-----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, ADwk24qbS1G+/jQTNVi1fBKtl0bc3wBCNIpD20OtufR4yCivHS2cy4Bp/1fcAmik unZXDcJdmtsoSajGJonKzw== 0000940944-06-000099.txt : 20060728 0000940944-06-000099.hdr.sgml : 20060728 20060728172635 ACCESSION NUMBER: 0000940944-06-000099 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20060528 FILED AS OF DATE: 20060728 DATE AS OF CHANGE: 20060728 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DARDEN RESTAURANTS INC CENTRAL INDEX KEY: 0000940944 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 593305930 STATE OF INCORPORATION: FL FISCAL YEAR END: 0529 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13666 FILM NUMBER: 06988948 BUSINESS ADDRESS: STREET 1: 5900 LAKE ELLENOR DR CITY: ORLANDO STATE: FL ZIP: 32809 BUSINESS PHONE: 4072454000 MAIL ADDRESS: STREET 1: 5900 LAKE ELLENOR DRIVE CITY: ORLANDO STATE: FL ZIP: 32809 FORMER COMPANY: FORMER CONFORMED NAME: GENERAL MILLS RESTAURANTS INC DATE OF NAME CHANGE: 19950313 10-K 1 form10k_2006.htm FORM 10 2006

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-K

 

 

 

(Mark One)

/X/

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended May 28, 2006

 

/ /

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

incorporation or organization)

(IRS Employer Identification No.)

 

 

5900 Lake Ellenor Drive, Orlando, Florida

(Address of principal executive offices)

32809

(Zip Code)

 

Registrant’s telephone number, including area code: (407) 245-4000

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Common Stock, without par value

and Preferred Stock Purchase Rights

 

Name of each exchange

on which registered

New York Stock Exchange

 

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes

X

No ___

 

Indicate by check mark if registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes __ No X .  

 

Indicate by check mark if the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

X

Accelerated filer ____

Non-accelerated filer ____

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes___ No

X .

 

Aggregate market value of Common Stock held by non-affiliates of the Registrant, based on the closing price of $36.09 per share as reported on the New York Stock Exchange on November 27, 2005: $5,450,113,413.

 

Number of shares of Common Stock outstanding as of July 6, 2006: 146,101,752 (excluding 129,201,101 shares held in the Company’s treasury).

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for its Annual Meeting of Shareholders on September 15, 2006, to be filed with the Securities and Exchange Commission no later than 120 days after May 28, 2006, are incorporated by reference into Part III, and portions of the Registrant’s Annual Report to Shareholders for the fiscal year ended May 28, 2006 are incorporated by reference into Parts I and II of this Report.

 



 

 

DARDEN RESTAURANTS, INC.

FORM 10-K

FISCAL YEAR ENDED MAY 28, 2006

 

TABLE OF CONTENTS

PART I

 

Page

Item 1.

Business

1

 

Item 1A.

Risk Factors

12

 

Item 1B.

Unresolved SEC Comments

15

 

Item 2.

Properties

16

 

Item 3.

Legal Proceedings

17

 

Item 4.

Submission of Matters to a Vote of Security Holders

18

 

PART II

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities

 

18

 

Item 6.

Selected Financial Data

18

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and
Results of Operations

 

19

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

19

 

Item 8.

Financial Statements and Supplementary Data

19

 

Item 9

Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure

 

19

 

Item 9A.

Controls and Procedures

19

 

Item 9B.

Other Information

19

 

PART III

 

 

Item 10.

Directors and Executive Officers of the Registrant

20

 

Item 11.

Executive Compensation

20

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters

 

20

 

Item 13.

Certain Relationships and Related Transactions

20

 

Item 14.

Principal Accountant Fees and Services

20

 

PART IV

 

 

Item 15.

Exhibits and Financial Statement Schedules

21

 

 

Signatures

22

                                                                                                        

 



 

 

PART I

Item 1. BUSINESS

 

Introduction

 

Darden Restaurants, Inc. is the largest publicly held casual dining restaurant company in the world,1 and served over 300 million meals during fiscal 2006. As of May 28, 2006, we operated 1,427 restaurants in the United States and Canada. In the United States, we operated 1,390 restaurants in 49 states (the exception being Alaska), including 651 Red Lobster®, 576 Olive Garden®, 32 Bahama Breeze®, 126 Smokey Bones Barbeque & Grill ® and five Seasons 52® 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 1,427 restaurants open on May 28, 2006, 850 were located on owned sites and 577 were located on leased sites. In Japan, as of May 28, 2006, we licensed 42 Red Lobster restaurants to an unaffiliated Japanese corporation that operates the restaurants under an Area Development and Franchise Agreement.

 

Darden Restaurants, Inc. is a Florida corporation incorporated in March 1995, and is the parent company of GMRI, Inc., also a Florida corporation. GMRI, Inc. and our other subsidiaries own the operating assets of the restaurants. GMRI, Inc. was originally incorporated in March 1968 as Red Lobster Inns of America, Inc. Our principal executive offices and restaurant support center are located at 5900 Lake Ellenor Drive, Orlando, Florida 32809, telephone (407) 245-4000. Our corporate website address is www.darden.com. We make our reports on Forms 10-K, 10-Q and 8-K, and Section 16 reports on Forms 3, 4 and 5, and all amendments to those reports available free of charge on our website the same day as the reports are filed with or furnished to the Securities and Exchange Commission. Information on our website is not deemed to be incorporated by reference into this Form 10-K. Unless the context indicates otherwise, all references to “Darden,” “we”, “our” or “us” include Darden Restaurants, Inc., GMRI, Inc. and our respective subsidiaries.

 

We have a 52/53 week fiscal year ending on the last Sunday in May. Our 2006 fiscal year, which ended on May 28, 2006, and our 2005 fiscal year, which ended on May 29, 2005, each had 52 weeks. Our 2004 fiscal year, which ended on May 30, 2004, had 53 weeks.

 

The following description of our business should be read in conjunction with the information in our Management’s Discussion and Analysis of Financial Condition and Results of Operations incorporated by reference in Item 7 of this Form 10-K and our consolidated financial statements incorporated by reference in Item 8 of this Form 10-K.

 

Background

 

We opened our first restaurant, a Red Lobster, in Lakeland, Florida in 1968. Red Lobster was founded by William B. Darden, for whom we are named. We were acquired by General Mills, Inc. in 1970. In May 1995, we became a separate publicly held company when General Mills distributed all outstanding Darden stock to General Mills’ stockholders.

 

The number of Red Lobster and Olive Garden restaurants open at the end of fiscal 2006 increased by three and 19, respectively, as compared to the end of fiscal 2005. Red Lobster has grown from six restaurants in operation at the end of fiscal 1970 to 682 restaurants in North America by the end of fiscal 2006. Olive Garden, an internally developed concept, opened its first restaurant in Orlando, Florida in fiscal 1983, and by the end of fiscal 2006 had expanded to 582 restaurants in North America.

 

Bahama Breeze is an internally developed concept that provides a Caribbean escape, offering the food, drinks and atmosphere you would find in the islands. In fiscal 1996, Bahama Breeze opened its first restaurant in Orlando, Florida. At the end of fiscal 2006, there were 32 Bahama Breeze restaurants.

 

_____________________________

 

1Source: Nation’s Restaurant News, “Special Report: Top 100,” June 26, 2006 (based on U.S. revenues from company-owned restaurants).

 

1

 



 

 

                Smokey Bones is also an internally developed concept featuring barbeque and other grilled favorites served in an inviting mountain-lodge setting that features televised sports. The first restaurant was opened in fiscal 2000 in Orlando, Florida. At the end of fiscal 2006, there were 126 Smokey Bones restaurants.

 

In February 2003, we opened a new test restaurant in Orlando, Florida called Seasons 52. It is a casually sophisticated fresh grill and wine bar with seasonally inspired menus offering fresh ingredients to create great tasting meals that are lower in calories than comparable restaurant meals. At the end of fiscal 2006, there were five Seasons 52 restaurants.

 

The table below shows our growth and lists the number of restaurants operated by Red Lobster, Olive Garden, Bahama Breeze, Smokey Bones and Seasons 52 as of the end of each fiscal year since 1970. The final column in the table lists our total sales for the years indicated.

 

Company-Operated Restaurants Open at Fiscal Year End

 

Fiscal

Year

Red

Lobster

Olive

Garden

Bahama

Breeze

Smokey

Bones

Seasons

52

Total

Restaurants (1)

Total Company Sales

($ in Millions) (2)(3)

 

 

 

 

 

 

 

 

1970

6

 

 

 

6

3.5

1971

24

 

 

 

24

9.1

1972

47

 

 

 

47

27.1

1973

70

 

 

 

70

48.0

1974

97

 

 

 

97

72.6

1975

137

 

 

 

137

108.5

1976

174

 

 

 

174

174.1

1977

210

 

 

 

210

229.2

1978

236

 

 

 

236

291.4

1979

244

 

 

 

244

337.5

1980

260

 

 

 

260

397.6

1981

291

 

 

 

291

528.4

1982

328

 

 

 

328

614.3

1983

360

1

 

 

 

361

718.5

1984

368

2

 

 

 

370

782.3

1985

372

4

 

 

 

376

842.2

1986

401

14

 

 

 

415

917.3

1987

433

52

 

 

 

485

1,097.7

1988

443

92

 

 

 

535

1,300.8

1989

490

145

 

 

 

635

1,621.5

1990

521

208

 

 

 

729

1,927.7

1991

568

272

 

 

 

840

2,212.3

1992

619

341

 

 

 

960

2,542.0

1993

638

400

 

 

 

1,038

2,737.0

1994

675

458

 

 

 

1,133

2,963.0

1995

715

477

 

 

 

1,192

3,163.3

1996

729

487

1

 

 

1,217

3,191.8

1997

703

477

2

 

 

1,182

3,171.8

1998

682

466

3

 

 

1,151

3,261.6

1999

669

464

6

 

 

1,139

3,432.4

2000

654

469

14

2

 

1,139

3,675.5

2001

661

477

21

9

 

1,168

3,992.4

2002

667

496

29

19

 

1,211

4,366.9

2003

673

524

34

39

1

1,271

4,655.0

2004

680

543

32

69

1

1,325

5,003.4

2005

679

563

32

104

3

1,381

5,278.1

2006

682

582

32

126

5

1,427

5,720.6

 

 

2

 



 

 

(1)

Includes only Red Lobster, Olive Garden, Bahama Breeze, Smokey Bones and Seasons 52 restaurants. Does not include other restaurant concepts operated by us in these years that are no longer owned or operated by us.

(2)

Includes total sales from all of our operations, including sales from restaurant concepts besides Red Lobster, Olive Garden, Bahama Breeze, Smokey Bones and Seasons 52 that are no longer owned or operated by us. Total company sales from 1970 through fiscal 1995 were included in the consolidated operations of our former parent company, General Mills, Inc., prior to our spin-off as a separate publicly traded corporation in May 1995.

(3)

Emerging Issues Task Force Issue 00-14 “Accounting for Certain Sales Incentives” requires sales incentives to be classified as a reduction of sales. We adopted Issue 00-14 in the fourth quarter of fiscal 2002. For purposes of this presentation, sales incentives have been reclassified as a reduction of sales for fiscal 1998 through 2006. Sales incentives for fiscal years prior to 1998 have not been reclassified.

 

Strategy

 

The restaurant industry is generally considered to be comprised of four segments: quick service, midscale, casual dining and fine dining. The industry is highly fragmented and includes many independent operators and small chains. We believe that capable operators of strong multi-unit concepts have the opportunity to increase their share of the casual dining segment. We plan to grow by increasing the number of restaurants in each of our existing concepts and by developing or acquiring additional concepts that can be expanded profitably.

 

While we are a leader in the casual dining segment, we know we cannot be successful without a clear sense of who we are. Our core purpose is “To nourish and delight everyone we serve.” This core purpose is supported by our core values:

 

 

Integrity and fairness;

 

 

Respect and caring;

 

 

Diversity;

 

 

Always learning/always teaching;

 

Being “of service”

 

 

Teamwork; and

 

 

Excellence.

 

 

Our mission is to be “The best in casual dining, now and for generations.” We believe we can achieve this goal by continuing to build on our historical strength as a multi-brand casual dining company, which is grounded in our commitment to combining the following areas:

 

 

A strong culture that inspires and engages our people with firmly held values, a clear mission, and a core purpose to nourish and delight everyone we serve;

 

Competitively superior leadership;

 

 

Brand management excellence;

 

 

Restaurant operating excellence; and

 

Restaurant support excellence.

 

 

Our strategic framework also includes two points that we believe separate us from our competition. We are committed to:

 

 

Being a multi-brand restaurant company that is bound together by common operating practices and a unifying culture which serves to make us stronger than the sum of our parts; and

 

Obtaining insights from our guests and employees to create powerful, broadly appealing brands and to develop successful people.

 

3

 



 

 

Restaurant Concepts

 

Red Lobster

 

Red Lobster is the largest casual dining, seafood-specialty restaurant operator in the United States. It offers an extensive menu featuring fresh fish, shrimp, crab, lobster, scallops and other seafood in a casual atmosphere. The menu includes a variety of specialty seafood and non-seafood entrées, appetizers and desserts.

