-----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, QQuahuXFa5eRMf+SazMHeAueAzUqQlTiZm92y43lCtiwQyl0/dfyaWClZ2ctPxU9 sprt7X8zYM0TvMcwZYG8nQ== 0000940944-03-000176.txt : 20030822 0000940944-03-000176.hdr.sgml : 20030822 20030822085018 ACCESSION NUMBER: 0000940944-03-000176 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 20030525 FILED AS OF DATE: 20030822 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: 0526 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13666 FILM NUMBER: 03861314 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 fy03_10k.txt FY03 10K 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 25, 2003 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___ to ___ Commission File Number: 1-13666 DARDEN RESTAURANTS, INC. (Exact name of registrant as specified in its charter) Florida 59-3305930 (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 5900 Lake Ellenor Drive 32809 Orlando, Florida (Zip Code) (Address of principal executive offices) (407) 245-4000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- --------------------- Common Stock, without par value New York Stock Exchange and Preferred Stock Purchase Rights Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by Reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of Common Stock held by non-affiliates of the Registrant, based on the closing price of $21.33 per share as reported on the New York Stock Exchange on November 22, 2002: $3,638,817,628. Number of shares of Common Stock outstanding as of July 28, 2003: 164,330,855 (excluding 98,079,127 shares held in the Company's treasury). DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement dated August 22, 2003 are incorporated by reference into Part III, and portions of the Registrant's Annual Report to Shareholders for the fiscal year ended May 25, 2003 are incorporated by reference into Parts I, II and IV of this Report. PART I Item 1. BUSINESS Introduction Darden Restaurants, Inc. is the largest publicly held casual dining restaurant company in the world1, and served over 300 million meals during fiscal 2003. As of May 25, 2003, we operated 1,271 restaurants in the United States and Canada. In the United States, we operated 1,234 restaurants in 49 states (the exception being Alaska), including 642 Red Lobster(R), 518 Olive Garden(R), 34 Bahama Breeze(R), 39 Smokey Bones(R) BBQ and one Seasons 52SM restaurants. In Canada, we operated 37 restaurants, including 31 Red Lobster and six Olive Garden restaurants. We own and operate all of our restaurants in the United States and Canada, with no franchising. Of our 1,271 restaurants and the one Olive Garden Cafe open on May 25, 2003, 803 were located on owned sites and 469 were located on leased sites. In Japan, we licensed 33 Red Lobster restaurants to an unaffiliated Japanese corporation that operates the restaurants under an Area Development and Franchise Agreement. Darden is a Florida corporation incorporated in March 1995, and is the parent company of GMRI, Inc., also a Florida corporation. GMRI and our other subsidiaries own the operating assets of the restaurants. GMRI was originally incorporated in March 1968 as Red Lobster Inns of America, Inc. Our principal executive offices and restaurant support center are located at 5900 Lake Ellenor Drive, Orlando, Florida 32809, telephone (407) 245-4000. Our corporate website address is www.darden.com (or, for employees inside our computer firewall, www.dardenusa.com). We make our filed reports on Forms 10-K, 10-Q and 8-K, and Section 16 reports on Forms 3, 4 and 5, and all amendments to those reports available free of charge on our website the same day as the reports are filed with or furnished to the Securities and Exchange Commission. Information on our website is not deemed to be incorporated by reference into this Form 10-K. Unless the context indicates otherwise, all references to Darden, "we", "our" or "us" include Darden, GMRI and our respective subsidiaries. Background We opened our first restaurant, a Red Lobster, in Lakeland, Florida in 1968. Red Lobster was founded by William B. Darden, for whom we are named. We were acquired by General Mills, Inc. in 1970. In May 1995, we became a separate publicly held company when General Mills distributed all outstanding Darden stock to General Mills' stockholders. The number of Red Lobster and Olive Garden restaurants open at the end of fiscal 2003 increased by six and 28, respectively, as compared to the end of fiscal 2002. Red Lobster has grown from six restaurants in operation at the end of fiscal 1970 to 673 units in North America by the end of fiscal 2003. Olive Garden, an internally developed concept, opened its first restaurant in Orlando, Florida in fiscal 1983, and by the end of fiscal 2003 had expanded to 524 restaurants and one food court cafe in North America. Bahama Breeze is an internally developed concept with a Caribbean theme. In fiscal 1996, Bahama Breeze opened its first restaurant in Orlando, Florida. At the end of fiscal 2003, there were 34 Bahama Breeze restaurants. Smokey Bones is also an internally developed concept featuring barbeque and other American-style favorites served in an inviting lodge setting. The first restaurant was opened in fiscal 2000 in Orlando, Florida. At the end of fiscal 2003, there were 39 Smokey Bones restaurants. In February 2003, we opened a new test restaurant in Orlando, Florida called Seasons 52SM. It is a casually sophisticated fresh grill and wine bar with seasonally inspired menus offering fresh ingredients to create great tasting, nutritionally balanced meals that are lower in calories than comparable restaurant meals. - ---------------------------------------- 1Source: Nation's Restaurant News, "Special Report: Top 100," June 30, 2003 (based on revenues from company- owned restaurants). 2 The table below shows our growth and lists the number of restaurants operated by Red Lobster, Olive Garden, Bahama Breeze, Smokey Bones and Seasons 52 as of the end of each fiscal year since 1970. The final column in the table lists our total sales for the years indicated.
Company-Operated Restaurants Open at Fiscal Year End Fiscal Red Olive Bahama Smokey Seasons Total Total Company Sales Year Lobster Garden (1) Breeze Bones 52 Restaurants (1)(2) ($ in Millions) (3)(4) ---- ------- ---------- ------ ----- -- ------------------ ---------------------- 1970 6 6 3.5 1971 24 24 9.1 1972 47 47 27.1 1973 70 70 48.0 1974 97 97 72.6 1975 137 137 108.5 1976 174 174 174.1 1977 210 210 229.2 1978 236 236 291.4 1979 244 244 337.5 1980 260 260 397.6 1981 291 291 528.4 1982 328 328 614.3 1983 360 1 361 718.5 1984 368 2 370 782.3 1985 372 4 376 842.2 1986 401 14 415 917.3 1987 433 52 485 1,097.7 1988 443 92 535 1,300.8 1989 490 145 635 1,621.5 1990 521 208 729 1,927.7 1991 568 272 840 2,212.3 1992 619 341 960 2,542.0 1993 638 400 1,038 2,737.0 1994 675 458 1,133 2,963.0 1995 715 477 1,192 3,163.3 1996 729 487 1 1,217 3,191.8 1997 703 477 2 1,182 3,171.8 1998 682 466 3 1,151 3,261.6 1999 669 464 6 1,139 3,432.4 2000 654 469 14 2 1,139 3,675.5 2001 661 477 21 9 1,168 3,992.4 2002 667 496 29 19 1,211 4,366.9 2003 673 524 34 39 1 1,271 4,655.0 - ---------------------------- (1) Does not include one Olive Garden Cafe restaurant. (2) Includes only Red Lobster, Olive Garden, Bahama Breeze, Smokey Bones and Seasons 52 restaurants. Does not include other restaurant concepts operated by us in these years that are no longer owned or operated by us. (3) Includes total sales from all of our operations, including sales from restaurant concepts besides Red Lobster, Olive Garden, Bahama Breeze, Smokey Bones and Seasons 52 that are no longer owned or operated by us. (4) Emerging Issues Task Force Issue 00-14 "Accounting for Certain Sales Incentives" requires sales incentives to be classified as a reduction of sales. We adopted Issue 00-14 in the fourth quarter of fiscal 2002. For purposes of this presentation, sales incentives have been reclassified as a reduction of sales for fiscal 1998 through 2003. Sales incentives for fiscal years prior to 1998 have not been reclassified.
3 Strategy The restaurant industry is generally considered to be comprised of four segments: quick service, midscale, casual dining and fine dining. The industry is highly fragmented and includes many independent operators and small chains. We believe that capable operators of strong multi-unit concepts have the opportunity to increase their share of the casual dining segment. We plan to grow by increasing the number of restaurants in each of our existing concepts and by developing or acquiring additional concepts that can be expanded profitably. While we are a leader in the casual dining segment, we know we cannot be successful without a clear sense of who we are. Our core purpose is "To nourish and delight everyone we serve." This core purpose is supported by our core values: o integrity and fairness; o respect and caring; o diversity; o always learning/always teaching; o being "of service"; o teamwork; and o excellence. Our mission is to be "The best in casual dining, now and for generations." Three strategic imperatives or "building blocks" support our mission: o leadership development as a core competency; o service and hospitality excellence; and o culinary and beverage excellence. These strategic imperatives are supported by three key enablers: o brand management skills; o diversity competency; and o technology solutions. Continuing focus on our three building blocks, supported by our commitment to brand management, diversity and technology, provides a strong foundation for future growth. Restaurant Concepts Red Lobster Red Lobster is the largest casual dining, seafood-specialty restaurant operator in the United States. It offers an extensive menu featuring fresh fish, shrimp, crab, lobster, scallops and other seafood in a casual atmosphere. The menu includes a variety of specialty seafood and non-seafood entrees, appetizers and desserts. Dinner entree prices range from $8.99 to $27.99, with certain fresh fish and lobster items available at market price. Lunch entree prices range from $5.99 to $11.99, and include side items and our signature Cheddar Bay biscuits. During fiscal 2003, the average check per person was between $16.00 and $17.00, with alcoholic beverages accounting for about nine percent of Red Lobster's sales. Red Lobster maintains approximately 135 different menus across its trade areas to reflect geographic differences in consumer preferences, prices and selections, as well as a lower-priced children's menu. Fiscal 2003 was a record year in sales for Red Lobster, with total sales of $2.433 billion. Sales were 4.1 percent above the previous year, and average sales per restaurant for fiscal 2003 were $3.7 million - all record levels for Red Lobster. As of the end of fiscal 2003, Red Lobster had enjoyed 22 consecutive quarters of U.S. same-restaurant sales increases. Nevertheless, Red Lobster's total sales in fiscal 2003 were lower than expected. Despite lower food and beverage costs as a percent of sales, Red Lobster experienced increased expenses, particularly 4 restaurant labor costs, restaurant expenses, selling, general and administrative expenses and depreciation as a percent of sales. This led to a decline in operating profit during fiscal 2003 versus last year. Olive Garden Olive Garden is the market share leader among casual dining Italian restaurants in the United States. Olive Garden's menu includes a variety of authentic Italian foods featuring fresh ingredients, and an expanded wine list that includes a broad selection of wines imported from Italy. The menu includes antipasti (appetizers); soups, salad and garlic breadsticks; baked pastas; sauteed specialties with chicken, seafood and fresh vegetables; grilled meats; and a variety of desserts. Olive Garden also uses coffee imported from Italy for its espresso and cappuccino. Most dinner entree prices range from $7.75 to $17.95, and most lunch entree prices range from $5.95 to $9.25. The price of each entree also includes as much fresh salad or soup and breadsticks as a guest desires. During fiscal 2003, the average check per person was $13.00 to $14.00, with alcoholic beverages accounting for about nine percent of Olive Garden's sales. Olive Garden maintains approximately 40 different dinner menus and 30 lunch menus across its trade areas to reflect geographic differences in consumer preferences, prices and selections, as well as two lower-priced children's menus. Fiscal 2003 was a record year for both sales and profits at Olive Garden. Olive Garden's total sales for fiscal 2003 were $1.990 billion, up 6.8 percent from the prior year, and its annual average sales per restaurant were $3.9 million, both record levels. Olive Garden had 35 consecutive quarters of U.S. same-restaurant sales increases as of the end of fiscal 2003. Olive Garden's sales gains, combined with lower food and beverage expense, restaurant labor costs and general and administrative expenses as a percent of sales, more than offset increased restaurant and marketing expenses as a percent of sales, resulting in record annual operating profit during fiscal 2003. Bahama Breeze Bahama Breeze is a Caribbean-themed restaurant that offers guests a distinctive island dining experience. The first Bahama Breeze opened in 1996 and met with strong positive consumer response. We continued to test the concept by opening a limited number of additional restaurants in each of the following years, and began national expansion of the concept in 1998. In fiscal 2003, sales at Bahama Breeze surpassed $137 million and we opened five new restaurants, bringing the total to 34 restaurants. The concept continues to be well received by guests, although its financial performance has not met our overall expectations, and we are making changes that we anticipate will improve its sales, financial performance and long-term potential. These changes include testing lunch operations, creating a new dinner menu and slowing new restaurant development (we plan to open four new Bahama Breeze restaurants in fiscal 2004) while reducing the size of the building and the related capital investment. However, these actions are still in the test phase and results will not be available until late in fiscal 2004. We expect Bahama Breeze to continue to be dilutive to earnings in fiscal 2004. Smokey Bones Smokey Bones features barbequed pork, beef and chicken, as well as other authentic American-style favorites, all served in a casual and inviting lodge setting that includes sports viewing on televisions. We opened the first Smokey Bones in September 1999, and began national expansion of the concept in fiscal 2002. Sales for Smokey Bones were $93 million in fiscal 2003. There are currently 39 Smokey Bones restaurants, and we plan to open 25 to 30 new Smokey Bones restaurants in fiscal 2004. We believe that Smokey Bones has strong expansion potential and is capable of achieving future sales of $500 million or more. Recent and Planned Growth During fiscal 2003, we opened 65 new restaurants (excluding the relocation of existing restaurants to new sites and the rebuilding of restaurants at existing sites) and closed four restaurants. This resulted in a net increase of 61 restaurants in fiscal 2003 (assuming the re-opening of one restaurant that was temporarily closed as of the end of fiscal 2003). We plan to open approximately 57 to 71 new Red Lobster, Olive Garden, Bahama Breeze and Smokey Bones restaurants during fiscal 2004 (excluding relocations and rebuilds). Our actual and projected new openings by concept (excluding relocations and rebuilds) are shown below. 5
Actual New Projected New Restaurant Openings Restaurant Openings Fiscal 2003(1) Fiscal 2004 -------------- ----------- Red Lobster................................ 11 8-12 Olive Garden............................... 28 20-25 Bahama Breeze.............................. 5 4 Smokey Bones............................... 20 25-30 ---- ----- Totals............................... 64 57-71 (1) Excludes one Seasons 52 test restaurant.
Our objective is to continue to expand our current portfolio of restaurant concepts, and to develop or acquire additional concepts that can be expanded profitably. We are currently testing new ideas and concepts, and expanding Bahama Breeze and Smokey Bones nationally in light of favorable consumer response. We also evaluate potential acquisition candidates to assess whether they would satisfy our strategic and financial objectives. At present, we have not identified any specific acquisitions. We will continue to focus on improving operational returns at Olive Garden and Red Lobster, and will limit new restaurant expansion of those concepts to high potential sites that we believe can generate significant returns on our investments. Olive Garden's expansion will include its recently developed "Tuscan Farmhouse" design, an outgrowth of our collaboration with Rocca delle Macie, a family-owned winery in Tuscany, Italy. In addition, we plan to expand Bahama Breeze and Smokey Bones at a pace that we believe will enable each new restaurant to capture the concept's full potential. The specific number of openings will depend on many factors, such as the success of the changes discussed above at Bahama Breeze, in addition to, in general, our ability to locate appropriate sites, negotiate acceptable purchase or lease terms, obtain necessary local governmental permits, complete construction and recruit and train restaurant management and hourly personnel. We consider location to be a critical factor in determining a restaurant's long-term success, and we devote significant effort to the site selection process. Prior to entering a market, we conduct a thorough study to determine the optimal number and placement of restaurants. Our site selection process incorporates a variety of analytical techniques to evaluate key factors. These factors include trade area demographics, such as target population density and household income levels; competitive influences in the trade area; the site's visibility, accessibility and traffic volume; and proximity to activity centers such as shopping malls, hotel/motel complexes, offices and universities. Members of senior management evaluate, inspect and approve each restaurant site prior to its acquisition. Constructing and opening a new restaurant typically takes 120 to 180 days after the site is acquired and permits are obtained. The following table illustrates the approximate average capital investment, size and dining capacity of the 11 Red Lobster and 28 Olive Garden restaurants that were opened during fiscal 2003 (excluding relocations, rebuilds and conversions of existing restaurants).
Capital Square Dining Dining Investment(1) Feet(2) Seats(3) Tables(4) Red Lobster (5).................... $3,714,000 6,962 222 58 Olive Garden (6)................... $3,779,000 7,685 210 59 (1) Includes net present value of leases, but excludes working capital. (2) Includes all space under the roof, including the coolers and freezers, but excludes gazebos, pavilions and porte cocheres. (3) Includes bar dining seats and patio seating, but excludes bar stools. (4) Includes patio dining tables. (5) Excludes two center city urban Red Lobster restaurants whose size is larger and cost is significantly higher than the average and therefore is not representative of the typical restaurant. (6) Excludes three center city urban Olive Garden restaurants whose size is larger and cost is significantly higher than the average and therefore is not representative of the typical restaurant.
6 For Bahama Breeze, we are in the process of designing a new building prototype with a lower capital investment and a simpler design that we expect to use for the first time in fiscal 2004. For Smokey Bones, we continue to seek out sites where existing buildings can be converted to Smokey Bones, and are locating new units in prime casual dining trade areas that we believe will allow us to realize greater rates of return on investment than were generated from certain early sites in less desirable locations. We systematically review the performance of our restaurants to ensure that each one meets our standards. When a restaurant falls below minimum standards, we conduct a thorough analysis to determine the causes, and implement marketing and operational plans to improve that restaurant's performance. If performance does not improve to acceptable levels, the restaurant is evaluated for relocation, closing or conversion to one of our other concepts. During fiscal 2003, we permanently closed four and relocated five Red Lobster restaurants in the United States. During the same period, we relocated three Olive Garden restaurants in the United States. Restaurant Operations We believe that high-quality restaurant management is critical to our long-term success. We also believe that our leadership position, strong success-oriented culture and various short-term and long-term incentive programs, including stock options and restricted stock, help attract and retain highly motivated restaurant managers. Our restaurant management structure varies by concept and restaurant size. Each restaurant is led by a general manager and one to four additional managers, depending on the operating complexity and sales volume of the restaurant. Each restaurant also employs approximately 65 to 140 hourly employees, most of whom work part-time. We issue detailed operations manuals covering all aspects of restaurant operations, as well as food and beverage manuals which detail the preparation procedures of our formulated recipes. The restaurant management teams are responsible for the day-to-day operation of each restaurant and for ensuring compliance with our operating standards. At our two largest concepts, Red Lobster and Olive Garden, restaurant general managers report to directors, and each director is responsible for seven to 14 restaurants. Restaurants are visited regularly by all levels of supervision to help ensure strict adherence to all aspects of our standards. Each concept's vice president or director of training, together with senior operations executives, is responsible for developing and maintaining that concept's operations training programs. These efforts include a 12-to 15-week training program for management trainees, and continuing development programs for managers, supervisors and directors. The emphasis of the training and development programs varies by restaurant concept, but includes leadership, restaurant business management and culinary skills. We also use a highly structured training program to open new restaurants, including deploying training teams experienced in all aspects of restaurant operations. The opening training teams typically begin work one week prior to opening and remain at the new restaurant one week following the opening. They are redeployed as appropriate to enable a smooth transition to the restaurant's operating staff. Quality Assurance Our Total Quality Department helps ensure that all restaurants provide safe, high-quality food in a clean and safe environment. Through rigorous physical evaluation and testing at our North American laboratories and through "point source inspection" by our international team of Quality Specialists in several foreign countries, we purchase only seafood that meets or exceeds our specifications. We use independent third parties to inspect and evaluate commodity vendors. In addition, any commodity supplier that produces a "high risk" product is subject to a minimum annual food safety evaluation by Darden personnel. We require our suppliers to maintain sound manufacturing practices and operate with the comprehensive HACCP food safety programs in place. Since 1976, we have maintained a microbiological laboratory to routinely test seafood and other commodities for quality and microbiological safety. In addition, Darden Total Quality Managers and third party auditors visit each restaurant periodically throughout the year to review food handling and to provide education and training in food safety and sanitation. The Total Quality managers also serve as a liaison to regulatory agencies on issues relating to food safety. 7 Purchasing and Distribution Our ability to ensure a consistent supply of high-quality food and supplies at competitive prices to all of our restaurant concepts depends upon procurement from reliable sources. Our purchasing staff sources, negotiates and purchases food and supplies from more than 2,000 suppliers in 45 countries. Suppliers must meet strict quality control standards in the development, harvest, catch and production of food products. Competitive bids, long-term contracts and long-term vendor relationships are routinely used to manage availability and cost of products. We believe that our seafood purchasing capabilities are a significant competitive advantage. Our purchasing staff travels routinely within the United States and internationally to source more than 100 varieties of top-quality seafood at competitive prices. We believe that we have established excellent long-term relationships with key seafood vendors, and usually source our product directly from producers (not brokers or middlemen). We operate a procurement office in Singapore, our only purchasing office outside of Orlando, to source products directly from Asia. While the supply of certain seafood species is volatile, we believe that we have the ability to identify alternative seafood products and to adjust our menus as necessary. All other essential food products are available, or can be made available upon short notice, from alternative qualified suppliers. Because of the relatively rapid turnover of perishable food products, inventories in the restaurants have a modest aggregate dollar value in relation to revenues. Controlled inventories of specified products are distributed to all restaurants through independent national distribution companies. Advertising and Marketing We believe that we have developed significant marketing and advertising capabilities. Our size enables us to be a dominant advertiser in the casual dining segment of the restaurant industry. We leverage the efficiency of national network television advertising and supplement it with local television advertising. Our restaurants appeal to a broad spectrum of consumers and we use advertising and product promotions to attract customers. We implement periodic promotions as appropriate to maintain and increase our sales and profits. We also rely on radio and newspaper advertising, as well as newspaper and direct mail couponing programs, as appropriate, to attract customers. We have developed and consistently use sophisticated consumer marketing research techniques to monitor customer satisfaction and evolving expectations. Employees At the end of fiscal 2003, we employed approximately 140,700 persons. Of these employees, approximately 1,300 were corporate or restaurant concept personnel located in our restaurant support center in Orlando, Florida, approximately 5,850 were restaurant management personnel in the restaurants or in field offices, and the remainder were hourly restaurant personnel. Of the restaurant support center employees, approximately 60% were management personnel and the balance were administrative or office employees. Our operating executives have an average of more than 14 years of experience with us. The restaurant general managers average 11 years with us. We believe that we provide working conditions and compensation that compare favorably with those of our competitors. Most employees, other than restaurant management and corporate management, are paid on an hourly basis. None of our employees are covered by a collective bargaining agreement. We consider our employee relations to be good. Management Information Systems We strive for leadership in the restaurant business by using technology as a competitive advantage. Since 1975, computers located in the restaurants have been used to assist in the management of the restaurants. We have implemented systems targeted at improved financial control, cost management, enhanced guest service and improved employee effectiveness. Management information systems are designed to be used across restaurant concepts, yet are flexible enough to meet the unique needs of each restaurant concept. In fiscal 2002, we implemented a suite of web-enabled financial systems and a high-speed data network connecting all restaurants to all current and anticipated future applications. During fiscal 2003, we completed an upgrade of our human resource (including payroll and benefits) systems using web-enabled and fully integrated application suites. 8 Restaurant hardware and software support is provided or coordinated from the restaurant support center in Orlando, Florida, seven days a week, 24 hours a day. A communications network sends and receives critical business data to and from the restaurants throughout the day and night, providing timely and extensive information on business activity in every location. The restaurant support center houses our data center, which contains sufficient computing power to process information from all restaurants quickly and efficiently. Our information is processed in a secured environment to protect both the actual data and the physical assets. We guard against business interruption by maintaining a disaster recovery plan, which includes storing critical business information off-site, testing the disaster recovery plan at a hot-site facility and providing on-site power backup via a large diesel generator. We use internally developed proprietary software, as well as purchased software, with proven, non-proprietary hardware. This allows processing power to be distributed effectively to each of our restaurants. Our management believes its current systems and the upgrades currently underway will position us well to support current needs and future growth. We are committed to maintaining an industry leadership position in information systems and computing technology. We use a strategic information systems planning process that involves senior management and is integrated into our overall business planning. Information systems projects are prioritized based upon strategic, financial, regulatory and other business advantage criteria. Competition The restaurant industry is intensely competitive with respect to the type and quality of food, price, service, restaurant location, personnel, concept, attractiveness of facilities, and effectiveness of advertising and marketing programs. The restaurant business is often affected by changes in consumer tastes; national, regional or local economic conditions; demographic trends; traffic patterns; the type, number and location of competing restaurants; and consumers' discretionary purchasing power. We compete within each market with national and regional chains as well as locally-owned restaurants, not only for customers but also for management and hourly personnel and suitable real estate sites Restaurants also face growing competition from the supermarket industry, which offers "convenient meals" in the form of improved entrees and side dishes from the deli section. We expect intense competition to continue in all of these areas. Other factors pertaining to our competitive position in the industry are addressed under the sections entitled "Purchasing and Distribution," "Advertising and Marketing," "Management Information Systems" and "Forward-Looking Statements" elsewhere in this report. Trademarks and Related Agreements We regard our Darden Restaurants(R), Red Lobster(R), Olive Garden(R), Bahama Breeze(R), Smokey Bones(R) and Seasons 52SM service marks, and other variations of these service marks, as having significant value and as being important in marketing the restaurants. Our policy is to pursue registration of our important service marks and trademarks and to oppose vigorously any infringement of them. Generally, with appropriate renewal and use, the registration of our service marks will continue indefinitely. Our only restaurant operations outside of North America historically have been conducted through an Area Development and Franchise Agreement with Red Lobster Japan Co., Ltd. (Red Lobster Japan), an unaffiliated Japanese corporation. Red Lobster Japan operated 33 Red Lobster restaurants in Japan as of May 25, 2003. We do not have an ownership interest in Red Lobster Japan, but receive royalty income under the Franchise Agreement. The amount of this income is not material to our consolidated financial statements. Seasonality Our sales volumes fluctuate seasonally. During fiscal years 2003, 2002 and 2001, our sales were highest in the spring, lowest in the fall, and comparable during winter and summer. Holidays, severe weather, storms and similar conditions may impact sales volumes seasonally in some operating regions. 