card companies are also considered cash equivalents because they are both short-term and highly liquid in nature and are typically converted to cash within three days of the sales transaction. Inventories Inventories consist of food and beverages, and are valued at the lower of weighted-average cost or market. Land, Buildings and Equipment Land, buildings and equipment are recorded at cost less accumulated depreciation. Repair and maintenance costs incurred to maintain the appearance and functionality of the land, buildings and equipment that do not extend its useful life or that are less than $1 are expensed as incurred. Building components are depreciated over estimated useful lives ranging from seven to 40 years using the straight-line method. Leasehold improvements, which are reflected on our consolidated balance sheets as a component of buildings, are amortized over the lesser of the expected lease term, including cancelable option periods, or the estimated useful lives of the related assets using the straight-line method. Equipment is depreciated over estimated useful lives ranging from two to ten years also using the straight-line method. Accelerated depreciation methods are generally used for income tax purposes. Depreciation and amortization expense associated with buildings and equipment amounted to $206,552, $203,349 and $184,963, in fiscal 2005, 2004 and 2003, respectively. In fiscal 2005, 2004 and 2003, we had losses on disposal of land, buildings and equipment of $1,164, $104 and $2,456, respectively, which were included in selling, general and administrative expenses. Capitalized Software Costs Capitalized software, which is a component of other assets, is recorded at cost less accumulated amortization. Capitalized software is amortized using the straight-line method over estimated useful lives ranging from three to ten years. The cost of capitalized software at May 29, 2005 and May 30, 2004, amounted to $51,292 and $46,629, respectively. Accumulated amortization as of May 29, 2005 and May 30, 2004 amounted to $19,877 and $14,301, respectively. Amortization expense associated with capitalized software amounted to $6,667, $6,655 and $6,255, in fiscal 2005, 2004 and 2003, respectively. Trust-Owned Life Insurance In August 2001, we caused a trust that we previously had established to purchase life insurance policies covering certain of our 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 a portion of our obligations under our non-qualified deferred compensation plan. The cash surrender value of the policies is included in other assets while changes in cash surrender value are included in selling, general and administrative expenses. 22 Liquor Licenses The costs of obtaining non-transferable liquor licenses that are directly issued by local government agencies for nominal fees are expensed as incurred. The costs of purchasing transferable liquor licenses through open markets in jurisdictions with a limited number of authorized liquor licenses are capitalized. Annual liquor license renewal fees are expensed. Impairment of Long-Lived Assets Land, buildings and equipment and certain other assets, including capitalized software costs and liquor licenses, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future undiscounted net cash flows expected to be generated by the assets. Identifiable cash flows are measured at the lowest level for which they are largely independent of the cash flows of other groups of assets and liabilities, generally at the restaurant level. If such assets are determined to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value. Fair value is generally determined based on appraisals or sales prices of comparable assets. Restaurant sites and certain other assets to be disposed of are reported at the lower of their carrying amount or fair value, less estimated costs to sell. Restaurant sites and certain other assets to be disposed of are included in assets held for disposal when certain criteria are met. These criteria include the requirement that the likelihood of disposing of these assets within one year is probable. Assets whose disposal is not probable within one year remain in land, buildings and equipment until their disposal is probable within one year. Insurance Accruals Through the use of insurance program deductibles and self-insurance, we retain a significant portion of expected losses under our workers' compensation, employee medical and general liability programs. However, we carry insurance for individual claims that generally exceed $250 for workers' compensation and general liability claims. Accrued liabilities have been recorded based on our estimates of the anticipated ultimate costs to settle all claims, both reported and unreported. Revenue Recognition Revenue from restaurant sales is recognized when food and beverage products are sold. Unearned revenues represent our liability for gift cards and certificates that have been sold but not yet redeemed and are recorded at their expected redemption value. When the gift cards and certificates are redeemed, we recognize restaurant sales and reduce unearned revenues. Food and Beverage Costs Food and beverage costs include inventory, warehousing and related purchasing and distribution costs. Vendor allowances received in connection with the purchase of a vendor's products are recognized as a reduction of the related food and beverage costs as earned. These allowances are recognized as earned in accordance with the underlying agreement with the vendor and completion of the earning process. Vendor agreements are generally for a period of one year or more and payments received are initially recorded as long-term liabilities. Amounts which are expected to be earned within one year are recorded as a current liability. Income Taxes We provide for federal and state income taxes currently payable as well as for those deferred because of temporary differences between reporting income and expenses for financial statement purposes versus tax purposes. Federal income tax credits are recorded as a reduction of income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. Income tax benefits credited to equity relate to tax benefits associated with amounts that are deductible for income tax purposes but do not affect earnings. These benefits are principally generated from employee exercises of non-qualified stock options and vesting of employee restricted stock awards. 23 Derivative Instruments and Hedging Activities We use financial and commodities derivatives to manage interest rate, compensation and commodities pricing risks inherent in our business operations. Our use of derivative instruments is currently limited to interest rate hedges, equity forwards contracts and commodities futures contracts. These instruments are structured as hedges of forecasted transactions or the variability of cash flows to be paid related to a recognized asset or liability (cash flow hedges). No derivative instruments are entered into for trading or speculative purposes. All derivatives are recognized on the balance sheet at fair value. On the date the derivative contract is entered into, we document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking the various hedge transactions. This process includes linking all derivatives designated as cash flow hedges to specific assets and liabilities on the consolidated balance sheet or to specific forecasted transactions. We also formally assess, both at the hedge's inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. Changes in the fair value of derivatives that are highly effective and that are designated and qualify as cash flow hedges are recorded in other comprehensive income until earnings are affected by the variability in cash flows of the designated hedged item. Where applicable, we discontinue hedge accounting prospectively when it is determined that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item or the derivative is terminated. Any changes in the fair value of a derivative where hedge accounting has been discontinued or is ineffective are recognized immediately in earnings. Cash flows related to derivatives are included in operating activities. Operating Leases We recognize rent expense on a straight-line basis over the expected lease term, including cancelable option periods when it is deemed to be reasonably assured that we would incur an economic penalty for not exercising the options. Within the provisions of certain of our leases, there are rent holidays and/or escalations in payments over the base lease term, as well as renewal periods. The effects of the holidays and escalations have been reflected in rent expense on a straight-line basis over the expected lease term, which includes cancelable option periods when it is deemed to be reasonably assured that we would incur an economic penalty for not exercising the option. The lease term commences on the date when we have the right to control the use of the leased property, which is typically before rent payments are due under the terms of the lease. Many of our leases have renewal periods totaling five to 20 years, exercisable at our option and require payment of property taxes, insurance and maintenance costs in addition to the rent payments. Percentage rent expense is generally based on sales levels and is accrued at the point in time we determine that it is probable that such sales levels will be achieved. Pre-Opening Expenses Non-capital expenditures associated with opening new restaurants are expensed as incurred. Advertising Production costs of commercials are charged to operations in the fiscal period the advertising is first aired. The costs of programming and other advertising, promotion and marketing programs are charged to operations in the fiscal period incurred. Advertising expense amounted to $214,608, $210,989 and $200,020, in fiscal 2005, 2004 and 2003, respectively. Stock-Based Compensation Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," encourages the use of a fair-value method of accounting for stock-based awards under which the fair value of stock options is determined on the date of grant and expensed over the vesting period. As allowed by SFAS No. 123, we have elected to account for our stock-based compensation plans under an intrinsic value method that requires compensation expense to be recorded only if, on the date of grant, the current market price of our common stock exceeds the exercise price the employee must pay for the stock. Our policy is to grant stock options at the fair market value of our underlying stock on the date of grant. Accordingly, no compensation expense has been recognized for stock options granted under any of our stock plans because the exercise price of all options granted was equal to the current market value of our stock on the grant date. 24 Had we determined compensation expense for our stock options based on the fair value at the grant date as prescribed under SFAS No. 123, our net earnings and net earnings per share would have been reduced to the pro forma amounts indicated below:
Fiscal Year ------------------------------------------------------------------------------------------------------------------- 2005 2004 2003 ------------------------------------------------------------------------------------------------------------------- Net earnings, as reported $ 290,606 $ 227,173 $225,979 Add: Stock-based compensation expense included in reported net earnings, net of related tax effects 5,134 3,158 2,642 Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects (22,719) (17,980) (19,801) ----------------------------------------------- Pro forma $ 273,021 $ 212,351 $208,820 =============================================== Basic net earnings per share As reported $ 1.85 $ 1.39 $ 1.33 Pro forma $ 1.74 $ 1.30 $ 1.23 Diluted net earnings per share As reported $ 1.78 $ 1.34 $ 1.27 Pro forma $ 1.67 $ 1.25 $ 1.18 ===================================================================================================================
To determine pro forma net earnings, reported net earnings have been adjusted for compensation expense associated with stock options granted that are expected to eventually vest. The preceding pro forma results were determined using the Black Scholes option-pricing model, which values options based on the stock price at the grant date, the expected life of the option, the estimated volatility of the stock, expected dividend payments and the risk-free interest rate over the expected life of the option. The dividend yield was calculated by dividing the current annualized dividend by the option exercise price for each grant. The expected volatility was determined considering stock prices for the fiscal year the grant occurred and prior fiscal years, as well as considering industry volatility data. The risk-free interest rate was the rate available on zero coupon U.S. government obligations with a term equal to the expected life of each grant. The expected life of the option was estimated based on the exercise history from previous grants. The weighted-average assumptions used in the Black Scholes model were as follows:
Stock Options Granted in Fiscal Year ------------------------------------------------------------------------------------------------------------------- 2005 2004 2003 ------------------------------------------------------------------------------------------------------------------- Risk-free interest rate 3.75% 2.62% 4.37% Expected volatility of stock 30.0% 30.0% 30.0% Dividend yield 0.3% 0.2% 0.2% Expected option life 6.0 years 6.0 years 6.0 years ===================================================================================================================
Restricted stock and restricted stock unit (RSU) awards are recognized as unearned compensation, a component of stockholders' equity, based on the fair market value of our common stock on the award date. These amounts are amortized to compensation expense, using the straight-line method, over the vesting period using assumed forfeiture rates for different types of awards. Compensation expense is adjusted in future periods if actual forfeiture rates differ from initial estimates. Net Earnings Per Share Basic net earnings per share are computed by dividing net earnings by the weighted-average number of common shares outstanding for the reporting period. Diluted net earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Outstanding stock options and restricted stock granted by us represent the only dilutive effect reflected in diluted weighted-average shares outstanding. Options and restricted stock do not impact the numerator of the diluted net earnings per share computation. 25 Options to purchase 2,680,412 shares, 4,643,389 shares and 3,952,618 shares of common stock were excluded from the calculation of diluted net earnings per share for fiscal 2005, 2004 and 2003, respectively, because their exercise prices exceeded the average market price of common shares for the period. Comprehensive Income (Loss) Comprehensive income (loss) includes net earnings and other comprehensive income (loss) items that are excluded from net earnings under accounting principles generally accepted in the United States of America. Other comprehensive income (loss) items include foreign currency translation adjustments, the effective unrealized portion of changes in the fair value of cash flow hedges and amounts associated with minimum pension liability adjustments. Foreign Currency The Canadian dollar is the functional currency for our Canadian restaurant operations. Assets and liabilities denominated in Canadian dollars are translated into U.S. dollars using the exchange rates in effect at the balance sheet date. Results of operations are translated using the average exchange rates prevailing throughout the period. Translation gains and losses are reported as a separate component of accumulated other comprehensive income (loss) in stockholders' equity. Aggregate cumulative translation losses were $8,724 and $10,174 at May 29, 2005 and May 30, 2004, respectively. Losses from foreign currency transactions, which amounted to $18, $53 and $105, are included in the consolidated statements of earnings for fiscal 2005, 2004 and 2003, respectively. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us 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 sales and expenses during the reporting period. Actual results could differ from those estimates. Segment Reporting As of May 29, 2005, we operated 1,381 Red Lobster, Olive Garden, Bahama Breeze, Smokey Bones Barbeque & Grill and Seasons 52 restaurants in North America as operating segments. The restaurants operate principally in the U.S. within the casual dining industry, providing similar products to similar customers. The restaurants also possess similar pricing structures, resulting in similar long-term expected financial performance characteristics. Revenues from external customers are derived principally from food and beverage sales. We do not rely on any major customers as a source of revenue. We believe we meet the criteria for aggregating our operating segments into a single reporting segment. Future Application of Accounting Standards In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 151, "Inventory Costs." SFAS No. 151 clarifies the accounting for abnormal amounts of idle facilities expense, freight, handling costs and wasted material. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not believe the adoption of SFAS No. 151 will have a material impact on our financial statements. In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-Monetary Assets." SFAS No. 153 eliminates the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. SFAS No. 153 is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We do not believe the adoption of SFAS No. 153 will have a material impact on our financial statements. In December 2004, the FASB issued SFAS No. 123 (Revised), "Share-Based Payment." SFAS No. 123R revises SFAS No. 123, "Accounting for Stock-Based Compensation" and generally requires the cost associated with employee services received in exchange for an award of equity instruments be measured based on the grant-date fair value of the award and recognized in the financial statements over the period during which employees are required to provide service in exchange for the award. SFAS No. 123R also provides guidance on how to determine the grant-date fair value for awards of equity instruments as well as alternative methods of adopting its requirements. SFAS No. 123R is effective for annual reporting periods beginning after June 15, 2005. As disclosed in Note 1, based on the current assumptions and calculations used, had we recognized compensation expense based on the fair value of awards of equity instruments, net earnings would have been reduced by approximately $17,585, $14,822 and $17,159 for fiscal 2005, 2004 and 2003, respectively. We have not yet determined the method of adoption or the effect of adopting SFAS No. 123R and have not determined whether the adoption will result in future amounts similar to the current pro forma disclosures under SFAS No. 123. 26 NOTE 2 - ACCOUNTS RECEIVABLE Our accounts receivable is primarily comprised of receivables from national storage and distribution companies with which we contract to provide services that are billed to us on a per-case basis. In connection with these services, certain of our inventory items are conveyed to these storage and distribution companies to transfer ownership and risk of loss prior to delivery of the inventory to our restaurants. We reacquire these items when the inventory is subsequently delivered to our restaurants. These transactions do not impact the consolidated statements of earnings. Receivables from national storage and distribution companies amounted to $20,296 and $20,276 at May 29, 2005 and May 30, 2004, respectively. The allowance for doubtful accounts associated with all of our receivables amounted to $400 and $350 at May 29, 2005 and May 30, 2004, respectively. NOTE 3 - RESTRUCTURING AND ASSET IMPAIRMENT ACTIVITIES Asset impairment charges related to the decision to relocate or rebuild certain restaurants amounted to $900, $5,667 and $4,876 in fiscal 2005, 2004 and 2003, respectively. Asset impairment credits related to assets sold that were previously impaired amounted to $2,786, $1,437 and $594 in fiscal 2005, 2004 and 2003, respectively. During fiscal 2005, we also recorded charges of $6,407 for the write-down of carrying value of two Olive Garden restaurants, one Red Lobster restaurant and one Smokey Bones restaurant. The Smokey Bones restaurant was closed subsequent to fiscal 2005 while the two Olive Garden restaurants and one Red Lobster restaurant continued to operate. All impairment amounts are included in asset impairment and restructuring charges in the consolidated statements of earnings. During fiscal 2004, we recorded pre-tax asset impairment charges of $36,526 for long-lived asset impairments associated with the closing of six Bahama Breeze restaurants and the write-down of the carrying value of four other Bahama Breeze restaurants, one Olive Garden restaurant and one Red Lobster restaurant, which continued to operate. We also recorded a restructuring charge of $1,112 primarily related to severance payments made to certain restaurant employees and exit costs associated with the closing of the six Bahama Breeze restaurants in accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." Below is a summary of the restructuring costs for fiscal 2005:
Balance at May Balance at 29, 2004 Additions Cash Payments May 30, 2005 - ------------------------------------------------------------------------------------------------------------- One-time termination benefits $ 49 $ -- $ (49) $ -- Lease termination costs -- -- -- -- Other exit costs 311 -- (311) -- - ------------------------------------------------------------------------------------------------------------- $ 360 $ -- $ (360) $ -- =============================================================================================================