 

Most dinner entrée prices range from $8.75 to $28.99, with certain lobster items available by the pound. Most lunch entrée prices range from $5.99 to $11.99. The price of each entrée includes salad, side items and our signature Cheddar Bay biscuits. During fiscal 2006, the average check per person was $17.00 to $18.00, with alcoholic beverages accounting for approximately 8.1 percent of Red Lobster’s sales. Red Lobster maintains approximately 108 different menus across its trade areas to reflect geographic differences in consumer preferences, prices and selections, as well as a lower-priced children’s menu.        

 

Olive Garden

 

Olive Garden is the market share leader among casual dining Italian restaurants in the United States. Olive Garden’s menu includes a variety of authentic Italian foods featuring fresh ingredients and an expanded wine list that includes a broad selection of wines imported from Italy. The menu includes antipasti (appetizers); soups, salad and garlic breadsticks; baked pastas; sautéed 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. Olive Garden is in the process of accelerating new restaurant growth through the introduction of two new prototypes in the fourth quarter of fiscal 2006, which are expected to deliver the same guest experience while reducing capital investment and improving operating efficiencies.

 

Most dinner entrée prices range from $7.95 to $19.50, and most lunch entrée prices range from $5.95 to $10.25. The price of each entrée also includes as much fresh salad or soup and breadsticks as a guest desires. During fiscal 2006, the average check per person was $14.00 to $15.00, with alcoholic beverages accounting for approximately 8.3 percent of Olive Garden’s sales. Olive Garden maintains approximately 42 different dinner menus and 36 lunch menus across its trade areas to reflect geographic differences in consumer preferences, prices and selections, as well as 13 children’s menus.

 

Bahama Breeze

 

Bahama Breeze is a restaurant that brings guests the feeling of a Caribbean escape. It offers the food, drinks and atmosphere you would find in the islands. The menu features distinctive, Caribbean-inspired fresh seafood, chicken and steaks as well as signature specialty drinks. The first Bahama Breeze opened in 1996 and met with strong positive consumer response. We continued to test the concept by opening a limited number of additional restaurants in each of the following years, and began national expansion of the concept in 1998. While the concept continued to be well received by guests, its financial performance did not meet our overall expectations. Bahama Breeze closed six restaurants and wrote down the carrying value of four others during the fourth quarter of fiscal 2004, reducing to 32 the total number of restaurants in operation, and postponed any new restaurant expansion.

 

Since fiscal 2004, Bahama Breeze has implemented a number of changes to become a more relevant brand for its guests, evolving its menu to make it more approachable yet still distinctive and improving the guest experience. Bahama Breeze will seek to deliver its strong potential by continuing to elevate the guest experience to be competitively superior and by improving restaurant-level returns through structural changes to its operations that remove costs and complexity that do not add value for its guests. Bahama Breeze’s focus now is to accelerate progress in these areas before returning to new restaurant growth.

 

Most dinner entrée prices at Bahama Breeze range from $9.00 to $22.00, and most lunch entrée prices range from $7.00 to $11.00. During fiscal 2006, the average check per person was $22.00 to $23.00, with alcoholic beverages accounting for approximately 24.3 percent of Bahama Breeze’s sales. Bahama Breeze maintains 11 different lunch and dinner menus to reflect geographic differences in consumer preferences, prices and selections, as well as a children’s menu.

 

4

 



 

 

Smokey Bones

 

Smokey Bones features barbequed pork, beef and chicken, as well as other grilled favorites, all served in a lively yet comfortable mountain-lodge setting that features televised sports. We opened the first Smokey Bones in September 1999, and began national expansion of the concept in fiscal 2002. We opened 26 new Smokey Bones restaurants during fiscal 2006, and had 126 restaurants in operation at the end of the fiscal year. Softening of sales at Smokey Bones during fiscal 2006, however, led us to reevaluate our new restaurant opening strategy. During the third quarter of fiscal 2006, we recorded an impairment charge for five Smokey Bones restaurants, three of which were permanently closed. We have identified a new direction for Smokey Bones that eliminates the barbeque-centric parts of the brand that we believe are a barrier to greater occasion breadth and increased frequency. During fiscal 2007, we plan to focus on the new direction for the Smokey Bones brand to increase breadth of appeal and to test the new direction in several remodeled restaurants starting in the second quarter of fiscal 2007, while limiting its new restaurant openings to the five locations under construction at the end of fiscal 2006. Depending on test results, we may invest further in a significant repositioning of the Smokey Bones brand, which may include a change of the concept’s name.

 

Most Smokey Bones dinner entrée prices range from $9.29 to $15.99, and most lunch entrée prices range from $6.49 to $8.99. During fiscal 2006, the average check per person was $14.00 to $15.00, with alcoholic beverages accounting for approximately 10.3 percent of Smokey Bones’ sales. Smokey Bones maintains approximately 14 different menus across its trade areas to reflect geographic differences in consumer preferences, prices and selections, as well as a children’s menu.

 

Recent and Planned Growth

 

During fiscal 2006, we opened 60 new restaurants (excluding the relocation of existing restaurants to new sites and the rebuilding of restaurants at existing sites) and closed 11 restaurants. In addition, we had three restaurants closed temporarily at the end of fiscal 2006, two of which we expect to reopen during fiscal 2007, and one we expect to reopen during fiscal 2008. This resulted in a net increase of 46 restaurants in fiscal 2006. We plan to open approximately 39-45 new Red Lobster, Olive Garden, Smokey Bones and Seasons 52 restaurants during fiscal 2007 (excluding relocations and rebuilds). Our actual and projected new openings by concept (excluding relocations and rebuilds) are shown below.

 

 

Actual New

Restaurant Openings

Fiscal 2006

Projected New

Restaurant Openings

Fiscal 2007

Red Lobster

8

2-3

Olive Garden

24

30-35

Bahama Breeze

0

0

Smokey Bones

26

5

Seasons 52

          2

                          2

Totals

60

39-45

 

The actual number of openings for each of our concepts will depend on many factors, including our ability to locate appropriate sites, negotiate acceptable purchase or lease terms, obtain necessary local governmental permits, complete construction, and recruit and train restaurant management and hourly personnel. Our objective is to continue to expand our current portfolio of restaurant concepts, and to develop or acquire additional concepts that can be expanded profitably. We have continued to test new ideas and concepts, and also to evaluate potential acquisition candidates to assess whether they would satisfy our strategic and financial objectives.

 

We consider location to be a critical factor in determining a restaurant’s long-term success, and we devote significant effort to the site selection process. Prior to entering a market, we conduct a thorough study to determine the optimal number and placement of restaurants. Our site selection process incorporates a variety of analytical techniques to evaluate key factors. These factors include trade area demographics, such as target population density and household income levels; competitive influences in the trade area; the site’s visibility, accessibility and traffic volume; and proximity to activity centers such as shopping malls, hotel/motel complexes, offices and universities. Members of senior management evaluate, inspect and approve each restaurant site prior to its acquisition.

 

5

 



 

 

Constructing and opening a new restaurant typically takes approximately 180 days on average after permits are obtained and the site is acquired.

 

The following table illustrates the approximate average capital investment, size and dining capacity of the 11 Red Lobster, 24 Olive Garden and 26 Smokey Bones restaurants that were opened during fiscal 2006 (including relocations but excluding rebuilds, in-line spaces, and conversions of existing restaurants).

 

 

Capital

Investment(1)

Square

Feet(2)

Dining

Seats(3)

Dining

Tables(4)

Red Lobster

$4,052,000

7,253

213

60

Olive Garden

$3,981,000

7,570

216

59

Smokey Bones

$3,663,000

6,893

210

49

 

(1) Estimated final cost includes net present value of leases and working capital credit, but excludes internal overhead.

(2) Includes all space under the roof, including the coolers and freezers, but excludes gazebos, pavilions and porte cocheres.

(3) Includes bar dining seats and patio seating, but excludes bar stools.

(4) Includes patio dining tables.

 

We systematically review the performance of our restaurants to ensure that each one meets our standards. When a restaurant falls below minimum standards, we conduct a thorough analysis to determine the causes, and implement marketing and operational plans to improve that restaurant’s performance. If performance does not improve to acceptable levels, the restaurant is evaluated for relocation, closing or conversion to one of our other concepts.

 

During fiscal 2006, we permanently closed four and relocated three Red Lobster restaurants, permanently closed three and relocated one Olive Garden restaurant, and permanently closed four Smokey Bones restaurants. During fiscal 2006, we also wrote down the carrying value of two Smokey Bones restaurants, which continued to operate. We continue to evaluate our site locations in order to minimize the risk of future asset impairment charges.

 

Restaurant Operations

 

We believe that high-quality restaurant management is critical to our long-term success. We also believe that our leadership position, strong success-oriented culture and various short-term and long-term incentive programs, including stock options, restricted stock or stock units, help attract and retain highly motivated restaurant managers.

 

Our restaurant management structure varies by concept and restaurant size. Each restaurant is led by a general manager and three to five additional managers, depending on the operating complexity and sales volume of the restaurant. Each restaurant also employs approximately 50-180 hourly employees, most of whom work part-time. We issue detailed operations manuals covering all aspects of restaurant operations, as well as food and beverage manuals which detail the preparation procedures of our recipes. The restaurant management teams are responsible for the day-to-day operation of each restaurant and for ensuring compliance with our operating standards. At our three largest concepts, Red Lobster, Olive Garden and Smokey Bones, restaurant general managers report to directors. At Red Lobster and Olive Garden, each director was responsible for six to 11 restaurants at the end of fiscal 2006, which is our target range for each director at established concepts. At Smokey Bones, each director was responsible for four to seven restaurants at the end of fiscal 2006. Restaurants are visited regularly by all levels of supervision to help ensure strict adherence to all aspects of our standards.

 

Each concept’s vice president or director of training, together with senior operations executives, are responsible for developing and maintaining that concept’s operations training programs. These efforts include a 12 to 15-week training program for management trainees, and continuing development programs for managers, supervisors and directors. The emphasis of the training and development programs varies by restaurant concept, but includes leadership, restaurant business management and culinary skills. We also use a highly structured training program to open new restaurants, including deploying training teams experienced in all aspects of restaurant

 

6

 



 

 

operations. The opening training teams typically begin work one week prior to opening and remain at the new restaurant up to three weeks after the opening. They are re-deployed as appropriate to enable a smooth transition to the restaurant’s operating staff.

 

Quality Assurance

 

Our Total Quality Department helps ensure that all restaurants provide safe, high-quality food in a clean and safe environment. Through rigorous physical evaluation and testing at our North American laboratories and through “point source inspection” by our international team of Quality Specialists in several foreign countries, we purchase only seafood that meets or exceeds our specifications. We use independent third parties to inspect and evaluate commodity vendors. In addition, any commodity supplier that produces a “high risk” product is subject to a food safety evaluation by Darden personnel at least annually. We require our suppliers to maintain sound manufacturing practices and operate with the comprehensive HACCP food safety programs in place. Since 1976, we have required routine microbiological testing of seafood and other commodities for quality and microbiological safety. In addition, Darden Total Quality Managers and third party auditors visit each restaurant periodically throughout the year to review food handling and to provide education and training in food safety and sanitation. The Total Quality managers also serve as a liaison to regulatory agencies on issues relating to food safety.

 

Purchasing and Distribution

 

Our ability to ensure a consistent supply of high-quality food and supplies at competitive prices to all of our restaurant concepts depends upon procurement from reliable sources. Our purchasing staff sources, negotiates and purchases food and supplies from more than 2,000 suppliers in approximately 45 countries. Suppliers must meet strict quality control standards in the development, harvest, catch and production of food products. Competitive bids, long-term contracts and long-term vendor relationships are routinely used to manage availability and cost of products.

 

We believe that our seafood purchasing capabilities are a significant competitive advantage. Our purchasing staff travels routinely within the United States and internationally to source more than 100 varieties of top-quality seafood at competitive prices. We believe that we have established excellent long-term relationships with key seafood vendors, and usually source our product directly from producers (not brokers or middlemen). We operate procurement offices in Singapore and Toronto, our only purchasing offices outside of Orlando, to source products directly from Asia and Canada. While the supply of certain seafood species is volatile, we believe we have the ability to identify alternative seafood products and to adjust our menus as necessary. All other essential food products are available, or can be made available upon short notice, from alternative qualified suppliers. Because of the relatively rapid turnover of perishable food products, inventories in the restaurants have a modest aggregate dollar value in relation to sales. Controlled inventories of specified products are distributed to all restaurants through independent national distribution companies.             

 

Our supplier diversity program is an integral part of our purchasing efforts. Through this program, we identify minority and women-owned vendors and assist them in establishing supplier relationships with us. We are committed to the development and growth of minority and women-owned enterprises, and in fiscal 2006 we spent approximately 8 percent and 2.5 percent, respectively, of our purchasing dollars with those firms.

 

We continue to invest in new technologies to improve our purchasing and restaurant operations. We are in the process of implementing “iKitchen,” a web-based software system, at all of our restaurants. The system is designed to more efficiently handle restaurant product orders, receiving, invoice approval and inventories.

 

Advertising and Marketing

 

We believe we have developed significant marketing and advertising capabilities. Our size enables us to be a leading advertiser in the casual dining segment of the restaurant industry. Red Lobster and Olive Garden leverage the efficiency of national network television advertising and supplement it with local television advertising. Bahama Breeze and Smokey Bones do not use national television advertising. Our restaurants appeal to a broad spectrum of consumers and we use advertising and product promotions to attract customers. We implement periodic promotions as appropriate to maintain and increase our sales and profits. We also rely on radio and newspaper advertising, as

 

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well as newspaper and direct mail coupon programs, as appropriate, to attract customers. We have developed and consistently use sophisticated consumer marketing research techniques to monitor customer satisfaction and evolving expectations.