9 Government Regulation We are subject to various federal, state and local laws affecting our business. Each of our restaurants must comply with licensing requirements and regulations by a number of governmental authorities, which include health, safety and fire agencies in the state or municipality in which the restaurant is located. The development and operation of restaurants depend on selecting and acquiring suitable sites, which are subject to zoning, land use, environmental, traffic and other regulations. To date, we have not been significantly affected by any difficulty, delay or failure to obtain required licenses or approvals. Presently about 9.6 percent of our sales are attributable to the sale of alcoholic beverages. Regulations governing their sale require licensure by each site (in most cases, on an annual basis), and licenses may be revoked or suspended for cause at any time. These regulations relate to many aspects of restaurant operation, including the minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, and storage and dispensing of alcoholic beverages. The failure of a restaurant to obtain or retain these licenses would adversely affect the restaurant's operations. We also are subject in certain states to "dram-shop" statutes, which generally provide an injured party with recourse against an establishment that serves alcoholic beverages to an intoxicated person, who then causes injury to himself or a third party. We carry liquor liability coverage as part of our comprehensive general liability insurance. We also are subject to federal and state minimum wage laws and other laws governing such matters as overtime, tip credits, working conditions, safety standards, and hiring and employment practices. Changes in these laws during fiscal 2003 have not had a material effect on our operations. We currently are operating under a Tip Rate Alternative Commitment ("TRAC") agreement with the Internal Revenue Service. Through increased educational and other efforts in the restaurants, the TRAC agreement reduces the likelihood of potential chain-wide employer-only FICA assessments for unreported tips. We are subject to federal and state environmental regulations, but these rules have not had a material effect on our operations. During fiscal 2003, there were no material capital expenditures for environmental control facilities and no material expenditures for this purpose are anticipated. Our facilities must comply with the applicable requirements of the Americans With Disabilities Act of 1990 ("ADA") and related state accessibility statutes. Under the ADA and related state laws, we must provide equivalent service to disabled persons, and make reasonable accommodation for their employment, and when constructing or undertaking significant remodeling of our restaurants, we must make those facilities accessible. Executive Officers Our executive officers as of August 22, 2003 are: Joe R. Lee, age 62, has been our Chief Executive Officer since December 1994 and Chairman of the Board since April 1995. Mr. Lee joined Red Lobster in 1967 as a member of its opening management team, and was named its President in 1975. From 1970 to 1995, he held various positions with General Mills, Inc., a manufacturer and marketer of consumer food products and our former parent, including Vice Chairman, with responsibility for various consumer foods businesses and corporate staff functions, Chief Financial Officer and Executive Vice President, Finance and International Restaurants. Richard E. Rivera, age 56, has been our President and Chief Operating Officer since December 2002, our Vice Chairman from March 2002 to December 2002, and a Director since December 1997. He was our Executive Vice President, and President of Red Lobster Restaurants from December 1997 until March 2002. He served as President and Chief Executive Officer of Chart House Restaurants, Inc. from July 1997 until December 1997, as President and Chief Executive Officer of RARE Hospitality International, Inc., the owner of LongHorn Steakhouse restaurants, from 1994 to 1997, and as President and Chief Executive Officer of TGI Friday's, Inc. from 1988 to 1994. He began his career with Steak & Ale Restaurants of America and has held various leadership positions in the industry over the last 25 years, including as a Director of the National Restaurant Association. 10 Blaine Sweatt, III, age 55, has been our President, New Business Development since February 1996 and Executive Vice President since April 1995, and a Director since 1995. He led teams that developed the Olive Garden, Bahama Breeze, Smokey Bones and Seasons 52 concepts, among others. He joined Red Lobster in 1976 and was named Director of New Restaurant Concept Development in 1981. From 1986 to 1989, he held various positions with General Mills, Inc., a manufacturer and marketer of consumer food products and our former parent. Laurie B. Burns, age 41, has been our Senior Vice President and President of Bahama Breeze since March 2003. She joined us in April 1999 as Vice President of Development for Red Lobster, and served as our Senior Vice President, Development from September 2000 until March 2003. She was a private real estate consultant from October 1998 until joining us in April 1999, and was Regional Vice President for Development for the Eastern United States at Homestead Village, an extended-stay hotel company, from 1995 to 1998. Linda J. Dimopoulos, age 52, has been Chief Financial Officer since December 2002. She joined us in 1982, and served as Senior Vice President, Financial Operations of Red Lobster from 1993 to July 1998, as our Senior Vice President, Corporate Controller and Business Information Systems from July 1998 to December 1999, and as our Senior Vice President, Chief Information Officer from December 1999 until assuming her current position in December 2002. Stephen E. Helsel, age 58, has been our Senior Vice President, Corporate Controller since December 1999. He joined us in 1973 as an accountant with Red Lobster, and was named Vice President, Controller of Red Lobster in 1989. He served as our Vice President, Controller, Accounting Services from 1991 to 1996, and as Senior Vice President, Information Services from 1996 until December 1999. Daniel M. Lyons, age 50, has been our Senior Vice President, Human Resources since January 1997. He joined us in 1993 as Senior Vice President of Personnel for Olive Garden. Prior to joining Olive Garden, he spent 18 years with the Quaker Oats Company. Andrew H. Madsen, age 47, has been our Senior Vice President and President of Olive Garden since March 2002. He joined us in December 1998 as Executive Vice President of Marketing for Olive Garden. From 1997 until joining us, he was President of International Master Publishers, Inc., a company that developed and marketed consumer information products such as magazines and compact discs. From 1993 until 1997, he worked at James River (now part of Georgia-Pacific Corporation, a diversified paper and building products manufacturer), where he held various positions, including Vice President/General Manager for the Dixie consumer products unit. From 1980 to 1992, he worked at General Mills, Inc., a manufacturer and marketer of consumer food products and our former parent, where he held progressively more responsible positions in consumer products marketing, including Vice President of Marketing. Edna Morris, age 51, has been our Senior Vice President and President of Red Lobster since March 2002. She joined us in October 1998 and served from then until March 2002 as Executive Vice President of Operations for Red Lobster. From 1992 until joining us, she held various positions with Advantica Restaurant Group, Inc., the parent of Denny's and other restaurant companies, including President of Quincy's Family Steakhouse from 1996 to 1998 and Executive Vice President during 1998. Barry Moullet, age 45, has been our Senior Vice President, Purchasing, Distribution and Food Safety since June 1999. He joined us in July 1996 as Senior Vice President, Purchasing and Distribution. Prior to joining us, he spent 15 years in the purchasing field in various positions with Restaurant Services, Inc., a Burger King purchasing co-operative, Kentucky Fried Chicken and the Pillsbury Company. Clarence Otis, Jr., age 47, has been our Executive Vice President since March 2002 and President of Smokey Bones BBQ since December 2002. He was our Senior Vice President from December 1999 until March 2002, and our Chief Financial Officer from December 1999 until December 2002. He joined us in 1995 as Vice President and Treasurer. He served as our Senior Vice President, Investor Relations and Treasurer from July 1997 to July 1998, and as Senior Vice President, Finance and Treasurer from July 1998 until December 1999. Prior to joining us, he was employed by Chemical Securities, Inc., an investment banking firm, where he had been Managing Director and Manager of Public Finance since 1991. 11 Paula J. Shives, age 52, has been our Senior Vice President, General Counsel and Secretary since June 1999. Prior to joining us, she served as Senior Vice President, General Counsel and Secretary from 1995 to 1999, and Associate General Counsel from 1985 to 1995 of Long John Silver's Restaurants, Inc. Richard J. Walsh, age 51, has been our Senior Vice President, Corporate Relations since 1994. He joined General Mills, Inc., our former parent, in 1984 as Manager of Government Affairs for Red Lobster. He served as Vice President of Government and Community Relations for General Mills Restaurants, Inc. from 1987 until assuming his current position in December 1994. Forward-Looking Statements Certain information included in this report and other materials filed or to be filed by us with the Commission (as well as information included in oral or written statements made by us or on our behalf), may contain forward-looking statements about our future performance, plans and objectives, long-term goals, forecasts of market trends and other matters. These statements may be contained in our filings with the Securities and Exchange Commission, in our press releases, in other written communications, and in oral statements made by or with the approval of one of our authorized officers. Words or phrases such as "believe," "plan," "will likely result," "expect," "intend," "will continue," "is anticipated," "estimate," "project" and similar expressions are intended to identify forward-looking statements. These statements, and any other statements that are not historical facts, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as codified in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended from time to time (the "Act"). These forward-looking statements include, but are not limited to, projections regarding: our growth plans and the number and type of new restaurant openings; improved financial performance at Bahama Breeze as a result of changing the prototype and other changes at that concept; and our expectation to realize more of Smokey Bones' full potential as a result of changes in the location of units and other initiatives. In connection with the "safe harbor" provisions of the Act, we are filing the following cautionary statements to identify important factors, risks and uncertainties that could cause our actual results to differ materially from those projected in forward-looking statements made by us, or on our behalf. These cautionary statements are to be used as a reference in connection with any forward-looking statements. The factors, risks and uncertainties identified in these cautionary statements are in addition to those contained in any other cautionary statements, written or oral, which may be made or otherwise addressed in connection with a forward-looking statement or contained in any of our subsequent filings with the Securities and Exchange Commission. Because of these factors, risks and uncertainties, we caution against placing undue reliance on forward-looking statements. Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could be incorrect, and there can be no assurance that the forward-looking statements will prove to be accurate. Forward-looking statements speak only as of the date on which they are made. We do not undertake any obligation to modify or revise any forward-looking statement to take into account or otherwise reflect subsequent events, or circumstances arising after the date that the forward-looking statement was made. The following factors, risks and uncertainties, have affected, and may continue to affect, our operating results and the environment within which we conduct our business. If our projections and estimates regarding these key factors differ materially from what actually occurs, our actual results could vary significantly from the performance projected in our forward-looking statements. Competition. The casual dining sector of the restaurant industry is intensely competitive in pricing, service, location, personnel, and type and quality of food. We compete with national, regional and local organizations primarily through the quality, variety and value perception of menu items. The number and location of restaurants, quality and efficiency of service, attractiveness of facilities and effectiveness of advertising and marketing programs are also important factors. We anticipate that intense competition will continue in all of these areas. Economic, Market and Other Conditions. Certain risks are endemic to the restaurant and retail industry in general. A protracted economic slowdown or worsening economy, industry-wide cost pressures, or weak consumer demand could lead to same-restaurant sales declines and suppress sales growth and profits. The casual dining sector of the restaurant industry is affected by changes in national, regional and local economic conditions; the seasonality of our business; consumer preferences, including changes in consumer tastes and the level of consumer acceptance of 12 our restaurant concepts; consumer spending patterns; demographic trends; weather; traffic patterns; and the type, number and location of competing restaurants. Our ability to undertake new restaurant development, as well as improvements and additions to existing restaurants, is affected by economic conditions, including interest rates, and government policies impacting land and construction costs and the cost and availability of borrowed funds. Price and Availability of Food, Labor, Utilities, Insurance and Media; Other Costs. Our profitability depends significantly on our ability to anticipate and react to changes in the price and availability of food; labor; utilities; insurance (including workers' compensation, general liability, health, and directors and officer's liability insurance); advertising, media and marketing; employee benefits; and other costs over which we may have little control. The price and availability of commodities, including, among other things, shrimp, lobster and other seafood, are subject to fluctuation and could increase or decrease more than we expect. We are subject to the general risk of inflation, and possible shortages or interruptions in supply caused by inclement weather or other conditions that could adversely affect the availability and cost of the items we buy. Restaurant pre-opening expenses could be more than expected, and labor shortages, increased employee turnover and higher minimum wage rates all could raise our cost of doing business. Our business also is subject to the risk of litigation by employees, consumers, suppliers, shareholders or others that may result in additional costs. There can be no assurance that management will be able to anticipate and react to these cost issues without a material adverse effect on our profitability and results of operations. Unfavorable Publicity Relating to Food Safety or Other Concerns. Multi-unit restaurant businesses can be adversely affected by publicity resulting from complaints or litigation alleging poor food quality, food-borne illness, personal injury, adverse health effects including obesity, or other operational concerns. Negative publicity may also result from actual or alleged violations of dram shop laws that may impose liability on sellers of liquors when a third party is injured as a result of intoxication. Regardless of whether the allegations are valid, unfavorable publicity relating to just one or a limited number of restaurants could taint public perception of the entire brand. Such unfavorable publicity and overall consumer perceptions of food safety could have a material adverse effect on our business. Importance of Locations. The success of our restaurants depends in large part on location. There can be no assurance that current locations will continue to be attractive, as demographic patterns change. Possible declines in neighborhoods where restaurants are located, or economic conditions surrounding those neighborhoods, could result in reduced sales in those locations. Government Regulation. We are subject to various federal, state and local laws affecting our business. The development and operation of restaurants depend to a significant extent on the selection and acquisition of suitable sites, which are subject to zoning, land use, environmental, traffic and other regulations. Restaurant operations are also subject to licensing and regulation by state and local departments relating to health, liquor licenses, sanitation and safety standards, federal and state labor laws (including applicable minimum wage requirements, overtime, working and safety conditions, and citizenship requirements), federal and state laws which prohibit discrimination and other laws regulating the design and operation of facilities, such as the Americans With Disabilities Act of 1990. We cannot predict the effect on our operations of these laws and regulations or the future enactment of additional legislation regulating these and other areas. Growth Plans. There can be no assurance that we will be able to achieve our growth objectives or that new restaurants opened or acquired will be profitable. There are inherent risks involved with expanding new concepts (such as Bahama Breeze and Smokey Bones) that have not yet proved their long-term viability. The opening and success of restaurants depends on various factors, including the identification and availability of suitable and economically viable locations; sales levels at existing restaurants; the negotiation of acceptable lease or purchase terms for new locations; obtaining all required governmental permits, including zoning approvals and liquor licenses, on a timely basis; other regulatory compliance; the availability of necessary contracts and subcontractors and the ability to meet construction schedules; our ability to manage union activities such as picketing, which could delay construction; the availability of capital at affordable cost to finance growth; changes in the weather or other acts of God that could result in construction delays and adversely affect the results of one or more restaurants for an indeterminate amount of time; our ability to hire and train qualified management personnel; and general economic and business conditions. 13 Item 2. PROPERTIES As of May 25, 2003, we operated 1,271 restaurants (including 673 Red Lobster, 524 Olive Garden, 34 Bahama Breeze, 39 Smokey Bones and one Seasons 52 restaurants) and one Olive Garden Cafe in the following locations: Alabama (20) Iowa (14) Nevada (11) South Dakota (3) Arizona (28) Kansas (10) New Hampshire (3) Tennessee (29) Arkansas (11) Kentucky (14) New Jersey (27) Texas (106) California (96) Louisiana (8) New Mexico (10) Utah (12) Colorado (27) Maine (3) New York (50) Vermont (1) Connecticut (9) Maryland (20) North Carolina (27) Virginia (42) Delaware (4) Massachusetts (8) North Dakota (4) Washington (24) Florida (133) Michigan (50) Ohio (73) West Virginia (5) Georgia (50) Minnesota (22) Oklahoma (17) Wisconsin (19) Hawaii (1) Mississippi (7) Oregon (11) Wyoming (2) Idaho (6) Missouri (29) Pennsylvania (62) Canada (37) Illinois (55) Montana (2) Rhode Island (2) Indiana (42) Nebraska (8) South Carolina (18)
Of our 1,271 restaurants and the one Olive Garden Cafe open on May 25, 2003, 803 were located on owned sites and 469 were located on leased sites. The 469 leases are classified as follows: Land-Only Leases (we own buildings and equipment).................. 352 Ground and Building Leases...........................................59 Space/In-Line/Other Leases...........................................58 ---- Total......................................................469 === During fiscal 1999, we formed two subsidiary corporations, each of which elected to be taxed as a Real Estate Investment Trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code. These elections limit the activities of both corporations to holding certain real estate assets. The formation of these two REITs is designed primarily to assist us in managing our real estate portfolio and possibly to provide a vehicle to access capital markets in the future. Both REITs are non-public REITs. Through our subsidiary companies, we indirectly own 100 percent of all voting stock and greater than 99.5 percent of the total value of each REIT. For financial reporting purposes, both REITs are included in our consolidated financial statements. We own or lease our executive offices, culinary center and training facilities in Orlando, Florida. Except in limited instances, our restaurant sites and other facilities are not subject to mortgages or encumbrances securing money borrowed by us from outside sources. In our opinion, our buildings and equipment generally are in good condition, suitable for their purposes and adequate for our current and foreseeable needs. See also Note 4 "Land, Buildings and Equipment" and Note 10 "Leases" of Notes to Consolidated Financial Statements on pages 36 and 40, respectively, of the Company's 2003 Annual Report to Shareholders, incorporated herein by reference. Item 3. LEGAL PROCEEDINGS From time to time, we are made a party to legal proceedings arising in the ordinary course of business. We do not believe that the results of these legal proceedings, even if unfavorable to us, will have a materially adverse impact on our financial position, results of operations or cash flows. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 14 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The principal United States market on which our common shares are traded is the New York Stock Exchange. As of July 28, 2003, there were approximately 42,429 record holders of our common shares. The information concerning the dividends and high and low intraday sales prices for our common shares on the New York Stock Exchange for each full quarterly period during fiscal 2002 and 2003 contained in Note 17, "Quarterly Data", on page 47 of our 2003 Annual Report to Shareholders is incorporated herein by reference. We have not sold any securities during the last three years that were not registered under the Securities Act of 1933. Item 6. SELECTED FINANCIAL DATA The information for fiscal 1999 through 2003 contained in the Five-Year Financial Summary on page 48 of our 2003 Annual Report to Shareholders is incorporated herein by reference. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information set forth in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 18 through 25 of our 2003 Annual Report to Shareholders is incorporated herein by reference. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The text under the heading "Quantitative and Qualitative Disclosures About Market Risk" contained within "Management's Discussion and Analysis of Financial Condition and Results of Operations" on page 24 of our 2003 Annual Report to Shareholders is incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Independent Auditors' Report, Consolidated Statements of Earnings, Consolidated Balance Sheets, Consolidated Statements of Changes in Stockholders' Equity and Accumulated Other Comprehensive Income, Consolidated Statements of Cash Flows, and Notes to Consolidated Financial Statements on pages 26 through 48 of our 2003 Annual Report to Shareholders are incorporated herein by reference. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. Item 9A. CONTROLS AND PROCEDURES Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) as of May 25, 2003, the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of May 25, 2003. During the fiscal quarter ended May 25, 2003, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 15 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information contained in the sections entitled "Who Are This Year's Nominees?" on pages 6 through 8, "What Board Committees Do You Have?" on pages 9 through 11, and "Section 16(a) Beneficial Ownership Reporting Compliance" on page 31 of our definitive Proxy Statement dated August 22, 2003, is incorporated herein by reference. Information regarding executive officers is contained in Part I above under the heading "Executive Officers." Our Board of Directors has determined that in its judgment, Jack A. Smith, the Chair of our Audit Committee, is an "audit committee financial expert" in accordance with the applicable rules and regulations of the Securities and Exchange Commission, and has "accounting or related financial management expertise" in accordance with the applicable listing standards of the New York Stock Exchange. The Board also determined that Mr. Smith is independent, as that term is used under applicable rules of the Securities and Exchange Commission, the listing standards of the New York Stock Exchange, and our Corporate Governance Guidelines. We have adopted a Code of Business Conduct and Ethics that is applicable to all of our employees. Appendix A to that Code provides a special Code of Ethics with additional provisions that apply to our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions (the "Senior Financial Officers"). Appendix B to the Code provides a Code of Business Conduct and Ethics for members of our Board of Directors. These documents are posted on our internet website noted on page two and are available free of charge. We intend to disclose any amendments to or waivers from these Codes for directors, executive officers or Senior Financial Officers on our website. Item 11. EXECUTIVE COMPENSATION The information contained in the sections entitled "How Are Directors Compensated?" on page 11, "Summary Compensation Table" on pages 18 through 19, "Option Grants in Last Fiscal Year" on page 20, "Stock Option Exercises and Holdings" on page 21, "Long-Term Incentive Plans - Awards in Last Fiscal Year" on page 20, "Do Executive Officers Currently Participate in a Defined Benefit Retirement Plan?" on page 22, "Do Executive Officers Currently Participate in a Non-Qualified Deferred Compensation Plan?" on page 22, "Do the Executive Officers Have Any Change-in-Control Arrangements?" on pages 22 through 23, and "Compensation Committee Interlocks and Insider Participation" on page 27 of our definitive Proxy Statement dated August 22, 2003, is incorporated herein by reference. The information appearing in the Proxy Statement under the heading "Compensation Committee Report" (except under the heading "Compensation Committee Interlocks and Insider Participation") is not incorporated herein. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information contained in the sections entitled "Security Ownership of Principal Shareholders" on pages 16 through 17, and "Security Ownership of Management" on pages 14 through 15 of our definitive Proxy Statement dated August 22, 2003, is incorporated herein by reference. Equity Compensation Plan Information The following table gives information about our common shares that may be issued as of May 25, 2003 under our 2002 Stock Incentive Plan ("2002 Plan"); Stock Option and Long-Term Incentive Plan of 1995 ("1995 Plan"); Restaurant Management and Employee Stock Plan of 2000 ("2000 Plan"); Stock Plan for Directors ("Director Stock Plan"); Compensation Plan for Non-Employee Directors ("Director Compensation Plan"); Stock Option and Long-Term Incentive Conversion Plan ("Conversion Plan") and Employee Stock Purchase Plan ("ESPP"). 16
- ------------------------------- ---------------------------- ---------------------------- ---------------------------- (a) (b) (c) - ------------------------------- ---------------------------- ---------------------------- ---------------------------- - ------------------------------- ---------------------------- ---------------------------- ---------------------------- Plan category Number of securities to be Weighted-average exercise Number of securities issued upon exercise of price of outstanding remaining available for outstanding options, options, warrants and future issuance under warrants and rights (3) rights equity compensation plans (excluding securities reflected in column (a)) - ------------------------------- ---------------------------- ---------------------------- ---------------------------- - ------------------------------- ---------------------------- ---------------------------- ---------------------------- Equity compensation plans approved by security holders (1) 23,093,014 $13.23 12,977,554 (4) - ------------------------------- ---------------------------- ---------------------------- ---------------------------- - ------------------------------- ---------------------------- ---------------------------- ---------------------------- Equity compensation plans not approved by security holders (2) 3,628,709 $16.87 1,760,163 (5) - ------------------------------- ---------------------------- ---------------------------- ---------------------------- - ------------------------------- ---------------------------- ---------------------------- ---------------------------- Total 26,721,723 $13.73 14,737,717 - ------------------------------- ---------------------------- ---------------------------- ---------------------------- - ------------------------- (1) Includes the 2002 Plan, 1995 Plan, Conversion Plan and ESPP. (2) Includes the 2000 Plan, Director Stock Plan and Director Compensation Plan. (3) Includes deferred compensation obligations that may be paid out in common stock. (4) In addition to grants of options, warrants or rights, includes up to 8,550,000 shares of common stock or other stock-based awards, including up to 1,700,000 shares of restricted stock, that may be issued under the 2002 Plan, up to 273,007 shares of restricted stock that may be issued under the 1995 Plan, and up to 778,456 shares of common stock that may be issued under the ESPP. (5) In addition to grants of options, warrants or rights, includes up to 29,296 shares of restricted stock that may be issued under the 2000 Plan, up to 95,051 shares of common stock that may be issued under the Director Compensation Plan, and up to 88,317 shares of common stock that may be issued under the Director Stock Plan.