The results of operations for all restaurants closed in fiscal 2005, 2004 and 2003 are not material to our consolidated results of operations and, therefore, have not been presented as discontinued operations. NOTE 4 - LAND, BUILDINGS AND EQUIPMENT, NET The components of land, buildings and equipment, net, are as follows: May 29, 2005 May 30, 2004 ------------------------------------------------------------------------------- Land $ 565,965 $ 545,191 Buildings 2,306,342 2,138,376 Equipment 1,036,143 1,008,133 Construction in progress 107,750 87,655 ------------------------------------------------------------------------------- Total land, buildings and equipment 4,016,200 3,779,355 Less accumulated depreciation (1,664,746) (1,528,739) ------------------------------------------------------------------------------- Net land, buildings, and equipment, net $ 2,351,454 $ 2,250,616 =============================================================================== 27 NOTE 5 - OTHER ASSETS The components of other assets are as follows: May 29, 2005 May 30, 2004 ------------------------------------------------------------------------------- Prepaid pension costs $ 63,475 $ 67,077 Trust-owned life insurance 43,873 40,422 Capitalized software costs, net 31,165 32,328 Liquor licenses 24,570 22,201 Prepaid interest and loan costs 8,008 12,396 Miscellaneous 7,960 9,001 ------------------------------------------------------------------------------- Total other assets $ 179,051 $ 183,425 =============================================================================== NOTE 6 - SHORT-TERM DEBT Short-term debt at May 29, 2005 and May 30, 2004, consisted of $0 and $14,500, respectively, of unsecured commercial paper borrowings with original maturities of one month or less. The debt bore an interest rate of 1.09 percent at May 30, 2004. NOTE 7 - OTHER CURRENT LIABILITIES The components of other current liabilities are as follows: May 29, 2005 May 30, 2004 ------------------------------------------------------------------------------- Employee benefits $134,272 $115,083 Sales and other taxes 39,011 40,122 Insurance 35,938 38,254 Miscellaneous 34,458 24,388 Accrued interest 10,499 10,477 ------------------------------------------------------------------------------- Total other current liabilities $254,178 $228,324 =============================================================================== NOTE 8 - LONG-TERM DEBT The components of long-term debt are as follows:
May 29, 2005 May 30, 2004 ------------------------------------------------------------------------------------------------------------------- 8.375% senior notes due September 2005 $ 150,000 $ 150,000 6.375% notes due February 2006 150,000 150,000 5.75% medium-term notes due March 2007 150,000 150,000 7.45% medium-term notes due April 2011 75,000 75,000 7.125% debentures due February 2016 100,000 100,000 ESOP loan with variable rate of interest (3.42% at May 29, 2005) due December 2018 26,010 29,403 ------------------------------------------------------------------------------------------------------------------- Total long-term debt 651,010 654,403 Less issuance discount (763) (1,054) ------------------------------------------------------------------------------------------------------------------- Total long-term debt less issuance discount 650,247 653,349 Less current portion (299,929) -- ------------------------------------------------------------------------------------------------------------------- Long-term debt, excluding current portion $ 350,318 $ 653,349 ===================================================================================================================
In July 2000, we registered $500,000 of debt securities with the Securities and Exchange Commission (SEC) using a shelf registration process. Under this process, we may offer, from time to time, up to an aggregate of $500,000 of debt securities. In September 2000, we issued $150,000 of unsecured 8.375 percent senior notes due in September 2005. The senior notes rank equally with all of our other unsecured and unsubordinated debt and will be senior in right of payment to any future subordinated debt we may issue. In April 2001, we issued $75,000 of unsecured 7.45 percent medium-term notes due in April 2011. In March 2002, we issued $150,000 of unsecured 5.75 percent medium-term notes due in March 2007. At May 29, 2005, our shelf registration provides for the issuance of an additional $125,000 of unsecured debt securities. 28 In January 1996, we issued $150,000 of unsecured 6.375 percent notes due in February 2006 and $100,000 of unsecured 7.125 percent debentures due in February 2016. Concurrent with the issuance of the notes and debentures, we terminated, and settled for cash, interest-rate swap agreements with notional amounts totaling $200,000, which hedged the movement of interest rates prior to the issuance of the notes and debentures. The cash paid in terminating the interest-rate swap agreements is being amortized to interest expense over the life of the notes and debentures. The effective annual interest rate is 7.57 percent for the notes and 7.82 percent for the debentures, after consideration of loan costs, issuance discounts and interest-rate swap termination costs. We also maintain a credit facility that expires in October 2008, with a consortium of banks under which we can borrow up to $400,000. The credit facility allows us to borrow at interest rates that vary based on a spread over (i) LIBOR or (ii) a base rate that is the higher of the prime rate, or one-half of one percent above the federal funds rate, at our option. The interest rate spread over LIBOR is determined by our debt rating. The credit facility supports our commercial paper borrowing program. We are required to pay a facility fee of 12.5 basis points per annum on the average daily amount of loan commitments by the consortium. The amount of interest and the annual facility fee are subject to change based on our maintenance of certain debt ratings and financial ratios, such as maximum debt to capital ratios. Advances under the credit facility are unsecured. At May 29, 2005 and May 30, 2004, no borrowings were outstanding and we were in compliance with the covenants under this credit facility. The aggregate maturities of long-term debt for each of the five fiscal years subsequent to May 29, 2005, and thereafter are $300,000 in 2006, $150,000 in 2007, $0 in 2008, 2009 and 2010 and $201,010 thereafter. NOTE 9 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES We use interest rate related derivative instruments to manage our exposure on debt instruments, as well as commodities derivatives to manage our exposure to commodity price fluctuations. We also use equity related derivative instruments to manage our exposure on cash compensation arrangements indexed to the market price of our common stock. By using these instruments, we expose ourselves, from time to time, to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. We minimize this credit risk by entering into transactions with high quality counterparties. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates, commodity prices, or market price of our common stock. We minimize this market risk by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. Futures Contracts and Commodity Swaps During fiscal 2005 and 2004, we entered into futures contracts and commodity swaps to reduce the risk of natural gas 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 accumulated other comprehensive income (loss). These changes in fair value are subsequently reclassified into earnings when the natural gas is purchased and used by us in our operations. Net losses of $311 and $439 related to these derivatives were recognized in earnings during fiscal 2005 and 2004, respectively. The fair value of these contracts was a net gain of $60 at May 29, 2005 and is expected to be reclassified from accumulated other comprehensive income (loss) into restaurant expenses during the next nine months. To the extent these derivatives are not effective, changes in their fair value are immediately recognized in current earnings. Outstanding derivatives are included in other current assets or other current liabilities. At May 29, 2005, the maximum length of time over which we are hedging our exposure to the variability in future natural gas cash flows is 12 months. No gains or losses were reclassified into earnings during fiscal 2005 or fiscal 2004 as a result of the discontinuance of natural gas cash flow hedges. Interest Rate Lock Agreement During fiscal 2002, we entered into a treasury interest rate lock agreement (treasury lock) to hedge the risk that the cost of a future issuance of fixed-rate debt may be adversely affected by interest rate fluctuations. The treasury lock, which had a $75,000 notional principal amount of indebtedness, was used to hedge a portion of the interest payments associated with $150,000 of debt subsequently issued in March 2002. The treasury lock was settled at the time of the related debt issuance with a net gain of $267 being recognized in other comprehensive income (loss). The net gain on the treasury lock is being amortized into earnings as an adjustment to interest expense over the same period in which the related interest costs on the new debt issuance are being recognized in earnings. Annual amortization of $53 was recognized in earnings as an adjustment to interest expense during fiscal 2005, 2004 and 2003. It is 29 expected that $53 of this gain will be recognized in earnings as an adjustment to interest expense during the next 12 months. Interest Rate Swaps During fiscal 2005 and 2004, we entered into interest rate swap agreements (swaps) to hedge the risk of changes in interest rates of a future issuance of fixed-rate debt. The swaps, which have a $100,000 notional principal amount of indebtedness, will be used to hedge the interest payments associated with a forecasted issuance of debt in fiscal 2006. To the extent the swaps are effective in offsetting the variability of the hedged cash flows, changes in the fair value of the swaps are not included in current earnings but are reported as accumulated other comprehensive income (loss). The accumulated gain or loss at the swap settlement date 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. The fair value of the swaps at May 29, 2005 was a loss of $3,131 and is included in accumulated other comprehensive income (loss) at May 29, 2005. No amounts were recognized in earnings during fiscal 2005 and fiscal 2004. We had interest rate swaps with a notional amount of $200,000, which we used to convert variable rates on our long-term debt to fixed rates effective May 30, 1995. We received the one-month commercial paper interest rate and paid fixed-rate interest ranging from 7.51 percent to 7.89 percent. The interest rate swaps were settled during January 1996 at a cost to us of $27,670. This cost is being recognized as an adjustment to interest expense over the term of our 10-year, 6.375 percent notes and 20-year, 7.125 percent debentures (see Note 8). Equity Forwards During fiscal 2005, we entered into equity forward contracts to hedge the risk of changes in future cash flows associated with the unvested unrecognized Darden stock units granted during the first quarter of fiscal 2005 (see Note 16). The equity forward contracts will be settled at the end of the vesting periods of their underlying Darden stock units, which range between four and five years. The equity forward contracts, which are indexed to 200,000 shares of our common stock, have a $3,904 notional amount and can only be net settled in cash. The equity forward contracts are used to hedge the variability in cash flows associated with the unvested unrecognized Darden stock units. To the extent the equity forward contracts are effective in offsetting the variability of the hedged cash