 

Employees

 

At the end of fiscal 2006, we employed approximately 157,300 persons. Of these employees, approximately 1,300 were corporate or restaurant concept personnel located in our restaurant support center in Orlando, Florida, approximately 6,300 were restaurant management personnel in the restaurants or in field offices, and the remainder were hourly restaurant personnel. Of the restaurant support center employees, approximately 60 percent were management personnel and the balance were administrative or office employees. Our operating executives have an average of more than 13 years of experience with us. The restaurant general managers average 12 years with us. We believe that we provide working conditions and compensation that compare favorably with those of our competitors. Most employees, other than restaurant management and corporate management, are paid on an hourly basis. None of our employees are covered by a collective bargaining agreement. We consider our employee relations to be good.

 

Information Technology

 

We strive for leadership in the restaurant business by using technology as a competitive advantage and as an enabler of our strategy. Since 1975, computers located in the restaurants have been used to assist in the management of the restaurants. We have implemented systems targeted at improved financial control, cost management, enhanced guest service and improved employee effectiveness. Management information systems are designed to be used across restaurant concepts, yet are flexible enough to meet the unique needs of each restaurant concept. Several years ago, we implemented a suite of web-enabled and fully integrated financial and human resource (including payroll and benefits) systems. We also implemented a high-speed data network connecting all restaurants to all current and anticipated future applications. In the past year, we began the implementation of “DASH,” a next generation technology platform for our restaurant point of sale system. We expect to deploy the new platform, including new hardware and software, to all restaurant concepts over the next two years. We are also in the process of implementing “iKitchen,” a web-based software system designed to more efficiently handle restaurant product orders and other related matters, as discussed above under “Purchasing and Distribution.”

 

Restaurant hardware and software support is provided or coordinated from the restaurant support center in Orlando, Florida, seven days a week, 24 hours a day. A communications network sends and receives critical business data to and from the restaurants throughout the day and night, providing timely and extensive information on business activity in every location. The restaurant support center houses our data center, which contains sufficient computing power to process information from all restaurants quickly and efficiently. Our information is processed in a secured environment to protect both the actual data and the physical assets. We guard against business interruption by maintaining a disaster recovery plan, which includes storing critical business information off-site, testing the disaster recovery plan at a hot-site facility and providing on-site power backup via a large diesel generator. We use internally developed proprietary software, as well as purchased software, with proven, non-proprietary hardware. This allows processing power to be distributed effectively to each of our restaurants.

 

Our management believes that our current systems and practice of implementing regular updates will position us well to support current needs and future growth. We are committed to maintaining an industry leadership position in information systems and computing technology. We use a strategic information systems planning process that involves senior management and is integrated into our overall business planning. Information systems projects are prioritized based upon strategic, financial, regulatory and other business advantage criteria.

 

Competition

 

The restaurant industry is intensely competitive with respect to the type and quality of food, price, service, restaurant location, personnel, concept, attractiveness of facilities, and effectiveness of advertising and marketing. The restaurant business is often affected by changes in consumer tastes; national, regional or local economic conditions; demographic trends; traffic patterns; the type, number and location of competing restaurants; and consumers’ discretionary purchasing power. We compete within each market with national and regional chains and

 

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locally-owned restaurants for customers, management and hourly personnel and suitable real estate sites. We also face growing competition from the supermarket industry, which offers “convenient meals” in the form of improved entrées and side dishes from the deli section. We expect intense competition to continue in all of these areas.

 

Other factors pertaining to our competitive position in the industry are addressed under the sections entitled “Purchasing and Distribution,” “Advertising and Marketing,” “Information Technology” and “Risk Factors” elsewhere in this report.

 

Trademarks and Related Agreements

 

We regard our Darden Restaurants®, Red Lobster®, Olive Garden®, Bahama Breeze®, Smokey Bones Barbeque & Grill® and Seasons 52® service marks, and other service marks related to our restaurant businesses, as having significant value and as being important to our marketing efforts. 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 are conducted through an Area Development and Franchise Agreement with Reins International, Inc. (“Reins”), an unaffiliated Japanese corporation. Reins operated 42 Red Lobster restaurants in Japan as of May 28, 2006. We do not have an ownership interest in Reins, but we 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 2006 and 2005, our sales were highest in the spring and winter, followed by summer, and lowest in the fall. During fiscal 2004, our sales were highest in the spring, lowest in the fall, and comparable during winter and summer. Holidays, severe weather and similar conditions may impact sales volumes seasonally in some operating regions.

 

Government Regulation

 

We are subject to various federal, state and local laws affecting our business. Each of our restaurants must comply with licensing requirements and regulations by a number of governmental authorities, which include health, safety and fire agencies in the state or municipality in which the restaurant is located. The development and operation of restaurants depend on selecting and acquiring suitable sites, which are subject to zoning, land use, environmental, traffic and other regulations. To date, we have not been significantly affected by any difficulty, delay or failure to obtain required licenses or approvals.

 

During fiscal 2006, approximately 8.9 percent of our sales were attributable to the sale of alcoholic beverages. Regulations governing their sale require licensure by each site (in most cases, on an annual basis), and licenses may be revoked or suspended for cause at any time. These regulations relate to many aspects of restaurant operation, including the minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, and storage and dispensing of alcoholic beverages. The failure of a restaurant to obtain or retain these licenses would adversely affect the restaurant’s operations. We also are subject in certain states to “dram-shop” statutes, which generally provide an injured party with recourse against an establishment that serves alcoholic beverages to an intoxicated person, who then causes injury to himself or a third party. We carry liquor liability coverage as part of our comprehensive general liability insurance.

 

We also are subject to federal and state minimum wage laws and other laws governing such matters as overtime, tip credits, working conditions, safety standards, and hiring and employment practices. Changes in these laws during fiscal 2006 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.

 

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                We are subject to federal and state environmental regulations, but these rules have not had a material effect on our operations. During fiscal 2006, 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.

 

Cautionary Statement Regarding Forward-Looking Statements

This report may contain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Darden Restaurants, Inc. and its subsidiaries. Statements preceded by, followed by or that include words such as “may,” “will,” “expect,” “intend,” “anticipate,” “continue,” “estimate,” “project,” “believe,” “plan” or similar expressions are intended to identify some of the forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are included, along with this statement, for purposes of complying with the safe harbor provisions of that Act. These forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the risks and uncertainties described in this report, including under the heading “Risk Factors,” and the documents incorporated by reference in this report. We undertake no obligation to update publicly or revise any forward-looking statements for any reason, whether as a result of new information, future events or otherwise.

Executive Officers of the Registrant

 

 

Our executive officers as of July 29, 2006 are listed below.

 

Clarence Otis, Jr., age 50, has been our Chairman of the Board since November 2005, Chief Executive Officer since November 2004, and a Director since September 2004. Mr. Otis was our Executive Vice President from March 2002 until November 2004 and President of Smokey Bones Barbeque & Grill from December 2002 until November 2004. He served as our Senior Vice President from December 1999 until April 2002, and our Chief Financial Officer from December 1999 until December 2002. He joined us in 1995 as Vice President and Treasurer. He served as our Senior Vice President, Investor Relations and Treasurer from July 1997 to July 1998, and as Senior Vice President, Finance and Treasurer from July 1998 until December 1999. From 1991 to 1995, he was employed by Chemical Securities, Inc. (now J.P. Morgan Securities, Inc.), an investment banking firm, where he had been Managing Director and Manager of Public Finance.

 

Andrew H. (Drew) Madsen, age 50, has been our President and Chief Operating Officer since November 2004, and a Director since September 2004. Mr. Madsen was our Senior Vice President and President of Olive Garden from March 2002 until November 2004, and Executive Vice President of Marketing for Olive Garden from December 1998 to March 2002. From 1997 until joining us, he was President of International Master Publishers, Inc., a company that developed and marketed consumer information products such as magazines and compact discs. From 1993 until 1997, he held various positions at James River Corporation (now part of Georgia-Pacific Corporation, a diversified paper and building products manufacturer), including Vice President and General Manager for the Dixie consumer products unit.

 

Blaine Sweatt, III, age 58, has been our President, New Business Development since February 1996, Executive Vice President since April 1995, and a Director since 1995. He led teams that developed the Olive Garden, Bahama Breeze, Smokey Bones and Seasons 52 concepts, among others. He joined Red Lobster in 1976 and was named Director of New Restaurant Concept Development in 1981. From 1986 to 1989, he held various positions with General Mills, Inc., a manufacturer and marketer of consumer food products and our former parent company.

 

James (J.J.) Buettgen, age 46, has been our Senior Vice President and President of Smokey Bones Barbeque & Grill since November 2004. From August 2004 until assuming his current position he was our Senior Vice President and President-designate of Smokey Bones. From July 2003 until August 2004, he was President of Big

 

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Bowl Asian Kitchen, a casual dining company owned by Brinker International, Inc., a restaurant operator, and from October 2002 until June 2003 he was Senior Vice President of Marketing and Brand Development for Brinker. From 1999 to 2002, he was Senior Vice President of Marketing and Sales for Disneyland Resorts, a division of the Walt Disney Company, where he helped launch Disney’s California Adventure theme park, and from 1998 to 1999 was Senior Vice President of Marketing for Hollywood Entertainment Group, a video retailer. He held several marketing posts with our former parent company, General Mills, Inc., a manufacturer and marketer of consumer food products, from 1989 through 1994, and served first as a director and then as Vice President of Marketing for Olive Garden from 1994 until 1998.

 

Laurie B. Burns, age 44, 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 55, has been our Senior Vice President and Chief Financial Officer since December 2002. She joined us in 1982, and served as Senior Vice President, Financial Operations of Red Lobster from 1993 to July 1998, as our Senior Vice President, Corporate Controller and Business Information Systems from July 1998 to December 1999, and as our Senior Vice President, Chief Information Officer from December 1999 until assuming her current position in December 2002.

 

Kim A. Lopdrup, age 48, has been our Senior Vice President and President of Red Lobster since May 2004. He joined us in November 2003 as Executive Vice President of Marketing for Red Lobster. From 2001 until 2002, he served as Executive Vice President and Chief Operating Officer for North American operations of Burger King Corporation, an operator and franchiser of fast food restaurants. From 1985 until 2001, he worked for Allied Domecq Quick Service Restaurants (“ADQSR”), a franchiser of quick service restaurants including Dunkin’ Donuts, Baskin-Robbins and Togo’s Eateries, where he held progressively more responsible positions in marketing, strategic and general management roles, eventually serving as Chief Executive Officer of ADQSR International.

 

Daniel M. Lyons, age 53, has been our Senior Vice President, Human Resources since January 1997. He joined us in 1993 as Senior Vice President of Personnel for Olive Garden. Prior to joining Olive Garden, he spent 18 years with the Quaker Oats Company, an international marketer of food and beverage products, holding increasingly more responsible positions including Vice President Human Resources for the North American Breakfast Food Division.

 

Barry B. Moullet, age 48, has been our Senior Vice President, Supply Chain & Development since August 2003. He served as our Senior Vice President Purchasing, Distribution and Food Safety from June 1999 until August 2003. He joined us in July 1996 as Senior Vice President, Purchasing and Distribution. Prior to joining us, he spent 15 years in the purchasing field in various positions with Restaurant Services, Inc., a Burger King purchasing co-operative, KFC Corporation and the Pillsbury Company.

 

David T. Pickens, age 51, has been our Senior Vice President and President of Olive Garden since December 2004. He joined us in 1973 as a Red Lobster hourly employee, and progressed from manager trainee to regional operations manager, director of operations, and ultimately was promoted to a division Senior Vice President of Operations for Red Lobster. He joined Olive Garden in 1995 as Senior Vice President of Operations for the Orlando division and was promoted to Executive Vice President of Operations in September 1999, where he served until his promotion to President of Olive Garden in December 2004.

 

C. Bradford Richmond, age 47, has been our Senior Vice President, Corporate Controller since August 2005. He served as Senior Vice President Finance, Strategic Planning and Controller of Red Lobster from January 2003 to August 2005, and previously was Senior Vice President, Finance and Controller at Olive Garden from August 1998 to January 2003. He joined us in 1982 as a food and beverage analyst for Casa Gallardo, a restaurant concept formerly owned and operated by us, and from June 1985 to August 1998 held progressively more responsible finance and marketing analyst positions with our York Steak House, Red Lobster and Olive Garden operating companies in both the United States and Canada.

 

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Paula J. Shives, age 55, 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., a seafood restaurant company.

 

Richard J. Walsh, age 54, has been our Senior Vice President, Corporate Affairs since 1994. He joined General Mills, Inc., a manufacturer and marketer of consumer food products and our former parent company, in 1984 as Manager of Government Affairs for Red Lobster. He served as Vice President of Government and Community Relations for General Mills Restaurants, Inc. from 1987 until assuming his current position in December 1994.

 

Item 1A. RISK FACTORS

 

Various risks and uncertainties could affect our business. Any of the risks described below or elsewhere in this report or our other filings with the Securities and Exchange Commission could have a material impact on our business, financial condition or results of operations. It is not possible to predict or identify all risk factors. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also impair our business operations. Therefore, the following is not intended to be a complete discussion of all potential risks or uncertainties.