The 2000 Plan The 2000 Plan provides for the issuance of up to 5,400,000 shares of common stock out of our treasury. The 2000 Plan allows us to award non-qualified stock options, restricted stock or restricted stock units. Only our employees other than executive officers are eligible to receive awards under the 2000 Plan. The purpose of the 2000 Plan is to provide incentives and awards to employees who may be responsible for the management, growth and sound development of our restaurants, and to align the interests of employees with the interests of our shareholders. The 2000 Plan is administered by the Compensation Committee of the Board of Directors. The exercise price of a stock option granted under the 2000 Plan may not be less than the fair market value of the underlying stock on the date of grant, and no option may have a term of more than ten years. The options that are currently outstanding under the 2000 Plan generally vest over a one- to four-year period beginning on the date of grant and expire ten years from the date of grant. Awards may be made under the 2000 Plan until January 1, 2004. The 2000 Plan was approved by our Board of Directors. The Director Stock Plan The Director Stock Plan provides for the issuance of up to 375,000 shares of common stock out of our treasury as non-qualified stock options, restricted stock or restricted stock units. Our non-employee directors are the only persons eligible to receive awards under the Director Stock Plan. The purpose of the Director Stock Plan is to provide incentives and awards to non-employee directors to align their interests with those of our shareholders. The Director Stock Plan is administered by the Compensation Committee of the Board of Directors. The exercise price of a stock option granted under the Director Stock Plan may not be less than the fair market value of the underlying stock on the date of grant, and no option may have a term of more than ten years. The options that are currently outstanding under the Director Stock Plan generally vest over a one- to three-year period beginning on the date of grant and expire ten years from the date of grant. The restrictions on restricted stock and restricted stock units granted under the plan generally lapse one year after the date of grant. Awards may be made under the Director Stock Plan until January 1, 2004. The Director Stock Plan was approved by our Board of Directors. 17 The Director Compensation Plan The Director Compensation Plan provides for the issuance of up to 105,981 shares of common stock out of our treasury. The plan allows us to award cash, deferred cash or common stock. Our non-employee directors are the only persons eligible to receive awards under the plan. The purpose of the plan is to provide incentives and awards to non-employee directors to align their interests with those of our shareholders. The plan is administered by the Compensation Committee of the Board of Directors and was approved by the Board. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained in the sections entitled "Do We Provide Loans for Executive Officers to Meet Their Share Ownership Guidelines?" on page 23, and "Are There Any Other Relationships or Related Transactions Between Us and Our Management?" on page 23 of our definitive Proxy Statement dated August 22, 2003, is incorporated herein by reference. Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information contained in the section entitled "Independent Auditor Fees and Services" on page 29 of our definitive Proxy Statement dated August 22, 2003, is incorporated herein by reference. PART IV Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements: Consolidated Statements of Earnings for the fiscal years ended May 25, 2003, May 26, 2002 and, May 27, 2001 (incorporated by reference to page 27 of our 2003 Annual Report to Shareholders). Consolidated Balance Sheets at May 25, 2003 and May 26, 2002 (incorporated by reference to page 28 of our 2003 Annual Report to Shareholders). Consolidated Statements of Changes in Stockholders' Equity and Accumulated Other Comprehensive Income for the fiscal years ended May 25, 2003, May 26, 2002, and May 27, 2001 (incorporated by reference to page 29 of our 2003 Annual Report to Shareholders). Consolidated Statements of Cash Flows for the fiscal years ended May 25, 2003, May 26, 2002 and May 27, 2001 (incorporated by reference to page 30 of our 2003 Annual Report to Shareholders). Notes to Consolidated Financial Statements (incorporated by reference to pages 31 through 48 of our 2003 Annual Report to Shareholders). 2. Financial Statements Schedules: Not applicable. 3. Exhibits: Pursuant to Item 601(b)(4)(iii) of Regulation S-K, copies of certain instruments defining the rights of holders of certain of our long-term debt are not filed, and in lieu thereof, we agree to furnish copies thereof to the Securities and Exchange Commission upon request. 18 Exhibit Number Title 3(a) Articles of Incorporation (incorporated herein by reference to Exhibit 3(a) to our Registration Statement on Form 10 effective May 5, 1995). 3(b) Bylaws as amended July 21, 2003. 4(a) Rights Agreement dated as of May 28, 1995 between us and Wells Fargo Bank Minnesota, National Association (formerly known as Norwest Bank Minnesota, N.A.), as amended May 23, 1996, assigned to Wachovia Bank, National Association (formerly known as First Union National Bank), as Rights Agent, as of September 29, 1997 (incorporated by reference to Exhibit 4(a) to our Annual Report on Form 10-K for the fiscal year ended May 31, 1998). 4(b) Indenture dated as of January 1, 1996, between us and Wells Fargo Bank Minnesota, National Association (formerly known as Norwest Bank Minnesota, N.A.), as Trustee (incorporated herein by reference to our Current Report on Form 8-K filed February 9, 1996). *10(a) Darden Restaurants, Inc. Stock Option and Long-Term Incentive Plan of 1995, as amended March 19, 2003 (incorporated herein by reference to Exhibit 10(b) to our Quarterly Report on Form 10-Q for the quarter ended February 23, 2003). *10(b) Darden Restaurants, Inc. FlexComp Plan, as amended March 19, 2003 (incorporated herein by reference to Exhibit 10(f) to our Quarterly Report on Form 10-Q for the quarter ended February 23, 2003). *10(c) Darden Restaurants, Inc. Stock Option and Long-Term Incentive Conversion Plan, as amended (incorporated herein by reference to Exhibit 10(c) to our Annual Report on Form 10-K for the fiscal year ended May 26, 1996). *10(d) Supplemental Pension Plan of Darden Restaurants, Inc. (incorporated herein by reference to Exhibit 10(d) to our Registration Statement on Form 10 effective May 5, 1995). *10(e) Executive Health Plan of Darden Restaurants, Inc. (incorporated herein by reference to Exhibit 10(e) to our Registration Statement on Form 10 effective May 5, 1995). *10(f) Darden Restaurants, Inc. Stock Plan for Directors, as amended June 19, 2003. *10(g) Darden Restaurants, Inc. Compensation Plan for Non-Employee Directors, as amended March 19, 2003 (incorporated herein by reference to Exhibit 10(d) to our Quarterly Report on Form 10-Q for the quarter ended February 23, 2003). *10(h) Darden Restaurants, Inc. Management and Professional Incentive Plan, as amended June 19, 2003. *10(i) Benefits Trust Agreement dated as of October 3, 1995, between us and Wells Fargo Bank Minnesota, National Association (formerly known as Norwest Bank Minnesota, N.A.), as Trustee (incorporated herein by reference to Exhibit 10(i) to our Annual Report on Form 10-K for the fiscal year ended May 25, 1997). *10(j) Form of Management Continuity Agreement, as amended, between us and certain of our executive officers (incorporated herein by reference to Exhibit 10(j) to our Annual Report on Form 10-K for the fiscal year ended May 25, 1997). 19 *10(k) Form of documents for our Fiscal 1998 Stock Purchase/Option Award program, including a Non-Negotiable Promissory Note and a Stock Pledge Agreement (incorporated herein by reference to Exhibit 10(k) to our Annual Report on Form 10-K for the fiscal year ended May 27, 2001). *10(l) Darden Restaurants, Inc. Restaurant Management and Employee Stock Plan of 2000, as amended June 19, 2003. *10(m) Darden Restaurants, Inc. 2002 Stock Incentive Plan, as amended March 19, 2003 (incorporated herein by reference to Exhibit 10(a) to our Quarterly Report on Form 10-Q for the quarter ended February 23, 2003). 10(n) Credit Agreement dated as of October 29, 1999, among Darden Restaurants, Inc. and the banks named therein (incorporated herein by reference to Exhibit 10(a) to our Quarterly Report on Form 10-Q for the quarter ended August 25, 2002). 10(o) First Amendment dated as of July 26, 2002, to Credit Agreement dated as of October 29, 1999, among Darden Restaurants, Inc. and the banks listed therein (incorporated herein by reference to Exhibit 10(b) to our Quarterly Report on Form 10-Q for the quarter ended August 25, 2002). 12 Computation of Ratio of Consolidated Earnings to Fixed Charges. 13 Portions of 2003 Annual Report to Shareholders. 21 Subsidiaries of Darden Restaurants, Inc. 23 Independent Accountants' Consent. 24 Powers of Attorney. 31(a) Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 22, 2003. 31(b) Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 22, 2003. 32(a) Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated August 22, 2003. 32(b) Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated August 22, 2003. * Items that are management contracts or compensatory plans or arrangements required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K and Item 601(b)(10)(iii)(A) of Regulation S-K. We will furnish copies of any exhibit listed above upon request upon the payment of a reasonable fee to cover our expenses in furnishing such exhibit. 20 (b) Reports on Form 8-K. During the fourth quarter covered by this report, we filed or furnished the following current reports on Form 8-K: (i) Current report on Form 8-K dated March 20, 2003, reporting certain financial results for the third quarter of fiscal 2003. (ii) Current report on Form 8-K dated April 29, 2003, announcing fiscal April same-restaurant sales results. In addition, we filed or furnished the following reports on Form 8-K subsequent to the close of the fourth quarter of fiscal 2003: (i) Current report on Form 8-K dated June 19, 2003, reporting fiscal 2003 annual and fourth quarter earnings per diluted share. 21 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: August 22, 2003 DARDEN RESTAURANTS, INC. By: /s/ Joe R. Lee ----------------------------- Joe R. Lee Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
Signature Title Date /s/ Joe R. Lee Director, Chairman of the Board and Chief August 22, 2003 - -------------------------------- Joe R. Lee Executive Officer (Principal executive officer) /s/ Linda J. Dimopoulos Senior Vice President and Chief Financial Officer August 22, 2003 - -------------------------------- Linda J. Dimopoulos (Principal financial and accounting officer) /s/ Leonard L. Berry* Director - -------------------------------- Leonard L. Berry /s/ Odie C. Donald* Director - -------------------------------- Odie C. Donald /s/ Julius Erving, II* Director - -------------------------------- Julius Erving, II /s/ David H. Hughes* Director - -------------------------------- David H. Hughes /s/ Cornelius McGillicuddy, III* ** Director - -------------------------------- Cornelius McGillicuddy, III /s/ Richard E. Rivera* Director - -------------------------------- Richard E. Rivera /s/ Michael D. Rose* Director - -------------------------------- Michael D. Rose /s/ Maria A. Sastre* Director - -------------------------------- Maria A. Sastre /s/ Jack A. Smith* Director - -------------------------------- Jack A. Smith 22 /s/ Blaine Sweatt, III* Director - -------------------------------- Blaine Sweatt, III /s/ Rita P. Wilson* Director - -------------------------------- Rita P. Wilson
*BY: /s/ Paula J. Shives - -------------------------------- Paula J. Shives, Attorney-In-Fact August 22, 2003 ** Popularly known as Senator Connie Mack, III. Senator Mack signs legal documents, including this Form 10-K, under his legal name of Cornelius McGillicuddy, III. 23 EXHIBIT INDEX Exhibit Number Title 3(a) Articles of Incorporation (incorporated herein by reference to Exhibit 3(a) to our Registration Statement on Form 10 effective May 5, 1995). 3(b) Bylaws as amended July 21, 2003. 4(a) Rights Agreement dated as of May 28, 1995 between us and Wells Fargo Bank Minnesota, National Association (formerly known as Norwest Bank Minnesota, N.A.), as amended May 23, 1996, assigned to Wachovia Bank, National Association (formerly known as First Union National Bank), as Rights Agent, as of September 29, 1997 (incorporated by reference to Exhibit 4(a) to our Annual Report on Form 10-K for the fiscal year ended May 31, 1998). 4(b) Indenture dated as of January 1, 1996, between us and Wells Fargo Bank Minnesota, National Association (formerly known as Norwest Bank Minnesota, N.A.), as Trustee (incorporated herein by reference to our Current Report on Form 8-K filed February 9, 1996). *10(a) Darden Restaurants, Inc. Stock Option and Long-Term Incentive Plan of 1995, as amended March 19, 2003 (incorporated herein by reference to Exhibit 10(b) to our Quarterly Report on Form 10-Q for the quarter ended February 23, 2003). *10(b) Darden Restaurants, Inc. FlexComp Plan as amended March 19, 2003 (incorporated herein by reference to Exhibit 10(f) to our Quarterly Report on Form 10-Q for the quarter ended February 23, 2003). . * 10(c) Darden Restaurants, Inc. Stock Option and Long-Term Incentive Conversion Plan, as amended (incorporated herein by reference to Exhibit 10(c) to our Annual Report on Form 10-K for the fiscal year ended May 26, 1996). *10(d) Supplemental Pension Plan of Darden Restaurants, Inc. (incorporated herein by reference to Exhibit 10(d) to our Registration Statement on Form 10 effective May 5, 1995). *10(e) Executive Health Plan of Darden Restaurants, Inc. (incorporated herein by reference to Exhibit 10(e) to our Registration Statement on Form 10 effective May 5, 1995). *10(f) Darden Restaurants, Inc. Stock Plan for Directors, as amended June 19, 2003. *10(g) Darden Restaurants, Inc. Compensation Plan for Non-Employee Directors, as amended March 19, 2003 (incorporated herein by reference to Exhibit 10(d) to our Quarterly Report on Form 10-Q for the quarter ended February 23, 2003). *10(h) Darden Restaurants, Inc. Management and Professional Incentive Plan, as amended June 19, 2003. *10(i) Benefits Trust Agreement dated as of October 3, 1995, between us and Wells Fargo Bank Minnesota, National Association (formerly known as Norwest Bank Minnesota, N.A.), as Trustee (incorporated herein by reference to Exhibit 10(i) to our Annual Report on Form 10-K for the fiscal year ended May 25, 1997). 24 *10(j) Form of Management Continuity Agreement, as amended, between us and certain of our executive officers (incorporated herein by reference to Exhibit 10(j) to our Annual Report on Form 10-K for the fiscal year ended May 25, 1997). *10(k) Form of documents for our Fiscal 1998 Stock Purchase/Option Award program, including a Non-Negotiable Promissory Note and a Stock Pledge Agreement (incorporated herein by reference to Exhibit 10(k) to our Annual Report on Form 10-K for the fiscal year ended May 27, 2001). *10(l) Darden Restaurants, Inc. Restaurant Management and Employee Stock Plan of 2000, as amended June 19, 2003. *10(m) Darden Restaurants, Inc. 2002 Stock Incentive Plan, as amended March 19, 2003 (incorporated herein by reference to Exhibit 10(a) to our Quarterly Report on Form 10-Q for the quarter ended February 23, 2003). 10(n) Credit Agreement dated as of October 29, 1999, among Darden Restaurants, Inc. and the banks named therein (incorporated herein by reference to Exhibit 10(a) to our Quarterly Report on Form 10-Q for the quarter ended August 25, 2002). 10(o) First Amendment dated as of July 26, 2002, to Credit Agreement dated as of October 29, 1999, among Darden Restaurants, Inc. and the banks listed therein (incorporated herein by reference to Exhibit 10(b) to our Quarterly Report on Form 10-Q for the quarter ended August 25, 2002). 12 Computation of Ratio of Consolidated Earnings to Fixed Charges. 13 Portions of 2003 Annual Report to Shareholders. 21 Subsidiaries of Darden Restaurants, Inc. 23 Independent Accountants' Consent. 24 Powers of Attorney. 31(a) Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 22, 2003. 31(b) Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 22, 2003. 32(a) Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated August 22, 2003. 32(b) Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated August 22, 2003. * Items marked with an asterisk are management contracts or compensatory plans or arrangements required to be filed as an exhibit pursuant to Item 14 of Form 10-K and Item 601(b)(10)(iii)(A) of Regulation S-K. 25 EX-3 4 bylaws.txt EXHIBIT 3(B) - BYLAWS Exhibit 3(b) BY-LAWS OF DARDEN RESTAURANTS, INC. TABLE OF CONTENTS ARTICLE 1 SHAREHOLDERS SECTION 1. Place of Holding Meeting...........................1 SECTION 2. Quorum.............................................1 SECTION 3. Adjournment of Meetings............................1 SECTION 4. Annual Election of Directors.......................1 SECTION 5. Voting at Shareholders' Meetings...................2 SECTION 6. Notice of Shareholders' Meetings...................2 SECTION 7. Nomination of Directors............................3 SECTION 8. Notice of Business.................................3 SECTION 9. Organization.......................................4 SECTION 10. Order of Business..................................4 ARTICLE II DIRECTORS SECTION 1. Organization.......................................4 SECTION 2. Election of Officers...............................4 SECTION 3. Regular Meetings...................................5 SECTION 4. Special Meetings; How Called, Notice...............5 SECTION 5. Number; Qualifications; Quorum; Term...............5 SECTION 6. Place of Meetings..................................6 SECTION 7. Vacancies..........................................6 SECTION 8. Resignation and Removal of Directors...............6 SECTION 9. Compensation of Directors..........................6 SECTION 10. Committees.........................................6 SECTION 11. Executive Committee; Powers........................7 SECTION 12. Preferred Directors................................8 ARTICLE III OFFICERS SECTION 1. Titles.............................................8 SECTION 2. Chairman...........................................8 SECTION 3. Vice Chairman......................................8 SECTION 4. President..........................................8 SECTION 5. Vice President(s)..................................8 SECTION 6. Secretary..........................................9 SECTION 7. Assistant Secretary................................9 SECTION 8. Resignation and Removal of Officers................9 SECTION 9. Salaries...........................................10 ARTICLE IV CAPITAL STOCK SECTION 1. Issue of Stock With or Without Certificates........10 SECTION 2. Transfer of Shares.................................10 SECTION 3. Lost Certificates..................................10 SECTION 4. Rules as to Issue of Shares........................11 SECTION 5. Holder of Record Deemed Holder in Fact.............11 SECTION 6. Closing of Transfer Books or Fixing Record Date....11 ARTICLE V CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC. SECTION 1. Contracts, Etc; How Executed.......................12 SECTION 2. Loans..............................................12 SECTION 3. Deposits...........................................12 SECTION 4. Checks, Drafts, Etc................................12 SECTION 5. Transaction of Business............................13 ARTICLE VI MISCELLANEOUS PROVISIONS SECTION 1. ...................................................13 (a) Fiscal year....................................13 (b) Staff and Divisional Titles....................13 SECTION 2. Notice and Waiver of Notice........................13 SECTION 3. Inspection of Books................................13 SECTION 4. Construction.......................................14 SECTION 5. Adjournment of Meetings............................14 SECTION 6. Indemnification....................................14 SECTION 7. Resolution of Board of Directors Providing for Issuance of Preferred Shares..................15 ARTICLE VII AMENDMENTS SECTION 1. Amendment of Bylaws................................15 BYLAWS of DARDEN RESTAURANTS, INC. ARTICLE 1 SHAREHOLDERS SECTION 1. Place of Holding Meeting: Meetings of shareholders may be held within or without the State of Florida, and, unless otherwise determined by the board of directors or the shareholders, all meetings of the shareholders shall be held at the principal office of the corporation in the City of Orlando in the State of Florida. The place of meeting of the shareholders for the election of directors shall not be changed within sixty (60) days next before the day on which the election is to be held. A notice of any change shall be given to each shareholder entitled to vote, at least twenty (20) days before the election is held, in person or by letter mailed to such person at the last-known post office address. SECTION 2. Quorum: Any number of shareholders together holding a majority of the votes entitled to be cast by a voting group on a particular matter, represented in person or by proxy at any meeting of shareholders, constitutes a quorum of that voting group for action on that matter, except as may be otherwise provided by law, by the articles of incorporation or by these bylaws. At any meeting of shareholders for the election of directors at which any voting group shall have a separate vote, the absence of a quorum of any other voting group shall not prevent the election of the directors to be elected by such voting group. SECTION 3. Adjournment of Meetings: If less than a quorum shall be in attendance at the time for which the meeting shall have been called, the meeting may be adjourned from time to time by a majority vote of the shares represented, and who would be entitled to vote at the meeting if a quorum were present, without any notice other than by announcement at the meeting. Any meeting at which a quorum is present may also be adjourned, in like manner, for such time, or upon such call, as may be determined by vote. At any such adjourned meeting at which a quorum may be present any business may be transacted which might have been transacted at the meeting as originally called. SECTION 4. Annual Election of Directors: The annual meeting of shareholders for the election of directors and the transaction of other business shall be held on the fourth Monday of September in each year at 1:00 o'clock in the afternoon, standard time, unless, by resolution, the board of directors fixes another date or time in the months of September or October for the holding of such annual meeting. If the election of directors shall not be had on the day designated herein for the annual meeting or at an adjournment thereof, the board of directors shall cause a meeting of the shareholders for the election of a board of 1 directors to be held as soon thereafter as conveniently may be. At such meeting the shareholders may elect the directors and transact other business with the same force and effect as at an annual meeting duly called and held. After the first election of directors, no share shall be voted on at any election which shall have been transferred on the books of the corporation within twenty (20) days next preceding such election, except where the transfer books of the corporation shall have been closed or a date shall have been fixed as a record date for the determination of the shareholders entitled to vote, as provided in Article IV, Section 6 of these bylaws. The directors elected annually shall hold office until the next annual election and until their successors are respectively elected and qualified; provided, in the event that any voting group has the right to elect directors separately as a voting group and such right shall have vested, such right may be exercised as provided in the articles of incorporation of the corporation. The secretary shall prepare, or cause to be prepared, at least ten (10) days before every election, a complete list of shareholders entitled to vote, arranged in alphabetical order, and such list shall be kept in a file at the principal office of the corporation for such ten (10) days, for the examination of any shareholder at any time during usual business hours, and shall be produced and kept at the time and place of election during the whole time thereof, subject to the inspection of any shareholder who may be present. SECTION 5. Voting at Shareholders' Meeting: The board of directors shall determine the voting power of any Preferred Shares in accordance with Article III of the articles of incorporation. Unless otherwise provided in the articles of incorporation or these bylaws and subject to the provisions of the Florida Business Corporation Act (the "Florida Law"), each shareholder entitled to vote shall have one (1) vote to each share of voting stock registered in its name on the books of the corporation. SECTION 6. Notice of Shareholders' Meetings: Written notice, stating the time and place of the meeting and, in case of a special meeting, stating also the general nature of the business to be considered, shall be given by the secretary by mailing, or causing to be mailed, such notice, postage prepaid, to each shareholder entitled to vote, at the post office address as the same appears on the stock books of the corporation, or by delivering such notice to such person personally, at least ten (10) days before the meeting. A written waiver of such notice signed by the person entitled thereto, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. 2 SECTION 7. Nomination of Directors: Only persons who are nominated in accordance with the procedures set forth in these bylaws shall be eligible to serve as directors. Nominations of persons for election to the board of directors of the corporation may be made at a meeting of shareholders (a) by or at the direction of the board of directors or (b) by any shareholder of the corporation who is a shareholder of record at the time of giving of notice provided for in this Section, who shall be entitled to vote for the election of directors at the meeting and who complies with the notice procedures set forth in this Section. Such nominations, other than those made by or at the direction of the board of directors, shall be made pursuant to timely notice in writing to the secretary of the corporation. To be timely, a shareholder's notice shall be delivered to or mailed and received at the principal executive offices of the corporation not less than 120 calendar days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than thirty days, notice by the shareholder to be timely must be so received not later than the close of business on the later of one hundred twenty calendar days in advance of such annual meeting or ten calendar days following the day on which such notice of the date of the meeting or such public disclosure is first made. Such shareholder's notice shall set forth (a) as to each person whom the shareholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Ace of 1934 (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (b) as to the shareholder giving the notice (i) the name and address, as they appear on the corporation's books, of such shareholder and (ii) the class and number of shares of the corporation which are beneficially owned by such shareholder. At the request of the board of directors, any person nominated by the board of directors for election as a director shall furnish to the secretary of the corporation that information required to be set forth in a shareholder's notice of nomination which pertains to the nominee. No person shall be eligible to serve as a director of the corporation unless nominated in accordance with the procedures set forth in this Section. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by the bylaws, and if such person should so determine, such person shall so declare to the meeting and the defective nomination shall be disregarded. Notwithstanding the foregoing provisions of this Section, a shareholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, and the rules and regulations thereunder with respect to the matters set forth in this Section. SECTION 8. Notice of Business: At any meeting of the shareholders, only such business shall be conducted as shall have been brought before the meeting (a) by or at the direction of the board of directors or (b) by any shareholder or the corporation who is a shareholder of record at the time of giving of the notice provided for in this Section, who shall be entitled to vote at such meeting and who complies with the notice procedures set forth in this Section. For business to be properly brought before a shareholder meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the secretary of the corporation in accordance with the timeliness provisions of Section 7 above. A shareholder's notice to the 3 secretary shall set forth as to each matter the shareholder proposes to bring before the meeting (a) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (b) the name and address, as they appear on the corporation's books, of the shareholder proposing such business, (c) the class and number of shares of the corporation which are beneficially owned by the shareholder and (d) any material interest of the shareholder in such business. Notwithstanding anything in the bylaws to the contrary, no business shall be conducted at a shareholder meeting except in accordance with the procedures set forth in this Section. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of the bylaws, and if such person should so determine, such person shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this Section, a shareholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, and the rules and regulations thereunder with respect to the matters set forth in this Section. SECTION 9. Organization: At each meeting of shareholders, the chairman of the board, if one shall have been elected, (or in the absence of the chairman or if a chairman shall not been elected, the president) shall act as chairman of the meeting. The secretary (or in the absence or inability to act of the secretary, the person whom the chairman of the meeting shall appoint secretary of the meeting) shall act as secretary of the meeting and keep the minutes thereof. SECTION 10. Order of Business: The order of business at all meetings of shareholders, as well as the rules governing such meetings, shall be solely determined by the chairman of the meeting. ARTICLE II DIRECTORS SECTION 1. Organization: The board of directors may hold a meeting for the purpose of organization and the transaction of other business if a quorum by present, immediately before and/or after the annual meeting of the shareholders and immediately before and/or after any special meeting at which directors are elected. Notice of such meeting need not be given. Such organizational meeting(s) may be held at any other time or place, which shall be specified in a notice given as hereinafter provided for special meetings of the board of directors, or in a consent and waiver of notice thereof signed by all the directors. SECTION 2. Election of Officers: At such meeting the board of directors may elect from among its number a chairman (or person having a similar title) of the board of directors, one or more persons to serve as a vice chairman, a president as well as one or more corporate and company vice presidents, a secretary and one or more assistant secretaries, who need not be directors. Such officers shall hold office until the next annual election of officers and until their successors are respectively elected and qualified, unless removed by the board of directors as provided in Section 8 of Article III. 4 SECTION 3. Regular Meetings: Regular meetings of the board of directors shall be held on such dates as are designated, from time to time, by resolutions of the board, and shall be held at the principal office of the corporation or at such other location as the board selects. Each regular meeting shall commence at the time designated by the chairman of the board on at least five (5) days' written notice to each director when sent by mail and on at least three 93) days notice when sent by private express carrier or transmitted by telex, facsimile or similar means. SECTION 4. Special Meetings; How Called; Notice: Special meetings of the board of directors may be called by the chairman of the board, a vice chairman of the board, the president or by any three (3) directors who are not salaried officers or salaried employees of the corporation. Written notice of the time, place and purposes of each special meeting shall be sent by private express carrier or transmitted by telex, facsimile or similar means to each director at least twenty-four (24) hours prior to such meeting. Notwithstanding the preceding, any meeting of the board of directors shall be a legal meeting without any notice thereof if all the members of the board shall be present, or if all absent members waive notice thereof. SECTION 5. Number; Qualifications; Quorum; Term: (a) The board of directors shall consist of not less than three nor more than fifteen (15) members. (b) Not more than six (6) of the members of the board of directors shall be officers or employees of the corporation, but, solely for this provision, the chairman of the board shall not be deemed to be such an officer or employee. (c) Subject to the provisions of the articles of incorporation, as amended, one-third (1/3) of the total number of the directors (but in no event less than two (2) directors) shall constitute a quorum for the transaction of business. The affirmative vote of a majority of the directors present at a meeting at which a quorum is constituted shall be the act of the board of directors, unless the articles of incorporation shall require a vote of a greater number. (d) Except as otherwise provided in these by-laws, directors shall hold office until the next succeeding annual shareholders' meeting and thereafter until their successors are respectively elected and qualified. (e) Except as otherwise provided in the articles of incorporation or these bylaws, the number of directors may be altered from time to time by amendment to subsection (a) above. SECTION 6. Place of Meetings: The board of directors may hold its meetings and keep the books of the corporation outside of the State of Florida, at any office of the corporation, or at any other place, as it may from time to time by resolution determine. 5 SECTION 7. Vacancies: Except as otherwise provided in the articles of incorporation, any vacancy in the board of directors because of death, resignation, disqualification, increase in number of directors or any other cause may be filled by a majority of the remaining directors, though less than a quorum, at any regular or special meeting of the directors. Any such vacancy resulting from any cause whatsoever may also be filled by the shareholders at the first annual meeting held after such vacancy shall occur or at a special meeting thereof called for the purpose. SECTION 8. Resignation and Removal of Directors: Any director of the corporation may resign at any time by giving written notice to the chairman of the board or to the secretary of the corporation. Such resignation shall take effect at the time specified therein. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 9. Compensation of Directors: The board of directors shall have the authority to fix the compensation of directors. In addition, each director shall be entitled to be reimbursed by the corporation for all expenses incurred in attending meetings of the board of directors or of any committee of which such person is a member. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity and receiving compensation for such services from the corporation; provided, that any person who is receiving a stated compensation as an officer of the corporation for services as such officer shall not receive any additional compensation for services as a director during such period. A director entitled to receive stated compensation for services as director, who shall serve for only a portion of a year, shall be entitled to receive only that portion of the director's annual stated compensation on which the period of such service during the year bears to the entire year. The annual compensation of directors shall be paid at such times and in such installments as the board of directors may determine. SECTION 10. Committees: (a) The Board of Directors shall designate an Executive Committee, Audit Committee, Compensation Committee and Nominating and Governance Committee, and one or more other committees as it may deem advisable, each of which shall have and may exercise the powers and authority of the Board of Directors to the extent provided in the charters of each committee adopted by the Board of Directors in one or more resolutions. The members of the committees, who shall be at least two in number, shall act only as a committee and the individual members shall have no power as such. Unless the Board of Directors elects a committee chairman, each committee shall elect its own chairman, and have full power and authority to make rules for the conduct of its business. The Board shall have the power at any time to change the membership of committees, fill vacancies, and to abolish committees. (b) The members of each committee shall be elected by the Board of Directors and shall serve until the first meeting of the Board of Directors after the annual meeting of shareholders and until their successors are elected and qualified or until the members' earlier resignation or removal. Vacancies may be filled by the Board of Directors at any meeting. Except for the Audit, Compensation and Nominating and Governance Committees, the Chairman 6 of the Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee to serve for that committee meeting only. (c ) The Chairman of the Board or Chief Executive Officer, the committee chairman, or a majority of any committee may call a meeting of that committee, except that only the Chairman of the Board or Chief Executive Officer or chairman of the Executive Committee may call a meeting of the Executive Committee. A quorum of any committee shall consist of a majority of its members unless otherwise provided by resolution of the Board of Directors. The majority vote of a quorum shall be required for the transaction of business. The committee may also take action by unanimous written consent of all committee members without a meeting. The secretary of the committee or the chairman of the committee shall give notice of all meetings of the committee by mailing the notice to the members of the committee at least three days before each meeting or by telephoning the members not later than one day before the meeting. The notice shall state the time, date and place of the meeting. Any notice or waiver of notice shall also satisfy the requirements of Article VI, Section 2 below. Each committee shall fix its other rules of procedure. (d) No committee of the Board shall have the power or authority to: (i) approve or recommend to shareholders actions or proposals required by the Florida Business Corporation Act to be approved by shareholders; (ii) fill vacancies on the Board of Directors or any committee thereof; (iii) adopt, amend or repeal the Bylaws; (iv) authorize or approve the reacquisition of shares unless pursuant to a general formula or method specified by the Board of Directors; or (v) authorize or approve the issuance or sale or contract for the sale of shares, or determine the designation and relative rights, preferences, and limitations of a voting group except that the Board of Directors may authorize a committee (or a senior executive officer of the corporation) to do so within limits specifically prescribed by the Board of Directors. SECTION 11. Executive Committee; Powers: During the intervals between meetings of the board of directors, the executive committee shall have and may, to the extent permitted under Florida Law, exercise all the powers of the board of directors in the management of the business and affairs of the corporation, including power to authorize the execution of any papers and to authorize the seal of the corporation to be affixed to all papers which may require it, in such manner as such committee shall deem best for the interests of the corporation, in all cases in which specific directions shall not have been given by the board of directors. A majority of the executive committee shall constitute a quorum for the transaction of business, and the act of a majority of those present at a meeting, at which a quorum is present, shall be the act of the Executive Committee. The executive committee shall keep a record of its acts and proceedings 7 and make a report thereof from time to time to the Board of Directors. The executive committee shall have such other duties and responsibilities and shall operate in the manner set forth in the charter of the committee adopted by the Board. SECTION 12. Preferred Directors: Notwithstanding anything else contained herein, whenever the holders of one or more classes or series of Preferred Shares shall have the right, voting separately as a class or series, to elect directors, the election, term of office, filing of vacancies, removal and other features of such directorships shall be governed by the terms of the resolutions applicable thereto adopted by the board of directors pursuant to the articles of incorporation, and such directors so elected shall not be subject to the provisions of sections 5, 7 and 8 of this Article II unless otherwise provided therein. ARTICLE III OFFICERS SECTION 1. Titles: The corporate and company officers to be elected by the board of directors shall be a chairman of the board of directors and, at the election of the board of directors, one or more persons to serve as a vice chairman, and a president, who shall be directors, and one or more corporate or company vice presidents, a secretary and one or more assistant secretaries, who need not be directors. The board shall designate one of the corporate officers to serve as chief executive officer. SECTION 2. Chairman: The chairman of the board of directors shall preside at all meetings of the board and all meetings of the shareholders, as well as all meetings of the executive committee. The chairman, upon being designated the chief executive officer, shall have supervisory authority over the policies of the corporation as well as the management and control of the business and affairs of the corporation. The chairman shall also exercise such other powers as the board of directors may from time to time direct or which may be required by law. SECTION 3. Vice Chairman: The officer or officers serving as vice chairman shall have such duties and responsibilities relating to the management of the corporation as may be defined and designated by the chief executive officer or the board of directors. SECTION 4. President: The president shall have responsibility for the management of the operating businesses of the corporation and shall do and perform all acts incident to the office of president or which are authorized by the chief executive officer, the board of directors or as may be required by law. SECTION 5. Vice President(s): Each corporate vice president shall have such designations and such powers and shall perform such duties as may be assigned by the board of directors or the chief executive officer. The board of directors may designate one or more corporate vice presidents to be a senior executive vice president, executive vice president, senior vice president or group vice president. 8 Each corporate vice president shall have such designations and such powers, and shall perform such duties, as may be assigned by the board of directors, the chief executive officer or by a corporate vice president. SECTION 6. Secretary: The secretary shall: (a) keep the minutes of meetings of shareholders, of the board of directors and of the executive committee in books provided for the purpose; (b) see that all notices are duly given in accordance with the provisions of these bylaws or as required by law; (c) be custodian of the records and have charge of the seal of the corporation and see that it is affixed to all stock certificates prior to their issuance and to all documents the execution of which on behalf of the corporation under its seal is duly authorized in accordance with the provisions of these bylaws; (d) have charge of the stock books of the corporation and keep or cause to be kept the stock and transfer books in such manner as to show at any time the amount of the stock of the corporation issued and outstanding, the manner in which and the time when such stock was paid for, the names, alphabetically arranged, and the addresses of the holders of record thereof, the number of shares held by each, and the time when each became such holder of record; exhibit or cause to be exhibited at all reasonable times to any director, upon application, the original or duplicate stock ledger; (e) see that the books, reports, statements, certificates and all other documents and records required by law are properly kept, executed and filed; and (f) in general, perform all duties incident to the office of secretary, and such other duties as from time to time may be assigned by the board of directors. SECTION 7. Assistant Secretary: The board of directors may elect an assistant secretary or more than one assistant secretary. At the request of the secretary, or in the absence or disability of the secretary, an assistant secretary may perform all the duties of the secretary, and, when so acting, shall have all the powers of, and be subject to all the restrictions upon, the secretary. Each assistant secretary shall have such other powers and shall perform such other duties as may be assigned by the board of directors. SECTION 8. Resignation and Removal of Officers: Any officer of the corporation may resign at any time by giving written notice to the chairman of the board or to the secretary. Such resignation shall take effect when the notice is so delivered unless the notice specifies a later effective date, and unless otherwise specified therein the acceptance of such resignation shall not be necessary to make it effective. 9 Any officer may be removed for cause at any time by a majority of the board of directors and any officer may be removed summarily without cause by such vote. SECTION 9. Salaries: The salaries of officers shall be fixed from time to time by the board of directors or the executive committee or other committee appointed by the board. The board of directors or the executive committee of the board may authorize and empower the chief executive officer, any vice chairman, or any vice president of the corporation designated by the board of directors or by the executive committee to fix the salaries of all officers of the corporation who are not directors of the corporation. No officer shall be prevented from receiving a salary by reason of the fact that such officer is also a director of the corporation. ARTICLE IV CAPITAL STOCK SECTION 1. Issue of Stock With or Without Certificates: The board of directors may authorize the issue of some or all of the shares of any or all of its classes or series without certificates. Certificates for those shares of the capital stock of the corporation that are represented by certificates shall be in such forms as shall be approved by the board of directors. Each holder of shares represented by certificates shall be entitled to have the certificate for such shares issued under the seal of the corporation, signed by the chairman, a vice chairman or a vice president and also by the secretary or an assistant secretary; provided, that where a certificate is countersigned by a transfer agent, other than the corporation or its employee, or by a registrar, other than the corporation or its employee, the corporate seal and any other signature on such certificate may be a facsimile, engraved, stamped or printed. In case any officer, transfer agent or registrar of the corporation who shall have signed, or whose facsimile signature shall have been used on any such certificate, shall cease to be such officer, transfer agent or registrar, whether because of death, resignation, or otherwise, before such certificate shall have been delivered by the corporation, such certificate shall nevertheless be deemed to have been adopted by the corporation and may be issued and delivered as thought the person who signed such certificate or whose facsimile signature shall have been used thereon had not ceased to be such officer, transfer agent or registrar. SECTION 2. Transfer of Shares: The shares of the corporation shall be transferable upon its books by the holders thereof in person or by their duly authorized attorneys or legal representatives, and upon such transfer of any shares represented by certificates, the old certificates for such shares shall be surrendered to the corporation by the delivery thereof of the person in charge of the shares and transfer books and ledgers, or to such other person as the board of directors may designate, by whom they shall be canceled, and new certificates (or an appropriate entry in respect of shares without certificates) shall thereupon be issued for the shares so transferred to the person entitled thereto. A record shall be made of each transfer and whenever a transfer shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of the transfer. SECTION 3. Lost Certificates: Any person claiming a certificate representing shares to be lost or destroyed shall make an affidavit or affirmation of that fact, and if requested 10 to do so by the board of directors or the secretary of the corporation shall advertise such fact in such manner as the board of directors or the secretary may require, and shall give to the corporation, its transfer agent and registrar, if any, a bond of indemnity in such sum as the board of directors or secretary may direct, but not less than double the value of the shares represented by such certificate, in form satisfactory to the board of directors and to the transfer agent and registrar of the corporation, if any, and with or without sureties as the board of directors or secretary with the approval of the transfer agent and registrar, if any, may prescribe; whereupon the chairman, a vice chairman or a vice president and the secretary or an assistant secretary may cause to be issued a new certificate of the same tenor (or cause an appropriate entry to be made in respect of shares without certificates) and for the same number of shares as the one alleged to have been lost or destroyed. SECTION 4. Rules as to Issue of Shares: The board of directors shall make such rules and regulations as it may deem expedient concerning the issue, transfer and registration of shares of the corporation. It may appoint one or more transfer agents and/or registrars of transfer, and may require all to bear the signature of either or both. Each and every person accepting shares from the corporation therein shall furnish the corporation with a written statement of the residence or post office address of that person, and in the event of changing such residence shall advise the corporation of such new address. SECTION 5. Holder of Record Deemed Holder in Fact: The board of directors shall be entitled to treat the holder of record of any share or shares as the holder in fact thereof, and accordingly shall not be bound to recognize any equitable or other claim to, or interest in, such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as expressly provided by law. SECTION 6. Closing of Transfer Books or Fixing Record Date: The board of directors shall have the power to close the share transfer books of the corporation for a period not exceeding sixty (60) days preceding the date of any meeting of shareholders or the date for payment of any dividend or the date for the allotment of rights or the date when any change or conversion or exchange of capital stock shall go into effect; provided, that in lieu of closing the share transfer books as aforesaid, the board of directors may fix in advance a date, not exceeding sixty (60) days preceding the date of any meeting of shareholders or the date for the payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect, as a record date for the determination of the shareholders entitled to notice of, and to vote at, any such meeting, or entitled to receive payment of any such dividend, or to any such allotment of rights, or the exercise the rights in respect of any such change, conversion or exchange of capital stock, and in such case only such shareholders as shall be shareholders of record on the date so fixed shall be entitled to such notice of, and to vote at, such meeting, or to receive payment of such dividend, or to receive such allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after any such record date fixed as aforesaid. 11 ARTICLE V CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC. SECTION 1. Contracts, Etc.; How Executed: The board of directors or such officer or person to whom such power shall be delegated by the board of directors by resolution, except as in these bylaws otherwise provided, may authorize any officer or officers, agent or agents, either by name or by designation of their respective offices, positions or class, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances; and, unless so authorized, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement, or to pledge its credit or to render it liable pecuniarily for any purpose or in any amount. SECTION 2. Loans: No loans shall be contracted on behalf of the corporation and no negotiable paper shall be issued in its name, unless and except as authorized by the vote of the board of directors or by such officer or person to whom such power shall be delegated by the board of directors by resolution or by these bylaws. When so authorized by the board of directors or by such officer or person to whom such power shall be delegated by its board of directors by resolution or by these bylaws, any officer or agent of the corporation may obtain loans and advances at any time for the corporation from any bank, banking firm, trust company or other institution, or from any firm, corporation or individual, and for such loans and advances may make, execute and deliver promissory notes, bonds or other evidences of indebtedness of the corporation, and, when authorized as aforesaid to give security for the payment of any loan, advance, indebtedness or liability of the corporation, may pledge, hypothecate or transfer any and all stocks, securities and other personal property at any time held by the corporation, and to that end endorse, assign and deliver the same, but only to the extent and in the manner authorized by the board of directors or by these bylaws. Such authority may be general or confined to specific instances. SECTION 3. Deposits: All funds of the corporation shall be deposited from time to time to the credit of the corporation with such banks, banking firms, trust companies or other depositaries as the board of directors may select or as may be selected by any officer or officers, agent or agents of the corporation to whom such power may be delegated from time to time by the board of directors or by these bylaws. SECTION 4. Checks, Drafts, Etc.: All checks, drafts or other orders for the payment of money, notes, acceptances or other evidences of indebtedness issued in the name of the corporation, shall be signed by such officer or officers, agent or agents of the corporation and in such manner as shall be determined from time to time by resolution of the board of directors or by such officer or person to whom such power of determination shall be delegated by the board of directors by resolution or by these bylaws. Endorsements for deposit to the credit of the corporation in any of its authorized depositaries may be made, without any countersignature, by the chairman of the board, a vice chairman or any vice president or by any other officer or agent of the corporation appointed by any officer of the corporation to whom the board of directors, by 12 resolution, shall have delegated such power of appointment, or by hand-stamped impression in the name of the corporation. SECTION 5. Transaction of Business: The corporation, or any division or department into which any of the business or operations of the corporation may have been divided, may transact business and execute contracts under its own corporate name, its division or department name, a trademark or a trade name. ARTICLE VI MISCELLANEOUS PROVISIONS SECTION 1. (a) Fiscal Year: The fiscal year of the corporation shall end with the last Sunday of May of each year. (b) Staff and Divisional Titles: The chief executive officer may appoint, at such officer's discretion, such persons to hold the title of staff vice president, divisional president or divisional vice president or other similar designation. Such persons shall not be officers of the corporation and shall retain such title at the sole discretion of the chief executive officer who may from time to time make or revoke such designation. SECTION 2. Notice and Waiver of Notice: Whenever any notice is required by these bylaws to be given, personal notice to the person is not meant unless expressly so stated; and any notice so required shall be deemed to be sufficient if given by depositing the same in a post office or post box in a sealed postpaid wrapper, addressed to the person entitled thereto at the post office address as shown on the transfer books of the corporation, in case of a shareholder, and at the last known post office address in case of an officer or director who is not a shareholder; and such notice shall be deemed to have been given on the day of such deposit. In the case of notice by private express carrier, telex, facsimile or similar means, notice shall be deemed to be sufficient if transmitted or sent to the person entitled to notice or to any person at the residence or usual place of business of the person entitled to notice who it is reasonably believed will convey such notice to the person entitled thereto; and notice shall be deemed to have been given at the time of receipt at such residence or place of business. Any notice required by these bylaws may be given to the person entitled thereto personally and attendance of a person at a meeting shall constitute a waiver of notice of such meeting. Whenever notice is required to be given under these bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. SECTION 3. Inspection of Books: The board of directors shall determine from time to time whether and, if allowed, when and under what conditions and regulations the accounts, records and books of the corporation (except such as may, by statute, be specifically open to inspection), or any of them, shall be open to the inspection of the shareholders, and the shareholders' rights in this respect are and shall be restricted and limited accordingly. 13 SECTION 4. Construction: All references herein in the plural shall be construed to include the singular and in the singular shall be construed to include the plural, if the context so requires. SECTION 5. Adjournment of Meetings: If less than a quorum shall be present at any meeting of the board of directors of the corporation, or of the executive committee of the board, or other committee, the meeting may be adjourned from time to time by a majority vote of members present, without any notice other than by announcement at the meeting, until a quorum shall attend. Any meeting at which a quorum is present may also be adjourned in like manner, for such time or upon such call, as may be determined by vote. At any such adjourned meeting at which a quorum may be present, any business may be transacted which might have been transacted at the meeting originally held if a quorum had been present thereat. SECTION 6. Indemnification: (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 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 Section 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 extend permitted by Florida Law. The right to indemnification conferred in this Section 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. (c) 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. (d) The rights and authority conferred in this Section shall not be exclusive of any other right which any person may otherwise have or hereafter acquire. 14 (e) Neither the amendment nor repeal of this Section, 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 Section in respect of any acts or omissions occurring prior to such amendment, repeal, adoption or modification. SECTION 7. Resolution of Board of Directors Providing for Issuance of Preferred Shares: For purposes of these bylaws, the articles of incorporation shall be deemed to include any articles of amendment filed and recorded in accordance with section 607.0602(4) of the Florida Law which, in accordance with that section, sets forth the resolution or resolutions adopted by the board of directors providing for the issuance of Preferred Shares or any series thereof. ARTICLE VII AMENDMENTS SECTION 1. Amendment of Bylaws: All bylaws of the corporation shall be subject to adoption, alteration, amendment or repeal as provided in, and subject to the provisions of, the articles of incorporation. Adopted March 29, 1995 Amended July 21, 2003 15 EX-10 5 directorstockplan.txt EXHIBIT 10(F) - STOCK PLAN FOR DIRECTORS Exhibit 10(f) DARDEN RESTAURANTS, INC. STOCK PLAN FOR DIRECTORS 1. Purpose. The purpose of the Darden Restaurants, Inc. Stock Plan (the "Plan") for Directors is to increase the proprietary interest of Directors in Darden Restaurants, Inc. (the "Company") by granting them non-qualified options to purchase Common Stock of the Company ("Common Stock") and shares of Common Stock subject to the restrictions described herein that will promote long-term shareholder value through ownership of Common Stock. 2. Administration. The Plan shall be administered by the Compensation Committee of the Board of Directors of the Company. Grants of options to purchase Common Stock under the Plan and the amount and nature of the awards of Common Stock shall be made automatically or by the Board of Directors as provided in Section 4. However, subject to the express provisions of the Plan and applicable law, the Compensation Committee shall have full authority to: (i) interpret the Plan; (ii) promulgate such rules and regulations with respect to the Plan as it deems desirable; (iii) amend the terms and conditions of any award or award agreement, provided, however, that, except as otherwise provided in Section 5 hereof, the Committee shall not reprice, adjust or amend the exercise price of options to purchase Common Stock of the Company previously awarded to any Director, whether through amendment, cancellation and replacement grant, or any other means; (iv) determine whether, to what extent and under what circumstances shares of Common Stock payable with respect to an award under the Plan shall be deferred either automatically or at the election of the holder of the award or the Committee; and (v) make all other determinations necessary or appropriate for the administration of the Plan, and such determinations shall be final and binding upon all persons having an interest in the Plan. 3. Participation. Each person who is a Director of the Company or any of its subsidiaries at the date of each grant or award shall be eligible to participate in the Plan. A "Director" for purposes of this Plan is defined as a person who has been elected to the Board of Directors of the Company and does not have an employee status with the Company. 4. Awards under the Plan. The number of shares of Common Stock authorized for grants under the Plan is 375,000, provided that all such shares shall be issued from Common Stock held in the Company's treasury. In addition, all shares of Common Stock authorized, but unissued under the predecessor Stock Plan for Directors effective May 28, 1995, as amended, shall be available and authorized for issuance under this Plan. If any shares of Common Stock covered by an award or to which an award relates are not purchased or are forfeited or otherwise reacquired by the Company (including shares of Restricted Stock, as described below, whether or not dividends have been paid on such shares), or if an award otherwise terminates or is cancelled without delivery of any shares of Common Stock, then the number of shares of Common Stock counted against the aggregate number of shares available under the Plan with respect to such award, to the extent of any such forfeiture, termination or cancellation, shall again be available for granting awards under the Plan. In addition, any shares of Common Stock that are used by a participant in connection with the satisfaction of tax obligations relating to an award, as described below, under the Plan shall be available for granting awards under the Plan. (a) Non-qualified Stock Options (i) Grant of Options. Each person who becomes a Director for the first time after the effective date of the Plan shall be awarded an option ("Option") to purchase 12,500 shares of Common Stock, effective as of the date such person becomes a Director. In addition, at the close of business on each annual shareholders' meeting, each Director elected or re-elected to the Board shall be granted an Option to purchase 3,000 shares of Common Stock. The written agreement evidencing such Options granted under the Plan shall be dated as of the applicable date of each grant. All Options granted under the Plan shall be non-qualified stock options governed by Section 83 of the Internal Revenue Code of 1986, as amended. (ii) Option Exercise Price. The per share price to be paid by the Director at the time an Option is exercised shall be 100% of the Fair Market Value of the Common Stock on the date of grant. "Fair Market Value" shall equal the mean of the high and low price for the Common Stock on the New York Stock Exchange on the relevant date or, if the New York Stock Exchange is closed on that date, on the last preceding date on which the Exchange was open for trading. (iii)Term of Option. Each Option shall expire ten (10) years from the date of grant. (iv) Exercise of Option. Options shall be exercisable only after one year from the date the Option is granted, except that (1) "SRO's" may be exercised after a period of six months or longer if so determined by the Board of Directors at the date of the grant of the SRO and (2) the 12,500 Options granted to a Director upon his or her first election to the Board of Directors shall be exercisable only after three years from the date the Options are granted. (v) Method of Exercise and Tax Obligations. Each notice of exercise shall be accompanied by the full purchase price of the shares being purchased. Such payment may be made in cash, check, shares of Common Stock valued using the Fair Market Value as of the exercise date or a combination thereof. The Company may also require payment of the amount of any federal, state or local withholding tax attributable to the exercise of an Option or the delivery of shares of Common Stock upon lapse of the Restricted Period described below. (vi) Non-transferability. An Option shall be non-assignable and non-transferable by a Director other than by (1) the Director's last will and testament, or (2) the applicable laws of descent and distribution, or (3) by gift by a Director to a "family member" defined by the Compensation Committee. Such Option may be exercised only by such Director or his or her guardian or legal representative or the donee family member. A Director shall forfeit any Option assigned or transferred, voluntarily or involuntarily, other than as permitted under this subsection. (vii)Notwithstanding anything contained herein to the contrary, upon retirement of a Director or other cessation of service on the Board of Directors, the Director's Options will vest and be exercisable according to the following schedules. (1) For a Director with at least five years of Board service, including service on the predecessor General Mills, Inc. Board of Directors, unvested Options granted prior to September 1999 will continue to vest. Once vested, Options will be exercisable for the full term of the Option. (2) For a Director with less than five years of Board service, including service on the predecessor General Mills, Inc. Board of Directors, unvested Options will be forfeited. Options granted prior to September 1999 that have vested will be exercisable for the full Option term. Options granted beginning with and after the September 1999 grant if vested, must be exercised within ninety days of the end of Board service or, otherwise, will be forfeited. (b) Restricted Stock. (i) Awards. Each Director on the effective date of the Plan shall be granted an award of 3,000 shares of ------ Common Stock, restricted as described below ("Restricted Stock"). At the close of business on each successive annual stockholders' meeting date thereafter, each Director then elected or re-elected to the Board shall be granted an award of 3,000 shares of Restricted Stock. Notwithstanding the foregoing, prior to the date of each 2 annual stockholders' meeting, with respect to any such award of Restricted Stock to be made for such upcoming year, a Director may elect (1) on such terms and conditions as the Committee shall determine (including through the terms of the Compensation Plan for Non-Employee Directors), to defer receipt of all or any portion of the Common Stock that would otherwise be received pursuant to his or her Restricted Stock award until a date that is on or after the cessation of Board service or (2) to receive the equivalent of 1,000 of the 3,000 shares of any Restricted Stock award in cash based on the Fair Market Value of the Common Stock on the date of such stockholders' meeting. Any such deferral election shall result in the Restricted Stock not being issued to the Director and, in exchange, the Director will be credited with stock units, representing the Company's obligation to pay deferred compensation at a later date in the form of unrestricted Common Stock, all on such terms and conditions as the Committee shall determine (including through the terms of the Compensation Plan for Non-Employee Directors). (ii) Restricted Period. The restrictions set forth shall apply from the date of each grant until the earlier of the following: (1) the last day on which the New York Stock Exchange is open for trading immediately prior to the annual stockholders meeting next succeeding the grant of such Restricted Stock, or (2) the Director's death or disability (the "Restricted Period"). Until the expiration of the Restricted Period, none of the Restricted Stock may be sold, transferred, assigned, pledged or otherwise encumbered or disposed of, and all of the Restricted Stock shall be forfeited and all further rights of the Director to or with respect to such Restricted Stock shall terminate without any obligation on the part of the Company unless the Director has remained a Director throughout the Restricted Period applicable to such Restricted Stock. (iii)Other Terms and Conditions. Any shares of Restricted Stock granted hereunder may be evidenced in such manner as the Committee deems appropriate, including, without limitation, book-entry registration or issuance of stock certificates, and may be held in escrow. If certificated, each such certificate shall bear a legend giving notice of the restrictions. Each Director must also endorse in blank and return to the Company a stock power for each grant of Restricted Stock. During the Restricted Period, each Director shall have all the rights and privileges of a shareholder with respect to the Restricted Stock, including the right to vote the shares and to receive dividends thereon. At the expiration of the Restricted Period, a stock certificate free of all restrictions for the number of shares of Restricted Stock so registered shall be delivered to the Director or his or her estate. (c) Stock Award. (i) Awards. At the close of business on the date of each annual stockholders' meeting occurring after July 26, 2002, in lieu of the award of Restricted Stock described in Section 4(b) above, each Director elected or re-elected to the Board at such stockholders' meeting shall be granted an award equal to that number of shares of Common Stock having a Fair Market Value on the date of grant equal to $100,000, rounded to the nearest whole share (the "Stock Award"). Each Director who, after July 26, 2002, is appointed as a Director of the Company at any time other than at an annual stockholders' meeting shall be granted on the date of such appointment a prorated Stock Award equal to that number of shares of Common Stock, rounded to the nearest whole share, having a Fair Market Value on the date of grant equal to $100,000 multiplied by a fraction, the numerator of which is 365 minus the number of days in the period from the date of the annual stockholders' meeting immediately preceding such appointment to the date of such appointment and the denominator of which is 365. Notwithstanding the foregoing, prior to the date of each annual stockholders' meeting or the date of any such appointment, as the case may be, a Director may elect with respect to each such Stock Award to be granted on such date (1) on such terms and conditions as the Committee shall determine (including through the terms of the Compensation Plan for Non- 3 Employee Directors), to defer receipt of all or any portion of the Common Stock that would otherwise be received pursuant to his or her Stock Award until a date that is on or after the cessation of Board service or (2) to receive 25% or 50% of the Stock Award in cash. Any such deferral election shall result in such shares of Common Stock not being issued to the Director and, in exchange, the Director will be credited with stock units, representing the Company's obligation to pay deferred compensation at a later date in the form of unrestricted Common Stock, all on such terms and conditions as the Committee shall determine (including through the terms of the Compensation Plan for Non-Employee Directors). (ii) Non-transferability. From the date of grant to the first anniversary of the date of grant of any Stock Award (the "Non-transferability Period"), none of the shares of Common Stock subject to the Stock Award may be sold, transferred, assigned, pledged or otherwise encumbered or disposed of by a Director other than by (1) the Director's last will and testament, or (2) the applicable laws of descent and distribution. During the Non-transferability Period, any certificate representing shares of Common Stock that are subject to a Stock Award shall bear a legend giving notice of the restrictions described in this Section 4(c)(ii). During the Non-transferability Period, each Director shall have all the rights and privileges of a shareholder with respect to the shares of Common Stock subject to the Stock Award, including the right to vote such shares and to receive dividends thereon. (d) "SRO's". In addition to the awards described in Sections 4(a), (b) and (c) above, the Board of Directors also shall grant salary replacement options ("SRO's") to one or more of the Directors pursuant to the annual decision of each Director in lieu of all or part of an annual retainer or for directors fees for attendance at Board or Committee meetings or other compensation for services as a Director. Such grants shall be made on the last day of each fiscal quarter of the Company for compensation accrued during such quarter and be valued by the same formula as used by the Compensation Committee for awards of SRO's to employees of the Company. SRO's shall be treated as Options under this Plan for all other purposes. (e) Change of Control. The Options granted hereunder shall become exercisable and the restrictions on Restricted Stock and Stock Awards shall lapse upon the occurrence of a "Change of Control." Each of the following shall constitute a "Change of Control": (i) if any person (including a group as defined in Section 13(d)(3) of the 1934 Act) 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; (ii) 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 (iii)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. 