flows, changes in the fair value of the equity forward contracts are not included in current earnings but are reported as accumulated other comprehensive income (loss). A deferred gain of $2,185 related to the equity forward contracts was recognized in accumulated other comprehensive income (loss) at May 29, 2005. As the Darden stock units vest, we will effectively de-designate that portion of the equity forward contract that no longer qualifies for hedge accounting and changes in fair value associated with that portion of the equity forward contract will be recognized in current earnings. A gain of $471 was recognized in earnings as a component of restaurant labor during fiscal 2005. NOTE 10 - FINANCIAL INSTRUMENTS The fair values of cash equivalents, accounts receivable, accounts payable and short-term debt approximate their carrying amounts due to their short duration. The carrying value and fair value of long-term debt at May 29, 2005 was $650,247 and $686,040, respectively. The carrying value and fair value of long-term debt at May 30, 2004 was $653,349 and $700,383, respectively. The fair value of long-term debt is determined based on market prices or, if market prices are not available, the present value of the underlying cash flows discounted at our incremental borrowing rates. NOTE 11 - STOCKHOLDERS' EQUITY Treasury Stock Our Board of Directors has authorized us to repurchase up to 137.4 million shares of our common stock. In fiscal 2005, 2004 and 2003, we purchased treasury stock totaling $311,686, $235,462 and $213,311, respectively. At May 29, 2005, a total of 120.6 million shares have been repurchased under the authorization. The repurchased common stock is reflected as a reduction of stockholders' equity. 30 Stock Purchase/Loan Program We have share ownership guidelines for our officers. To assist them in meeting these guidelines, we implemented the 1998 Stock Purchase/Option Award Loan Program (Loan Program) in conjunction with our Stock Option and Long-Term Incentive Plan of 1995. The Loan Program provided loans to our officers and awarded two options for every new share purchased, up to a maximum total share value equal to a designated percentage of the officer's base compensation. Loans are full recourse and interest bearing, with a maximum principal amount of 75 percent of the value of the stock purchased. The stock purchased is held on deposit with us until the loan is repaid. The interest rate for loans under the Loan Program is fixed and is equal to the applicable federal rate for mid-term loans with semi-annual compounding for the month in which the loan originates. Interest is payable on a weekly basis. Loan principal is payable in installments with 25 percent, 25 percent and 50 percent of the total loan due at the end of the fifth, sixth and seventh years of the loan. Effective July 30, 2002, and in compliance with the Sarbanes-Oxley Act of 2002, we no longer issue new loans under the Loan Program. We account for outstanding officer notes receivable as a reduction of stockholders' equity. Stockholders' Rights Plan Under our Rights Agreement dated as of May 16, 2005, each share of our common stock has associated with it one right to purchase one-thousandth of a share of our Series A Participating Cumulative Preferred Stock at a purchase price of $120, subject to adjustment under certain circumstances to prevent dilution. The rights are exercisable when, and are not transferable apart from our common stock until, a person or group has acquired 15 percent or more, or makes a tender offer for 15 percent or more, of our common stock. If the specified percentage of our common stock is then acquired, each right will entitle the holder (other than the acquiring company) to receive, upon exercise, common stock of either us or the acquiring company having a value equal to two times the exercise price of the right. The rights are redeemable by our Board of Directors under certain circumstances and expire on May 25, 2015. Accumulated Other Comprehensive Income (Loss) The components of accumulated other comprehensive income (loss) are as follows:
May 29, 2005 May 30, 2004 ----------------------------------------------------------------------------------------------------------------- Foreign currency translation adjustment $(8,724) $(10,174) Unrealized gains on derivatives, net of tax 345 587 Minimum pension liability adjustment, net of tax (497) (586) ----------------------------------------------------------------------------------------------------------------- Total accumulated other comprehensive income (loss) $(8,876) $(10,173) =================================================================================================================
Reclassification adjustments associated with pre-tax net derivative income (losses) realized in net earnings for fiscal 2005, 2004 and 2003 amounted to $213, $(386) and $994, respectively. NOTE 12 - LEASES An analysis of rent expense incurred under operating leases is as follows:
Fiscal Year ------------------------------------------------------------------------------------------------------------------- 2005 2004 2003 ------------------------------------------------------------------------------------------------------------------- Restaurant minimum rent $62,116 $56,462 $48,121 Restaurant percentage rent 4,036 3,820 3,682 Restaurant equipment minimum rent 7 57 5,719 Restaurant rent averaging expense 7,636 7,522 9,482 Transportation equipment 3,083 2,514 2,665 Office equipment 1,200 1,302 1,138 Office space 1,129 1,286 1,713 Warehouse space 325 315 303 ------------------------------------------------------------------------------------------------------------------- Total rent expense $79,532 $73,278 $72,823 ===================================================================================================================
The annual non-cancelable future lease commitments for each of the five fiscal years subsequent to May 29, 2005 and thereafter are: $68,301 in 2006, $63,598 in 2007, $56,112 in 2008, $48,112 in 2009, $40,352 in 2010 and $143,068 thereafter, for a cumulative total of $419,543. 31 NOTE 13 - INTEREST, NET The components of interest, net, are as follows:
Fiscal Year ------------------------------------------------------------------------------------------------------------------- 2005 2004 2003 ------------------------------------------------------------------------------------------------------------------- Interest expense $47,656 $47,710 $47,566 Capitalized interest (3,182) (3,500) (3,470) Interest income (1,355) (551) (1,499) ------------------------------------------------------------------------------------------------------------------- Interest, net $43,119 $43,659 $42,597 ===================================================================================================================
Capitalized interest was computed using our average borrowing rate. We paid $39,083, $39,661 and $38,682, for interest (excluding amounts capitalized) in fiscal 2005, 2004 and 2003, respectively. NOTE 14 - INCOME TAXES The components of earnings before income taxes and the provision for income taxes thereon are as follows:
Fiscal Year ------------------------------------------------------------------------------------------------------------------- 2005 2004 2003 ------------------------------------------------------------------------------------------------------------------- Earnings before income taxes: U.S. $ 416,905 $ 328,577 $ 335,611 Canada 7,012 4,199 1,992 ------------------------------------------------------------------------------------------------------------------- Earnings before income taxes $ 423,917 $ 332,776 $ 337,603 ------------------------------------------------------------------------------------------------------------------- Income taxes: Current: Federal $ 137,549 75,121 $ 68,178 State and local 20,438 13,663 11,396 Canada 46 131 24 ------------------------------------------------------------------------------------------------------------------- Total current $ 158,033 $ 88,915 $ 79,598 ------------------------------------------------------------------------------------------------------------------- Deferred (principally U.S.) (24,722) 16,688 32,026 ------------------------------------------------------------------------------------------------------------------- Total income taxes $ 133,311 $ 105,603 $ 111,624 ===================================================================================================================
During fiscal 2005, 2004 and 2003, we paid income taxes of $111,386, $92,265 and $65,398, respectively. The following table is a reconciliation of the U.S. statutory income tax rate to the effective income tax rate included in the accompanying consolidated statements of earnings:
Fiscal Year ------------------------------------------------------------------------------------------------------------------- 2005 2004 2003 ------------------------------------------------------------------------------------------------------------------- U.S. statutory rate 35.0% 35.0% 35.0% State and local income taxes, net of federal tax benefits 2.9 3.2 3.0 Benefit of federal income tax credits (5.0) (5.2) (4.5) Other, net (1.5) (1.3) (0.4) ------------------------------------------------------------------------------------------------------------------- Effective income tax rate 31.4% 31.7% 33.1% ===================================================================================================================
32 The tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows:
May 29, 2005 May 30, 2004 ------------------------------------------------------------------------------------------------------------------- Accrued liabilities $ 18,016 $ 13,286 Compensation and employee benefits 76,680 63,234 Deferred rent and interest income 33,149 28,094 Asset disposition and restructuring liabilities 2,239 2,651 Other 4,537 2,918 ------------------------------------------------------------------------------------------------------------------- Gross deferred tax assets $ 134,621 $ 110,183 ------------------------------------------------------------------------------------------------------------------- Buildings and equipment (145,421) (143,910) Prepaid pension costs (24,115) (25,452) Prepaid interest (1,205) (1,333) Capitalized software and other assets (11,334) (15,976) Other (3,808) (944) ------------------------------------------------------------------------------------------------------------------- Gross deferred tax liabilities $ (185,883) $ (187,615) ------------------------------------------------------------------------------------------------------------------- Net deferred tax liabilities $ (51,262) $ (77,432) ===================================================================================================================