 

We face intense competition, and if we are unable to continue to compete effectively, our business, financial condition and results of operations would be adversely affected.

The casual dining sector of the restaurant industry is intensely competitive with respect to pricing, service, location, personnel and type and quality of food, and there are many well-established competitors. We compete within each market with national and regional restaurant chains and locally-owned restaurants. We also face growing competition as a result of the trend toward convergence in grocery, deli and restaurant services, particularly in the supermarket industry which offers “convenient meals” in the form of improved entrées and side dishes from the deli section. We compete primarily on the quality, variety and value perception of menu items. The number and location of restaurants, type of concept, quality and efficiency of service, attractiveness of facilities and effectiveness of advertising and marketing programs are also important factors. We anticipate that intense competition will continue with respect to all of these factors. If we are unable to continue to compete effectively, our business, financial condition and results of operations would be adversely affected.

Certain economic and business factors specific to the restaurant industry and certain general economic factors that are largely out of our control may adversely affect our results of operations.

Our business results depend on a number of industry-specific and general economic factors, many of which are beyond our control. The casual dining sector of the restaurant industry is affected by changes in national, regional and local economic conditions, seasonal fluctuation of sales volumes, consumer preferences, including changes in consumer tastes and dietary habits and the level of consumer acceptance of our restaurant concepts, and consumer spending patterns. The performance of individual restaurants may also be adversely affected by factors such as demographic trends, severe weather including hurricanes, traffic patterns, the price and availability of gasoline and the type, number and location of competing restaurants.

In addition, general economic conditions, such as recessionary economic cycles, a protracted economic slowdown, a worsening economy or industry-wide cost pressures, could affect consumer behavior and spending for restaurant dining occasions and lead to a decline in sales and earnings. Furthermore, we cannot predict the effects of actual or threatened armed conflicts or terrorist attacks, efforts to combat terrorism, military action against any foreign state or group located in a foreign state or heightened security requirements on the economy or consumer confidence in the United States. Any of these events could also affect consumer spending patterns or result in increased costs for us due to security measures.

Unfavorable changes in the above factors or in other business and economic conditions affecting our customers could increase our costs, reduce traffic in some or all of our restaurants or impose practical limits on pricing, any of which could lower our profit margins and have a material adverse affect on our financial condition and results of operations.

 

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The price and availability of food, ingredients and utilities used by our restaurants could adversely affect our revenues and results of operations.

Our results of operations depend significantly on our ability to anticipate and react to changes in the price and availability of food, ingredients, utilities and other related costs over which we may have little control. Operating margins for our restaurants are subject to changes in the price and availability of food commodities, including shrimp, lobster, crab and other seafood, as well as beef, pork, chicken, cheese and produce. The introduction of or changes to tariffs on imported shrimp or other food products could increase our costs and possibly impact the supply of those products. We are subject to the general risks of inflation. In addition, possible shortages or interruptions in the supply of food items caused by inclement weather or other conditions beyond our control could adversely affect the availability, quality and cost of the items we buy. Our restaurants’ operating margins are also affected by fluctuations in the price of utilities such as natural gas, whether as a result of inflation or otherwise, on which the restaurants depend for their energy supply. Our inability to anticipate and respond effectively to an adverse change in any of these factors could have a significant adverse effect on our results of operations.

We may be subject to increased labor and insurance costs.

Our restaurant operations are subject to federal and state laws governing such matters as minimum wages, working conditions, overtime and tip credits. We have a substantial number of employees who are paid wage rates at or slightly above the minimum wage. As federal and state minimum wage rates increase, we may need to increase not only the wages of our minimum wage employees but also the wages paid to employees at wage rates that are above minimum wage. Labor shortages and increased employee turnover could also increase our labor costs. If competitive pressures or other factors prevent us from offsetting increased labor costs by increases in prices, our profitability may decline. In addition, the current premiums that we pay for our insurance (including workers’ compensation, general liability, property, health, and directors’ and officers’ liability) may increase at any time, thereby further increasing our costs. The dollar amount of claims that we actually experience under our workers’ compensation and general liability insurance, for which we carry high per-claim deductibles, may also increase at any time, thereby further increasing our costs. Further, the decreased availability of property and liability insurance has the potential to negatively impact the cost of premiums and the magnitude of uninsured losses.

Increased advertising and marketing costs could adversely affect our results of operations.

If our competitors increase their spending on advertising and promotions, if our advertising, media or marketing expenses increase, or if our advertising and promotions become less effective than that of our competitors, we could experience a material adverse effect on our results of operations.

We may experience higher-than-anticipated costs associated with the opening of new restaurants or with the closing, relocating and remodeling of existing restaurants, which may adversely affect our results of operations.

Our revenues and expenses can be impacted significantly by the number and timing of the opening of new restaurants and the closing, relocating and remodeling of existing restaurants. We incur substantial pre-opening expenses each time we open a new restaurant and other expenses when we close, relocate or remodel existing restaurants. The expenses of opening, closing, relocating or remodeling any of our restaurants, may be higher than anticipated. An increase in such expenses could have an adverse effect on our results of operations.

Litigation may adversely affect our business, financial condition and results of operations.

Our business is subject to the risk of litigation by employees, consumers, suppliers, shareholders or others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. The outcome of litigation, particularly class action lawsuits and regulatory actions, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to such lawsuits may remain unknown for substantial periods of time. The cost to defend future litigation may be significant. There may also be adverse publicity associated with litigation that could decrease customer acceptance of our services, regardless of whether the allegations are valid or whether we are ultimately found liable. As a result, litigation may adversely affect our business, financial condition and results of operations.

 

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Unfavorable publicity could harm our business.

Multi-unit restaurant businesses such as ours can be adversely affected by publicity resulting from complaints or litigation alleging poor food quality, food-borne illness, personal injury, adverse health effects (including obesity) or other concerns. Negative publicity may also result from actual or alleged violations by our restaurants of “dram shop” laws which generally provide an injured party with recourse against an establishment that serves alcoholic beverages to an intoxicated party who then causes injury to himself or to a third party. Regardless of whether the allegations or complaints are valid, unfavorable publicity relating to a limited number of our restaurants, or only to a single restaurant, could adversely affect public perception of the entire brand. Adverse publicity and its effect on overall consumer perceptions of food safety could have a material adverse effect on our business.

A lack of availability of suitable locations for new restaurants or a decline in the quality of the locations of our current restaurants may adversely affect our revenues and results of operations.

The success of our restaurants depends in large part on their location. As demographic and economic patterns change, current locations may not continue to be attractive or profitable. Possible declines in neighborhoods where our restaurants are located or adverse economic conditions in areas surrounding those neighborhoods could result in reduced revenues in those locations. In addition, desirable locations for new restaurant openings or for the relocation of existing restaurants may not be available at an acceptable cost when we identify a particular opportunity for a new restaurant or relocation. The occurrence of one or more of these events could have a significant adverse effect on our revenues and results of operations.

We are subject to a number of risks relating to federal, state and local regulation of our business that may increase our costs and decrease our profit margins.

The restaurant industry is subject to extensive federal, state and local laws and regulations, including those relating to building and zoning requirements and those relating to the preparation and sale of food. The development and operation of restaurants depend to a significant extent on the selection and acquisition of suitable sites, which are subject to zoning, land use, environmental, traffic and other regulations and requirements. We are also subject to licensing and regulation by state and local authorities relating to health, sanitation, safety and fire standards and liquor licenses, federal and state laws governing our relationships with employees (including the Fair Labor Standards Act of 1938 and the Immigration Reform and Control Act of 1986 and applicable requirements concerning the minimum wage, overtime, family leave, tip credits, working conditions, safety standards and immigration status), federal and state laws which prohibit discrimination and other laws regulating the design and operation of facilities, such as the Americans With Disabilities Act of 1990. In addition, we are subject to a variety of federal, state and local laws and regulations relating to the use, storage, discharge, emission, and disposal of hazardous materials. The impact of current laws and regulations, the effect of future changes in laws or regulations that impose additional requirements and the consequences of litigation relating to current or future laws and regulations could increase our compliance and other costs of doing business and therefore have an adverse effect on our results of operations. Failure to comply with the laws and regulatory requirements of federal, state and local authorities could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability.

Our growth through the opening of new restaurants and the development or acquisition of new dining concepts may not be successful and could result in poor financial performance.

As part of our business strategy, we intend to continue to expand our current portfolio of restaurant concepts and to develop or acquire additional concepts that can be expanded profitably. This strategy involves numerous risks, and we may not be able to achieve our growth objectives. We may not be able to open all of our planned new restaurants, and the new restaurants that we open may not be profitable or as profitable as our existing restaurants. New restaurants typically experience an adjustment period before sales levels and operating margins normalize, and even sales at successful newly-opened restaurants generally do not make a significant contribution to profitability in their initial months of operation. The opening of new restaurants can also have an adverse effect on sales levels at existing restaurants. There are additional risks involved with expanding newer concepts (such as Bahama Breeze and Smokey Bones) that have not yet proven their long-term viability. Furthermore, we may not be able to develop or acquire additional concepts that are as profitable as our existing restaurants. Growth through acquisitions may involve additional risks. For example, we may pay too much for a concept relative to the actual

 

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economic return, be required to borrow funds to make our acquisition (which would increase our interest expense) or be unable to integrate an acquired concept into our operations.

The ability to open and profitably operate restaurants is subject to various risks, such as the identification and availability of suitable and economically viable locations, the negotiation of acceptable lease or purchase terms for new locations, the need to obtain all required governmental permits (including zoning approvals and liquor licenses) on a timely basis, the need to comply with other regulatory requirements, the availability of necessary contractors and subcontractors, the ability to meet construction schedules and budgets, the ability to manage union activities such as picketing or hand billing which could delay construction, increases in labor and building materials costs, the availability of financing at acceptable rates and terms, changes in weather or other acts of God that could result in construction delays and adversely affect the results of one or more restaurants for an indeterminate amount of time, our ability to hire and train qualified management personnel and general economic and business conditions. At each potential location, we compete with other restaurants and retail businesses for desirable development sites, construction contractors, management personnel, hourly employees and other resources. If we are unable to successfully manage these risks, we could face increased costs and lower than anticipated revenues and earnings in future periods.

Our plans to improve financial performance at Bahama Breeze and Smokey Bones and reposition the Smokey Bones brand may not be successful, which could require us to make substantial further investments in those concepts and result in further losses and impairments.

 

While each of our restaurant concepts, as well as each of our individual restaurants, are subject to the risks and uncertainties described above, there is an enhanced level of risk and uncertainty related to the operation and expansion of our newer concepts such as Bahama Breeze and Smokey Bones. These concepts have not yet proven their long-term viability or growth potential. We have made substantial investments in the development and expansion of each of these concepts, and further investment is required in order to bring the financial performance of these concepts to acceptable levels. Until we have improved the financial performance of Bahama Breeze and Smokey Bones, further growth of those concepts has been postponed. While we have identified and continue to implement a number of structural changes to operations at Bahama Breeze, those changes may not be successful in improving guest experience and restaurant-level returns. At Smokey Bones, we believe we have identified significant barriers to greater occasion breadth and increased frequency that we must eliminate or reduce. Our plan to change the direction of Smokey Bones in order to address these issues has not yet been tested and may not be successful. If the test is not successful, we may incur further losses and impairment charges at that concept. Even if the test results are positive, we will need to make substantial additional investments in order to reposition the Smokey Bones brand, and the new brand will be subject to the risks and uncertainties that accompany any emerging restaurant concept.

 

Item 1B. UNRESOLVED SEC COMMENTS

 

 

None.

 

 

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Item 2. PROPERTIES

 

As of May 28, 2006, we operated 1,427 restaurants (including 682 Red Lobster, 582 Olive Garden, 32 Bahama Breeze, 126 Smokey Bones and five Seasons 52 restaurants) in the following locations:

 

Alabama (23)

Iowa (14)

Nevada (12)

South Dakota (4)

Arizona (31)

Kansas (10)

New Hampshire (6)

Tennessee (35)

Arkansas (11)

Kentucky (18)

New Jersey (31)

Texas (118)

California (97)

Louisiana (13)

New Mexico (11)

Utah (13)

Colorado (26)

Maine (4)

New York (54)

Vermont (1)

Connecticut (9)

Maryland (24)

North Carolina (34)

Virginia (49)

Delaware (6)

Massachusetts (13)

North Dakota (4)

Washington (24)

Florida (150)

Michigan (52)

Ohio (88)

West Virginia (7)

Georgia (60)

Minnesota (24)

Oklahoma (19)

Wisconsin (20)

Hawaii (1)

Mississippi (9)

Oregon (12)

Wyoming (2)

Idaho (6)

Missouri (32)

Pennsylvania (73)

Canada (37)

Illinois (56)

Montana (2)

Rhode Island (3)

 

Indiana (47)

Nebraska (8)

South Carolina (24)

 

 

Of our 1,427 restaurants open on May 28, 2006, 850 were located on owned sites and 577 were located on leased sites. The 577 leases are classified as follows:

 

Land-Only Leases (we own buildings and equipment)

459

Ground and Building Leases

66

Space/In-Line/Other Leases

         52

Total

577

 

During fiscal 1999, we formed two subsidiary corporations, each of which elected to be taxed as a Real Estate Investment Trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code. These elections limit the activities of both corporations to holding certain real estate assets. The formation of these two REITs is designed primarily to assist us in managing our real estate portfolio and possibly to provide a vehicle to access capital markets in the future.