5. Adjustments. In the event of a stock dividend or stock split, or combination or other reduction in the number of issued shares of Common Stock, a merger, consolidation, reorganization, recapitalization, sale or exchange of substantially all assets or dissolution of the Company, or whenever the Committee determines such adjustments are appropriate to prevent dilution or enlargement of the benefits or potential benefits intended to be 4 made available under this Plan, then appropriate adjustments shall be made in the shares and number of shares of Common Stock subject to and authorized by this Plan and the number of shares of Common Stock subject to Options, Restricted Stock and Stock Awards previously granted hereunder and the exercise price of Options previously granted hereunder, in order to prevent dilution or enlargement of the rights of the Directors under the Plan. 6. Amendment of the Plan. The Board of Directors may suspend or terminate the Plan or any portion thereof at any time, and the Board of Directors may amend the Plan from time to time as may be deemed to be in the best interests of the Company; provided, however, that no such amendment, alteration or discontinuation shall be made (a) that would impair the rights of a Director with respect to Options, Restricted Stock or Stock Awards theretofore awarded, without such person's consent, or (b) without the approval of the stockholders, (i) if such approval is necessary to comply with any legal, tax or statutory requirement, including any approval requirement which is a prerequisite for exemptive relief from Section 16 of the Securities Exchange Act of 1934 (the "1934 Act") or (ii) would materially change the definition of persons eligible to receive awards under this Plan, or (c) unless such amendment is necessary to comply with changes in the Internal Revenue Code of 1986, as amended, or the Employment Retirement Income Security Act of 1974, as amended, or rules promulgated thereunder. 7. Miscellaneous Provisions. Neither the Plan nor any action taken hereunder shall be construed as giving any Director any right to be nominated for re-election to the Board. The Plan shall be governed by the laws of the state of Florida. 8. Effective Date and Duration of Plan. The Plan shall be deemed effective as of the effective date of the distribution of Common Stock to the holders of General Mills, Inc. Common Stock. No awards shall be made hereunder after September 30, 2005. 9. Section 16. With respect to persons subject to Section 16 of the 1934 Act, transactions under the Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the 1934 Act. To the extent any provision of the Plan or action by the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. As amended and restated July 26, 2002 As further amended March 19, 2003, effective as of July 26, 2002 As amended June 19, 2003 5 EX-10 6 mip_plan.txt EXHIBIT 10(H) MIP Exhibit 10(h) DARDEN RESTAURANTS, INC. MANAGEMENT AND PROFESSIONAL INCENTIVE PLAN TABLE OF CONTENTS PART I. DEFINITIONS.....................................................1 A. Actively Employed....................................................1 B. Additional Incentive Award...........................................1 C. Agent................................................................1 D. Award................................................................1 E. Base Incentive Award.................................................1 F. Board................................................................1 G. Change of Control....................................................1 H. Committee............................................................1 I. Common Stock.........................................................2 J. Company..............................................................2 K. Consolidated Earnings................................................2 L. Management Employee..................................................2 M. Matching Restricted Stock ...........................................2 N. Original Deposit.....................................................2 O. Participant..........................................................2 P. Plan.................................................................2 Q. Plan Year............................................................2 R. Professional Employee................................................2 S. Stock Matching.......................................................2 T. Stock Matching Provisions............................................3 PART II. GENERAL PROVISIONS...................................................3 A. Objective Of The Plan................................................3 B. Eligibility..........................................................3 C. Participation........................................................3 PART III. BASE INCENTIVE AWARDS...........................................3 A. Individual Performance...............................................3 B. Corporate Performance................................................4 C. Determination Of Amounts Of Award....................................4 PART IV. ADDITIONAL INCENTIVE AWARDS..........................................5 A. Cash Or Other Awards.................................................5 B. Participation In Stock Matching......................................5 PART V. DEFERRAL OF CASH INCENTIVE AWARDS....................................6 PART VI. PLAN ADMINISTRATION..................................................7 i PART I DEFINITIONS A. Actively Employed The term "Actively Employed" means the Participant is deemed to be an active employee of the Company, as determined in accordance with the Company's policies and procedures, provided that the period during which a Participant is "Actively Employed" will not include any leave of absence period, except as otherwise determined by the Company's policies and procedures. B. Additional Incentive Award The term "Additional Incentive Award" means a Participant's additional incentive award granted under Part IV of this Plan. C. Agent The term "Agent" means the Company or such other entity as the Committee may designate to fulfill the responsibilities of "Agent" under this Plan. D. Award The term "Award" means any Base Incentive Award and/or Additional Incentive Award granted under this Plan. E. Base Incentive Award The term "Base Incentive Award" means a Participant's base incentive award granted under Part III of this Plan. F. Board The term "Board" means the Board of Directors of the Company. G. Change of Control The term "Change of Control" means the occurrence of any of the following events: (i) 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 the Company entitled to vote for the election of directors; (ii) 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 (iii)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. H. Committee The term "Committee" means the Compensation Committee of the Board. 1 I. Common Stock The term "Common Stock" or "Stock" means the common stock of the Company. J. Company The term "Company" means Darden Restaurants, Inc. and its subsidiaries. K. Consolidated Earnings The term "Consolidated Earnings" means consolidated net income for the year for which an Award is made, adjusted to omit the effects of unusual and extraordinary items, discontinued operations and the cumulative effects of changes in accounting principles, all as shown on the audited consolidated statement of earnings of the Company and its subsidiaries and as determined in accordance with generally accepted accounting principles. L. Management Employee The term "Management Employee" means any active key management employee of the Company or its subsidiaries, to the extent designated by the Senior Vice President, Human Resources, including such members of the Board and the Chairman as are actively employed by the Company or its subsidiaries. M. Matching Restricted Stock The term "Matching Restricted Stock" means shares described in Part IV(B) of this Plan. N. Original Deposit The term "Original Deposit" means shares deposited pursuant to Part IV(B) of this Plan. O. Participant The term "Participant" means an individual selected to be a Participant in accordance with Part II of this Plan. P. Plan The term "Plan" means the Darden Restaurants, Inc. Management and Professional Incentive Plan, formerly known as the Darden Restaurants, Inc. Management Incentive Plan. Q. Plan Year The term "Plan Year" means the Company's fiscal year. R. Professional Employee The term "Professional Employee" means any professional employee to the extent designated by the Vice President, Compensation. S. Stock Matching The term "Stock Matching" means incentive compensation in the form of Common Stock made available by the Company on the condition the Participant deposits a specified amount of Common Stock with the Company. 2 T. Stock Matching Provisions The term "Stock Matching Provisions" means the provisions set forth in Part IV(B) of this Plan. PART II GENERAL PROVISIONS A. Objective Of The Plan It is the intent of the Company to provide financial rewards to key management and professional employees in recognition of individual contributions to the success of the Company under the provisions of this Plan. As such, the Committee has designed this Plan to accomplish such objectives. Participant Awards will be based on the comparative impact of the Participant's position to the overall corporate results as measured by the degree to which the individual is able to affect division/subsidiary, group and corporate results. B. Eligibility Any Management Employee and any Professional Employee will be eligible to participate in the Plan. Eligibility will not carry any rights to participation nor to any fixed Awards under the Plan. C. Participation As early as possible in each Plan Year, management will recommend a list of proposed Participants in the Plan, and the Committee thereupon will determine those who have been selected as Participants for the current Plan Year. Participants will be those persons holding positions, which significantly affect operating results, while providing the opportunity to contribute to current earnings and the future success of the Company. During the year, other Participants may be added because of promotion or for other reasons warranting their inclusion, and Participants may be excluded from active participation because of demotion or other reasons warranting their exclusion. In order to receive an Award, a Participant must be Actively Employed as of the end of the Plan Year for which such Award is made, unless the Participant's termination is due to death or retirement on or after age 55 and 10 years of service during the Plan Year. In all events in which a Participant is eligible to receive an Award, the Award will be prorated based on the total days employed during the Plan Year in a position eligible for participation in the Plan. PART III BASE INCENTIVE AWARDS The size of a Participant's Base Incentive Award under this Plan will be based on both individual and corporate performance, relative to pre-established performance objectives. A. Individual Performance Individual performance for the Plan Year will be determined as follows: 1. At the beginning of each Plan Year, each Participant will develop written objectives for the year, which are directly related to specific job accountabilities. 2. The individual objectives will be reviewed with each Participant's supervisor for acceptance and will become the primary basis for establishing the individual's performance for the year. For the Chief Executive Officer, such objectives will be reviewed and approved by the Committee. 3 3. Near the end of each Plan Year, each Participant will submit to his or her supervisor, a summary of accomplishments related to individual performance during the year. Based on this information and other information related to individual performance or job accountabilities, the supervisor will assess the individual's performance. B. Corporate Performance At the beginning of each Plan Year, the Committee will establish corporate and/or unit performance targets, and near the end of each Plan Year, the Committee will establish corporate and/or unit performance ratings, based on generally accepted performance measures to be selected by the Committee such as, but not limited to, earnings per share, return on cash, return on sales, cash flow, market share, revenue growth, earnings growth, return on gross investment, total shareholder return and operating profits. C. Determination Of Amounts Of Award The Committee acting in its discretion, subject to the maximum amounts set forth below, will determine the amounts of Awards to Participants for any Plan Year. Such determinations, except in the case of the Award for the Chairman of the Board, will be made after considering the recommendations of the Chairman and such other matters as the Committee will deem relevant. The Committee's determination of Awards for any Plan Year shall be made no later than the 90th day of the Plan Year. Any Award which is granted for a period of more than one Plan Year shall be made no later than the 90th day of the first Plan Year. Notwithstanding the foregoing, the maximum Awards payable with respect to any Plan Year to any Participant will not exceed two tenths of one percent (0.2%) of the Company's annual sales for such year (as reflected in the Company's annual audited financial statements for such year). For this purpose, the value of the Common Stock, restricted stock or restricted stock units that are part of any Award will be based on the fair market value of the Common Stock subject to the Award on the date the Award is made. In all events, however, any Award in the form of cash shall not be paid, and any Award in the form of Common Stock, restricted stock or restricted stock units shall be forfeited, unless the Company has Consolidated Earnings for the Plan Year for which the Award is granted. Further, an Award based on a period of more than one year will be limited to the aggregate Consolidated Earnings and sales of the Company for such period of years, excluding any year which the Company has no Consolidated Earnings. Any Award in the form of cash shall not be paid, and any Award in the form of Common Stock, restricted stock or restricted stock units shall remain subject to risk of forfeiture, until: (a) the Committee receives assurances from both the Company's Chief Financial Officer and its independent accountants that the Company has achieved Consolidated Earnings for the Plan Year(s) and that the amount of such Award does not exceed the applicable limitation under this Part III; and (b) the Committee certifies in writing to the Board that the Consolidated Earnings have been achieved and the applicable limitation has not been exceeded. Awards will be paid in cash, Common Stock, restricted stock or restricted stock units, or any combination of the foregoing, as determined by the Senior Vice President, Human Resources. Any such Common Stock, restricted stock or restricted stock units shall be issued pursuant to the terms of the Company's Stock Option and Long-Term Incentive Plan of 1995, Restaurant Management and Employee Stock Plan of 2000, 2002 Stock Incentive Plan or any successor plan or plans, each as may be amended from time to time. 4 PART IV ADDITIONAL INCENTIVE AWARDS A. Cash Or Other Awards Subject to the terms and conditions of Part III of this Plan and, where applicable, to the Stock Matching Provisions, a Management Employee is eligible to receive an Additional Incentive Award in the form of cash, or if so determined by the Senior Vice President, Human Resources, Common Stock, restricted stock or restricted stock units, or any combination of the foregoing. Any Additional Incentive Award, or any part thereof, may be made subject to the Stock Matching Provisions if so determined by the Senior Vice President, Human Resources. B. Participation In Stock Matching If an Additional Incentive Award, or any part thereof, is designated as being made subject to the Stock Matching Provisions, then the following provisions shall apply: 1. A Management Employee under age 55 as of the last day of the Plan Year who is selected to participate in the Stock Matching Provisions of the Plan may do so by depositing shares of Common Stock based on a percentage of his or her Base Incentive Award, which percentage the Committee will set on an annual basis. Such percentage may vary by employee group and from year to year. 2. Participants age 55 or over as of the last day of the Plan Year who are selected for Stock Matching may elect full, partial or no participation in the Stock Matching Provisions, with immediate cash payments being made in an amount equal to 60% of the amount of the Base Incentive Award otherwise eligible for Stock Matching for which the employee has elected to receive cash payment in lieu of Stock Matching. 3. The Company will notify each Management Employee who participates in the Stock Matching Provisions of the maximum number of shares of Common Stock which he or she is permitted to deposit under the Plan, and each Participant may choose to deposit all or any portion of the number of shares permitted to be deposited. Participants may make their Original Deposit at any time after they receive their Base Incentive Award, but, to participate in the Stock Matching Provisions of this Plan, Participants must deposit such shares with the Agent no later than the December 31 immediately following the end of the Plan Year for which the Base Incentive Award has been paid. 4. Any Participant who dies, retires on or after attaining age 65, elects early retirement after attaining age 55 and completing 10 years of service, or is permanently disabled and unable to work as determined by the Senior Vice President, Human Resources, either during a Plan Year or prior to the final date for depositing the Original Deposit shares for such Plan Year (December 31), will not be eligible to participate in the Stock Matching Provisions, but instead, such Participant, or the Participant's legal representative, will receive an Additional Incentive Award in Stock or cash, as determined by the Senior Vice President, Human Resources, for the Plan Year in an amount equal to the amount otherwise eligible for Stock Matching. 5. On or before the December 31 immediately preceding the end of the Plan Year, Participants must notify the Company in writing of the applicable participation alternatives elected under the Stock Matching Provisions. Elections regarding Stock Matching participation are effective for the current Plan Year. 6. As soon as practical following the Original Deposit by a Participant, the Company will match these shares and either deposit with the Agent for the Participant's account matching Common Stock for each share of the Original Deposit or evidence the issuance of matching Common Stock 5 for each share of the Original Deposit in book entry form as reflected on the master stockholder records of the Company. All such deposited Stock will be Matching Restricted Stock, which will be delivered to the Participant upon vesting. Matching Restricted Stock shall have such terms as may be determined from time to time pursuant to the terms of the applicable plan under which such Matching Restricted Stock is issued; provided, however, that any Matching Restricted Stock granted prior to June 19, 2003 shall include the following terms: The vesting period will be from one (1) to ten (10) years (the "Restricted Period") as determined by the Committee, and may be accelerated based on performance goals established by the Committee. In the event of termination after attainment of age 55 and 10 years of service but prior to the completion of the Restricted Period, provided the Participant leaves his or her shares, if any, on deposit, the Participant will vest in all corresponding shares of Matching Restricted Stock as of the earlier of attainment of age 65 or the end of the Restricted Period. If the Company terminates the Participant's employment involuntarily and not for cause (as determined by the Committee) prior to the completion of the Restricted Period, and the sum of the Participant's age and years of service with the Company equals or exceeds seventy (70), any shares that have not vested on the date of termination of the Participant's employment but that would have vested within two (2) years from the date of termination if the Participant's employment had continued shall become immediately vested on the date of the Participant's termination of employment. In the event the Original Deposit Stock is withdrawn or a required deposit was not made, all Matching Restricted Stock will be forfeited to the Company. If termination of employment occurs prior to attainment of age 55 and completion of 10 years of service or prior to the time that the sum of the Participant's age and years of service with the Company equals or exceeds seventy (70), and prior to completion of the Restricted Period (except for death), such Matching Restricted Stock will be forfeited to the Company. In the event of the death of a Participant prior to vesting in the Matching Restricted Stock, a pro-rata portion of such shares will vest and be delivered to the Participant's beneficiary, based on the ratio of the number of months during which the shares were on deposit prior to the Participant's death to the number of months in the Restricted Period, with all remaining shares being forfeited. In the event of the death of a Participant prior to completion of a performance cycle, as established in accordance with the terms of a performance accelerated vesting schedule, a pro-rata portion of such shares will vest and be delivered to the Participant's beneficiary, at the end of the performance cycle, based on the ratio of the number of months during which the shares were on deposit prior to the Participant's death to the number of months completed in the performance cycle, with all remaining shares being forfeited. 7. A Participant may temporarily withdraw all or a portion of the shares on deposit for all Plan Years (other than Matching Restricted Stock) in order to exercise Company stock options, subject to an equal number of shares of Common Stock being immediately re-deposited with the Agent after such exercise. PART V DEFERRAL OF CASH INCENTIVE AWARDS Subject to rules adopted by the Committee, a Participant may elect to defer all or a portion of a cash Award during each calendar year in accordance with the terms and conditions of the Company's FlexComp Plan or any successor plan. In order to defer all or a portion of the cash Award for a particular bonus period, a Participant must make a valid election under the FlexComp Plan by executing and filing a deferral election form with the Company sixty (60) days prior to the end of the Plan Year. 6 PART VI PLAN ADMINISTRATION This Plan will be effective in each fiscal year of the Company and will be administered by the Committee and the Committee will have full authority to interpret the Plan. Such interpretations of the Committee will be final and binding on all parties, including the Participants, survivors of the Participants, and the Company. The Committee will have the authority to delegate the duties and responsibilities of administering the 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. The Board, or if specifically delegated, its delegate, may amend, modify or terminate the Plan at any time, provided, however, that no such amendment, modification or termination will adversely affect any benefit earned (but not necessarily vested) under the Plan prior to the date of such amendment or termination, unless the Participant, or the Participant's beneficiary, becomes entitled to an amount equal to or greater than the value of the adversely affected portion of such benefit under another plan, program or practice adopted by the Company. Notwithstanding the above, an amendment, modification, or termination affecting previously accrued benefits may not occur after a Change of Control without the written consent of a majority of the Participants determined as of the day before such Change of Control. In the event the Company will effect one or more changes, split-ups or combinations of shares of Common Stock or one or more other like transactions, the Board or the Committee may make such adjustment, upward or downward, in the number of shares of Common Stock to be deposited by the Participants as will appropriately reflect the effect of such transactions. In the event the Company will distribute shares of a subsidiary of the Company to its stockholders in a spin-off transaction, the shares of stock of the subsidiary distributed to Participants, which are attributable to Restricted Stock, will be vested and delivered to the Participants subject to any specific instructions of the Committee. Except as otherwise provided in this Plan, neither any benefit payable hereunder nor the right to receive any future benefit under the Plan may be anticipated, alienated, sold, transferred, assigned, pledged, encumbered, or subjected to any charge or legal process. If any attempt is made to do so, or if a person eligible for any benefits becomes bankrupt, the Committee, in its sole discretion, may terminate the interest under the Plan of the person affected and may cause the interest to be held or applied for the benefit of one or more of the dependents of such person or may make any other disposition of such interest that it deems appropriate. All questions pertaining to the construction, validity and effect of the Plan will be determined in accordance with the laws of the State of Florida and the laws of the United States. Approved by sole stockholder on February 27, 1995, effective May 28, 1995 Amended May 23, 1996 Approved by shareholders September 19, 1996 Amended June 21, 1999 Amended June 21, 2000 effective as of June 1, 2000, subject to shareholder approval Approved by shareholders September 20, 2000 Amended June 19, 2003 7 EX-10 7 twothousand_plan.txt EXHIBIT 10(L) - 2000 PLAN Exhibit 10(l) ------------- DARDEN RESTAURANTS, INC. RESTAURANT MANAGEMENT AND EMPLOYEE STOCK PLAN OF 2000 1. PURPOSE OF THE PLAN The purpose of the Darden Restaurants, Inc. Restaurant Management and Employee Stock Plan of 2000 (the "Plan") is to assist Darden Restaurants, Inc., its subsidiaries and affiliates (i.e., entities in which Darden Restaurants, Inc. directly or indirectly owns an equity interest of 25% or more) (collectively, the "Company") in attracting and retaining able employees, including but not limited to restaurant management employees. The Plan is designed to provide incentives and awards to employees who may be responsible for the management, growth and sound development of the restaurants of the Company, and to align the interests of employees with the interests of the Company's stockholders. The Plan allows the Company to award "Stock Options", "Restricted Stock" or "Restricted Stock Units" (hereinafter defined) to its employees in lieu of salary increases or other consideration, compensation or benefits, as an incentive award, or as a bonus, including but not limited to a "sign-on" award or bonus to a new employee at the time of his or her hiring. 2. EFFECTIVE DATE, DURATION AND SUMMARY OF PLAN A. Effective Date and Duration This Plan is effective as of January 1, 2000. Awards may be made under the Plan until January 1, 2004. B. Summary of Stock Option Provisions for Participants The stock option ("Stock Option") that may be awarded to an employee under this Plan gives the employee a right to purchase Darden Restaurants, Inc. "Common Stock" (hereinafter defined) at a fixed price at a future date. An employee will receive an option agreement in his or her name. The option agreement will contain the term and other conditions of the option grant, including any consideration the employee will forego or exchange as a condition of the grant. In general, each option agreement will state the number of shares of Darden Restaurants, Inc. Common Stock that the employee can purchase from the Company, the price at which shares may be purchased, and the last date upon which a purchase may be made. An award of Stock Options under this Plan will not result in any taxable income at the time of receipt of the award and the option agreement. The price at which the employee may buy Darden Restaurants, Inc. shares will be equal to the market price of the shares on the New York Stock Exchange as of the day of the Stock Option award. If the price of Darden Restaurants, Inc. Common Stock has risen when the Stock Option becomes exercisable, the employee will be able to gain by exercising the Stock Option. The gain would equal the difference between the exercise price of the Stock Option and the market price of Darden Restaurants, Inc. shares on the date the employee buys shares under the terms of the option certificate. This gain would be taxable to the employee at the time of exercise. The employee will never be obligated to buy shares of the Company if he or she does not wish to do so. Once the Stock Option becomes exercisable, the employee can continue to hold it as an employee for its remaining term before making the decision whether or not to buy shares of the Company. After the term of the Stock Option expires, the rights under the Stock Option will lapse and it cannot be used by the employee. In general, the employee cannot sell or assign the Stock Option to any other person. The specific provisions covering Stock Option transferability are covered in Section 10 and other portions of the Plan. 3. ADMINISTRATION OF THE PLAN The Plan will be administered by the Compensation Committee of the Company (the "Committee"). The Committee will be comprised solely of non-employee, independent members of the Board of Directors of the Company (the "Board") appointed in accordance with the Company's Articles of Incorporation and By-laws. Subject to the express provisions of the Plan and applicable law, the Committee will have authority to: (i) adopt rules and regulations for carrying out the purpose of the Plan; (ii) select the employees to whom "Awards" (hereinafter defined) will be made; (iii) determine the number of shares to be awarded and the other terms and conditions of Awards in accordance with the provisions of the Plan; (iv) amend the terms and conditions of any Award or agreement relating to any Award, provided, however, that, except as otherwise provided in Section 4 hereof, the Committee shall not reprice, adjust or amend the exercise price of Stock Options previously awarded to any Participant (hereinafter defined), whether through amendment, cancellation and replacement grant, or any other means; and (v) interpret, construe and implement the provisions of the Plan. In addition, if at any time Rule 16b-3 or any successor rule ("Rule 16b-3") under the Securities Exchange Act of 1934, as amended (the "1934 Act"), so permits, the Committee may delegate its duties under the Plan, in whole or in part to the Chief Executive Officer and to other senior officers of the Company if so doing will not adversely affect the Plan's exemption from Section 16 of the 1934 Act (or any successor provisions) provided by Rule 16b-3. Notwithstanding the foregoing, only the Committee may select and make other decisions as to Awards to employees who are executives of the Company, provided that officers and directors who are subject to reporting obligations under Section 16 of the 1934 Act are not eligible to receive Awards under this Plan. The Committee (or its permitted delegate) may correct any defect or supply any omission or reconcile any inconsistency in any agreement relating to any Award under the Plan in the manner and to the extent it deems necessary. Decisions of the Committee (or its permitted delegate) shall be final, conclusive and binding upon all parties, including the Company, stockholders and employees. 4. COMMON STOCK SUBJECT TO THE PLAN Only the shares of common stock of the Company (without par value) ("Common Stock") held in the Company's treasury may be transferred to the employee upon exercise of a Stock Option, awarded as Restricted Stock, or transferred upon expiration of the restricted period for Restricted Stock Units. The Committee, in its discretion, may require, as a condition to the grant of Stock Options, Restricted Stock or Restricted Stock Units (collectively, "Awards"), the deposit of Common Stock owned by the employee receiving such grant, and, if the required deposit is not made or maintained during the required holding period or the applicable restricted period, the forfeiture of such Awards. Required deposits of Common Stock may not be sold, pledged, transferred or assigned during the applicable holding period or restricted period. The Committee may also determine whether any shares issued upon exercise of a Stock Option will be restricted in any manner. Subject to the following provisions of this Section 4, the maximum aggregate number of treasury shares of Common Stock authorized under the Plan and for which Awards may be granted is five million four hundred thousand (5,400,000). Upon the expiration, forfeiture, termination or cancellation, in whole or in part, of Restricted Stock Units or unexercised Stock Options, or the forfeiture or other reacquisition by the Company of shares of Restricted Stock, the shares of Common Stock held in the Company's treasury and previously allocated to such Stock Options, Restricted Stock or Restricted Stock Units will again be available for Awards under the Plan. To the extent that any shares of Common Stock covered by an Award are not delivered to a Participant (as hereafter defined) or beneficiary because such shares are used to satisfy the applicable tax withholding obligation, such shares shall not be deemed to have been delivered for purposes of determining the maximum number of shares of Common Stock available for delivery under the Plan. The number of shares subject to the Plan, the outstanding Awards and the exercise price per share of outstanding Stock Options may be appropriately adjusted by the Committee in the event that: 2 (i) the number of outstanding shares of Common Stock will be changed by reason of split-ups, spin-offs, combinations or reclassifications of shares; (ii) any stock dividends are distributed to the holders of Common Stock; (iii)the Common Stock is converted into or exchanged for other shares as a result of a merger or consolidation (including a sale of assets) or other recapitalization, or similar events occur that affect the value of the Common Stock; or (iv) the Committee determines such adjustments are appropriate to prevent a material dilution or material enlargement of the benefits or potential benefits intended to be made available under the Plan. 5. ELIGIBLE PERSONS Only persons who are employees of the Company shall be eligible to receive Awards under the Plan ("Participants"). No Award will be made to any member of the Committee, any other non-employee director of the Company, or any officer or director subject to the reporting obligations of Section 16 of the 1934 Act. 6. PURCHASE PRICE OF STOCK OPTION SHARES The purchase price for each share of Common Stock that may be purchased under a Stock Option will not be less than 100% of the "Fair Market Value" (hereinafter defined) of the shares of Common Stock on the date of grant. "Fair Market Value", as used in the Plan, equals the mean of the high and low prices of the Common Stock on the New York Stock Exchange on the applicable date. 7. STOCK OPTION TERM AND TYPE The term of any Stock Option may not exceed ten (10) years from the date of grant and will expire as of the close of business on the last day of the designated term, unless terminated earlier under the provisions of the Plan. All Stock Option grants under the Plan are non-qualified stock options governed by Section 83 of the Internal Revenue Code of 1986, as amended (the "Code"). 8. EXERCISE OF STOCK OPTIONS A. Except as provided in Sections 12 and 13 ("Change of Control" and "Termination of Employment"), each Stock Option may be exercised no sooner from the date of grant than in increments of one-fourth after one year, one-fourth after two years, one-fourth after three years and one-fourth after four years, subject to the Participant's continued employment with the Company and other terms and conditions prescribed by the Committee. Notwithstanding the foregoing, the Committee (or its delegate) may specify a longer period before a Stock Option may be exercised. B. A Participant exercising a Stock Option must notify the Company prior to 5:00 P.M. EST/EDT on the day of exercise, which must be a business day at the offices of the Company's Restaurant Support Center. The notification of such exercise must include the number of shares to be purchased. At the time of purchase, the Participant must tender the full purchase price of the shares purchased. Until such payment has been made and a certificate (or certificates) for the shares purchased has been issued in the Participant's name, the Participant will possess no stockholder rights with respect to such shares. Payment of the purchase price will be made to the Company as follows, subject to any applicable rules or regulations adopted by the Committee: (i) in cash (including check, draft, money order or wire transfer payable to the order of the Company); or 3 (ii) through the delivery of shares of Common Stock owned by the Participant; or (iii)to the extent permitted by law and pursuant to any rules the Committee may adopt, by directing the Company to withhold from any shares of Common Stock to be transferred to the Participant, all or a portion of such shares; or (iv) by a combination of (i), (ii) or (iii) above. For purposes of determining the amount of a payment under subsections (ii) or (iii), above, the Common Stock will have a value equal to its Fair Market Value on the date of exercise. 