A valuation allowance for deferred tax assets is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Realization is dependent upon the generation of future taxable income or the reversal of deferred tax liabilities during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. At May 29, 2005 and May 30, 2004, no valuation allowance has been recognized for deferred tax assets because we believe that sufficient projected future taxable income will be generated to fully utilize the benefits of these deductible amounts. NOTE 15- RETIREMENT PLANS Defined Benefit Plans and Postretirement Benefit Plan Substantially all of our employees are eligible to participate in a retirement plan. We sponsor non-contributory defined benefit pension plans for our salaried employees, in which benefits are based on various formulas that include years of service and compensation factors and for a group of hourly employees, in which a fixed level of benefits is provided. Pension plan assets are primarily invested in U.S., international and private equities, long duration fixed income securities and real assets. Our policy is to fund, at a minimum, the amount necessary on an actuarial basis to provide for benefits in accordance with the requirements of the Employee Retirement Income Security Act of 1974, as amended. We also sponsor a contributory postretirement benefit plan that provides health care benefits to our salaried retirees. During fiscal 2005, 2004 and 2003, we funded the defined benefit pension plans in the amount of $103, $85 and $20,063, respectively. We expect to contribute approximately $200 to our defined benefit pension plans during fiscal 2006. During fiscal 2005, 2004 and 2003, we funded the postretirement benefit plan in the amount of $472, $172 and $140, respectively. We expect to contribute approximately $400 to our postretirement benefit plan during fiscal 2006. 33 The following provides a reconciliation of the changes in the plan benefit obligation, fair value of plan assets and the funded status of the plans as of February 28, 2005 and 2004:
Defined Benefit Plans Postretirement Benefit Plan - --------------------------------------------------------------------------------------------------------------------- 2005 2004 2005 2004 - --------------------------------------------------------------------------------------------------------------------- Change in Benefit Obligation: Benefit obligation at beginning of period $143,689 $129,636 $ 16,885 $ 14,809 Service cost 4,840 4,516 699 626 Interest cost 7,315 7,077 1,006 920 Participant contributions -- -- 145 128 Benefits paid (5,387) (5,554) (544) (300) Actuarial loss (gain) 7,739 8,014 (1,821) 702 - --------------------------------------------------------------------------------------------------------------------- Benefit obligation at end of period $158,196 $143,689 $ 16,370 $ 16,885 ===================================================================================================================== Change in Plan Assets: Fair value at beginning of period $145,252 $115,962 $ -- $ -- Actual return on plan assets 18,162 34,759 -- -- Employer contributions 88 85 399 172 Participant contributions -- -- 145 128 Benefits paid (5,387) (5,554) (544) (300) - --------------------------------------------------------------------------------------------------------------------- Fair value at end of period $158,115 $145,252 $ -- $ -- ===================================================================================================================== Reconciliation of the Plan's Funded Status: Funded status at end of period $ (81) $ 1,563 $ (16,370) $ (16,885) Unrecognized prior service cost (22) (479) -- -- Unrecognized actuarial loss 59,379 62,062 4,292 6,458 Contributions for March to May 37 22 150 77 - --------------------------------------------------------------------------------------------------------------------- Prepaid (accrued) benefit costs $ 59,313 $ 63,168 $ (11,928) $ (10,350) ===================================================================================================================== Components of the Consolidated Balance Sheets: Prepaid benefit costs $ 63,475 $ 67,077 $ -- $ -- Accrued benefit costs (4,974) (4,859) (11,928) (10,350) Accumulated other comprehensive loss 812 950 -- -- - --------------------------------------------------------------------------------------------------------------------- Net asset (liability) recognized $ 59,313 $ 63,168 $ (11,928) $ (10,350) =====================================================================================================================
The accumulated benefit obligation for all pension plans was $150,841 and $135,950 at May 29, 2005 and May 30, 2004, respectively. The accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $5,011 and $0, respectively, at February 28, 2005 and $4,881 and $0, respectively, at February 28, 2004. The projected benefit obligation for pension plans with projected benefit obligations in excess of plan assets approximated their accumulated benefit obligation at February 28, 2005 and February 28, 2004. 34 The following table presents the weighted-average assumptions used to determine benefit obligations and net expense:
Defined Benefit Plans Postretirement Benefit Plan - ------------------------------------------------------------------------------------------------------------------ 2005 2004 2005 2004 - ------------------------------------------------------------------------------------------------------------------ Weighted-average assumptions used to determine benefit obligations at May 29 and May 30, (1) Discount rate 5.75% 6.00% 5.75% 6.00% Rate of future compensation increases 3.75% 3.75% N/A N/A Weighted-average assumptions used to determine net expense for fiscal years ended May 29 and May 30, (2) Discount rate 6.00% 6.25% 6.00% 6.25% Expected long-term rate of return on plan assets 9.00% 9.00% N/A N/A Rate of future compensation increases 3.75% 3.75% N/A N/A ================================================================================================================== (1) Determined as of the end of fiscal year (2) Determined as of the beginning of fiscal year
We set the discount rate assumption annually for each of the plans at their valuation dates to reflect the yield of high-quality fixed-income debt instruments, with lives that approximate the maturity of the plan benefits. The expected long-term rate of return on plan assets and health care cost trend rates are based upon several factors, including our historical assumptions compared with actual results, an analysis of current market conditions, asset allocations and the views of leading financial advisers and economists. Our target asset allocation is 35 percent U.S. equities, 30 percent high-quality, long-duration fixed-income securities, 15 percent international equities, 10 percent real assets and 10 percent private equities. We monitor our actual asset allocation to ensure that it approximates our target allocation and believe that our long-term asset allocation will continue to approximate our target allocation. The defined benefit pension plans have the following asset allocations at their measurement dates of February 28, 2005 and 2004, respectively: - -------------------------------------------------------------------------------- 2005 2004 - -------------------------------------------------------------------------------- U.S. equities 37% 38% High-quality, long-duration fixed-income securities 24% 26% International equities 20% 18% Real assets 13% 12% Private equities 6% 6% - -------------------------------------------------------------------------------- Total 100% 100% ================================================================================ Based on an analysis performed in fiscal 2003, we lowered our defined benefit plans' expected long-term rate of return on plan assets for fiscal 2004 to 9.0 percent, a reduction from its previous level of 10.4 percent. Our historical ten-year rate of return on plan assets, calculated using the geometric method average of returns, is approximately 10.9 percent as of May 29, 2005. The discount rate and expected return on plan assets assumptions have a significant effect on amounts reported for defined benefit pension plans. A quarter percentage point change in the defined benefit plans' discount rate and the expected long-term rate of return on plan assets would increase or decrease earnings before income taxes by $769 and $357, respectively. The assumed health care cost trend rate increase in the per-capita charges for benefits ranged from 10.0 percent to 11.0 percent for fiscal 2006, depending on the medical service category. The rates gradually decrease to 5.0 percent through fiscal 2011 and remain at that level thereafter. The assumed health care cost trend rate has a significant effect on amounts reported for retiree health care plans. A one-percentage-point variance in the assumed health care cost trend rate would increase or decrease the total of the service and interest cost components of net periodic postretirement benefit cost by $620 and $485, respectively, and would increase or decrease the accumulated postretirement benefit obligation by $3,507 and $2,744, respectively. 35 Components of net periodic benefit cost (income) are as follows:
Defined Benefit Plans Postretirement Benefit Plan - ----------------------------------------------------------------------------------------------------------------------- 2005 2004 2003 2005 2004 2003 - ----------------------------------------------------------------------------------------------------------------------- Service cost $ 4,840 $ 4,516 $ 3,732 $ 699 $ 626 $ 388 Interest cost 7,315 7,076 7,088 1,005 919 648 Expected return on plan assets (12,841) (12,821) (12,739) -- -- -- Amortization of unrecognized prior service cost (348) (348) (348) -- 29 18 Recognized net actuarial loss 4,992 3,710 1,924 346 334 46 - ----------------------------------------------------------------------------------------------------------------------- Net periodic benefit cost (income) $ 3,958 $ 2,133 $ (343) $ 2,050 $ 1,908 $ 1,100 =======================================================================================================================