 

Both REITs are non-public REITs. Through our subsidiary companies, we indirectly own 100 percent of all voting stock and greater than 99.5 percent of the total value of each REIT. For financial reporting purposes, both REITs are included in our consolidated financial statements.

 

Of the 15 buildings that make up our executive offices, culinary center, training facilities and supporting warehouses in Orange County (Orlando metro area), Florida, we currently own 10 and lease five. On June 20, 2006, we entered into an agreement to sell and lease back the 10 owned buildings. Subject to certain conditions, the sale is expected to close in August 2006. The initial term of the leases would be three years, with two one-year renewal options. We also have assembled several adjacent parcels of vacant land in Orange County, Florida, and have announced our intention to relocate our headquarters to this site. We expect it will take three or more years to design and build a new Restaurant Support Center campus, and no definitive timetable has as yet been established.

 

Except in limited instances, our present restaurant sites and other facilities are not subject to mortgages or encumbrances securing money borrowed by us from outside sources. In our opinion, our current buildings and equipment generally are in good condition, suitable for their purposes and adequate for our current needs, but we expect the new Restaurant Support Center campus to offer a more collaborative and unified environment with additional room for future growth. See also Note 4 “Land, Buildings and Equipment, Net” and Note 12 “Leases” under Notes to Consolidated Financial Statements in our 2006 Annual Report to Shareholders, incorporated herein by reference.

 

16

 



 

 

Item 3. LEGAL PROCEEDINGS

We are subject to private lawsuits, administrative proceedings and claims that arise in the ordinary course of our business. A number of these lawsuits, proceedings and claims may exist at any given time. These matters typically involve claims from guests, employees and others related to operational issues common to the restaurant industry, and can also involve infringement of, or challenges to, our trademarks. While the resolution of a lawsuit, proceeding or claim may have an impact on our financial results for the period in which it is resolved, we believe that the final disposition of the lawsuits, proceedings and claims in which we are currently involved, either individually or in the aggregate, will not have a material adverse effect on our financial position, results of operations or liquidity. The following is a brief description of the more significant of these matters. In view of the inherent uncertainties of litigation, the outcome of any unresolved matter described below cannot be predicted at this time, nor can the amount of any potential loss be reasonably estimated.

Like other restaurant companies and retail employers, we have been faced in a few states with allegations of purported class-wide wage and hour violations. In March 2002 and March 2003, two purported class action lawsuits were brought against us in the Superior Court of Orange County, California by three current and former hourly restaurant employees alleging violations of California labor laws with respect to providing meal and rest breaks. Although we continue to believe we provided the required meal and rest breaks to our employees, to avoid potentially costly and protracted litigation, we agreed during the second quarter of fiscal 2005 to settle both lawsuits and a similar case filed in Sacramento County, for approximately $9.5 million. Terms of the settlement did not include any admission of liability by us, and all settlement proceeds were paid as of the end of the third quarter of fiscal 2006.

In August 2003, three former employees in Washington filed a similar purported class action in Washington State Superior Court in Spokane County alleging violations of Washington labor laws with respect to providing rest breaks. The Court stayed the action and ordered the plaintiffs into our mandatory arbitration program. We believe we provided the required meal and rest breaks to our employees, and we intend to vigorously defend our position in this case.

Beginning in 2002, a total of five purported class action lawsuits were filed in Superior Courts of California (two each in Los Angeles County and Orange County, and one in Sacramento County) in which the plaintiffs allege that they and other current and former service managers, beverage and hospitality managers and culinary managers were improperly classified as exempt employees under California labor laws. The plaintiffs sought unpaid overtime wages and penalties. Two of the cases were removed to arbitration under our mandatory arbitration program, one was stayed to allow consideration of judicial coordination with the other cases, one is proceeding as an individual claim, and one remains a purported class action litigation matter. Although we continue to believe we correctly classified these employees, to avoid potentially costly and protracted litigation, we agreed in February 2006 to a tentative settlement. Without admitting any liability, we agreed to pay up to a maximum total of $11 million to settle all five cases, of which $9 million was recognized during fiscal 2006 and is included in selling, general and administrative expenses. The tentative settlement will be documented in a full settlement agreement and must have court approval. We cannot predict when the settlement will be final but estimate preliminary court approval will occur in the first half of fiscal 2007, with final court approval and payment of the settlement proceeds no earlier than the second quarter of fiscal 2007.

On March 23, 2006, we received a notice that the staff of the U.S. Federal Trade Commission (FTC) was conducting an inquiry into the marketing of our gift cards. We have been cooperating with the staff, providing information and making some voluntary adjustments to the disclosure of dormancy fees that may be imposed on the cards. On July 26, 2006, we were notified that the FTC staff had concluded that we had violated Section 5 of the FTC Act, which prohibits unfair or deceptive acts and practices. The staff asserts that we did not give adequate notice to consumers that our gift cards, if not used for 24 consecutive months, are subject to a gradual reduction in value by a dormancy fee. The notice included a proposed consent order, and indicated that if negotiations based on the order were not successful within 30 days, the staff would recommend to the FTC Bureau Director that a complaint, a copy of which was enclosed, be filed in federal district court. The proposed consent order included, among other things for negotiation, an opening suggestion that we provide equitable monetary relief in the amount of $31,006,630, suspend the collection of dormancy fees on previously issued gift cards, and make certain disclosures relating to dormancy fees. We believe that our gift card marketing practices comply with applicable laws. We have not yet determined a course of action, but have continued to discuss the matter with the FTC staff.

 

17

 



 

 

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

 

Not applicable.

PART II

 

Item 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The principal United States market on which our common shares are traded is the New York Stock Exchange, where our shares are traded under the symbol DRI. As of July 24, 2006, there were approximately 37,327 record holders of our common shares. The information concerning the dividends and high and low intraday sales prices for our common shares traded on the New York Stock Exchange for each full quarterly period during fiscal 2005 and 2006 contained in Note 19 “Quarterly Data (Unaudited)” under Notes to Consolidated Financial Statements in our 2006 Annual Report to Shareholders is incorporated herein by reference. We have not sold any securities during the last fiscal year that were not registered under the Securities Act of 1933.

 

The table below provides information concerning our repurchase of shares of our common stock during the quarter ended May 28, 2006. Since commencing our repurchase program in December 1995, through May 28, 2006 we have repurchased a total of 132.5 million shares under authorizations from our Board of Directors.

 

 




Period

Total Number
of Shares Purchased (1)


Average Price Paid per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

Maximum Number of Shares That
May Yet Be Purchased Under the Plans or Programs (2)

February 27, 2006 through
April 2, 2006

1,219,226

$41.18

1,219,226

6,026,826

April 3, 2006 through
April 30, 2006

775,178

$39.74

775,178

5,251,648

May 1, 2006 through
May 28, 2006

379,685

$37.53

379,685

4,871,963

Total

2,374,089

$40.13

2,374,089

4,871,963

 

(1)

All of the shares purchased during the quarter ended May 28, 2006 were purchased as part of our repurchase program, the authority for which was increased to an aggregate of 137.4 million shares by our Board of Directors on September 28, 2004 and announced publicly in a press release issued that same day. On June 16, 2006, our Board of Directors authorized an additional share repurchase authorization totaling 25 million shares, bringing the total shares authorized to be repurchased to 162.4 million shares. This additional authorization was announced publicly in a press release issued on June 20, 2006. There is no expiration date for our program. The number of shares purchased includes shares withheld for taxes on vesting of restricted stock, and shares delivered or deemed to be delivered to us on tender of stock in payment for the exercise price of options. These shares are included as part of our repurchase program and reduce the repurchase authority granted by our Board. The number of shares repurchased excludes shares we reacquired pursuant to tax withholding on option exercises or forfeiture of restricted stock.

 

(2)

Repurchases are subject to prevailing market prices, may be made in open market or private transactions, and may occur or be discontinued at any time. There can be no assurance that we will repurchase any additional shares. The figures in this column do not include the additional 25 million shares that were authorized to be repurchased by our Board on June 16, 2006.

 

Item 6. SELECTED FINANCIAL DATA

 

The information for fiscal 2002 through 2006 contained in the Five-Year Financial Summary in our 2006 Annual Report to Shareholders is incorporated herein by reference.

 

18

 



 

 

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The information set forth in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2006 Annual Report to Shareholders is incorporated herein by reference.

 

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The text under the heading “Quantitative and Qualitative Disclosures About Market Risk” contained within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2006 Annual Report to Shareholders is incorporated herein by reference.

 

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The Report of Management Responsibilities, Management’s Report on Internal Control Over Financial Reporting, Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting, Report of Independent Registered Public Accounting Firm, Consolidated Statements of Earnings, Consolidated Balance Sheets, Consolidated Statements of Changes in Stockholders’ Equity and Accumulated Other Comprehensive Income (Loss), Consolidated Statements of Cash Flows, and Notes to Consolidated Financial Statements in our 2006 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 28, 2006, 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 28, 2006.

 

During the fiscal quarter ended May 28, 2006, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

The annual report of our management on internal control over financial reporting, and the attestation report of KPMG LLP, our independent registered public accounting firm, regarding our internal control over financial reporting in our 2006 Annual Report to Shareholders, are incorporated herein by reference.

 

Item 9B. OTHER INFORMATION.

 

 

Not applicable.

 

 

19

 



 

 

PART III

 

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 

The information contained in the sections entitled “Who Are This Year’s Nominees?”, “What Board Committees Do You Have?” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive Proxy Statement for our 2006 Annual Meeting of Shareholders is incorporated herein by reference. Information regarding executive officers is contained in Part I above under the heading “Executive Officers of the Registrant.”

 

All of our employees are subject to our Code of Business Conduct and Ethics. Appendix A to the Code provides a special Code of Ethics with additional provisions that apply to our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions (the “Senior Financial Officers”). Appendix B to the Code provides a Code of Business Conduct and Ethics for members of our Board of Directors. These documents are posted on our internet website at www.darden.com and are available in print free of charge to any shareholder who requests them. We will disclose any amendments to or waivers of these Codes for directors, executive officers or Senior Financial Officers on our website.

 

We also have adopted a set of Corporate Governance Guidelines and charters for all of our Board Committees, including the Audit, Compensation, and Nominating and Governance Committees. The Corporate Governance Guidelines and committee charters are available on our website at www.darden.com and in print free of charge to any shareholder who requests them. Written requests for our Code of Business Conduct and Ethics, Corporate Governance Guidelines and committee charters should be addressed to Darden Restaurants, Inc., 5900 Lake Ellenor Drive, Orlando, FL 32809, Attention: Corporate Secretary.

 

Item 11. EXECUTIVE COMPENSATION

 

The information contained in the sections entitled “How Are Directors Compensated?” “Summary Compensation Table” “Option Grants In Last Fiscal Year” “Stock Option Exercises And Holdings” “Do Executive Officers Currently Participate In A Defined Benefit Retirement Plan?” “Do Executive Officers Currently Participate In Any Non-Qualified Deferred Compensation Plan?” “Do Executive Officers Have Any Change-In-Control Arrangements?” “Do Any Of The Executive Officers Have Employment Agreements?” and “Compensation Committee Interlocks And Insider Participation” in our definitive Proxy Statement for our 2006 Annual Meeting of Shareholders, is incorporated herein by reference. The information appearing in the Proxy Statement under the heading “Compensation Committee Report” (except under the heading “Compensation Committee Interlocks And Insider Participation”) is not incorporated herein.

 

Item 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The information contained in the sections entitled “What Shares May Be Issued Under Our Equity Compensation Plans?,” “Security Ownership Of Principal Shareholders” and “Security Ownership Of Management” in our definitive Proxy Statement for our 2006 Annual Meeting of Shareholders, is incorporated herein by reference.

 

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

The information contained in the section entitled “Are There Any Relationships Or Related Transactions Between Us And Our Management?” in our definitive Proxy Statement for our 2006 Annual Meeting of Shareholders, is incorporated herein by reference.

 

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The information contained in the section entitled “Independent Registered Public Accounting Firm Fees And Services” in our definitive Proxy Statement for our 2006 Annual Meeting of Shareholders, is incorporated herein by reference.

 

20

 



 

 

PART IV

 

Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a)

1. Financial Statements:

 

 

Report of Management Responsibilities

 

 

Management’s Report on Internal Control over Financial Reporting

 

 

Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

 

 

Report of Independent Registered Public Accounting Firm

 

Consolidated Statements of Earnings for the fiscal years ended May 28, 2006, May 29, 2005 and May 30, 2004.

 

 

Consolidated Balance Sheets at May 28, 2006 and May 29, 2005.

 

Consolidated Statements of Changes in Stockholders’ Equity and Accumulated Other Comprehensive Income (Loss) for the fiscal years ended May 28, 2006, May 29, 2005 and May 30, 2004.

 

Consolidated Statements of Cash Flows for the fiscal years ended May 28, 2006, May 29, 2005 and May 30, 2004.

 

 

Notes to Consolidated Financial Statements.

 

 

2. Financial Statements Schedules:

 

 

Not applicable.