9. RESTRICTED STOCK AND RESTRICTED STOCK UNITS With respect to Awards of Restricted Stock and Restricted Stock Units, the Committee will: (i) select Participants to whom Awards will be made, provided that Restricted Stock Units may only be awarded to Company employees who are employed outside the United States; (ii) determine the number of shares of Restricted Stock or the number of Restricted Stock Units to be awarded; (iii)determine the length of the restricted period, which may not be less than one year, provided, however, that effective for Restricted Stock granted on or after June 1, 2000, the restricted period may be accelerated to less than one year based on performance goals established by the Committee; (iv) determine the consideration, if any, to be exchanged by the Participant as a condition to a grant of Restricted Stock or Restricted Stock Units; and (v) determine any restrictions in addition to those set forth in this Section 9. Any shares of Restricted Stock granted under the Plan may be evidenced in such manner as the Committee deems appropriate, including, without limitation, by book-entry registration or by issuance of stock certificates. Such shares may be held in escrow. Subject to the restrictions set forth in this Section 9, each Participant who receives Restricted Stock will have all rights as a stockholder with respect to such shares, including the right to vote the shares and receive dividends and other distributions. Each Participant who receives Restricted Stock Units will be eligible to receive, at the expiration of the applicable restricted period, one share of Common Stock for each Restricted Stock Unit awarded. The Company will transfer the amount of Common Stock from treasury shares and register a certificate in the name of each such Participant. Participants who receive Restricted Stock Units will have no rights as stockholders with respect to such Restricted Stock Units until such time as share certificates for Common Stock are transferred to the Participants. However, quarterly during the applicable restricted period for all Restricted Stock Units awarded under this Plan, the Company will pay to each such Participant an amount equal to the sum of all dividends and other distributions paid by the Company during the prior quarter on an equivalent number of shares of Common Stock. Subject to the provisions of Section 12, for awards of Restricted Stock or Restricted Stock Units that have a deposit requirement, a Participant will be eligible to vest only in those shares of Restricted Stock or Restricted Stock Units for which personally-owned shares are on deposit with the Company as of the date the Participant's employment with the Company terminates. 4 The total number of shares of Common Stock issued through the vesting of Awards of Restricted Stock or Restricted Stock Units granted under the Plan will not exceed five percent (5%) of the total number of shares authorized for this Plan. No single Participant will receive Awards of Restricted Stock or Restricted Stock Units under the Plan if, upon vesting, would exceed two percent (2%) of the total number of shares authorized for the Plan. 10. NON-TRANSFERABILITY Except as otherwise provided in Section 9, no shares of Restricted Stock and no Restricted Stock Units may be sold, exchanged, transferred, pledged, or assigned during the restricted period. A Participant may not sell, exchange, transfer, pledge or assign any Stock Options awarded under this Plan except (i) by the Participant's last will and testament through the executor or legal representative of the deceased Participant's estate or (ii) by the applicable laws of descent and distribution, or (iii) by gift to a "family member", as defined by the Committee, from a Participant who is subject to the reporting requirements of Section 16 of the 1934 Act and is eligible for retirement (age 55 with 10 years of service) at the time of the gift. Stock Options granted under this Plan may be exercised during the Participant's lifetime only by the Participant or his or her guardian or legal representative. After death, such Stock Options may be exercised in accordance with Section 13B. Other than as set forth in this Plan, no Award under the Plan will be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt to the contrary will be void. 11. WITHHOLDING TAXES As conditions precedent to the obligations of the Company to deliver shares of Common Stock upon the exercise of a Stock Option, and to transfer shares of unrestricted Common Stock from the treasury upon the vesting of Restricted Stock or Restricted Stock Units, the Participant must pay to the Company cash in an amount equal to all required federal, state, local and foreign withholding taxes. Notwithstanding the foregoing, to the extent permitted by law and pursuant to any rules the Committee may adopt, a Participant may authorize and direct the Company to satisfy any such tax withholding requirement by withholding the number of shares sufficient to satisfy the withholding obligation from the Common Stock to be transferred to the Participant. 12. CHANGE OF CONTROL Each outstanding Stock Option will become immediately and fully exercisable for a period of six (6) months following the date of any of the following occurrences (each called a "Change of Control"): (i) if any person (including a group as defined in Section 13(d)(3) of the 1934 Act) becomes, directly or indirectly, the beneficial owner of twenty percent (20%) or more of the shares of the Company entitled to vote for the election of directors; (ii) 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 (iii)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. After such six-month period, the normal option exercise provisions of the Plan will govern. If a Participant is terminated as an employee of the Company within two (2) years after any of the events specified in (i), (ii) or (iii), his or her outstanding Stock Options on the date of termination will become immediately exercisable for a period of three (3) months. 5 For Stock Option grants that require the deposit of employee-owned Common Stock as a condition to obtaining rights and that are outstanding as of the date of any such Change of Control, (a) the deposit requirement will terminate on the date of the Change of Control and deposited stock will be promptly returned to the Participant, and (b) any restrictions on the sale of shares issued upon the exercise of any such Stock Option will lapse. In the event of a Change of Control, a Participant will vest in all shares of Restricted Stock and Restricted Stock Units effective on the date of the Change of Control, and any matching deposits of Common Stock will be promptly returned to the Participant. 13. TERMINATION OF EMPLOYMENT A. Termination of Employment If the Participant's employment with the Company terminates for any reason other than as specified in this Section 13, the Participant's Stock Options will terminate three (3) months after such termination and all shares of Restricted Stock and all Restricted Stock Units that are subject to restriction on the termination date will be forfeited by the Participant to the Company. In the event a Participant's employment with the Company is terminated for the convenience of the Company, as determined by the Committee, the Committee (or its delegate), in its (or its delegate's) sole discretion, may vest the Participant in all or any portion of outstanding Stock Options (which shall become exercisable) and/or shares of Restricted Stock or Restricted Stock Units awarded to such Participant, effective as of the date of such termination or according to any other schedule that the Committee (or its delegate) deems appropriate. In addition, and notwithstanding the foregoing provisions of this Section 13A, effective for Stock Options granted on or after March 21, 2001, if a Participant's employment with the Company is terminated for the convenience of the Company and for reasons other than cause (as determined by the Committee), and the Participant's combined age and years of service with the Company equal at least 70 at the time of such termination, then the Participant's Stock Options that would have vested within two years from the date of termination shall vest and become immediately exercisable, and shall expire on the earlier of (i) the expiration date of such Stock Options, or (ii) two years following the termination of employment. B. Death If a Participant dies while employed by the Company, any Stock Option previously granted under this Plan may be exercised by the following persons to the full extent that such Stock Option could have been exercised by the Participant immediately prior to death: (i) by the person (which may include any individual, corporation, partnership, association or trust) designated in the Participant's last will and testament or, (ii) in the absence of such designation, by the executor or administrator of the Participant's estate, or (iii) by the person to whom the Stock Option has been transferred to by such executor or administrator pursuant to Section 10, or (iv) by the donee of a Stock Option made pursuant to Section 10 (iii). Outstanding Stock Option grants that are not otherwise exercisable as of the date of death will vest and become exercisable in a pro-rata amount, based on the ratio that the number of full months of employment completed during the Stock Option's vesting period, from the date of grant to the date of death, bears to the number of full months in the Stock Option's vesting period. If a Participant dies while employed by the Company, his or her Stock Option grants conditioned on a deposit of employee-owned Common Stock may be exercised as provided in the first paragraph of this Section 13B, subject to the following special conditions: (i) any restrictions on the sale of shares issued upon the exercise of any such Stock Option will cease; and 6 (ii) any employee-owned Common Stock deposited by the Participant as a condition to the Stock Option grant will be promptly returned to the person (which may include any individual, corporation, partnership, association or trust) designated in the Participant's last will and testament or, in the absence of such designation, to the Participant's estate, and all requirements regarding deposit by the Participant will terminate. A Participant who dies during any applicable restricted period will vest in a proportionate number of shares of Restricted Stock or Restricted Stock Units, effective as of the date of death. The proportionate vesting will be based on the ratio that the number of full months of employment completed during the restricted period prior to the date of death bears to the number of full months in the applicable restricted period. C. Retirement The Committee will determine, at the time of grant, the treatment of a Stock Option upon the retirement of the Participant. Unless other terms are specified in the original Stock Option grant, and except for Stock Options granted on or after March 21, 2001, a Participant who retires from the Company at or after age 55, with 10 years of service with the Company, may exercise the Stock Option according to its original terms and conditions. For Stock Option grants conditioned on the deposit of employee-owned Common Stock, any restrictions on the sale of shares issued upon the exercise of any such Stock Option will lapse on the date of retirement of a Participant at or after age 55 with 10 years of service with the Company. Effective for Stock Options granted on or after March 21, 2001, if a Participant retires on or after reaching age 55 with 10 years of service with the Company, then upon such retirement, such Stock Options shall fully vest and become immediately exercisable and retain the same Expiration Date as determined at the time of grant. A Participant shall be fully vested in all shares of Restricted Stock or Restricted Stock Units upon attainment of age 65 (unless any such award specifically provides otherwise). Unless the applicable Award provides otherwise, a Participant who retires at or after age 55 with 10 years of service with the Company, but prior to age 65, during any applicable restricted period may elect either of the following alternatives for Restricted Stock or Restricted Stock Units: (a) leave employee-owned shares on deposit with the Company and vest in all shares of Restricted Stock or Restricted Stock Units, effective as of the earlier of the date the Participant attains age 65 or the expiration of the applicable restricted period; or (b) withdraw employee-owned shares and vest in a proportionate number of shares of Restricted Stock or Restricted Stock Units as of the date the shares on deposit are withdrawn. The proportionate vesting will be based on the ratio that the number of full months of employment completed during the restricted period prior to the date of retirement bears to the number of full months in the applicable restricted period. D. Spin-offs If termination of employment is due to the cessation, transfer, or spin-off of a complete line of business of the Company, the Committee, in its sole discretion, may determine the treatment of all outstanding Awards under the Plan. E. Non-Competition Effective for Stock Options granted on or after June 21, 1999, recipients of such Stock Options shall not, for a period of two years following termination of their employment with the Company for any reason whatsoever (including retirement), directly or indirectly, (i) own, manage or operate, be employed by, or render consulting, advisory or other services to, any enterprise, corporation or business that owns or operates casual dining restaurants, anywhere in the United 7 States or Canada (a "Competitor"), or (ii) solicit or induce any person who is an employee of the Company to own, manage or operate, be employed by, or render consulting, advisory or other services to, a Competitor. Notwithstanding anything to the contrary contained in paragraphs A through D of this Section 13, upon violation by a Participant of the non-compete provisions of this paragraph E, all of such Participant's outstanding Stock Options will expire on the earlier of (i) the expiration date of the Stock Options, or (ii) three months following the date of employment with a Competitor or other prohibited competitive action. 14. AMENDMENTS OF THE PLAN The Plan may be terminated, modified, or amended by the Board of Directors of the Company or, subject to the limitations of its delegated authority, by the Committee. In addition, the Committee may from time to time prescribe, amend and rescind rules and regulations relating to the Plan. Subject to approval of the Board of Directors, the Committee may at any time terminate or suspend the operation of the Plan, provided that the Committee may take no action without the approval of the Board of Directors of the Company that would: (i) materially increase the number of shares that may be issued under the Plan; (ii) materially increase the benefits accruing to Participants under the Plan; or (iii)materially modify the requirements as to eligibility for participating in the Plan. The Board of Directors will have authority to cause the Company to take any action related to the Plan that may be required to comply with the provisions of the Securities Act of 1933, as amended, the 1934 Act, and the rules and regulations prescribed by the Securities and Exchange Commission. Any such action will be at the expense of the Company. Except as provided for in the preceding, no termination, modification, suspension, or amendment of the Plan shall alter or impair the rights of any Participant pursuant to a prior Award without the consent of the Participant. There is no obligation for uniformity of treatment of Participants under the Plan. 15. FOREIGN JURISDICTIONS; GOVERNING LAW If not inconsistent with the intent of the Plan, the Committee may adopt, amend, and terminate such arrangements as it may deem necessary or desirable to provide tax advantages or other benefits under the laws of any foreign jurisdiction to Participants subject to such laws. Notwithstanding the foregoing, the provisions of this Plan are to be construed under, and governed by, the laws of the State of Florida. 16. NOTICE All notices to the Company regarding the Plan must be in writing and will be effective when actually received by the Company. Notices must be sent to: Darden Restaurants, Inc. 5900 Lake Ellenor Dr. Orlando, FL 32809 Attn: General Counsel As amended and restated July 26, 2002 As further amended March 19, 2003, effective as of July 26, 2002 As amended June 19, 2003 8 EX-12 8 exhibit12_earningsratio.txt EXHIBIT 12 - RATIO OF EARNINGS EXHIBIT 12 ---------- DARDEN RESTAURANTS, INC. COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS TO FIXED CHARGES (Dollar Amounts in Thousands)
Fiscal Year Ended ---------------------------------------------------------------------------------------------------------------------- May 25, May 26, May 27, May 28, May 30, 2003 2002 2001 2000 1999 ---------------------------------------------------------------------------------------------------------------------- Consolidated Earnings from Operations before Income Taxes .................... $347,748 $363,309 $301,218 $273,907 $215,875 Plus Fixed Charges: Gross Interest Expense.................. 47,566 41,493 35,196 24,999 21,015 40% of Restaurant and Equipment Minimum Rent Expense................ 21,536 20,600 19,352 18,834 18,914 --------- ------------ ------------ ----------- ------------ Total Fixed Charges........... $69,102 $62,093 $54,548 $43,833 $39,929 Less Capitalized Interest.................. (3,470) (3,653) (3,671) (1,910) (593) --------- ------------ ------------ ----------- ------------ Consolidated Earnings from Operations before Income Taxes Available to Cover Fixed Charges..................... $413,380 $421,749 $352,095 $315,830 $255,211 ========= ============ ============ =========== ============ Ratio of Consolidated Earnings to Fixed Charges ................................ 5.98 6.79 6.45 7.21 6.39 ========= ============ ============ =========== ============ ----------------------------------------------------------------------------------------------------------------------
EX-13 9 fy03_mda.txt EXHIBIT 13, MD&A Exhibit 13 --------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes found elsewhere in this report. As of May 25, 2003, Darden Restaurants, Inc. operated 1,271 Red Lobster, Olive Garden, Bahama Breeze, Smokey Bones BBQ, and Seasons 52 restaurants in the United States and Canada and licensed 33 restaurants in Japan. We own and operate all of our restaurants in the U.S. and Canada, with no franchising. Our fiscal year ends on the last Sunday in May. Fiscal 2003, 2002, and 2001 each consisted of 52 weeks of operation. On March 21, 2002, our Board of Directors declared a three-for-two split of our common stock. The stock split was accomplished through a 50 percent stock dividend, which was distributed on May 1, 2002 to stockholders of record as of the close of business on April 10, 2002. All applicable references in this discussion and analysis to number of shares and per share amounts of common stock have been adjusted to reflect the stock split. RESULTS OF OPERATIONS FOR FISCAL 2003, 2002, AND 2001 The following table sets forth selected operating data as a percentage of sales for the periods indicated. All information is derived from the consolidated statements of earnings for the periods indicated.
Fiscal Years - ------------------------------------------------------------------------------------------------------------------- 2003 2002 2001 - ------------------------------------------------------------------------------------------------------------------- Sales......................................................... 100.0% 100.0% 100.0% Costs and expenses: Cost of sales: Food and beverage........................................ 31.1 31.7 32.6 Restaurant labor......................................... 31.9 31.5 31.6 Restaurant expenses...................................... 15.1 14.3 14.0 ------ ---- ---- Total cost of sales, excluding restaurant depreciation and amortization of 3.8%, 3.6%, and 3.5%, respectively........................................ 78.1% 77.5% 78.2% Selling, general, and administrative....................... 9.4 9.6 9.8 Depreciation and amortization.............................. 4.1 3.8 3.7 Interest, net.............................................. 0.9 0.9 0.8 Restructuring credit....................................... -- (0.1) -- -------- -------- -------- Total costs and expenses......................... 92.5% 91.7% 92.5% ------ ------ ------ Earnings before income taxes.................................. 7.5 8.3 7.5 Income taxes.................................................. 2.5 2.9 2.6 ------- ------ ------ Net earnings.................................................. 5.0% 5.4% 4.9% ===== ====== ====== - -------------------------------------------------------------------------------------------------------------------
SALES Sales were $4.65 billion in fiscal 2003, $4.37 billion in fiscal 2002, and $3.99 billion in fiscal 2001. The 6.6 percent increase in sales for fiscal 2003 was primarily due to same-restaurant sales increases in the U.S. and a net increase of 60 company-owned restaurants since fiscal 2002. Total sales, although higher than the previous year, were less than anticipated due to lower than expected guest counts for fiscal 2003. Guest count growth was restrained by a competitive environment that was more challenging than expected, less effective advertising than in fiscal 2002, and a more severe winter than normal. Red Lobster sales of $2.43 billion were 4.1 percent above last year. U.S. same-restaurant sales for Red Lobster increased 2.7 percent due to a 3.1 percent increase in average check and a 0.4 percent decrease in guest counts. Average annual sales per restaurant for Red Lobster were $3.7 million in fiscal 2003. Olive Garden sales of $1.99 billion were 6.8 percent above last year. U.S. same-restaurant sales for Olive Garden increased 2.2 percent due to a 3.7 percent increase in average check and a 1.5 percent decrease in guest counts. Average annual sales per restaurant for Olive Garden were $3.9 million in fiscal 2003. Red Lobster and Olive Garden have enjoyed 22 and 35 consecutive quarters of U.S. same-restaurant sales increases, respectively. Bahama Breeze generated sales that exceeded $137 million and opened five new restaurants during fiscal 2003. We continue to make changes to Bahama Breeze that we anticipate will improve its sales, financial performance, and overall long-term potential. These changes include testing lunch operations, creating a new dinner menu, and slowing new restaurant development while we reduce the size of these restaurants and our related capital 1 investment. Smokey Bones opened 20 new restaurants during fiscal 2003, more than doubling the total number of Smokey Bones restaurants open at the end of fiscal 2002. Sales for Smokey Bones in fiscal 2003 were $93 million. The 9.4 percent increase in sales for fiscal 2002 versus the prior year was primarily due to same-restaurant sales increases in the U.S. and a net increase of 43 company-owned restaurants since fiscal 2001. Red Lobster sales of $2.34 billion were 7.1 percent above fiscal 2001. U.S. same-restaurant sales for Red Lobster increased 6.2 percent due to a 2.8 percent increase in average check and a 3.4 percent increase in guest counts. Average annual sales per restaurant for Red Lobster were $3.5 million in fiscal 2002. Olive Garden sales of $1.86 billion were 9.5 percent above fiscal 2001. U.S. same-restaurant sales for Olive Garden increased 6.3 percent due to a 3.1 percent increase in average check and a 3.2 percent increase in guest counts. Average annual sales per restaurant for Olive Garden were $3.9 million in fiscal 2002. Bahama Breeze opened eight new restaurants during fiscal 2002 and generated sales of over $125 million. Smokey Bones opened ten new restaurants during fiscal 2002 and generated sales of over $42 million. COSTS AND EXPENSES Total costs and expenses were $4.31 billion in fiscal 2003, $4.00 billion in fiscal 2002, and $3.69 billion in fiscal 2001. Total costs and expenses in fiscal 2003 were 92.5 percent of sales, an increase from 91.7 percent of sales in fiscal 2002. The following analysis of the components of total costs and expenses is presented as a percent of sales. Food and beverage costs as a percent of sales decreased in fiscal 2003 and fiscal 2002 primarily as a result of lower product cost, pricing changes, and changes in the mix of sales among our various restaurant companies. Restaurant labor increased in fiscal 2003 primarily as a result of a modest increase in wage rates, higher promotional staffing levels and increased sales volatility, which made it more difficult to predict staffing needs. These factors were only partially offset by the impact of higher sales. Restaurant labor decreased in fiscal 2002 primarily due to efficiencies resulting from higher sales. Restaurant expenses (which include lease, property tax, credit card, utility, workers' compensation, insurance, new restaurant pre-opening, and other operating expenses) as a percent of sales increased in fiscal 2003 primarily due to increased insurance, new restaurant pre-opening, workers' compensation and utility costs. These cost increases were only partially offset by higher sales. Restaurant expenses in fiscal 2002 were higher than fiscal 2001 primarily due to increased workers' compensation, new restaurant pre-opening, credit card and other operating expenses, which were only partially offset by lower utility expenses and higher sales volumes. Selling, general, and administrative expenses as a percent of sales decreased in fiscal 2003 primarily due to decreased bonus costs and the favorable impact of higher sales. These amounts were only partially offset by increased marketing expense incurred in response to the challenging economic and competitive environment. Selling, general, and administrative expenses in fiscal 2002 were less than fiscal 2001 primarily as a result of decreased national television marketing expenses and the favorable impact of higher sales in fiscal 2002. These amounts were partially offset by our fiscal 2002 donation to the restaurant industry's Dine Out for America benefit and higher fiscal 2002 donations to the Darden Restaurants, Inc. Foundation. Depreciation and amortization expense increased in fiscal 2003 and 2002 primarily as a result of new restaurant and remodel activity, which were only partially offset by the favorable impact of higher sales. Net interest expense in fiscal 2003 was comparable to fiscal 2002 primarily because increased interest expense associated with higher average debt levels in fiscal 2003 was offset by the favorable impact of higher fiscal 2003 sales. Net interest expense increased in fiscal 2002 primarily due to increased interest expense associated with higher average debt levels, which was only partially offset by the impact of higher fiscal 2002 sales. Pre-tax restructuring credits of $0.4 million and $2.6 million were recorded in fiscal 2003 and 2002, respectively. The credits resulted from lower than projected costs of lease terminations in connection with our fiscal 1997 restructuring. No restructuring credit was recognized during fiscal 2001. All fiscal 1997 restructuring actions have been completed as of May 25, 2003. INCOME TAXES The effective income tax rates for fiscal 2003, 2002, and 2001 were 33.2 percent, 34.6 percent, and 34.6 percent, respectively. The rate decrease in fiscal 2003 was primarily a result of ongoing tax liability adjustments that were made as a result of information that became available in fiscal 2003 and lower fiscal 2003 pre-tax earnings. The comparability of fiscal 2002 and 2001 effective rates was primarily a result of increased tax expense associated with higher fiscal 2002 pre-tax earnings which was offset by fiscal 2002 deductions that were not available in fiscal 2001. 2 NET EARNINGS AND NET EARNINGS PER SHARE Net earnings for fiscal 2003 were $232 million ($1.31 per diluted share) compared with net earnings for fiscal 2002 of $238 million ($1.30 per diluted share) and net earnings for fiscal 2001 of $197 million ($1.06 per diluted share). Net earnings for fiscal 2003 decreased 2.3 percent and diluted net earnings per share increased 0.8 percent, compared to fiscal 2002. The decrease in net earnings was primarily due to increases in restaurant labor, restaurant expenses, and depreciation and amortization expenses, which were only partially offset by the impact of higher sales. The increase in diluted net earnings per share is due to a reduction in the average diluted shares outstanding from fiscal 2002 to fiscal 2003 because of our continuing repurchase of our common stock. Net earnings and diluted net earnings per share for fiscal 2002 increased 20.7 percent and 22.6 percent, respectively, compared to fiscal 2001. The increase in both net earnings and diluted net earnings per share was primarily due to increases in sales at both Red Lobster and Olive Garden and decreases in food and beverage costs and restaurant labor as a percent of sales. Diluted net earnings per share also reflected a reduction in the average diluted shares outstanding due to our share repurchase activities. SEASONALITY Our sales volumes fluctuate seasonally. During fiscal 2003, 2002, and 2001, our sales were highest in the spring, lowest in the fall, and comparable during winter and summer. Holidays, severe weather, storms, and similar conditions may impact sales volumes seasonally in some operating regions. 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 2003, 2002, and 2001. 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 accounting principles generally accepted in the United States of America. 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 revenues and expenses during the reporting period (see Note 1 to our consolidated financial statements). 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. 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 a component of buildings, are amortized over the lesser of the lease term or the estimated useful lives of the related assets using the straight-line method. Equipment is depreciated over estimated useful lives ranging from three to ten years also using the straight-line method. Accelerated depreciation methods are generally used for income tax purposes. 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, 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. 3 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 net cash flows expected to be generated by the assets. If these assets are determined to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value. 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. Those assets whose disposal is not probable within one year remain in land, buildings, and equipment until their disposal is probable within one year. 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. Self-Insurance Reserves We self-insure a significant portion of expected losses under our workers' compensation, employee medical, and general liability programs. Accrued liabilities have been recorded based on our estimates of the ultimate costs to settle incurred claims, both reported and not yet reported. Our accounting policies regarding self-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, effective rates for state and local income taxes, allowable tax credits for items such as taxes paid on reported tip income, estimates related to depreciation and amortization expense allowable for tax purposes, 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. 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 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 only accurate as of the date of this annual report and have been obtained with the understanding that Moody's Investors Service, Standard & Poor's, and Fitch will continue to monitor 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 serves as our primary source of short-term financing. As of May 25, 2003, 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 29, 1999, as amended, with a consortium of banks, including 4 Wachovia Bank, N.A., as administrative agent, under which we can borrow up to $300 million. The credit facility allows us to borrow at interest rates based on the prime rate, LIBOR, or a competitively bid rate among the members of the lender consortium, at our option, and on our credit rating. The credit facility expires on October 29, 2004, 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. None of these covenants are expected to impact our liquidity or capital resources. As of May 25, 2003, we were in compliance with all covenants and no amounts were outstanding under the credit facility. At May 25, 2003, our long-term debt consisted principally of: (1) $150 million of unsecured 8.375 percent senior notes due in September 2005, (2) $150 million of unsecured 6.375 percent notes due in February 2006, (3) $150 million of unsecured 5.75 percent medium-term notes due in March 2007, (4) $75 million of unsecured 7.45 percent medium-term notes due in April 2011, (5) $100 million of unsecured 7.125 percent debentures due in February 2016, and (6) an unsecured, variable rate, $34 million commercial bank loan due in December 2018 that supports two loans from us to the Employee Stock Ownership Plan portion of the Darden Savings Plan. 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 as of May 25, 2003, is as follows (in thousands):
- -------------------------- ------------------------------------------------------------------------------------------- Payments Due by Period - -------------------------- ------------------------------------------------------------------------------------------- - -------------------------- --------------- ------------------ ----------------- ------------------- ------------------ Contractual Less than 2-3 4-5 After 5 Obligations Total 1 Year Years Years Years - -------------------------- --------------- ------------------ ----------------- ------------------- ------------------ - -------------------------- --------------- ------------------ ----------------- ------------------- ------------------ Long-term debt (1) $659,430 $ -- $300,000 $150,000 $209,430 - -------------------------- --------------- ------------------ ----------------- ------------------- ------------------ - -------------------------- --------------- ------------------ ----------------- ------------------- ------------------ Operating leases 327,921 55,938 97,192 72,170 102,621 - -------------------------- --------------- ------------------ ----------------- ------------------- ------------------ - -------------------------- --------------- ------------------ ----------------- ------------------- ------------------ Total contractual cash obligations $987,351 $55,938 $397,192 $222,170 $312,051 - -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
- -------------------------- ------------------------------------------------------------------------------------------- Amount of Commitment Expiration per Period - -------------------------- ------------------------------------------------------------------------------------------- - -------------------------- --------------- ------------------ ------------------ ----------------- ------------------- Total Amounts Other Commercial Committed Less than 2-3 4-5 Over 5 Commitments 1 Year Years Years Years - -------------------------- --------------- ------------------ ------------------ ----------------- ------------------- - -------------------------- --------------- ------------------ ------------------ ----------------- ------------------- Trade letters of credit $ 8,301 $ 8,301 $ -- $ -- $ -- - -------------------------- --------------- ------------------ ------------------ ----------------- ------------------- - -------------------------- --------------- ------------------ ------------------ ----------------- ------------------- Standby letters of credit (2) 48,945 48,945 -- -- -- - -------------------------- --------------- ------------------ ------------------ ----------------- ------------------- - -------------------------- --------------- ------------------ ------------------ ----------------- ------------------- Guarantees (3) 4,254 687 1,163 1,150 1,254 - -------------------------- --------------- ------------------ ------------------ ----------------- ------------------- - -------------------------- --------------- ------------------ ------------------ ----------------- ------------------- Other 2,250 1,000 1,250 -- -- - -------------------------- --------------- ------------------ ------------------ ----------------- ------------------- - -------------------------- --------------- ------------------ ------------------ ----------------- ------------------- Total commercial commitments $63,750 $58,933 $2,413 $1,150 $1,254 - -------------------------- --------------- ------------------ ------------------ ----------------- ------------------- 1) Excludes issuance discount of $1,344. 2) Includes letters of credit for $41,442 of workers' compensation and general liabilities accrued in our consolidated financial statements; also includes letters of credit for $6,091 of lease payments included in contractual operating lease obligation payments noted above. 3) Consists solely of guarantees associated with sub-leased properties. We are not aware of any non-performance under these sub-lease arrangements that would result in us having to perform in accordance with the terms of the guarantees.