The following benefit payments are expected to be paid: - -------------------------------------------------------------------------------- Defined Benefit Postretirement Plans Benefit Plan - -------------------------------------------------------------------------------- 2006 $ 5,666 $ 292 2007 6,283 340 2008 6,756 386 2009 7,151 453 2010 7,628 503 2011-2015 46,695 3,696 Defined Contribution Plan We have a defined contribution plan covering most employees age 21 and older. We match contributions for participants with at least one year of service at up to six percent of compensation, based on our performance. The match ranges from a minimum of $0.25 to $1.20 for each dollar contributed by the participant. The plan had net assets of $498,125 at May 29, 2005 and $390,461 at May 30, 2004. Expense recognized in fiscal 2005, 2004 and 2003, was $2,713, $2,666 and $1,732, respectively. Employees classified as "highly compensated" under the Internal Revenue Code are not eligible to participate in this plan. Instead, highly compensated employees are eligible to participate in a separate non-qualified deferred compensation plan. This plan allows eligible employees to defer the payment of all or part of their annual salary and bonus and provides for awards that approximate the matching contributions and other amounts that participants would have received had they been eligible to participate in our defined contribution and defined benefit plans. Amounts payable to highly compensated employees under the non-qualified deferred compensation plan totaled $108,407 and $88,569 at May 29, 2005 and May 30, 2004, respectively. These amounts are included in other current liabilities. The defined contribution plan includes an Employee Stock Ownership Plan (ESOP). This ESOP originally borrowed $50,000 from third parties, with guarantees by us, and borrowed $25,000 from us at a variable interest rate. The $50,000 third party loan was refinanced in 1997 by a commercial bank's loan to us and a corresponding loan from us to the ESOP. Compensation expense is recognized as contributions are accrued. In addition to matching plan participant contributions, our contributions to the plan are also made to pay certain employee incentive bonuses. Fluctuations in our stock price impact the amount of expense to be recognized. Contributions to the plan, plus the dividends accumulated on allocated and unallocated shares held by the ESOP, are used to pay principal, interest and expenses of the plan. As loan payments are made, common stock is allocated to ESOP participants. In fiscal 2005, 2004 and 2003, the ESOP incurred interest expense of $677, $473 and $697, respectively, and used dividends received of $1,235, $454 and $1,002, respectively, and contributions received from us of $3,389, $4,093 and $4,266, respectively, to pay principal and interest on our debt. These ESOP shares are included in average common shares outstanding for purposes of calculating net earnings per share. At May 29, 2005, the ESOP's debt to us had a balance of $26,010 with a variable rate of interest of 3.42 percent; $9,110 of the principal balance is due to be repaid no later than December 2007, with the remaining $16,900 due to be repaid no later than December 2014. The number of our common shares held in the ESOP at May 29, 2005 approximated 9,810,000 shares, representing 4,211,000 allocated shares, 9,000 committed-to-be-released shares and 5,590,000 suspense shares. At the end of fiscal 2005, the ESOP borrowed $1,606 from us at a variable interest rate and acquired an additional 50,000 shares of our common stock, which were held in suspense within the ESOP at May 29, 2005. The loan, which had a variable interest rate of 3.42 percent at May 29, 2005, is due to be repaid no later than December 2018. The shares acquired under this loan are accounted for in accordance with Statement of Position (SOP) 93-6, "Employers Accounting for Employee Stock Ownership Plans." Fluctuations in our stock price are recognized as adjustments to common stock and surplus when the shares are committed to be released. These ESOP shares are not 36 considered outstanding until they are committed to be released and, therefore, have been excluded for purposes of calculating basic and diluted net earnings per share at May 29, 2005. The fair value of these shares at May 29, 2005 was $1,624. NOTE 16 - STOCK PLANS We maintain two active stock option and stock grant plans under which new awards may still be issued: the 2002 Stock Incentive Plan (2002 Plan) and the Stock Plan for Directors (Director Stock Plan). We also have two other stock option and stock grant plans under which we no longer can make new awards, although awards outstanding under the plans may still vest and be exercised in accordance with their terms: the Stock Option and Long-Term Incentive Plan of 1995 (1995 Plan) and the Restaurant Management and Employee Stock Plan of 2000 (2000 Plan). All of the plans are administered by the Compensation Committee of the Board of Directors. The 2002 Plan provides for the issuance of up to 8,550,000 common shares in connection with the granting of non-qualified stock options, incentive stock options, stock appreciation rights, stock awards, restricted stock, RSUs, stock awards and other stock-based awards to key employees and non-employee directors. Up to 1,700,000 shares may be granted under the plan as restricted stock and RSUs. The Director Stock Plan provides for the issuance of up to 375,000 common shares out of our treasury in connection with the granting of non-qualified stock options, restricted stock and RSUs to non-employee directors. The 1995 Plan provided for the issuance of up to 33,300,000 common shares in connection with the granting of non-qualified stock options, restricted stock or RSUs to key employees. No new awards could be made under the 1995 Plan after September 30, 2004. The 2000 Plan provided for the issuance of up to 5,400,000 shares of common stock out of our treasury as non-qualified stock options, restricted stock, or RSUs. As noted above, no new awards may be made under the 1995 Plan and the 2000 Plan, although awards outstanding under those plans may still vest and be exercised in accordance with their terms. Under all of the plans, stock options are granted at a price equal to the fair value of the shares at the date of grant, for terms not exceeding ten years and have various vesting periods at the discretion of the Compensation Committee. Outstanding options generally vest over one to four years. Restricted stock and RSUs granted under the 1995, 2000 and 2002 Plans generally vest over periods ranging from three to five years and no sooner than one year from the date of grant. The restricted period for certain grants may be accelerated based on performance goals established by the Compensation Committee. We also maintain the Compensation Plan for Non-Employee Directors. This plan provides that non-employee directors may elect to receive their annual retainer and meeting fees in any combination of cash, deferred cash, or our common shares and authorizes the issuance of up to 105,981 common shares out of our treasury for this purpose. The common shares are issued under the plan at a value equal to the market price in consideration of foregone retainer and meeting fees. The per share weighted-average fair value of stock options granted during fiscal 2005, 2004 and 2003 was $7.75, $6.83 and $9.01, respectively. Stock option activity during the periods indicated was as follows:
Weighted-Average Weighted-Average Options Exercise Price Options Exercise Price Exercisable Per Share Outstanding Per Share ------------------------------------------------------------------------------------------------------------------- Balance at May 26, 2002 12,152,538 $ 8.31 26,922,535 $ 11.44 ------------------------------------------------------------------------------------------------------------------- Options granted 4,200,086 $ 25.99 Options exercised (3,132,894) $ 9.23 Options cancelled (1,298,094) $ 16.86 ------------------------------------------------------------------------------------------------------------------- Balance at May 25, 2003 13,481,166 $ 9.59 26,691,633 $ 13.73 ------------------------------------------------------------------------------------------------------------------- Options granted 3,336,655 $ 20.36 Options exercised (3,463,615) $ 10.01 Options cancelled (911,036) $ 18.98 ------------------------------------------------------------------------------------------------------------------- Balance at May 30, 2004 14,380,195 $11.00 25,653,637 $ 14.91 ------------------------------------------------------------------------------------------------------------------- Options granted 2,147,650 $ 21.88 Options exercised (6,614,735) $ 10.51 Options cancelled (607,550) $ 21.20 ------------------------------------------------------------------------------------------------------------------- Balance at May 29, 2005 11,879,660 $13.28 20,579,002 $ 16.86 -------------------------------------------------------------------------------------------------------------------
The following table provides information regarding exercisable and outstanding options at May 29, 2005: 37
Weighted- Weighted- Weighted- Average Range of Average Average Remaining Exercise Options Exercise Options Exercise Contractual Price Per Share Exercisable Price Per Share Outstanding Price Per Share Life (Years) ------------------------------------------------------------------------------------------------------------------- $ 4.00 - $10.00 1,696,626 $ 6.42 1,696,626 $ 6.42 1.9 $10.01 - $15.00 6,933,340 11.97 6,933,340 11.97 4.2 $15.01 - $20.00 2,185,049 17.07 5,746,334 17.87 6.9 $20.01 - $25.00 559,929 22.93 3,497,264 21.93 8.5 Over $25.00 504,716 27.20 2,705,438 27.28 7.3 ------------------------------------------------------------------------------------------------------------------- 11,879,660 $ 13.28 20,579,002 $16.86 5.9 ===================================================================================================================
We granted restricted stock and RSUs during fiscal 2005, 2004 and 2003 totaling 500,917, 513,305 and 275,610, respectively. The per share weighted-average fair value of the awards granted in fiscal 2005, 2004 and 2003 was $21.82, $19.45 and $26.53, respectively. After giving consideration to vesting terms, assumed forfeiture rates and subsequent forfeiture adjustments, compensation expense recognized in net earnings for awards granted in fiscal 2005, 2004 and 2003 amounted to $7,464, $4,198 and $3,579, respectively. During fiscal 2005, we issued Darden stock units to certain key employees. The Darden stock units were granted at a value equal to the market price of our common stock at the date of grant and will be settled in cash at the end of their vesting periods, which range between four and five years, at the then market price of our common stock. Compensation expense is measured based on the market price of our common stock each period and is amortized over the vesting period. At May 29, 2005, we had 436,870 Darden stock units outstanding. No Darden stock units were outstanding during fiscal 2004 and 2003. NOTE 17 - EMPLOYEE STOCK PURCHASE PLAN We maintain the Darden Restaurants Employee Stock Purchase Plan to provide eligible employees who have completed one year of service (excluding senior officers subject to Section 16(b) of the Securities Exchange Act of 1934) an opportunity to purchase shares of our common stock, subject to certain limitations. Under the plan, up to an aggregate of 3,600,000 shares are available for purchase by employees at the lower of 85 percent of the fair market value of our common stock as of the first or last trading days of each quarterly participation period. During fiscal 2005, 2004 and 2003, employees purchased shares of common stock under the plan totaling 266,407, 319,299 and 261,409, respectively. At May 29, 2005, an additional 1,692,748 shares were available for issuance. No compensation expense has been recognized for shares issued under the plan. The impact of recognizing compensation expense for purchases made under the plan in accordance with the fair value method specified in SFAS No. 123 is less than $900, net of related tax effects, in fiscal 2005, 2004 and 2003 and had no impact on reported basic or diluted net earnings per share. NOTE 18 - COMMITMENTS AND CONTINGENCIES As collateral for performance on contracts and as credit guarantees to banks and insurers, we were contingently liable for guarantees of subsidiary obligations under standby letters of credit. At May 29, 2005 and May 30, 2004, we had $72,677 and $72,480, respectively, of standby letters of credit related to workers' compensation and general liabilities accrued in our consolidated financial statements. At May 29, 2005 and May 30, 2004, we had $13,829 and $15,896, respectively, of standby letters of credit