 

 

3. Exhibits:

 

The exhibits listed in the accompanying Exhibit Index are filed as part of this Form 10-K and incorporated herein by reference. Pursuant to Item 601(b)(4)(iii) of Regulation S-K, copies of certain instruments defining the rights of holders of certain of our long-term debt are not filed, and in lieu thereof, we agree to furnish copies thereof to the Securities and Exchange Commission upon request. The Exhibit Index specifically identifies with an asterisk each management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K. We will furnish copies of any exhibit listed on the Exhibit Index upon request upon the payment of a reasonable fee to cover our expenses in furnishing such exhibits.

 

21

 



 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

                  

 

Dated: July 27, 2006

 

 

DARDEN RESTAURANTS, INC.

 

 

 

 


By: /s/ Clarence Otis, Jr.

 

 

 

 

Clarence Otis, Jr., 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 dates indicated.

 

 

Signature

 

Title

 

Date

 

 

 

 

 

/s/ Clarence Otis, Jr.

 

Director, Chairman of the Board and            
Chief Executive Officer (Principal executive officer)

 

July 27, 2006

Clarence Otis, Jr.

 

 

 

 

 

/s/ Linda J. Dimopoulos

 

Senior Vice President and Chief Financial Officer

(Principal financial and accounting officer)

 

July 27, 2006

Linda J. Dimopoulos

 

 

 

 

 

/s/ Leonard L. Berry*

 

Director

 

 

Leonard L. Berry

 

 

 

 

 

/s/ Odie C. Donald*

 

Director

 

 

Odie C. Donald

 

 

 

 

 

/s/ David H. Hughes*

 

Director

 

 

David H. Hughes

 

 

 

 

 

/s/ Charles A. Ledsinger, Jr.*

 

Director

 

 

Charles A. Ledsinger, Jr.

 

 

 

 

 

/s/ William M. Lewis, Jr.*

 

Director

 

 

William M. Lewis, Jr.

 

 

 

 

 

/s/ Andrew H. Madsen*

 

Director

 

 

Andrew H. Madsen

 

 

 

 

 

/s/ Cornelius McGillicuddy, III* **

 

Director

 

 

Cornelius McGillicuddy, III

 

 

 

 

 

/s/ Michael D. Rose*

 

Director

 

 

Michael D. Rose

 

 

 

 

 

/s/ Maria A. Sastre*

 

Director

 

 

Maria A. Sastre

 

 

 

 

 

/s/ Jack A. Smith*

 

Director

 

 

Jack A. Smith

 

 

22

 



 

 

 

 

 

 

 

 

/s/ Blaine Sweatt, III*

 

Director

 

 

Blaine Sweatt, III

 

 

 

 

 

/s/ Rita P. Wilson*

 

Director

 

 

Rita P. Wilson

 

 

 

 

 

 

 

 

 

*By: 


/s/ Paula J. Shives

 

 

 

 

Paula J. Shives, Attorney-In-Fact
July 27, 2006

 

 

 

 

 

 

**

Popularly known as Senator Connie Mack, III. Senator Mack signs legal documents, including this Form 10-K, under his legal name of Cornelius McGillicuddy, III.

 

 

23

 



 

 

EXHIBIT INDEX

 

 

Exhibit

 

 

Number

Title

 

 

3(a)

Articles of Incorporation as amended May 26, 2005 (incorporated by reference to Exhibit 3(a) to our Annual Report on Form 10-K for the fiscal year ended May 29, 2005).

 

 

3(b)

Bylaws as amended July 21, 2003 (incorporated by reference to Exhibit 3(b) to our Annual Report on Form 10-K for the fiscal year ended May 25, 2003).

 

 

4(a)

Rights Agreement dated as of May 16, 2005 between us and Wachovia Bank, National Association, as Rights Agent (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed May 16, 2005).

 

 

4(b)

Amendment to Rights Agreement dated as of June 2, 2006, by and between us, Wachovia Bank, National Association and Wells Fargo Bank, National Association, as successor Rights Agent (incorporated by reference to Exhibit 4 to our Current Report on Form 8-K filed on June 5, 2006).

 

 

4(c)

Indenture dated as of January 1, 1996, between us and Wells Fargo Bank, National Association (as successor to Wells Fargo Bank Minnesota, National Association, formerly known as Norwest Bank Minnesota, National Association) (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed February 9, 1996).

 

 

 

* 10(a)

Darden Restaurants, Inc. Stock Option and Long-Term Incentive Plan of 1995, as amended March 19, 2003 (incorporated herein by reference to Exhibit 10(b) to our Quarterly Report on Form 10-Q for the quarter ended February 23, 2003).

 

 

 

 

* 10(b)

Darden Restaurants, Inc. FlexComp Plan as amended December 4, 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 Annual Report on Form 10-K for the year ended May 29, 2005).

 

 

 

 

* 10(e)

Executive Health Plan of Darden Restaurants, Inc. (incorporated herein by reference to Exhibit 10(e) to our Registration Statement on Form 10 effective May 5, 1995).

 

 

 

 

* 10(f)

Darden Restaurants, Inc. Stock Plan for Directors, as amended June 19, 2003 (incorporated by reference to Exhibit 10(f) to our Annual Report on Form 10-K for the fiscal year ended May 25, 2003).

 

 

 

 

* 10(g)

Darden Restaurants, Inc. Compensation Plan for Non-Employee Directors, as amended March 19, 2003 (incorporated herein by reference to Exhibit 10(d) to our Quarterly Report on Form 10-Q for the quarter ended February 23, 2003).

 

 

 

 

* 10(h)

Darden Restaurants, Inc. Management and Professional Incentive Plan, as amended June 19, 2003 (incorporated by reference to Exhibit 10(h) to our Annual Report on Form 10-K for the fiscal year ended May 25, 2003).

 

 

 

 

* 10(i)

Benefits Trust Agreement dated as of October 3, 1995, between us and Wells Fargo Bank, National Association (as successor to Wells Fargo Bank Minnesota, National Association, formerly known as Norwest Bank Minnesota, National Association) (incorporated herein by

 

 

24

 



 

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).

 

 

 

 

* 10(k)

Form of documents for our Fiscal 1998 Stock Purchase/Option Award Program, including a Non-Negotiable Promissory Note and a Stock Pledge Agreement (incorporated herein by reference to Exhibit 10(k) to our Annual Report on Form 10-K for the fiscal year ended May 27, 2001).

 

 

 

 

* 10(l)

Darden Restaurants, Inc. Restaurant Management and Employee Stock Plan of 2000, as amended June 19, 2003 (incorporated by reference to Exhibit 10(l) to our Annual Report on Form 10-K for the fiscal year ended May 25, 2003).

 

 

 

 

* 10(m)

Darden Restaurants, Inc. 2002 Stock Incentive Plan, as amended March 19, 2003 (incorporated herein by reference to Exhibit 10(a) to our Quarterly Report on Form 10-Q for the quarter ended February 23, 2003).

 

 

 

10(n)

Credit Agreement dated as of August 16, 2005, among Darden Restaurants, Inc. and the certain banks named therein, Bank of America, N.A. as syndication agent, SunTrust Bank as syndication agent, Wells Fargo Bank, N.A. as documentation agent, and Wachovia Bank, N.A. as administrative agent (incorporated herein by reference to Exhibit 10 to our Current Report on Form 8-K filed August 18, 2005).

 

 

*10(o)

Darden Restaurants, Inc. Director Compensation Program, effective as of October 1, 2005 (incorporated herein by reference to Exhibit 10 to our Current Report on Form 8-K filed December 15, 2005).

 

 

*10(p)

Form of Non-Qualified Stock Option Award Agreement under the Darden Restaurants, Inc. 2002 Stock Incentive Plan (incorporated herein by reference to Exhibit 10(a) to our Current Report on Form 8-K filed June 20, 2006).

 

 

*10(q)

Form of Restricted Stock Award Agreement under the Darden Restaurants, Inc. 2002 Stock Incentive Plan (incorporated herein by reference to Exhibit 10(b) to our Current Report on Form 8-K filed June 20, 2006).

 

 

*10(r)

Form of Restricted Stock Units Award Agreement (U.S.) under the Darden Restaurants, Inc. 2002 Stock Incentive Plan (incorporated herein by reference to Exhibit 10(c) to our Current Report on Form 8-K filed June 20, 2006).

 

 

*10(s)

Form of Restricted Stock Units Award Agreement (Canada) under the Darden Restaurants, Inc. 2002 Stock Incentive Plan (incorporated herein by reference to Exhibit 10(d) to our Current Report on Form 8-K filed June 20, 2006).

 

 

*10(t)

Form of Darden Stock Units Award Agreement (U.S.) under the Darden Restaurants, Inc. 2002 Stock Incentive Plan (incorporated herein by reference to Exhibit 10(e) to our Current Report on Form 8-K filed June 20, 2006).

 

 

*10(u)

Form of Darden Stock Units Award Agreement (Canada) under the Darden Restaurants, Inc. 2002 Stock Incentive Plan (incorporated herein by reference to Exhibit 10(f) to our Current Report on Form 8-K filed June 20, 2006).

 

 

25

 



 

 

 

*10(v)

Darden Restaurants, Inc. Performance Criteria for Annual Cash Bonus under the Management and Professional Incentive Plan for fiscal 2007 (incorporated herein by reference to Exhibit 10(k) to our Current Report on Form 8-K filed June 20, 2006).

 

 

*10(w)

Form of Performance Stock Units Award Agreement under the Darden Restaurants, Inc. 2002 Stock Incentive Plan (incorporated herein by reference to Exhibit 10(g) to our Current Report on Form 8-K filed June 20, 2006).

 

 

*10(x)

Form of Special Project Performance Stock Units Award Agreement under the Darden Restaurants, Inc. 2002 Stock Incentive Plan.

 

 

*10(y)

Special Project Incentive Program – C5 agreement dated August 16, 2002 between Darden Restaurants, Inc. and Blaine Sweatt (incorporated herein by reference to Exhibit 10(h) to our Current Report on Form 8-K filed June 20, 2006).

 

 

*10(z)

Special Project Incentive Program – C5 agreement, as amended, dated June 16, 2006 between Darden Restaurants, Inc. and Blaine Sweatt (incorporated herein by reference to Exhibit 10(i) to our Current Report on Form 8-K filed June 20, 2006).

 

 

*10(aa)

Special Project Incentive Program – Seasons 52 agreement dated June 16, 2002 between Darden Restaurants, Inc. and Blaine Sweatt (incorporated herein by reference to Exhibit 10(j) to our Current Report on Form 8-K filed June 20, 2006).

 

 

12

Computation of Ratio of Consolidated Earnings to Fixed Charges.

 

 

13

Portions of 2006 Annual Report to Shareholders.

 

 

21

Subsidiaries of Darden Restaurants, Inc.

 

 

23

Consent of Independent Registered Public Accounting Firm.

 

 

24

Powers of Attorney.

 

 

31(a)

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

31(b)

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

32(a)

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

32(b)

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

                                               

 

* Items marked with an asterisk are management contracts or compensatory plans or arrangements required to be filed as an exhibit pursuant to Item 14 of Form 10-K and Item 601(b)(10)(iii)(A) of Regulation S-K.

 

26

 



 

 

 

 

 

 

EX-10 3 exhibti10b_flexcompplandoc.htm EXHIBIT 10B FORM 10K 2006 FLEXCOMP PLAN DOCUMENTS

Exhibit 10(b)

 

As amended through January 1, 2004

 

 

 

 

 

 

 

 

 

DARDEN RESTAURANTS, INC.

FLEXCOMP PLAN

 

 

 

 

 

DARDEN RESTAURANTS, INC.

FLEXCOMP PLAN

 

ARTICLE I

INTRODUCTION

 

Section 1.1      Purpose of Plan. Darden Restaurants, Inc. (formerly known as “General Mills Restaurants, Inc.”) hereby adopts the Darden Restaurants, Inc. FlexComp Plan (the “Plan”) for a select group of the key management and highly compensated employees of the Company as a means of providing bonus income and a method for sheltering a portion of an eligible individual’s income from current taxation by providing (i) current bonus income (referred to herein as “FlexComp Awards”) on an annual basis and providing a means by which an eligible individual may elect to defer the payment of all or a portion of his or her FlexComp Award for a period of one or more years, and (ii) a means by which an eligible individual may elect to defer the payment of all or a portion of his or her salary and/or applicable bonus (in addition to his FlexComp Awards) for a period of one or more years. In addition, this Plan is intended to be a successor Plan with respect to certain liabilities on behalf of certain individuals who had deferred compensation accounts under the General Mills Restaurants, Inc. FlexComp Plan, the General Mills, Inc. Deferred Compensation Plan and/or the Supplemental Savings Plan of General Mills, Inc. immediately prior to the Effective Date, which liabilities were transferred to this Plan as a result of the spin-off of General Mills Restaurants, Inc. from General Mills, Inc.

 

Section 1.2      Effective Date of Plan. This Plan is a successor plan to the plans named below as of the Effective Date. This Plan was amended, effective January 1, 1996, to allow for the deferral of salary and bonuses with respect to eligible individuals. The original effective date of the predecessor plans, from which liabilities are transferred to this Plan, are as follows:

 

 

(a)

The original effective date of the General Mills Restaurants, Inc. FlexComp Plan was June 1, 1994;

 

 

(b)

The original effective date of the General Mills, Inc. Deferred Compensation Plan was May 1, 1984; and

 

 

(c)

The original effective date of the Supplemental Savings Plan of General Mills, Inc. was July 25, 1983.