Our fixed-charge coverage ratio, which measures the number of times each year that we earn enough to cover our fixed charges, amounted to 6.0 times and 6.8 times at May 25, 2003, and May 26, 2002, respectively. Our adjusted debt to adjusted total capital ratio (which includes 6.25 times the total annual restaurant minimum rent ($48.1 million and $43.1 million for the fiscal years ended May 25, 2003, and May 26, 2002, respectively) and 3.00 times the total annual restaurant equipment minimum rent ($5.7 million and $8.4 million for the fiscal years ended May 25, 2003 and May 26, 2002, respectively) as components of adjusted debt and adjusted total capital) was 45 percent and 46 percent at May 25, 2003, and May 26, 2002, 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 5 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 25, 2003 May 26, 2002 - -------------------------------------------------------------------------------------------------------------------- CAPITAL STRUCTURE - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Long-term debt $ 658 $ 662 Stockholders' equity 1,196 1,129 - -------------------------------------------------------------------------------------------------------------------- Total capital $1,854 $1,791 ==================================================================================================================== ADJUSTMENTS TO CAPITAL - -------------------------------------------------------------------------------------------------------------------- Long-term debt $ 658 $ 662 Lease-debt equivalent 318 295 - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Adjusted debt $ 976 $ 957 Stockholders' equity 1,196 1,129 - -------------------------------------------------------------------------------------------------------------------- Adjusted total capital $2,172 $2,086 ==================================================================================================================== ==================================================================================================================== CAPITAL STRUCTURE RATIOS - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Debt to total capital ratio 36% 37% Adjusted debt to adjusted total capital ratio 45% 46% ====================================================================================================================
Our Board of Directors has authorized us to repurchase up to 115.4 million shares of our common stock. Net cash flows used in financing activities included our repurchase of 10.7 million shares of our common stock for $213 million in fiscal 2003 compared to 9.0 million shares for $209 million in fiscal 2002 and 12.7 million shares for $177 million in fiscal 2001. As of May 25, 2003, a total of 98.5 million shares have been repurchased under the authorization. The repurchased common stock is reflected as a reduction of stockholders' equity. Net cash flows used in financing activities also included dividends paid to stockholders of $14 million, $9 million, and $9 million in fiscal 2003, 2002, and 2001, 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 $423 million in fiscal 2003, compared to $318 million in fiscal 2002, and $355 million in fiscal 2001. The increased expenditures in fiscal 2003 resulted primarily from increased spending associated with building more new restaurants and replacing equipment. The reduced expenditures in fiscal 2002 resulted primarily from a reduction in spending associated with building new restaurants. We estimate that our fiscal 2004 capital expenditures will approximate $400 million. Net cash flows provided by operating activities for fiscal 2003 also 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. Our defined benefit and other post-retirement 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. As of May 25, 2003, our discount rate was 6.25 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 recent analysis, 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 will decrease earnings before income taxes by approximately $2 million in fiscal 2004. As of May 25, 2003, our expected health care costs trend rates ranged from 12.0 percent to 13.0 percent for fiscal 2004, 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 9.4 percent. We have an unrecognized net actuarial loss for the defined benefit plans and post-retirement benefit plan as of May 25, 2003, of $80 million and $6 million, respectively. The unrecognized net actuarial loss represents changes in the 6 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 2004 net periodic benefit cost for the defined benefit plans and post-retirement benefit plan is expected to be approximately $4 million and $0.3 million, respectively. We believe our defined benefit and post-retirement 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 $0.6 million and $0.4 million, respectively. A quarter percentage point change in our post-retirement benefit plan discount rate would increase or decrease earnings before income taxes by less than $0.1 million. If the health care cost trend rates were to be increased or decreased by one percentage point each future year, the aggregate of the service cost and interest cost components of net periodic post-retirement benefit cost would change by $0.3 million. 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 and borrowings available under our shelf registration for unsecured debt securities and short-term commercial paper program should be sufficient to finance our capital expenditures, stock repurchase program, and other operating activities through fiscal 2004. FINANCIAL CONDITION Our current assets of $326 million at May 25, 2003, decreased from $443 million at May 26, 2002. The decrease resulted primarily from decreases in cash and cash equivalents of $104 million and short-term investments of $10 million that resulted principally from the short-term investment of proceeds received from the March 2002 medium-term debt issuance. Other assets of $182 million at May 25, 2003, increased from $159 million at May 26, 2002, primarily as a result of the $20 million funding of our defined benefit pension plans during fiscal 2003. Current liabilities of $640 million at May 25, 2003, increased from $601 million at May 26, 2002, primarily as a result of increases in accounts payable of $16 million and unearned revenues of $16 million. The increase in accounts payable is primarily due to the timing of our inventory purchases at the end of fiscal 2003. The increase in unearned revenues is primarily due to an increase in gift card sales during fiscal 2003. Net non-current deferred income tax liabilities of $151 million at May 25, 2003, increased from $118 million at May 26, 2002, primarily as a result of current income tax deductions for certain capitalized software costs, smallwares, and equipment. 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, and commodity prices. To manage this exposure, we periodically enter into interest rate, foreign currency exchange, and commodity instruments for other than trading purposes (see Notes 1 and 7 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. As of May 25, 2003, 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 $1 million over a period of one year. 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 $24 million. The fair value of our long-term fixed rate debt during fiscal 2003 averaged $681 million, with a high of $706 million and a low of $645 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 June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 establishes accounting standards for the recognition and measurement of an asset retirement obligation and our associated asset retirement cost. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. SFAS No. 143 is effective for financial statements issued for fiscal years 7 beginning after June 15, 2002. We adopted SFAS No. 143 in the first quarter of fiscal 2004. Adoption of SFAS No. 143 did not materially impact our consolidated financial statements. In April 2003, the FASB issued SFAS No. 149, "Amendment to Statement 133 on Derivative Instruments and Hedging Activities". SFAS No. 149 amends and clarifies the financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement is effective for hedging relationships designated and contracts entered into or modified after June 30, 2003, except for the provisions that relate to SFAS No. 133 implementation issues, which will continue to be applied in accordance with their respective dates. Adoption of SFAS No. 149 did not materially impact our consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150 establishes accounting standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. It requires certain financial instruments that were previously classified as equity to be classified as assets or liabilities. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Adoption of SFAS No. 150 is not expected to materially impact our consolidated financial statements. 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 Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Words or phrases such as "believe", "plan", "will", "expect", "intend", "estimate", and "project", and similar expressions are intended to identify forward-looking statements. All of these statements, and any other statements in this report that are not historical facts, are forward-looking. Examples of forward-looking statements include, but are not limited to, projections regarding expected casual dining sales growth; the ability of the casual dining segment to weather economic downturns; demographic trends; our expansion plans, capital expenditures, and business development activities; and our long-term goals of increasing market share, expanding margins on incremental sales, and earnings growth. These forward-looking statements are based on assumptions concerning important factors, risks, and uncertainties that could significantly affect anticipated results in the future and, accordingly, could cause the actual results to differ materially from those expressed in the forward-looking statements. These factors, risks, and uncertainties include, but are not limited to: o the highly competitive nature of the restaurant industry, especially pricing, service, location, personnel, and type and quality of food; o economic, market, and other conditions, including a protracted economic slowdown or worsening economy, industry-wide cost pressures, weak consumer demand, changes in consumer preferences, demographic trends, weather conditions, construction costs, and the cost and availability of borrowed funds; o the price and availability of food, labor, utilities, insurance and media, and other costs, including seafood costs, employee benefits, workers' compensation insurance, and the general impact of inflation; o unfavorable publicity relating to food safety or other concerns, including litigation alleging poor food quality, food-borne illness, or personal injury; o the availability of desirable restaurant locations; o government regulations, including those relating to zoning, land use, environmental matters, and liquor licenses; and o growth plans, including real estate development and construction activities, the issuance and renewal of licenses and permits for restaurant development, and the availability of funds to finance growth. 8 REPORT OF MANAGEMENT RESPONSIBILITIES The management of Darden Restaurants, Inc. is responsible for the fairness and accuracy of the consolidated financial statements. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, using management's best estimates and judgments where appropriate. The financial information throughout this report is consistent with our consolidated financial statements. Management has established a system of internal controls that provides reasonable assurance that assets are adequately safeguarded, and transactions are recorded accurately, in all material respects, in accordance with management's authorization. We maintain a strong audit program that independently evaluates the adequacy and effectiveness of internal controls. Our internal controls provide for appropriate separation of duties and responsibilities, and there are documented policies regarding utilization of 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 independent auditors are properly discharging their duties regarding internal control and financial reporting. The independent auditors, internal auditors, and employees have full and free access to the Audit Committee at any time. KPMG LLP, independent certified public accountants, are retained to audit our consolidated financial statements. Their report follows. /s/ Joe R. Lee - ---------------------- Joe R. Lee Chairman of the Board and Chief Executive Officer 9 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Darden Restaurants, Inc. We have audited the accompanying consolidated balance sheets of Darden Restaurants, Inc. and subsidiaries as of May 25, 2003, and May 26, 2002, and the related consolidated statements of earnings, changes in stockholders' equity and accumulated other comprehensive income, and cash flows for each of the years in the three-year period ended May 25, 2003. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Darden Restaurants, Inc. and subsidiaries as of May 25, 2003, and May 26, 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended May 25, 2003, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP - ------------------------- Orlando, Florida June 17, 2003 10
CONSOLIDATED STATEMENTS OF EARNINGS Fiscal Year Ended - -------------------------------------------------------------------------------------------------------------------- (In thousands, except per share data) May 25, 2003 May 26, 2002 May 27, 2001 - -------------------------------------------------------------------------------------------------------------------- Sales $4,654,971 $4,366,911 $3,992,419 Costs and expenses: Cost of sales: Food and beverage 1,449,162 1,384,481 1,302,926 Restaurant labor 1,485,046 1,373,416 1,261,837 Restaurant expenses 700,182 625,710 559,670 - -------------------------------------------------------------------------------------------------------------------- Total cost of sales, excluding restaurant depreciation and amortization of $177,127, $155,837, and $138,229, respectively $3,634,390 $3,383,607 $3,124,433 Selling, general, and administrative 439,376 420,149 389,240 Depreciation and amortization 191,218 165,829 146,864 Interest, net 42,597 36,585 30,664 Restructuring credit (358) (2,568) -- - -------------------------------------------------------------------------------------------------------------------- Total costs and expenses $4,307,223 $4,003,602 $3,691,201 - -------------------------------------------------------------------------------------------------------------------- Earnings before income taxes 347,748 363,309 301,218 Income taxes 115,488 125,521 104,218 - -------------------------------------------------------------------------------------------------------------------- Net earnings $ 232,260 $ 237,788 $ 197,000 ==================================================================================================================== Net earnings per share: Basic $ 1.36 $ 1.36 $ 1.10 Diluted $ 1.31 $ 1.30 $ 1.06 ==================================================================================================================== Average number of common shares outstanding: Basic 170,300 174,700 179,600 Diluted 177,400 183,500 185,600 ====================================================================================================================
See accompanying notes to consolidated financial statements. 11
CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------------------------------------------- (In thousands) May 25, 2003 May 26, 2002 - -------------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 48,630 $ 152,875 Short-term investments -- 9,904 Receivables 29,023 29,089 Inventories 173,644 172,413 Assets held for disposal -- 3,868 Prepaid expenses and other current assets 25,126 23,076 Deferred income taxes 49,206 52,127 - -------------------------------------------------------------------------------------------------------------------- Total current assets $ 325,629 $ 443,352 Land, buildings, and equipment 2,157,132 1,926,947 Other assets 181,872 159,437 - -------------------------------------------------------------------------------------------------------------------- Total assets $2,664,633 $2,529,736 ==================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 175,991 $ 160,064 Accrued payroll 85,975 87,936 Accrued income taxes 67,975 68,504 Other accrued taxes 35,069 30,474 Unearned revenues 72,698 56,632 Other current liabilities 202,201 197,404 - -------------------------------------------------------------------------------------------------------------------- Total current liabilities $ 639,909 $ 601,014 Long-term debt 658,086 662,506 Deferred income taxes 150,537 117,709 Other liabilities 19,910 19,630 - -------------------------------------------------------------------------------------------------------------------- Total liabilities $1,468,442 $1,400,859 - -------------------------------------------------------------------------------------------------------------------- Stockholders' equity: Common stock and surplus, no par value. Authorized 500,000 shares; issued 261,463 and 258,426 shares, respectively; outstanding 164,950 and 172,135 shares, respectively $1,525,957 $1,474,054 Preferred stock, no par value. Authorized 25,000 shares; none issued and outstanding -- -- Retained earnings 979,443 760,684 Treasury stock, 96,513 and 86,291 shares, at cost, respectively (1,254,293) (1,044,915) Accumulated other comprehensive income (10,489) (12,841) Unearned compensation (42,848) (46,108) Officer notes receivable (1,579) (1,997) - -------------------------------------------------------------------------------------------------------------------- Total stockholders' equity $1,196,191 $1,128,877 - -------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $2,664,633 $2,529,736 ====================================================================================================================
See accompanying notes to consolidated financial statements. 12 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME
- ------------------------------------------------------------------------------------------------------------------------- Common Accumulated Stock Other Officer Total and Retained Treasury Comprehensive Unearned Notes Stockholders' (In thousands, except per share Surplus Earnings Stock Income Compensation Receivable Equity data) - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- Balance at May 28, 2000 $1,351,707 $344,579 $ (666,837) $(12,457) $(56,522) $(1,868) $958,602 - ------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net earnings -- 197,000 -- -- -- -- 197,000 Other comprehensive income, foreign currency adjustment -- -- -- (645) -- -- (645) ---------- Total comprehensive income 196,355 Cash dividends declared ($0.053 per share) -- (9,458) -- -- -- -- (9,458) Stock option exercises (4,670 shares) 33,158 -- -- -- -- -- 33,158 Issuance of restricted stock (443 shares), net of forfeiture adjustments 3,986 -- 1,035 -- (5,109) -- (88) Earned compensation -- -- -- -- 4,164 -- 4,164 ESOP note receivable repayments -- -- -- -- 8,145 -- 8,145 Income tax benefits credited to equity 15,287 -- -- -- -- -- 15,287 Purchases of common stock for treasury (12,660 shares) -- -- (176,511) -- -- -- (176,511) Issuance of treasury stock under Employee Stock Purchase Plan and other plans (336 shares) 1,661 -- 2,059 -- -- -- 3,720 Issuance of officer notes, net -- -- -- -- -- (56) (56) - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- Balance at May 27, 2001 $1,405,799 $532,121 $ (840,254) $(13,102) $(49,322) $(1,924) $1,033,318 - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net earnings -- 237,788 -- -- -- -- 237,788 Other comprehensive income: Foreign currency adjustment -- -- -- 169 -- -- 169 Change in fair value of derivatives, net of tax of $234 -- -- -- 380 -- -- 380 Minimum pension liability adjustment, net of tax benefit of $177 -- -- -- (288) -- -- (288) ----------- Total comprehensive income 238,049 Cash dividends declared ($0.053 per share) -- (9,225) -- -- -- -- (9,225) Stock option exercises (4,310 shares) 34,742 -- 1,364 -- -- -- 36,106 Issuance of restricted stock (374 shares), net of forfeiture adjustments 5,666 -- 815 -- (6,493) -- (12) Earned compensation -- -- -- -- 4,392 -- 4,392 ESOP note receivable repayments -- -- -- -- 5,315 -- 5,315 Income tax benefits credited to equity 24,989 -- -- -- -- -- 24,989 Purchases of common stock for treasury (8,972 shares) -- -- (208,578) -- -- -- (208,578) Issuance of treasury stock under Employee Stock Purchase Plan and other plans (290 shares) 2,858 -- 1,738 -- -- -- 4,596 Issuance of officer notes, net -- -- -- -- -- (73) (73) - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- Balance at May 26, 2002 $1,474,054 $760,684 $(1,044,915) $(12,841) $(46,108) $(1,997) $1,128,877 - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net earnings -- 232,260 -- -- -- -- 232,260 Other comprehensive income: Foreign currency adjustment -- -- -- 2,579 -- -- 2,579 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 234,612 Cash dividends declared ($0.080 per share) -- (13,501) -- -- -- -- (13,501) Stock option exercises (3,133 shares) 27,261 -- 1,652 -- -- -- 28,913 Issuance of restricted stock (177 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 Issuance of officer notes, net -- -- -- -- -- 418 418 - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- Balance at May 25, 2003 $1,525,957 $979,443 $(1,254,293) $(10,489) $(42,848) $(1,579) $1,196,191 - -------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 13 CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended - -------------------------------------------------------------------------------------------------------------------- (In thousands) May 25, 2003 May 26, 2002 May 27, 2001 - -------------------------------------------------------------------------------------------------------------------- Cash flows - operating activities Net earnings $ 232,260 $ 237,788 $ 197,000 Adjustments to reconcile net earnings to cash flows: Depreciation and amortization 191,218 165,829 146,864 Asset impairment charge 4,876 -- -- Amortization of unearned compensation and loan costs 6,901 7,578 7,031 Change in current assets and liabilities 36,046 49,604 41,740 Change in other liabilities 280 (619) (642) Contribution to defined benefit pension plans (20,000) -- -- Loss on disposal of land, buildings, and equipment 2,456 1,803 1,559 Change in cash surrender value of trust-owned life insurance 2,441 743 -- Deferred income taxes 35,749 22,800 11,750 Income tax benefits credited to equity 16,385 24,989 15,287 Non-cash restructuring credit (358) (2,568) -- Non-cash compensation expense 758 -- -- Other, net 280 195 (19) - -------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities $ 509,292 $ 508,142 $ 420,570 - -------------------------------------------------------------------------------------------------------------------- Cash flows - investing activities Purchases of land, buildings, and equipment (423,273) (318,392) (355,139) Increase in other assets (8,163) (24,741) (10,730) Purchase of trust-owned life insurance (6,000) (31,500) -- Proceeds from disposal of land, buildings, and equipment (including assets held for disposal) 7,047 10,741 13,492 Proceeds from maturities of (purchases of) short-term investments 10,000 (9,904) -- - -------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities $(420,389) $(373,796) $(352,377) - -------------------------------------------------------------------------------------------------------------------- Cash flows - financing activities Proceeds from issuance of common stock 33,664 40,520 36,701 Dividends paid (13,501) (9,225) (9,458) Purchases of treasury stock (213,311) (208,578) (176,511) ESOP note receivable repayments 4,710 5,315 8,145 Decrease in short-term debt -- (12,000) (103,000) Proceeds from issuance of long-term debt -- 149,655 224,454 Repayment of long-term debt (4,710) (7,962) (10,658) Payment of loan costs -- (1,010) (2,154) - -------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities $(193,148) $ (43,285) $ (32,481) - -------------------------------------------------------------------------------------------------------------------- (Decrease) increase in cash and cash equivalents (104,245) 91,061 35,712 Cash and cash equivalents - beginning of year 152,875 61,814 26,102 - -------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents - end of year $ 48,630 $ 152,875 $ 61,814 ==================================================================================================================== Cash flows from changes in current assets and liabilities Receivables 66 3,781 (4,908) Inventories (1,231) (23,984) (6,242) Prepaid expenses and other current assets (8,523) 1,987 (289) Accounts payable 15,927 3,205 16,372 Accrued payroll (1,961) 5,348 4,783 Accrued income taxes (529) 20,806 14,442 Other accrued taxes 4,595 3,045 1,905 Unearned revenues 16,066 18,487 24,008 Other current liabilities 11,636 16,929 (8,331) - -------------------------------------------------------------------------------------------------------------------- Change in current assets and liabilities $ 36,046 $ 49,604 $ 41,740 ====================================================================================================================
See accompanying notes to consolidated financial statements. 14 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 33 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 2003, 2002, and 2001 each consisted of 52 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 maturity of three months or less. Amounts receivable from credit card companies are also considered cash equivalents because they are both short-term and highly liquid in nature and are typically converted to cash within three days of the sales transaction. Short-Term Investments Short-term investments included a U.S. treasury bill that was classified as a held-to-maturity security because we had the positive intent and ability to hold the security to maturity. The security was valued at amortized cost, which approximated fair value, and matured in September 2002. Inventories Inventories 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. Building components are depreciated over estimated useful lives ranging from seven to 40 years using the straight-line method. Leasehold improvements, which are a component of buildings, are amortized over the lesser of the lease term or the estimated useful lives of the related assets using the straight-line method. Equipment is depreciated over estimated useful lives ranging from three to ten years also using the straight-line method. Accelerated depreciation methods are generally used for income tax purposes. Depreciation and amortization expense associated with land, buildings, and equipment amounted to $184,963, $162,784 and $145,058, in fiscal 2003, 2002, and 2001, respectively. In fiscal 2003, 2002, and 2001, we had losses on disposal of land, buildings, and equipment of $2,456, $1,803, and $1,559, 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 25, 2003, and May 26, 2002, amounted to $44,018 and $38,621, respectively. Accumulated amortization as of May 25, 2003, and May 26, 2002, amounted to $9,963 and $5,006, respectively. Amortization expense associated with capitalized software amounted to $6,255, $3,045 and $1,806, in fiscal 2003, 2002, and 2001, 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. 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. 15 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 net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value. Fair value is generally determined based on appraisals or sales prices of comparable assets. During fiscal 2003, we recorded an asset impairment charge of $4,876 related to the decision to relocate and rebuild certain restaurants. 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. Those assets whose disposal is not probable within one year remain in land, buildings, and equipment until their disposal is probable within one year. During fiscal 2003, we recorded an asset impairment credit of $594 related to assets sold that were previously impaired. All impairment amounts are included in selling, general, and administrative expenses. Self-Insurance Reserves We self-insure a significant portion of expected losses under our workers' compensation, employee medical, and general liability programs. Accrued liabilities have been recorded based on our estimates of the ultimate costs to settle incurred 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 the deferred 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 income in the period that includes the enactment date. Income tax benefits credited to equity relate to tax benefits associated with amounts that are deductible for income tax purposes but do not affect net earnings. These benefits are principally generated from employee exercises of non-qualified stock options and vesting of employee restricted stock awards. Derivative Instruments and Hedging Activities We account for derivative financial instruments and hedging activities in accordance with the Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of FASB Statement No. 133." SFAS No. 133 and SFAS No. 138 require that all derivative instruments be recorded on the balance sheet at fair value. We use financial and commodities derivatives to manage interest rate and commodities pricing risks inherent in our business operations. Our use of derivative instruments is currently limited to interest rate hedges and commodities futures contracts. These instruments are structured as hedges of forecasted transactions or the variability of cash flow to be paid related to a recognized asset or liability (cash flow hedges). 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 16 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. Pre-Opening Expenses Non-capital expenditures associated with opening new restaurants are expensed as incurred. Advertising Production costs of commercials and programming are charged to operations in the fiscal year the advertising is first aired. The costs of other advertising, promotion, and marketing programs are charged to operations in the fiscal period incurred. Advertising expense amounted to $203,393, $187,154, and $177,998, in fiscal 2003, 2002 and 2001, respectively. Stock-Based Compensation SFAS No. 123, "Accounting for Stock-Based Compensation," encourages the use of a fair-value method of accounting for stock-based awards under which the fair value of stock options is determined on the date of grant and expensed over the vesting period. As allowed by SFAS No. 123, 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 at 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. 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 - -------------------------------------------------------------------------------------------------------------------- 2003 2002 2001 - -------------------------------------------------------------------------------------------------------------------- Net earnings, as reported $ 232,260 $ 237,788 $ 197,000 Add: Stock-based compensation expense included in reported net earnings, net of related tax effects 2,642 2,695 2,565 Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects (19,801) (18,386) (15,023) ----------------------------------------------------- Pro forma $215,101 $ 222,097 $ 184,542 ===================================================== Basic net earnings per share As reported $ 1.36 $ 1.36 $ 1.10 Pro forma $ 1.26 $ 1.27 $ 1.03 Diluted net earnings per share As reported $ 1.31 $ 1.30 $ 1.06 Pro forma $ 1.22 $ 1.21 $ 0.99 ====================================================================================================================
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. 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 issued by us represent the only dilutive effect reflected in diluted weighted-average shares outstanding. Options do not impact the numerator of the diluted net earnings per share computation. Options to purchase 3,952,618 shares, 161,220 shares, and 3,618,900 shares of common stock were excluded from the calculation of diluted net earnings per share for fiscal 2003, 2002, and 2001, respectively, because their exercise prices exceeded the average market price of common shares for the period. 17 Comprehensive Income Comprehensive income includes net earnings and other comprehensive income items that are excluded from net earnings under accounting principles generally accepted in the United States of America. Other comprehensive income items include foreign currency translation adjustments, the effective unrealized portion of changes in the fair value of cash flow hedges, and amounts associated with minimum pension liability adjustments. Foreign Currency 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 in stockholders' equity. Gains (losses) from foreign currency transactions, which amounted to ($105), $33, and $1, are included in the consolidated statements of earnings for fiscal 2003, 2002, and 2001 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 revenues and expenses during the reporting period. Actual results could differ from those estimates. Segment Reporting As of May 25, 2003, we operated 1,271 Red Lobster, Olive Garden, Bahama Breeze, Smokey Bones BBQ and Seasons 52 restaurants in North America as part of a single operating segment. 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 operations into a single reporting segment. Reclassifications Certain reclassifications, including the reclassification of unearned revenues from other current liabilities, have been made to prior year amounts to conform to current year presentation. Adoption of New Accounting Standards In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and resolves significant implementation issues that had evolved since the issuance of SFAS No. 121. SFAS No. 144 also establishes a single accounting model for long-lived assets to be disposed of by sale. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001, and its provisions are generally to be applied prospectively. We adopted SFAS No. 144 in the first quarter of fiscal 2003. Adoption of SFAS No. 144 did not materially impact our consolidated financial statements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 provides guidance on the recognition and measurement of liabilities for costs associated with exit or disposal activities. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. We adopted SFAS No. 146 in the third quarter of fiscal 2003. Adoption of SFAS No. 146 did not materially impact our consolidated financial statements. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others." Interpretation No. 45 supersedes Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness of Others," and provides guidance on the recognition and disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees. The initial recognition and measurement provisions of Interpretation No. 45 are effective for guarantees issued or modified after December 31, 2002, and are to be applied prospectively. The disclosure requirements are effective for financial statements for interim or annual periods ending after December 15, 2002. We adopted Interpretation No. 45 in the third quarter of fiscal 2003. Adoption of Interpretation No. 45 did not materially impact our consolidated financial statements. In November 2002, the FASB's Emerging Issues Task Force (EITF) discussed Issue No. 02-16, "Accounting by a Reseller for Cash Consideration Received from a Vendor." Issue No. 02-16 provides guidance on the recognition of cash consideration received by a customer from a vendor. The consensus reached by the EITF in November 2002 is 18 effective for fiscal periods beginning after December 15, 2002. Income statements for prior periods are required to be reclassified to comply with the consensus. We adopted the consensus reached in Issue No. 02-16 in the fourth quarter of fiscal 2003 and its provisions did not have a material impact on our consolidated financial statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," and provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 to require more prominent and frequent disclosures in financial statements about the effects of stock-based compensation. The transition guidance and annual disclosure provisions of SFAS No.148 are effective for financial statements issued for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. We adopted SFAS No. 148 in the fourth quarter of fiscal 2003. Adoption of the disclosure requirements of SFAS No. 148 did not materially impact our consolidated financial statements. Future Application of Accounting Standards In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. We adopted SFAS No. 143 in the first quarter of fiscal 2004. Adoption of SFAS No. 143 did not materially impact our consolidated financial statements. In April 2003, the FASB issued SFAS No. 149, "Amendment to Statement 133 on Derivative Instruments and Hedging Activities". SFAS No. 149 amends and clarifies the financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement is effective for hedging relationships designated and contracts entered into or modified after June 30, 2003, except for the provisions that relate to SFAS No. 133 Implementation Issues, which will continue to be applied in accordance with their respective dates. Adoption of SFAS No. 149 did not materially impact our consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150 establishes accounting standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. It requires certain financial instruments that were previously classified as equity to be classified as assets or liabilities. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Adoption of SFAS No. 150 is not expected to materially impact our consolidated financial statements. 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 $19,628 and $21,083 at May 25, 2003, and May 26, 2002, respectively. The allowance for doubtful accounts associated with our receivables amounted to $330 at both May 25, 2003, and May 26, 2002. NOTE 3 - RESTRUCTURING ACTIVITIES In connection with the closing of certain restaurant properties, we recorded restructuring expenses of $70,900 in fiscal 1997. The restructuring liability, which is a component of other current liabilities, was established to accrue for estimated carrying costs of buildings and equipment prior to disposal, employee severance costs, lease buy-out provisions, and other costs associated with the restructuring action. All restaurant closings and other activities under this restructuring action were completed as of May 25, 2003. During fiscal 2003 and 2002, we recognized restructuring credits of $358 and $2,568, respectively. The fiscal 2003 and 2002 credits resulted from lease terminations completed on more favorable terms than previously anticipated. No restructuring expense or credit was charged to operating results during fiscal 2001. 19 As of May 25, 2003, $45,438 of carrying, employee severance, and lease buy-out costs associated with the 1997 restructuring action had been paid and charged against the restructuring liability. A summary of restructuring liability activity for fiscal 2003 and 2002 is as follows:
Fiscal Year - ---------------------------------------------------------------------------- ------------------ -------------------- 2003 2002 - ---------------------------------------------------------------------------- ------------------ -------------------- Beginning balance $ 1,946 $ 5,798 Non-cash adjustments: Restructuring credits (358) (2,568) Cash payments: Carrying costs and employee severance payments (203) (860) Lease payments including lease buy-outs, net (1,385) (424) - ---------------------------------------------------------------------------- ------------------ -------------------- Ending balance $ -- $ 1,946 ============================================================================ ================== ====================
NOTE 4 - LAND, BUILDINGS, AND EQUIPMENT The components of land, buildings, and equipment are as follows:
May 25, 2003 May 26, 2002 - -------------------------------------------------------------------------------------------------------------------- Land $ 505,444 $ 471,072 Buildings 1,898,716 1,719,778 Equipment 922,592 830,404 Construction in progress 195,078 123,987 - -------------------------------------------------------------------------------------------------------------------- Total land, buildings, and equipment 3,521,830 3,145,241 Less accumulated depreciation (1,364,698) (1,218,294) - -------------------------------------------------------------------------------------------------------------------- Net land, buildings, and equipment $2,157,132 $1,926,947 ====================================================================================================================
NOTE 5 - OTHER ASSETS The components of other assets are as follows:
May 25, 2003 May 26, 2002 - -------------------------------------------------------------------------------------------------------------------- Prepaid pension costs $ 68,873 $ 48,262 Capitalized software costs, net 34,055 33,615 Trust-owned life insurance 34,316 30,757 Liquor licenses 21,219 19,405 Prepaid interest and loan costs 14,863 17,895 Miscellaneous 8,546 9,503 - -------------------------------------------------------------------------------------------------------------------- Total other assets $181,872 $159,437 ====================================================================================================================
NOTE 6 - LONG-TERM DEBT The components of long-term debt are as follows:
May 25, 2003 May 26, 2002 - -------------------------------------------------------------------------------------------------------------------- 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 (1.64% at May 25, 2003) due December 2018 34,430 39,140 - -------------------------------------------------------------------------------------------------------------------- Total long-term debt 659,430 664,140 Less issuance discount (1,344) (1,634) - -------------------------------------------------------------------------------------------------------------------- Total long-term debt less issuance discount 658,086 662,506 Less current portion -- -- - -------------------------------------------------------------------------------------------------------------------- Long-term debt, excluding current portion $ 658,086 $ 662,506 ====================================================================================================================
20 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 $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 are senior in right of payment to all of our future subordinated debt. In November 2000, we filed a prospectus supplement with the SEC to offer up to $350,000 of medium-term notes from time to time as part of the shelf registration process referred to above. In April 2001, 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. As of May 25, 2003, our shelf registration provides for the issuance of an additional $125,000 of unsecured debt securities. 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 2004, with a consortium of banks under which we can borrow up to $300,000. The credit facility allows us to borrow at interest rates that vary based on the prime rate, LIBOR, or a competitively bid rate among the members of the lender consortium, at our option. The credit facility supports our commercial paper borrowing program. We are required to pay a facility fee of 15 basis points per annum on the average daily amount of loan commitments by the consortium. The amount of interest and the annual facility fee are subject to change based on 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 25, 2003, and May 26, 2002, no borrowings were outstanding under this credit facility. The aggregate maturities of long-term debt for each of the five fiscal years subsequent to May 25, 2003, and thereafter are $0 in 2004 through 2005, $300,000 in 2006, $150,000 in 2007, $0 in 2008, and $209,430 thereafter. NOTE 7 - 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. 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 or commodity prices. 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 2003 and 2002, we entered into futures contracts and commodity swaps to reduce the risk of natural gas and coffee price fluctuations. To the extent these derivatives are effective in offsetting the variability of the hedged cash flows, changes in the derivatives' fair value are not included in current earnings but are reported as other comprehensive income. These changes in fair value are subsequently reclassified into earnings when the natural gas and coffee are purchased and used by us in our operations. Net gains (losses) of $941 and ($276) related to these derivatives were recognized in earnings during fiscal 2003 and 2002, respectively. It is expected that $495 of net gains related to these contracts at May 25, 2003, will be reclassified from accumulated other comprehensive income into food and beverage costs or restaurant expenses during the next 12 months. To the extent these derivatives are not effective, changes in their fair value are immediately recognized in current earnings. Outstanding derivatives are included in other current assets or other current liabilities. As of May 25, 2003, the maximum length of time over which we are hedging our exposure to the variability in future natural gas cash flows is 12 months. As of May 25, 2003, we are not hedging our exposure to the variability in future coffee cash flows. No gains or losses were reclassified into earnings during fiscal 2003 or 2002 as a result of the discontinuance of natural gas and coffee cash flow hedges. 21 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. The net gain on the treasury lock is being amortized into earnings as an adjustment to interest expense over the same period in which the related interest costs on the new debt issuance are being recognized in earnings. Amortization of $53 and $14 was recognized in earnings as an adjustment to interest expense during fiscal 2003 and 2002, respectively. It is 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 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 6). NOTE 8 - FINANCIAL INSTRUMENTS The fair values of cash equivalents, accounts receivable, and accounts payable approximate their carrying amounts due to their short duration. Short-term investments are carried at amortized cost, which approximates fair value. The carrying value and fair value of long-term debt at May 25, 2003, was $658,086 and $740,130, respectively. The carrying value and fair value of long-term debt at May 26, 2002, was $662,506 and $680,115, 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 9 - STOCKHOLDERS' EQUITY Treasury Stock Our Board of Directors has authorized us to repurchase up to 115.4 million shares of our common stock. In fiscal 2003, 2002, and 2001, we purchased treasury stock totaling $213,311, $208,578, and $176,511, respectively. As of May 25, 2003, a total of 98.5 million shares have been repurchased under the authorization. The repurchased common stock is reflected as a reduction of stockholders' equity. 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 to our executive-level officers under the Loan Program. We account for outstanding officer notes receivable as a reduction of stockholders' equity. Stockholders' Rights Plan Under our amended Rights Agreement, each share of our common stock has associated with it two-thirds of a right to purchase one-hundredth of a share of our Series A Participating Cumulative Preferred Stock at a purchase price of $62.50, subject to adjustment under certain circumstances to prevent dilution. The number of rights associated with each share of our common stock reflects an adjustment resulting from our three-for-two stock split in May 2002. The rights are exercisable when, and are not transferable apart from our common stock until, a person or group has acquired 20 percent or more, or makes a tender offer for 20 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 24, 2005. 22 Stock Split On March 21, 2002, our Board of Directors declared a three-for-two split of our common stock. The stock split was accomplished through a 50 percent stock dividend, which was distributed on May 1, 2002 to stockholders of record as of the close of business on April 10, 2002. In connection with the stock split, the number of common shares reserved for issuance or subject to issuance under our stock option, stock grant, and other plans was proportionately increased. The total number of common and preferred shares authorized for issuance under our Articles of Incorporation remained the same. All applicable references to number of shares and per share amounts of common stock in these financial statements and notes have been adjusted to reflect the stock split. Accumulated Other Comprehensive Income (Loss) The components of accumulated other comprehensive income (loss) are as follows:
May 25, 2003 May 26, 2002 - -------------------------------------------------------------------------------------------------------------------- Foreign currency translation adjustment $(10,354) $(12,933) Unrealized gains on derivatives 382 380 Minimum pension liability adjustment (517) (288) - -------------------------------------------------------------------------------------------------------------------- Total accumulated other comprehensive income (loss) $(10,489) $(12,841) ====================================================================================================================
Reclassification adjustments associated with pre-tax net derivative income (losses) realized in net earnings for fiscal 2003, 2002, and 2001 amounted to $994, ($262), and $0, respectively. NOTE 10 - LEASES An analysis of rent expense incurred under operating leases is as follows:
Fiscal Year - -------------------------------------------------------------------------------------------------------------------- 2003 2002 2001 - -------------------------------------------------------------------------------------------------------------------- Restaurant minimum rent $48,121 $43,113 $40,007 Restaurant percentage rent 3,682 3,550 3,163 Restaurant equipment minimum rent 5,719 8,386 8,388 Restaurant rent averaging expense (663) (518) (510) Transportation equipment 2,665 2,481 2,320 Office equipment 1,138 1,526 1,323 Office space 1,713 1,387 1,020 Warehouse space 303 237 227 - -------------------------------------------------------------------------------------------------------------------- Total rent expense $62,678 $60,162 $55,938 ====================================================================================================================
Minimum rental obligations are accounted for on a straight-line basis over the term of the lease. Percentage rent expense is generally based on sales levels or changes in the Consumer Price Index. Many of 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 annual non-cancelable future lease commitments for each of the five fiscal years subsequent to May 25, 2003, and thereafter are: $55,938 in 2004, $51,627 in 2005, $45,565 in 2006, $39,637 in 2007, $32,533 in 2008, and $102,621 thereafter, for a cumulative total of $327,921. NOTE 11 - INTEREST, NET The components of interest, net, are as follows:
Fiscal Year - -------------------------------------------------------------------------------------------------------------------- 2003 2002 2001 - -------------------------------------------------------------------------------------------------------------------- Interest expense $47,566 $41,493 $35,196 Capitalized interest (3,470) (3,653) (3,671) Interest income (1,499) (1,255) (861) - -------------------------------------------------------------------------------------------------------------------- Interest, net $42,597 $36,585 $30,664 ====================================================================================================================
Capitalized interest was computed using our average borrowing rate. We paid $38,682, $31,027 and, $24,281, for interest (excluding amounts capitalized) in fiscal 2003, 2002, and 2001, respectively. 23 NOTE 12 - INCOME TAXES The components of earnings before income taxes and the provision for income taxes thereon are as follows:
Fiscal Year - -------------------------------------------------------------------------------------------------------------------- 2003 2002 2001 - -------------------------------------------------------------------------------------------------------------------- Earnings before income taxes: U.S. $ 345,496 $ 359,947 $ 296,160 Canada 2,252 3,362 5,058 - -------------------------------------------------------------------------------------------------------------------- Earnings before income taxes $ 347,748 $ 363,309 $ 301,218 - -------------------------------------------------------------------------------------------------------------------- Income taxes: Current: Federal $ 68,178 $ 88,063 $ 79,285 State and local 11,396 14,582 13,049 Canada 24 133 134 - -------------------------------------------------------------------------------------------------------------------- Total current $ 79,598 $ 102,778 $ 92,468 - -------------------------------------------------------------------------------------------------------------------- Deferred (principally U.S.) 35,890 22,743 11,750 - -------------------------------------------------------------------------------------------------------------------- Total income taxes $ 115,488 $ 125,521 $ 104,218 ====================================================================================================================
During fiscal 2003, 2002, and 2001, we paid income taxes of $65,398, $56,839, and $63,893, 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 - -------------------------------------------------------------------------------------------------------------------- 2003 2002 2001 - -------------------------------------------------------------------------------------------------------------------- U.S. statutory rate 35.0% 35.0% 35.0% State and local income taxes, net of federal tax benefits 3.0 3.1 3.1 Benefit of federal income tax credits (4.5) (3.9) (4.1) Other, net (0.3) 0.4 0.6 - -------------------------------------------------------------------------------------------------------------------- Effective income tax rate 33.2% 34.6% 34.6% ====================================================================================================================
The tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows:
May 25, 2003 May 26, 2002 - -------------------------------------------------------------------------------------------------------------------- Accrued liabilities $ 12,616 $ 19,052 Compensation and employee benefits 55,935 52,804 Asset disposition and restructuring liabilities 2,004 2,584 Other 2,638 2,392 - -------------------------------------------------------------------------------------------------------------------- Gross deferred tax assets $ 73,193 $ 76,832 - -------------------------------------------------------------------------------------------------------------------- Buildings and equipment (116,148) (93,752) Prepaid pension costs (25,987) (18,096) Prepaid interest (1,454) (3,478) Deferred rent and interest income (13,117) (12,496) Capitalized software and other assets (16,115) (12,127) Other (1,703) (2,465) - -------------------------------------------------------------------------------------------------------------------- Gross deferred tax liabilities $(174,524) $ (142,414) - -------------------------------------------------------------------------------------------------------------------- Net deferred tax liabilities $(101,331) $ (65,582) ====================================================================================================================
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. As of May 25, 2003, and May 26, 2002, 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. 24 NOTE 13 - RETIREMENT PLANS Defined Benefit Plans and Post-Retirement 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 post-retirement benefit plan that provides health care benefits to our salaried retirees. During fiscal 2003, we funded the defined benefit pension plans in the amount of $20,000. This funding allowed the defined benefit pension plans to maintain a fully funded status as of the February 28, 2003 annual valuation date. 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, 2003 and 2002:
Defined Benefit Plans (1) Post-Retirement Benefit Plan - ---------------------------------------------- -------------- -------------- ----- ------------------- --------------- 2003 2002 2003 2002 - ---------------------------------------------- -------------- -------------- ----- ------------------- --------------- - ---------------------------------------------- -------------- -------------- ----- ------------------- --------------- Change in Benefit Obligation: Benefit obligation at beginning of period $111,155 $ 97,339 $ 9,356 $ 6,739 Service cost 3,732 3,586 388 291 Interest cost 7,088 7,145 648 500 Participant contributions -- -- 112 91 Benefits paid (4,558) (4,412) (252) (214) Actuarial loss 12,219 7,497 4,557 1,949 --------- ----------- -------- --------- Benefit obligation at end of period $129,636 $111,155 $ 14,809 $ 9,356 ======== ======== ======== ======== Change in Plan Assets: Fair value at beginning of period $109,574 $120,042 $ -- $ -- Actual return on plan assets (9,117) (6,097) -- -- Employer contributions 20,063 41 140 123 Participant contributions -- -- 112 91 Benefits paid (4,558) (4,412) (252) (214) ----------- ---------- --------- --------- Fair value at end of period $115,962 $109,574 $ -- $ -- ======== ======== ============ ============ Reconciliation of the Plan's Funded Status: Funded status at end of period $(13,675) $ (1,581) $(14,809) $ (9,356) Unrecognized prior service cost (936) (1,392) 29 47 Unrecognized actuarial loss 79,805 47,762 6,089 1,579 Contributions for March to May 19 10 35 44 ---------- ------------- --------- ------------ Prepaid (accrued) benefit costs $ 65,213 $ 44,799 $ (8,656) $ (7,686) ======== ========= ========== ========= Components of the Consolidated Balance Sheets: Prepaid benefit costs $ 68,873 $ 48,262 $ -- $ -- Accrued benefit costs (4,496) (3,929) (8,656) (7,686) Accumulated other comprehensive income 836 466 -- -- --------- ------------ ------------ ------------- Net asset (liability) recognized $ 65,213 $ 44,799 $ (8,656) $ (7,686) ======== ========= ========== ========= (1) For plans with accumulated benefit obligations in excess of plan assets, the accumulated benefit obligation and fair value of plan assets were $4,515 and $0, respectively, as of February 28, 2003, and $3,939 and $0, respectively, as of February 28, 2002.
25 The following table presents the weighted-average assumptions used to determine the actuarial present value of the defined benefit plans and the post-retirement benefit plan obligations:
Defined Benefit Plans Post-RetirementBenefit Plan - --------------------------------------------------- -------------- -------------- ------ ----------- -------------- 2003 2002 2003 2002 - --------------------------------------------------- -------------- -------------- ------ ----------- -------------- - --------------------------------------------------- -------------- -------------- ------ ----------- -------------- Discount rate 6.25% 7.00% 6.25% 7.00% Expected long-term rate of return on plan assets 10.40% 10.40% N/A N/A Rate of future compensation increases 3.75% 3.75% N/A N/A - --------------------------------------------------- -------------- -------------- ------ ----------- --------------
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. Based on our recent analysis, we have lowered our defined benefit plans' expected long-term rate of return on plan assets for fiscal 2004 to 9.00 percent. 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 $610 and $360, respectively. The assumed health care cost trend rate increase in the per-capita charges for benefits ranged from 12.0 percent to 13.0 percent for fiscal 2004, 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 post-retirement benefit cost by $207 and $179, respectively, and would increase or decrease the accumulated post-retirement benefit obligation by $3,013 and $2,377, respectively. Components of net periodic benefit (income) cost are as follows:
Defined Benefit Plans Post-Retirement Benefit Plan - ------------------------------------------------- ---------- ----------- ---------- --- --------- ---------- -------- 2003 2002 2001 2003 2002 2001 - ------------------------------------------------- ---------- ----------- ---------- --- --------- ---------- -------- - ------------------------------------------------- ---------- ----------- ---------- --- --------- ---------- -------- Service cost $ 3,732 $ 3,586 $ 3,488 $ 388 $ 291 $ 246 Interest cost 7,088 7,145 6,255 648 500 447 Expected return on plan assets (12,739) (12,416) (11,589) -- -- -- Amortization of unrecognized transition asset -- (642) (642) -- -- -- Amortization of unrecognized prior service cost (348) (456) (456) 18 18 18 Recognized net actuarial loss (gain) 1,924 1,104 213 46 -- (18) - ------------------------------------------------- ---------- ----------- ---------- --- --------- ---------- -------- Net periodic benefit (income) cost $ (343) $ (1,679) $(2,731) $1,100 $ 809 $ 693 ================================================= ========== =========== ========== === ========= ========== ========
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 $334,319 at May 25, 2003, and $442,030 at May 26, 2002. Expense recognized in fiscal 2003, 2002, and 2001 was $1,732, $1,593, and $3,358, respectively. Employees classified as "highly compensated" under the Internal Revenue Code are ineligible to participate in this plan. Amounts payable to highly compensated employees under a separate, non-qualified deferred compensation plan totaled $69,653 and $66,241 as of May 25, 2003 and May 26, 2002, 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 2003, 2002, and 2001, the ESOP incurred interest expense of $697, $1,258, and $3,086, respectively, and used dividends received of $1,002, $735, and $415, respectively, and contributions received from us of $4,266, $5,166, and $9,224, respectively, to pay principal and interest on our debt. 26 The ESOP shares we own are included in average common shares outstanding for purposes of calculating net earnings per share. At May 25, 2003, the ESOP's debt to us had a balance of $34,430 with a variable rate of interest of 1.64 percent; $17,530 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 within the ESOP at May 25, 2003, approximates 12,157,000 shares, representing 4,533,000 allocated shares, 222,000 committed-to-be-released shares, and 7,402,000 suspense shares. NOTE 14 - STOCK PLANS We maintain four principal stock option and stock grant plans: the Stock Option and Long-Term Incentive Plan of 1995 (1995 Plan); the Restaurant Management and Employee Stock Plan of 2000 (2000 Plan); the 2002 Stock Incentive Plan (2002 Plan) and the Stock Plan for Directors (Director Stock Plan). All of the plans are administered by the Compensation Committee of the Board of Directors. The 1995 Plan provides for the issuance of up to 33,300,000 common shares in connection with the granting of non-qualified stock options, restricted stock, or RSUs to key employees. Up to 2,250,000 shares may be granted under the plan as restricted stock and RSUs. The 2000 Plan provides for the issuance of up to 5,400,000 common shares out of our treasury in connection with the granting of non-qualified stock options and restricted stock or RSUs to key employees, excluding directors and executive officers. Restricted stock and RSUs may be granted under the plan for up to five percent of the shares authorized under the plan. 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, or RSUs 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 and restricted stock and RSUs to non-employee directors. Under all of the plans, stock options are granted at a price equal to the fair value of the shares at the date of grant, for terms not exceeding ten years, and have various vesting periods at the discretion of the Compensation Committee. Outstanding options generally vest over two to four years. Restricted stock and RSUs granted under the 1995, 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 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 issuable under the plan have an aggregate fair value equal to the value of the foregone retainer and meeting fees. The per share weighted-average fair value of stock options granted during fiscal 2003, 2002, and 2001 was $9.01, $6.05, and $4.48, respectively. These amounts were determined using the Black Scholes option-pricing model, which values options based on the stock price at the grant date, the expected life of the option, the estimated volatility of the stock, expected dividend payments, and the risk-free interest rate over the expected life of the option. The dividend yield was calculated by dividing the current annualized dividend by the option 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 remaining term for each grant. The expected life of the option was estimated based on the exercise history from previous grants. The weighted-average assumptions used in the Black Scholes model were as follows:
Stock Options Granted in Fiscal Year - -------------------------------------------------------------------------------------------------------------------- 2003 2002 2001 - -------------------------------------------------------------------------------------------------------------------- Risk-free interest rate 4.37% 4.50% 7.00% Expected volatility of stock 30.0% 30.0% 30.0% Dividend yield 0.2% 0.1% 0.1% Expected option life 6.0 years 6.0 years 6.0 years ====================================================================================================================
27 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 29, 2000 10,068,389 $ 7.12 26,352,761 $ 8.98 - -------------------------------------------------------------------------------------------------------------------- Options granted 5,375,727 $ 10.99 Options exercised (4,670,100) $ 7.00 Options cancelled (926,100) $ 10.82 - -------------------------------------------------------------------------------------------------------------------- Balance at May 27, 2001 12,222,339 $ 7.62 26,132,288 $ 9.68 - -------------------------------------------------------------------------------------------------------------------- Options granted 5,776,350 $ 17.36 Options exercised (4,310,327) $ 8.36 Options cancelled (675,776) $ 13.49 - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Balance at May 26, 2002 12,152,538 $ 8.31 26,922,535 $ 11.44 - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------------------------
The following table provides information regarding exercisable and outstanding options as of May 25, 2003:
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 7,089,174 $ 6.99 7,090,672 $ 6.99 2.5 $10.01 - $15.00 5,904,902 12.03 10,492,834 11.96 5.8 $15.01 - $20.00 432,208 16.85 5,133,444 17.03 8.2 Over $20.00 54,882 25.39 3,974,683 26.16 9.1 - -------------------------------------------------------------------------------------------------------------------- 13,481,166 $ 9.59 26,691,633 $13.73 5.9 ====================================================================================================================
We granted restricted stock and RSUs during fiscal 2003, 2002, and 2001 totaling 275,610, 428,280, and 563,306 shares, respectively. The per share weighted-average fair value of the awards granted in fiscal 2003, 2002, and 2001 was $26.53, $17.10, and $10.67, respectively. After giving consideration to assumed forfeiture rates and subsequent forfeiture adjustments, compensation expense recognized in net earnings for awards granted in fiscal 2003, 2002, and 2001 amounted to $3,579, $4,392, and $4,164, respectively. NOTE 15 - 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, employees may elect to purchase shares 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 2003, 2002, and 2001, employees purchased shares of common stock under the plan totaling 261,409, 284,576, and 328,338, respectively. As of May 25, 2003, an additional 778,456 shares are available for issuance. No compensation expense has been recognized for shares issued under the plan. The impact of recognizing compensation expense for purchases made under the plan in accordance with the fair value method specified in SFAS No. 123 is less than $800 and has no impact on reported basic or diluted net earnings per share. NOTE 16 - COMMITMENTS AND CONTINGENCIES We make trade commitments in the course of our normal operations. As of May 25, 2003, and May 26, 2002, we were contingently liable for approximately $8,301 and $9,786, respectively, under outstanding trade letters of credit issued in connection with purchase commitments. These letters of credit have terms of one month or less and are used to collateralize our obligations to third parties for the purchase of inventories. 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. As of May 25, 2003, and May 26, 2002, we had $41,442 and $30,000, respectively, of standby letters of credit related to workers' compensation and 28 general liabilities accrued in our consolidated financial statements. As of May 25, 2003, and May 26, 2002, we had $7,503 and $8,608, respectively, of standby letters of credit related to contractual operating lease obligations and other payments. All standby letters of credit are renewable annually. As of May 25, 2003, and May 26, 2002, we had other commercial commitments of $2,250 and $0, respectively. As of May 25, 2003 and May 26, 2002, we had $4,254 and $5,463, respectively, of guarantees associated with third-party sublease or assignment obligations. 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 25, 2003 and May 26, 2002 amounted to $2,935 and $3,769, respectively. We did not accrue for the guarantees, as the likelihood of the third parties defaulting on the sublease or assignment agreements was less than probable. In the event of default by a third party, the indemnity and/or default clauses in our sublease and 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 sublease or assignment agreements, except to the extent that the sublease or assignment allows us to repossess the building and personal property. These guarantees expire over their respective lease terms, which range from fiscal 2004 through fiscal 2012. We are involved in litigation arising from the normal course of business. In our opinion, this litigation is not expected to materially impact our consolidated financial statements. NOTE 17 - QUARTERLY DATA (UNAUDITED) The following table summarizes unaudited quarterly data for fiscal 2003 and 2002:
Fiscal 2003 - Quarters Ended - -------------------------------------------------------------------------------------------------------------------- Aug. 25 Nov. 24 Feb. 23 May 25 Total - -------------------------------------------------------------------------------------------------------------------- Sales $1,174,565 $1,071,531 $1,181,383 $1,227,492 $4,654,971 Earnings before income taxes 109,005 56,220 93,325 89,198 347,748 Net earnings 71,886 37,478 61,786 61,110 232,260 Net earnings per share: Basic 0.42 0.22 0.36 0.36 1.36 Diluted 0.40 0.21 0.35 0.35 1.31 Dividends paid per share -- 0.04 -- 0.04 0.08 Stock price: High 27.83 26.13 22.96 20.27 27.83 Low 19.17 17.96 16.46 16.70 16.46 ====================================================================================================================
Fiscal 2002 - Quarters Ended - -------------------------------------------------------------------------------------------------------------------- Aug. 26 Nov. 25 Feb. 24 May 26 Total - -------------------------------------------------------------------------------------------------------------------- Sales $1,073,410 $1,007,080 $1,124,472 $1,161,949 $4,366,911 Earnings before income taxes 95,577 56,255 102,776 108,701 363,309 Net earnings 62,156 36,463 66,220 72,949 237,788 Net earnings per share: Basic 0.35 0.21 0.38 0.42 1.36 Diluted 0.34 0.20 0.36 0.40 1.30 Dividends paid per share -- 0.0265 -- 0.0265 0.053 Stock price: High 21.667 21.653 28.660 29.767 29.767 Low 16.400 15.400 20.007 23.733 15.400 ====================================================================================================================
29 Five-Year Financial Summary (In thousands, except per share data)
Fiscal Year Ended - ---------------------------------------------------------------------------------------------------------------------- May 25, May 26, May 27, May 28, May 30, Operating Results 2003 2002 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------------- Sales $4,654,971 $4,366,911 $3,992,419 $3,675,461 $ 3,432,375 - ---------------------------------------------------------------------------------------------------------------------- Costs and expenses: Cost of sales: Food and beverage 1,449,162 1,384,481 1,302,926 1,199,709 1,133,705 Restaurant labor 1,485,046 1,373,416 1,261,837 1,181,156 1,117,401 Restaurant expenses 700,182 625,710 559,670 510,727 485,708 - ---------------------------------------------------------------------------------------------------------------------- Total cost of sales, excluding restaurant depreciation and amortization (1) $3,634,390 $3,383,607 $3,124,433 $2,891,592 $2,736,814 Selling, general, and administrative 439,376 420,149 389,240 363,041 343,280 Depreciation and amortization 191,218 165,829 146,864 130,464 125,327 Interest, net 42,597 36,585 30,664 22,388 19,540 Restructuring and asset impairment credit, net (358) (2,568) -- (5,931) (8,461) - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- Total costs and expenses $4,307,223 $4,003,602 $3,691,201 $3,401,554 $ 3,216,500 - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- Earnings before income taxes 347,748 363,309 301,218 273,907 215,875 Income taxes 115,488 125,521 104,218 97,202 75,337 - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- Net earnings $232,260 $ 237,788 $ 197,000 $ 176,705 $ 140,538 - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- Net earnings per share: Basic $ 1.36 $ 1.36 $ 1.10 $ 0.92 $ 0.68 Diluted $ 1.31 $ 1.30 $ 1.06 $ 0.89 $ 0.66 - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- Average number of common shares outstanding, net of shares held in Treasury: Basic 170,300 174,700 179,600 192,800 206,000 Diluted 177,400 183,500 185,600 197,800 212,100 ====================================================================================================================== ====================================================================================================================== Financial Position Total assets $2,664,633 $2,529,736 $2,216,534 $1,969,555 $ 1,888,560 Land, buildings, and equipment 2,157,132 1,926,947 1,779,515 1,578,541 1,461,535 Working capital (deficit) (314,280) (157,662) (226,116) (316,427) (194,478) Long-term debt 658,086 662,506 520,574 306,586 316,451 Stockholders' equity 1,196,191 1,128,877 1,033,318 958,602 962,349 Stockholders' equity per outstanding share 7.25 6.56 5.87 5.23 4.86 ====================================================================================================================== ====================================================================================================================== Other Statistics Cash flow from operations $ 509,292 $ 508,142 $ 420,570 $ 342,626 $ 357,942 Capital expenditures 426,204 318,392 355,139 268,946 123,673 Dividends paid 13,501 9,225 9,458 10,134 10,857 Dividends paid per share 0.080 0.053 0.053 0.053 0.053 Advertising expense 203,393 187,950 177,998 165,590 162,934 Stock price: High 27.83 29.767 19.660 15.375 15.583 Low 16.46 15.400 10.292 8.292 9.458 Close $ 18.35 $ 25.030 $ 19.267 $ 12.583 $ 14.208 Number of employees 140,700 133,200 128,900 122,300 116,700 Number of restaurants 1,271 1,211 1,168 1,139 1,139 ====================================================================================================================== (1) Total cost of sales, excluding restaurant depreciation and amortization of $177,127, $155,837, $138,229, $123,477, and $119,140, respectively.
30 EX-21 10 exhibit21_subsidiaries.txt EXHIBIT 21 - SUBSIDIARIES EXHIBIT 21 ---------- SUBSIDIARIES OF DARDEN RESTAURANTS, INC. As of May 25, 2003, 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 and Smokey Bones. GMRI Florida, Inc., a Florida corporation, owning a 99% limited partnership interest in GMRI Texas, L.P. GMRI Texas, L.P., a Texas limited partnership, doing business as Red Lobster, Olive Garden and Bahama Breeze. GMR Restaurants of Pennsylvania, Inc., a Pennsylvania corporation, doing business as Red Lobster, Olive Garden and Smokey Bones. We also had other direct and indirect subsidiaries as of May 25, 2003 but none of these subsidiaries would constitute a "significant subsidiary" as defined in Regulation S-X, Rule 1-02(w). EX-23 11 exhibit23_kpmgconsent.txt EXHIBIT 23 - ACCOUNTANT'S CONSENT EXHIBIT 23 ----------- KPMG LLP P.O. Box 31002 St. Petersburg, FL 33731-8902 P.O. Box 1439 Tampa, FL 33601-1439 INDEPENDENT ACCOUNTANTS' CONSENT 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 and 333-106278) of Darden Restaurants, Inc. of our report dated June 17, 2003, relating to the consolidated balance sheets of Darden Restaurants, Inc. and subsidiaries as of May 25, 2003 and May 26, 2002, and the related consolidated statements of earnings, changes in stockholders' equity and accumulated other comprehensive income, and cash flows for each of the fiscal years in the three-year period ended May 25, 2003, which report is incorporated by reference to page 26 of the Registrant's 2003 Annual Report to Stockholders filed as an exhibit to this Annual Report on Form 10-K of Darden Restaurants, Inc. /s/KPMG LLP Orlando, Florida August 21, 2003 EX-24 12 exhibit24_poa.txt EXHIBIT 24 - POWER OF ATTORNEY EXHIBIT 24 ---------- POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS, that the undersigned constitutes and appoints Paula J. Shives, Joe R. Lee 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 25, 2003, 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 18th day of June, 2003, by the following persons. /s/ Leonard L. Berry /s/ Richard E. Rivera ----------------------------- --------------------------- Leonard L. Berry Richard E. Rivera /s/ Odie C. Donald /s/ Michael D. Rose ------------------------------- --------------------------- Odie C. Donald Michael D. Rose /s/ Julius Erving, II /s/ Maria A. Sastre ------------------------------- --------------------------- Julius Erving, II Maria A. Sastre /s/ David H. Hughes /s/ Jack A. Smith ------------------------------- -------------------------- David H. Hughes Jack A. Smith /s/ Joe R. Lee /s/ Blaine Sweatt, III ------------------------------- --------------------------- Joe R. Lee Blaine Sweatt, III /s/ Cornelius McGillicuddy, III /s/ Rita P. Wilson ------------------------------- --------------------------- Cornelius McGillicuddy, III Rita P. Wilson EX-31 13 exhibit31a_jl-socert.txt EXHIBIT 31 - JOE LEE SARBANES OXLEY CERTIFICATION EXHIBIT 31(a) ------------- CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Joe R. Lee, 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)) 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) 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 (c) 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 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. August 22, 2003 /s/ Joe R. Lee - -------------------------------------- Joe R. Lee Chairman and Chief Executive Officer EX-31 14 exhibit31b_ld-socert.txt EXHIBIT 31B - LINDA D. SARBANES OXLEY CERT. 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)) 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) 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 (c) 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 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. August 22, 2003 /s/ Linda J. Dimopoulos - --------------------------------- Linda J. Dimopoulos Senior Vice President and Chief Financial Officer EX-32 15 exhibit32a_jl-socert.txt EXHIBIT 32B - JOE LEE SARBANES OXLEY CERT. 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 25, 2003, as filed with the Securities and Exchange Commission on the date hereof ("Report"), I, Joe R. Lee, Chairman and 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/ Joe R. Lee -------------------------------------------- Joe R. Lee Chairman and Chief Executive Officer August 22, 2003 EX-32 16 exhibit32b_ld-socert.txt EXHIBIT 32B - LINDA D. SARBANES OXLEY CERT. 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 25, 2003, as filed with the Securities and Exchange Commission on the date hereof ("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 August 22, 2003 -----END PRIVACY-ENHANCED MESSAGE-----