related to contractual operating lease obligations and other payments. All standby letters of credit are renewable annually. At May 29, 2005 and May 30, 2004, we had $1,768 and $4,346, respectively, of guarantees associated with leased properties that have been assigned to third parties. These amounts represent the maximum potential amount of future payments under the guarantees. The fair value of these potential payments discounted at our pre-tax cost of capital at May 29, 2005 and May 30, 2004, amounted to $1,395 and $3,131, respectively. We did not accrue for the guarantees, as the likelihood of the third parties defaulting on the assignment agreements was less than probable. In the event of default by a third party, the indemnity and/or default clauses in our assignment agreements govern our ability to recover from and pursue the third party for damages incurred as a result of its default. We do not hold any third-party assets as collateral related to these assignment agreements, except to the extent that the assignment allows 38 us to repossess the building and personal property. These guarantees expire over their respective lease terms, which range from fiscal 2007 through fiscal 2012. We are subject to private lawsuits, administrative proceedings and claims that arise in the ordinary course of our business. A number of these lawsuits, proceedings and claims may exist at any given time. These matters typically involve claims from guests, employees and others related to operational issues common to the restaurant industry, and can also involve infringement of, or challenges to, our trademarks. While the resolution of a lawsuit, proceeding or claim may have an impact on our financial results for the period in which it is resolved, we believe that the final disposition of the lawsuits, proceedings and claims in which we are currently involved, either individually or in the aggregate, will not have a material adverse effect on our financial position, results of operations or liquidity. Like other restaurant companies and retail employers, we have been faced in a few states with allegations of purported class-wide wage and hour violations. The following is a brief description of the more significant of these matters. In view of the inherent uncertainties of litigation, the outcome of any unresolved matter described below cannot be predicted at this time, nor can the amount of any potential loss be reasonably estimated. In March 2003 and March 2002, two purported class action lawsuits were brought against us in the Superior Court of Orange County, California by three current and former hourly restaurant employees alleging violations of California labor laws with respect to providing meal and rest breaks. Although we continue to believe we provided the required meal and rest breaks to our employees, to avoid potentially costly and protracted litigation, we agreed during the second quarter of fiscal 2005 to settle both lawsuits and a similar case filed in Sacramento County, for approximately $9,500. Terms of the settlement, which do not include any admission of liability by us, have received preliminary judicial approval, but completion of the settlement may not occur for several months. We recorded settlement expenses associated with these lawsuits of approximately $4,500 during fiscal 2005 and $5,000 during fiscal 2004, which are included in selling, general and administrative expenses. The settlement amounts of these lawsuits are included in other current liabilities at May 29, 2005. In August 2003, three former employees in Washington filed a similar purported class action in Washington State Superior Court in Spokane County alleging violations of Washington labor laws with respect to providing rest breaks. The Court stayed the action and ordered the plaintiffs into our mandatory arbitration program; the plaintiffs' motion for reconsideration was not granted, and their appeal of the denial of reconsideration was also not granted. We believe we provided the required meal and rest breaks to our employees, and we intend to vigorously defend our position in this case. Beginning in 2002, a total of five purported class action lawsuits have been filed in Superior Courts of California (two each in Los Angeles County and Orange County, and one in Sacramento County) in which the plaintiffs allege that they and other current and former service managers, beverage and hospitality managers and culinary managers were improperly classified as exempt employees under California labor laws. The plaintiffs seek unpaid overtime wages and penalties. Two of the cases have been removed to arbitration under our mandatory arbitration program, and we are seeking to cause the remaining cases to be stayed pending resolution of the earliest-filed cases. We believe we properly classified these employees as exempt under California law and we intend to vigorously defend against all claims in these lawsuits. 39 NOTE 19 - QUARTERLY DATA (UNAUDITED) The following table summarizes unaudited quarterly data for fiscal 2005 and 2004:
Fiscal 2005 - Quarters Ended ------------------------------------------------------------------------------------------------------------------- Aug. 29 Nov. 28 Feb. 27 May 29 Total ------------------------------------------------------------------------------------------------------------------- Sales $1,278,644 $1,229,373 $1,375,879 $1,394,214 $5,278,110 Earnings before income taxes 108,086 63,368 130,824 121,639 423,917 Net earnings 71,012 42,975 92,630 83,989 290,606 Net earnings per share: Basic 0.45 0.27 0.59 0.54 1.85 Diluted 0.44 0.26 0.56 0.52 1.78 Dividends paid per share -- 0.04 -- 0.04 0.08 Stock price: High 22.61 27.70 29.63 33.11 33.11 Low 19.30 20.33 26.17 25.78 19.30 ===================================================================================================================
Fiscal 2004 - Quarters Ended ------------------------------------------------------------------------------------------------------------------- Aug. 24 Nov. 23 Feb. 22 May 30 (1) Total ------------------------------------------------------------------------------------------------------------------- Sales $1,259,689 $1,142,543 $1,241,952 $1,359,171 $5,003,355 Earnings before income taxes 101,977 44,688 111,404 74,707 332,776 Net earnings 67,351 30,053 77,088 52,681 227,173 Net earnings per share: Basic 0.41 0.18 0.47 0.33 1.39 Diluted 0.40 0.18 0.45 0.32 1.34 Dividends paid per share -- 0.04 -- 0.04 0.08 Stock price: High 21.62 22.77 22.50 25.60 25.60 Low 17.80 18.25 18.48 21.40 17.80 =================================================================================================================== (1) Earnings before income taxes includes asset impairment charges of $36,526 ($22,372 after-tax) for long-lived asset impairments associated with the closing of six Bahama Breeze restaurants and the write-down of the carrying value of four other Bahama Breeze restaurants, one Olive Garden restaurant and one Red Lobster restaurant, which continued to operate. Earnings before income taxes also includes charges of $1,112 ($681 after-tax) related to severance payments made to certain restaurant employees and exit costs associated with the closing of six Bahama Breeze restaurants.
40 Five-Year Financial Summary (In thousands, except per share data)
Fiscal Year Ended ----------------------------------------------------------------------------------------------------------------------- May 29, May 30, May 25, May 26, May 27, Operating Results 2005 2004 (1) 2003 2002 2001 ----------------------------------------------------------------------------------------------------------------------- Sales $5,278,110 $5,003,355 $4,654,971 $4,366,911 $3,992,419 ----------------------------------------------------------------------------------------------------------------------- Costs and expenses: Cost of sales: Food and beverage 1,593,709 1,526,875 1,449,162 1,384,481 1,302,926 Restaurant labor 1,695,805 1,601,258 1,485,046 1,373,416 1,261,837 Restaurant expenses 806,314 774,806 713,699 636,575 566,234 ----------------------------------------------------------------------------------------------------------------------- Total cost of sales, excluding restaurant depreciation and amortization (2) $4,095,828 $3,902,939 $3,647,907 $3,394,472 $3,130,997 Selling, general and administrative 497,478 472,109 431,722 417,158 389,240 Depreciation and amortization 213,219 210,004 191,218 165,829 146,864 Interest, net 43,119 43,659 42,597 36,585 30,664 Asset impairment and restructuring charges (credits), net 4,549 41,868 3,924 (2,568) -- ----------------------------------------------------------------------------------------------------------------------- Total costs and expenses $4,854,193 $4,670,579 $4,317,368 $4,011,476 $3,697,765 ----------------------------------------------------------------------------------------------------------------------- Earnings before income taxes 423,917 332,776 337,603 355,435 294,654 Income taxes 133,311 105,603 111,624 122,664 101,707 ----------------------------------------------------------------------------------------------------------------------- Net earnings $ 290,606 $ 227,173 $ 225,979 $ 232,771 $ 192,947 ----------------------------------------------------------------------------------------------------------------------- Net earnings per share: Basic $ 1.85 $ 1.39 $ 1.33 $ 1.33 $ 1.07 Diluted $ 1.78 $ 1.34 $ 1.27 $ 1.27 $ 1.04 ----------------------------------------------------------------------------------------------------------------------- Average number of common shares outstanding, net of shares held in Treasury: Basic 156,700 163,500 170,300 174,700 179,600 Diluted 163,400 169,700 177,400 183,500 185,600 ======================================================================================================================= Financial Position Total assets $2,937,771 $2,780,348 $2,664,633 $2,529,736 $2,216,534 Land, buildings and equipment 2,351,454 2,250,616 2,157,132 1,926,947 1,779,515 Working capital (deficit) (637,341) (337,174) (314,280) (157,662) (226,116) Long-term debt, less current portion 350,318 653,349 658,086 662,506 520,574 Stockholders' equity 1,273,019 1,175,288 1,130,055 1,069,606 978,954 Stockholders' equity per outstanding shares 8.25 7.42 6.85 6.21 5.56 ======================================================================================================================= Other Statistics Cash flow from operations $ 583,242 $ 525,411 $ 508,635 $ 508,101 $ 420,570 Capital expenditures 329,238 354,326 423,273 318,392 355,139 Dividends paid 12,505 12,984 13,501 9,225 9,458 Dividends paid per share 0.080 0.080 0.080 0.053 0.053 Advertising expense 214,608 210,989 200,020 184,163 177,998 Stock price: High 33.11 25.60 27.83 29.767 19.660 Low 19.30 17.80 16.46 15.400 10.292 Close $ 32.80 $ 22.50 $ 18.35 $ 25.030 $ 19.267 Number of employees 150,100 141,300 140,700 133,200 128,900 Number of restaurants 1,381 1,325 1,271 1,211 1,168 ======================================================================================================================= (1) Fiscal year 2004 consisted of 53 weeks while all other fiscal years consisted of 52 weeks. (2) Total cost of sales, excluding restaurant depreciation and amortization of $198,422, $195,486, $177,127, $155,837 and $138,229, respectively.