 

The Plan has been amended from time to time from its original effective date. This amendment and restatement includes all amendments through July 26, 2002.

 

 

 

 

ARTICLE II

DEFINITIONS

 

Section 2.1      Code shall mean the Internal Revenue Code of 1986, as amended from time to time.

 

Section 2.2       Committee shall mean the Minor Amendment Committee of the Board of Directors of the Company or its delegate or the Compensation Committee of the Board of Directors with respect to any determination that is made with respect to a Participant who is subject to Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

 

Section 2.3       Company shall mean Darden Restaurants, Inc. and any of its subsidiaries or affiliated business entities as shall be authorized to participate in the Plan by the Board, or its delegate.

 

Section 2.4      Current Compensation shall be determined solely for the period during which the Participant was ineligible to accrue benefits under the Retirement Plan or the Retirement Income Plan of General Mills, Inc. and shall mean the “Earnable Compensation” that would have been recognized under the Retirement Plan for such Participant for such period, without regard to any limitations on compensation imposed under the Code. Notwithstanding the preceding sentence, the following special rules shall apply in determining Current Compensation:

 

 

(a)

Any annual incentive compensation that is based on fiscal year performance shall be considered Current Compensation for the Plan Year in which it accrues, and any incentive compensation that is not based on fiscal year performance shall be considered Current Compensation for the Plan Year in which paid.

 

 

(b)

In the case of a Participant who is totally and permanently disabled and who is receiving long-term disability benefits from an LTD Plan, Current Compensation shall include “hypothetical earnings” based on the greater of (1) the Participant’s base salary rate at the time the disability occurred, or (2) the Participant’s eligible earnings for the calendar year immediately prior to the onset of the disability, but shall not include “hypothetical earnings” for any period after the earlier of (A) the date the Participant attains age 65, or (B) the date the Participant is no longer eligible to receive benefits under an LTD Plan.

 

 

(c)

Current Compensation shall not include any amounts paid pursuant to a severance plan or arrangement or a special service allowance.

 

 

(d)

Any amounts attributable to sign-on bonuses or special project bonuses shall not be considered Current Compensation for purposes of determining the amount of any FlexComp Award (although such amounts shall be included for determining an individual’s compensation for purposes of Section 3.3(c), whether or not deferred).

 

 

 

 

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(e)

Current Compensation shall not include amounts paid prior to the date of a Participant’s first anniversary of employment, unless such Participant was hired prior to November 1, 1994.

 

Section 2.5      Deferred Comp Participant shall mean a Participant who is eligible under Section 3.3 to defer all or a portion of his or her compensation (including salary and/or bonuses) as described in Section 4.4.

 

Section 2.6       DSP shall mean the Darden Savings Plan (formerly the “Profit Sharing and Savings Plan for Darden Restaurants, Inc.).

 

 

Section 2.7

Effective Date shall mean May 29, 1995.

 

Section 2.8      FlexComp Award Participant shall mean a Participant who is eligible under Section 3.2 for a FlexComp Award under Section 4.1 and deferral of that award under Section 4.3.

 

Section 2.9     Management Incentive Plan shall mean the plan adopted by Darden Restaurants, Inc. for key management employees.

 

Section 2.10  Minor Amendment Committee shall mean the Minor Amendment Committee, appointed by the Board of Directors of Darden Restaurants, Inc.

 

Section 2.11   Participant shall mean any employee of the Company who meets the eligibility requirements for a deferral under this Plan as set forth in Article III.

 

 

Section 2.12

Plan Year shall mean the twelve-month period ending each May 31.

 

Section 2.13   Retirement Plan shall mean the Retirement Income Plan of Darden Restaurants, Inc. (formerly the “Pension Plan for Salaried Employees of General Mills Restaurants, Inc.”).

 

Section 2.14    Supplemental Savings Plan shall mean the Supplemental Savings Plan of General Mills, Inc., under which certain employees of General Mills, Inc. or one of its affiliates had an account balance as of the Effective Date, which liabilities were transferred to this Plan as of the Effective Date, or, with respect to individuals who became employees of the Company after the Effective Date, but before the one-year anniversary of the Effective Date, on said one-year anniversary of the Effective Date.

 

 

 

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ARTICLE III

ELIGIBILITY FOR AWARDS AND DEFERRALS

 

Section 3.1       Participation. An individual shall be a Participant in this Plan only if he or she satisfies any of the eligibility criteria set forth in Section 3.2 or Section 3.3. Upon becoming a Participant under Section 3.2 or Section 3.3, such an individual shall be permitted to participate solely for the deferral and award provisions of this Plan for which he or she has satisfied the eligibility criteria. Notwithstanding the foregoing, in no event may a Participant defer any amounts under this Plan during a period when the individual is receiving any amounts paid pursuant to a severance plan or arrangement or a special service allowance maintained by the Company.

 

Section 3.2       FlexComp Award Participants. An individual who has completed one year of service with the Company (including service with General Mills, Inc. prior to the Effective Date) shall be eligible to become a FlexComp Award Participant in the FlexComp Award feature of this Plan (including the deferral of such Award) for a Plan Year, if such individual:

 

 

(a)

is designated as eligible to participate hereunder by the Minor Amendment Committee (or its designee) or by the Compensation Committee if such individual is subject to Section 16 of the Exchange Act;

 

 

(b)

is a highly compensated employee (as defined in Code Section 414(q) and the regulations and other guidance issued thereunder) under the DSP and the Retirement Plan for the DSP and Retirement Plan plan years that occur within the Plan Year or was a highly compensated employee during the preceding two plan years of the DSP and the Retirement Plan or is employed at a salary which, on an annual basis, is anticipated to exceed $80,000 (adjusted for increases in the cost of living at the same time and in the same manner permitted under Code Section 415(d));

 

 

(c)

is either employed by the Company or receiving benefits under a long-term disability income plan of the Company (“LTD Plan”) on or after June 1, 1994;

 

 

(d)

is not an active participant in the Retirement Plan, the DSP, or any other tax-qualified retirement plan sponsored or maintained by the Company; and

 

 

(e)

would be entitled to accrue benefits under the Retirement Plan and be entitled to have contributions made under the DSP (or, if the individual is receiving benefits from an LTD Plan, would be entitled to accrue benefits under the Retirement Plan) if such plans did not have restrictions on participation by highly compensated employees or employees whose annualized salary as of his date of hire exceeds $80,000 (as adjusted).

 

Notwithstanding the foregoing provisions of Section 3.2(b), effective May 1, 1999, the rule in the DSP and Retirement Plan automatically excluding an employee from participation

 

 

 

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therein for two plan years after a plan year in which such employee is a highly compensated employee shall not apply with respect to Qualified Managers as defined in the DSP. Therefore, in lieu of Section 3.2(b), such individuals shall be eligible to become a FlexComp Award Participant in the FlexComp Award feature of this Plan (including the deferral of such Award) for a Plan Year, if such individual otherwise meets the requirements of Section 3.2(a), (c), (d), and (e) and such individual is a highly compensated employee, as defined therein for the current DSP and Retirement Plan plan years or is employed at a salary which, on an annual basis, is anticipated to exceed $80,000 (adjusted for increases in the cost of living at the same time and in the same manner permitted under Code Section 415(d)).

 

Section 3.3      Deferred Comp Participants. Effective January 1, 1996, an individual shall be eligible to become a Deferred Comp Participant in the deferred compensation features of this Plan (other than those deferral features applicable to FlexComp Awards) for any Plan Year, if he or she:

 

 

(a)

is an officer;

 

 

(b)

is a highly compensated employee (as defined in Code Section 414(q) and the regulations and other guidance issued thereunder) under the DSP and the Retirement Plan for the DSP and Retirement Plan plan years that occur within the Plan Year or was a highly compensated employee during the preceding two plan years of the DSP and the Retirement Plan or is employed at a salary which, on an annual basis, is anticipated to exceed $80,000 (adjusted for increases in the cost of living at the same time and in the same manner permitted under Code Section 415(d)); or

 

 

(c)

after having become eligible under (a) or (b) above for a prior Plan Year, the individual would have been a highly compensated employee under the DSP or the Retirement Plan for the DSP or Retirement Plan plan year ending within the Plan’s Plan Year (as defined in Code Section 414(q) and the regulations and other guidance issued thereunder) had the individual’s compensation included all amounts that the individual deferred under this Plan other than deferrals, if any, of the FlexComp Awards.

 

Notwithstanding the foregoing provisions of Section 3.3(b), effective May 1, 1999, the rule in the DSP and Retirement Plan automatically excluding an employee from participation therein for two plan years after a plan year in which such employee is a highly compensated employee shall not apply with respect to Qualified Managers as defined in the DSP. Therefore, in lieu of Section 3.3(b), such individuals shall be eligible to become a Deferred Comp Participant in the deferred compensation features of this Plan (other than those deferral features applicable to FlexComp Awards) for any Plan Year, if he or she otherwise meets the requirements of Section 3.3(a) or (c) or such individual is a highly compensated employee, as defined therein for the DSP and Retirement Plan plan years that occur within the Plan Year or is employed at a salary which, on an annual basis, is anticipated to exceed $80,000 (adjusted for increases in the cost of living at the same time and in the same manner permitted under Code Section 415(d)).

 

 

 

 

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ARTICLE IV

FLEXCOMP AWARDS AND PLAN DEFERRALS

 

Section 4.1      Payment of Annual FlexComp Award. A FlexComp Award Participant who: (i) as of the last day of a Plan Year, is actively employed by the Company or receiving benefits under an LTD Plan; or (ii) terminates employment during a Plan Year due to “retirement” (as that term is defined under the Retirement Plan) or death, shall be paid any FlexComp Award that he or she may become entitled to receive for the Plan Year (as determined under Section 4.2) in cash as soon as practicable following the end of such Plan Year. A FlexComp Award Participant who terminates during a Plan Year for any reason other than “retirement” (as defined under the Retirement Plan) or death shall be paid any FlexComp Award that he or she may become entitled to receive for the Plan Year in cash as soon as practicable after the end of the Plan Year following his or her termination of employment.

 

Section 4.2      Amount of Annual FlexComp Award. A FlexComp Award Participant shall be entitled to an annual FlexComp Award, the amount of which shall be determined as follows:

 

(a)         The formula for determining the FlexComp Award set forth in (b) or (c) below shall apply to all FlexComp Award Participants, as follows:

 

 

(1)

FlexComp Award Participants who are hired on or after June 1, 2000 shall have their FlexComp Award amounts determined under (b) below.

 

 

(2)

FlexComp Award Participants who were actively employed (including those on an authorized leave of absence) FlexComp Award Participants during the Plan Year beginning June 1, 2000 and who, in accordance with such procedures established by the Committee made a one-time irrevocable election prior to the date established by the Committee, to have their FlexComp Awards determined under the formula set forth in (b) or (c) below for all Plan Years beginning on and after June 1, 2000 shall have their FlexComp Awards determined in accordance with that affirmative election. In the absence of an affirmative election to the contrary, such Participant’s FlexComp Award for all Plan Years beginning on and after June 1, 2000 shall be determined under the formula set forth in (b) below.

 

 

(3)

FlexComp Award Participants who were actively employed before June 1, 2000, were not eligible for the election as described in (a)(2) above even though they were actively employed at such time, became eligible to participate as a FlexComp Award Participant without having incurred a break in service from the Company (whether or not such participation was for the first time), and participate in the final average pay portion of the Retirement Plan shall be provided with a one-time irrevocable election to choose whether to have the FlexComp Award determined under (b) or (c)

 

 

 

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below. Such irrevocable election shall be made upon becoming a FlexComp Award Participant at such time and in accordance with such procedures established by the Committee. In the absence of a timely affirmative election, the Participant’s FlexComp Award shall be determined under (b) below.

 

 

(4)

FlexComp Award Participants not otherwise described in (1), (2) or (3) above (including, by way of illustration and not limitation, FlexComp Award Participants who terminated employment prior to June 1, 2000 and are re-hired after that date), shall have their FlexComp Awards determined under the formula described in (b) below for all relevant Plan Years beginning on and after June 1, 2000.

 

 

(5)

In all events, the formula described in (c) below shall apply in determining the amount of all annual FlexComp Awards for periods before June 1, 2000.

 

(b)        If this Section 4.2(b) applies to a FlexComp Award Participant (as determined under (a) above), the amount of a FlexComp Award for any such Participant shall be determined under the following formula: [“X” (a DSP factor) plus “Y” (a fixed factor)] times the Participant’s Current Compensation. The determination of the appropriate factors and the relevant terms are set forth below:

 

 

(1)

X, the DSP factor, is based on the Participant’s lost DSP matching contributions, and, equals:

 

 

(A)

a variable amount, determined in the Company’s discretion, but which percentage shall be applied consistently to all such Participants, between 1.5% and 6% for periods on and after June 1, 2000, and before July 1, 2002; and

 

 

(B)

a variable amount, determined in the Company’s discretion, but which percentage shall be applied consistently to all such Participants, between 1.5% and 7.2% for periods on and after July 1, 2002.

 

 

(2)

Y, the fixed factor, is 4%.

 

 

(3)

In the event a Participant terminates employment with the Company during the Plan Year for any reason other than “retirement” (as defined under the Retirement Plan) or death, the Participant shall be entitled to a FlexComp Award for the portion of the Plan Year in which he or she is employed, based on his or her Current Compensation for the partial Plan Year.