41 EX-21 8 form10k_exhibit21.txt FORM 10K EXHIBIT 21 7-29-05 EXHIBIT 21 SUBSIDIARIES OF DARDEN RESTAURANTS, INC. As of May 29, 2005, we had four "significant subsidiaries", as defined in Regulation S-X, Rule 1-02(w), identified as follows: GMRI, Inc., a Florida corporation, doing business as Red Lobster, Olive Garden, Bahama Breeze, Smokey Bones, and Seasons 52. GMRI Florida, Inc., a Florida corporation, owning a 99 percent limited partnership interest in GMRI Texas, L.P. GMRI Texas, L.P., a Texas limited partnership, doing business as Red Lobster, Olive Garden, Bahama Breeze and Smokey Bones. GMR Restaurants of Pennsylvania, Inc., a Pennsylvania corporation, doing business as Red Lobster, Olive Garden, Bahama Breeze and Smokey Bones. We also had other direct and indirect subsidiaries as of May 29, 2005. None of these subsidiaries would constitute a "significant subsidiary" as defined in Regulation S-X, Rule 1-02(w). EX-23 9 form10k_exhibit23.txt FORM 10K EXHIBIT 23 7-29-05 EXHIBIT 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors Darden Restaurants, Inc.: We consent to incorporation by reference in the Registration Statements on Form S-3 (Nos. 33-93854 and 333-41350) and on Form S-8 (Nos. 333-57410, 333-91579, 333-69037, 333-105056, 333-106278, 333-124363 and 333-122560) of Darden Restaurants, Inc. of our reports dated July 28, 2005, relating to the consolidated balance sheets of Darden Restaurants, Inc. and subsidiaries as of May 29, 2005 and May 30, 2004, and the related consolidated statements of earnings, changes in stockholders' equity and accumulated other comprehensive income (loss), and cash flows for each of the fiscal years in the three-year period ended May 29, 2005, management's assessment of the effectiveness of internal control over financial reporting as of May 29, 2005, and the effectiveness of internal control over financial reporting as of May 29, 2005, which reports are incorporated by reference to the Registrant's 2005 Annual Report to Shareholders filed as an exhibit to this Annual Report on Form 10-K of Darden Restaurants, Inc. /s/ KPMG LLP Orlando, Florida July 28, 2005 EX-24 10 form10k_exhibit24.txt FORM 10K EXHIBIT 24 7-29-05 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS, that the undersigned constitutes and appoints Paula J. Shives, Clarence Otis, Jr. and Linda J. Dimopoulos, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for and in his or her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended May 29, 2005 and any and all amendments thereto and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as might or could be done in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, this Power of Attorney has been signed on this 11th day of June, 2005, by the following persons. By: /s/ Leonard L. Berry By: /s/ Cornelius McGillicuddy, III - --------------------------------- ----------------------------------- Leonard L. Berry Cornelius McGillicuddy, III By: /s/ Odie C. Donald By: /s/ Clarence Otis, Jr. - --------------------------------- ----------------------------------- Odie C. Donald Clarence Otis, Jr. By: /s/ David H. Hughes By: /s/ Michael D. Rose - -------------------------------- ----------------------------------- David H. Hughes Michael D. Rose By: /s/ Charles A. Ledsinger, Jr. By: /s/ Marie A. Sastre - ---------------------------------- ----------------------------------- Charles A. Ledsinger, Jr. Maria A. Sastre By: /s/ Joe R. Lee By: /s/ Jack A. Smith - ---------------------------------- ----------------------------------- Joe R. Lee Jack A. Smith By: /s/ William M. Lewis, Jr. By: /s/ Blaine Sweatt, III - ---------------------------------- ----------------------------------- William M. Lewis, Jr. Blaine Sweatt, III By: /s/ Andrew H. Madsen By: /s/ Rita P. Wilson - ---------------------------------- ----------------------------------- Andrew H. Madsen Rita P. Wilson EX-31 11 form10k_exhibit31a.txt FORM 10K EXHIBIT 31A 7-29-05 EXHIBIT 31(a) CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Clarence Otis, Jr., certify that: 1. I have reviewed this annual report on Form 10-K of Darden Restaurants, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of this annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. July 29, 2005 /s/ Clarence Otis, Jr. - ----------------------- Clarence Otis, Jr. Chief Executive Officer EX-31 12 form10k_exhibit31b.txt FORM 10K EXHIBIT 31B 7-29-05 EXHIBIT 31(b) CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Linda J. Dimopoulos, certify that: 1. I have reviewed this annual report on Form 10-K of Darden Restaurants, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of this annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. July 29, 2005 /s/ Linda J. Dimopoulos - --------------------------- Linda J. Dimopoulos Senior Vice President and Chief Financial Officer EX-32 13 form10k_exhibit32a.txt FORM 10K EXHIBIT 32A 7-29-05 EXHIBIT 32(a) CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Darden Restaurants, Inc. ("Company") on Form 10-K for the year ended May 29, 2005, as filed with the Securities and Exchange Commission ("Report"), I, Clarence Otis, Jr., Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Clarence Otis, Jr. ---------------------------------- Clarence Otis, Jr. Chief Executive Officer July 29, 2005 EX-32 14 form10k_exhibit32b.txt FORM 10K EXHIBIT 32B 7-29-05 EXHIBIT 32(b) CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Darden Restaurants, Inc. ("Company") on Form 10-K for the year ended May 29, 2005, as filed with the Securities and Exchange Commission ("Report"), I, Linda J. Dimopoulos, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Linda J. Dimopoulos ---------------------------- Linda J. Dimopoulos Senior Vice President and Chief Financial Officer July 29, 2005 COVER 15 filename15.txt Darden Restaurants, Inc. 5900 Lake Ellenor Drive Orlando, FL 32809 407-245-5811 VIA EDGAR July 29, 2005 Securities and Exchange Commission 450 Fifth Street N.W. Washington, DC 20549 Re: Darden Restaurants, Inc. (File No. 1-13666) Annual Report on Form 10-K for year ended May 29, 2005 Instruction D(3) - Changes in accounting practices Ladies and Gentlemen: On behalf of Darden Restaurants, Inc. ("Darden"), I am submitting herewith for filing with the Commission by EDGAR Darden's Annual Report on Form 10-K for the year ended May 29, 2005 (the "Form 10-K"). Pursuant to General Instruction D(3) to Form 10-K, please be advised that the financial statements in the Form 10-K, included as Exhibit 13, reflect a change from the preceding year in accounting principles or practices, or in the method of applying such principles or practices. As previously disclosed, following a December 2004 review of the accounting adjustments citied in several recent Form 8-K filings by other restaurant companies, and in consultation with our independent registered public accounting firm, KPMG LLP, Darden Restaurants, Inc. ("we," "our" or the "Company") determined that one of the adjustments in those filings relating to the treatment of lease accounting and leasehold depreciation applied to us, and that it was appropriate to adjust certain of our prior financial statements. As a result, on December 15, 2004, our Board of Directors concluded that our previously-filed financial statements for the fiscal years 1996 through 2004 and for the first quarter of fiscal 2005 should be restated (the "Restatement"). Historically, when accounting for leases with renewal options, we recorded rent expense on a straight-line basis over the initial non-cancelable lease term, with the term commencing when actual rent payments began. We depreciate our buildings, leasehold improvements and other long-lived assets on those properties over a period that includes both the initial non-cancelable lease term and all option periods provided for in the lease (or the useful life of the assets if shorter). We previously believed that these longstanding accounting treatments were appropriate under generally accepted accounting principles. We restated our financial statements to recognize rent expense on a straight-line basis over the expected lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty. The lease term commences on the date when we become legally obligated for the rent payments. These adjustments were not attributable to any material non-compliance by us, as a result of any misconduct, with any financial reporting requirements under the securities laws. We filed Amendment No. 1 on Form 10-K/A ("Form 10-K/A") to our Annual Report on Form 10-K for the fiscal year ended May 30, 2004, initially filed with the Securities and Exchange Commission (the "SEC") on August 12, 2004 (the "Original Filing") to reflect restatements of (i) our consolidated balance sheets at May 30, 2004 and May 25, 2003 and (ii) our consolidated statements of earnings, changes in stockholders' equity and accumulated other comprehensive income (loss), and cash flows, for the fiscal years ended May 30, 2004, May 25, 2003 and May 26, 2002, and the notes related thereto. Our financial statements in our Form 10-K, included as Exhibit 13, for the year ended May 29, 2005, include the same accounting principles and practices as those included in our Form 10-K/A, in all material respects. Thank you, and please call me at 407-245-5811 if you have any questions. Very truly yours, /s/ Douglas E. Wentz Douglas E. Wentz Senior Associate General Counsel and Assistant Secretary Enclosure -----END PRIVACY-ENHANCED MESSAGE-----