 

(c)         If this Section 4.2(c) applies to a FlexComp Award Participant (as determined under (a) above), the amount of a FlexComp Award for any such Participant shall be determined

 

 

 

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under the following formula: [“X” (a DSP factor) plus the product of “Y” (an age-based factor) and “Z” (a service-based factor)] times the Participant’s Current Compensation. The determination of the appropriate factors and the definitions of the relevant terms are set forth below:

 

 

(1)

X, the DSP factor, is based on the Participant’s lost DSP matching contributions, and, equals:

 

 

(A)

3% for periods before October 1, 1997;

 

 

(B)

a variable amount, determined in the Company’s discretion, but which percentage shall be applied consistently to all such Participants, between 1.5% and 6% for periods on and after October 1, 1997 and before July 1, 2002; and

 

 

(C)

a variable amount, determined in the Company’s discretion, but which percentage shall be applied consistently to all such Participants, between 1.5% and 7.2% for periods on and after July 1, 2002.

 

 

(2)

Y, the age-based factor is 1.085^ (the Participant’s age minus 30), with the Participant’s age being determined as of the last day of the Plan Year, unless the Participant terminates during the Plan Year for any reason other than “retirement” (as defined under the Retirement Plan) or death, in which case the Participant’s age shall be determined as of his or her date of termination.

 

 

(3)

Z, the service-based factor is equal to 1.8 + (.02 x the Participant’s years of credited service under the Retirement Plan (including years of service credited under the Pension Plan for Hourly Employees of General Mills Restaurants, Inc., if such service would have been included under the portability provisions of the Retirement Plan had the Participant been an active participant in the Retirement Plan at the time of the FlexComp Award) and under the Retirement Income Plan of General Mills, Inc. during periods when the Participant was entitled to accrue benefits thereunder before first becoming eligible to participate in this Plan).

 

 

(4)

The product of Y and Z shall not be less than 2%, or greater than 20%.

 

 

(5)

In the event a Participant terminates employment with the Company during the Plan Year for any reason other than “retirement” (as defined under the Retirement Plan) or death, the Participant shall be entitled to a FlexComp Award for the portion of the Plan Year in which he or she is employed, based on his or her Current Compensation for the partial Plan Year.

 

 

 

 

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Section 4.3      Deferral of Annual FlexComp Award. Notwithstanding Section 4.1, any FlexComp Award Participant may elect to defer up to 100% (in a whole percentage) of any FlexComp Award that he or she may become entitled to receive for a Plan Year. Any such election shall apply to the specified percentage of the Participant’s FlexComp Award for the Plan Year, provided the Participant completes and submits to the Company a deferral election form no later than the December 31 within such Plan Year. If a Participant will first become eligible to participate in the FlexComp Plan after December 31 of a Plan Year but prior to the end of such Plan Year, such Participant may make a deferral election conditioned on the granting of a FlexComp Award for such Plan Year (a “Conditional Election”), if made prior to December 31st of that Plan Year. Such Conditional Election shall apply to the FlexComp Award, if any, made to the Participant for such Plan Year. The Participant’s deferral percentage election shall remain in effect with respect to any FlexComp Awards for future Plan Years, until the Participant changes such election by completing and submitting to the Company a new deferral election form on or before any subsequent December 31. Any such new election shall apply to the specified percentage of the Participant’s FlexComp Award for the Plan Year in which such December 31 falls and for future Plan Years until the Participant next changes his or her election. Notwithstanding the foregoing, the amount of any deferral may not exceed the gross amount of the Participant’s FlexComp Award reduced by any tax required to be withheld from such amounts under Code Section 3101(a) and (b) or any state or local statute. Further, notwithstanding any prior deferral election, if the Participant terminates prior to the date of any FlexComp Award, then any deferral election made with respect to such FlexComp Award shall not become effective.

 

 

Section 4.4

Salary, Incentive, and Bonus Deferral Elections.

 

 

(a)

Elections by Officers. A Deferred Comp Participant who is an officer of the Company may make the following deferral elections:

 

 

(1)

Base Compensation. Such Participant may make an initial election to defer up to 25% (in a whole percentage) of his or her base compensation (15% of his or her base compensation (in whole percentages) earned prior to January 1, 2004) by completing and submitting to the Company a deferral election form at such time and in such manner as determined by the Compensation Committee. Such election shall apply to the Participant’s base compensation attributable to services performed after the election and before the beginning of the next calendar year. That initial deferral election shall continue to apply with respect to all future base compensation until the election is changed by the Participant. The Participant may elect to modify any deferral election of base compensation for the remainder of any calendar year or any future year by providing written notice to the Company at such time and in such manner as determined by the Compensation Committee. Any such change shall be effective as soon as practicable after the end of the week following the week after the Company’s receipt of the Participant’s written notice of change.

 

 

 

 

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(2)

Management Incentive Plan Bonus Deferral. Such Participant may elect to defer up to 100% (in a whole percentage) of his or her Management Incentive Plan incentive compensation by completing and submitting to the Company a deferral election form no later than the sixtieth (60th) day preceding the end of the Company’s fiscal year. Such deferral election shall apply to all future Management Incentive Plan incentive compensation payments until changed for a future Plan Year by the Participant in writing. A Participant may elect to change his or her deferral election of incentive compensation by providing written notice to the Company no later than the sixtieth (60th) day immediately preceding the Company’s fiscal year for which such incentive compensation would otherwise be payable. Notwithstanding the foregoing, the amount of any deferral may not exceed the gross amount of the Participant’s incentive compensation reduced by any tax required to be withheld from such amounts under Code Section 3101(a) and (b) or any state or local statute. Further, notwithstanding any prior deferral election, if the Participant terminates prior to the date of any incentive compensation award, then any deferral election made with respect to such incentive compensation award shall not become effective.

 

 

(b)

Elections by All Other Participants. A Deferred Comp Participant who is not an officer of the Company may make the following deferral elections:

 

 

(1)

Deferrals of Earnable Compensation. Such Participant may elect to defer up to 25% (in a whole percentage) of his or her “earnable compensation” (as such term is defined under the DSP) (15% of his or her “earnable compensation” (in whole percentages) earned prior to January 1, 2004) by completing and submitting to the Company a deferral election form at such time and in such manner as determined by the Minor Amendment Committee (or its delegate). Such election shall apply to the Participant’s “earnable compensation” attributable to services performed after the election and shall remain in effect until changed by the Participant. A Participant may change his or her deferral election of earnable compensation for any future period by providing written notice to the Company on such forms as prescribed by the Minor Amendment Committee or its delegate. Any such change shall be effective as soon as practicable after the end of the week following the week after the Company’s receipt of the Participant’s written notice.

 

 

(2)

Bonus for Operations. Such Participant may elect to defer up to 25% (in a whole percentage) of his or her operations bonus (15% of his or her operations bonus for bonuses payable prior to January 1, 2004) by completing and submitting to the Company a deferral election form no later than the forty-fifth (45th) day preceding the end of the applicable bonus period. Such deferral election shall apply to all future operations bonuses until changed by the Participant in writing. A Participant may elect to change his or her deferral election of future operations bonuses by

 

 

 

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providing written notice to the Company no later than the forty-fifth (45th) day preceding the end of the next applicable bonus period. Notwithstanding the foregoing, the amount of any deferral may not exceed the gross amount of the Participant’s operations bonus reduced by any tax required to be withheld from such amounts under Code Section 3101(a) and (b) or any state or local statute. Further, notwithstanding any prior deferral election, if the Participant terminates prior to the date of any award of an operations bonus, then any deferral election made with respect to such bonus shall not become effective.

 

 

(3)

Management Incentive Plan Bonus. Such Participant may elect to defer up to 25% (in a whole percentage) of his or her Management Incentive Plan bonus (15% of his or her Management Incentive Plan bonus for bonuses payable prior to January 1, 2004), provided the Participant completes and submits to the Company a deferral election form no later than the sixtieth (60th) day preceding the end of the applicable bonus period. Such deferral election shall apply to all future Management Incentive Plan bonuses until changed by the Participant in writing. A Participant may elect to change his or her deferral election of future Management Incentive Plan bonuses by providing written notice to the Company no later than the sixtieth (60th) day preceding the end of the next applicable Plan Year. Notwithstanding the foregoing, the amount of any deferral may not exceed the gross amount of the Participant’s Management Incentive Plan bonus reduced by any tax required to be withheld from such amounts under Code Section 3101(a) and (b) or any state or local statute. Further, notwithstanding any prior deferral election, if the Participant terminates prior to the date of any award of a Management Incentive Plan bonus, then any deferral election made with respect to such bonus shall not become effective.

 

 

(c)

Special Bonuses. Effective with respect to bonuses awarded on or after January 1, 1996, any Deferred Comp Participant may elect to defer up to 100% (in a whole percentage) of: (i) any “sign-on bonus” that may become payable to such Participant by completing and submitting to the Company a deferral election form no later than his or her date of hire, and (ii) any “special project bonus” that the Senior Vice President of Personnel, in his or her sole discretion, (or the Compensation Committee with respect to a Participant who is subject to Section 16 of the Exchange Act) may award to such Participant by completing and submitting to the Company a deferral election form within 30 days of receiving from the Company a written communication regarding the goals and objectives that must be attained in order to earn such special project bonus. Notwithstanding the foregoing, the amount of any deferral under this subsection may not exceed the gross amount of the applicable bonus reduced by any tax required to be withheld from such amounts under Code Section 3101(a) and (b) or any state or local statute. Further, notwithstanding any prior deferral election, if the Participant terminates prior to the date of any award of a sign-on or special project

 

 

 

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bonus, then any deferral election made with respect to such bonus shall not become effective.

 

 

(d)

Bridge Period Benefit Amount and Restricted Stock Amount. In addition to the deferral elections under subsections (a), (b) and (c), a Deferred Comp Participant may elect to defer an amount of his or her base compensation for calendar years 1998 and 1999, which amount is equivalent to a specified percentage (in a whole percentage) of his or her “Bridge Period Benefit Amount,” provided, however, that such election shall not be effective for base compensation earned prior to September 1, 1998. The Participant’s Bridge Period Benefit Amount shall equal (i) the taxable amounts paid to the Participant under the Darden Restaurants, Inc. Bridge Period Benefit Plan and the Darden Restaurants, Inc. Bridge Period Retirement Plan, plus (ii) the amounts realized by the Participant on his or her exercise of all or any portion of the Stock Option granted under such plans prior to December 31, 1999. In addition, a Participant may elect to defer an amount of his or her: (i) base compensation and Management Incentive Plan incentive compensation award if the Participant is an officer of the Company, (ii) earnable compensation, operations bonus and Management Incentive Plan incentive compensation award if the Participant is not an officer of the Company, and/or (iii) special bonuses, which amount is equivalent to a specified percentage (in a whole percentage) of his or her “Restricted Stock Amount.” The Participant’s Restricted Stock Amount shall equal the value of the Participant’s restricted stock that vests in the year such base compensation, incentive compensation, earnable compensation, or bonus is earned. Any such election under this subsection (d) shall be made by completing and submitting to the Company a deferral election form that shall apply to base compensation or earnable compensation that would otherwise be payable at least 30 days after such form is submitted to the Company and to incentive compensation and operations and special bonuses that are not determinable prior to at least 30 days after such form is submitted to the Company, pursuant to rules established by the Company. A Participant may change his or her deferral election of base compensation, earnable compensation and/or incentive compensation (including operations and special bonuses) under this subsection (d) by providing written notice to the Company. Any such change shall apply to base compensation or earnable compensation that would otherwise be payable as soon as practicable after the end of the week following the week after the Company’s receipt of the Participant’s written notice and to incentive compensation (including operations and special bonuses) that is not determinable prior to at least 30 days after the Company receives the Participant’s written notice, pursuant to rules established by the Company. Notwithstanding the foregoing, the amount of any deferral under this subsection (d) may not exceed the gross amount of the Bridge Period Benefit Amount and/or Restricted Stock Amount reduced by any tax required to be withheld from such amounts under Code Section 3101(a) and (b) or any state or local statute. Further, notwithstanding any prior deferral election, if the Participant terminates prior to the effective date of any deferral under this Section 4.3(d), then any deferral election made shall not become effective.

 

 

 

 

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Section 4.5      Short-Term Deferrals. Notwithstanding the foregoing provisions of this Article IV, the Company may permit a Participant to elect to defer all or part of the Participant’s incentive compensation award, if any, to a date certain selected by the Company within the taxable year it would otherwise be paid, upon written notice to the Company received by December 31 of the preceding calendar year. Interest shall be credited on such deferred amount at a rate selected by the Company and shall be communicated to the Participant at the same time the availability of any such short-term deferral opportunity is communicated to Participants.

 

ARTICLE V

ESTABLISHMENT OF ACCOUNTS AND CREDITS TO ACCOUNTS

 

Section 5.1       Deferred Accounts and Rates of Return on Deferred Accounts. A deferred compensation account (“Deferred Account”) shall be established on behalf of each Participant with respect to whom an amount is deferred under Section 4.4 of this Plan, including amounts transferred in accordance with Appendix A. The amount of a Participant’s deferrals under this Plan shall be credited to such Participant’s Deferred Account as soon as practicable after the amount would otherwise have been paid in the absence of the deferral election. Effective January 1, 1998, each Participant’s Deferred Account shall be credited daily with a “rate of return” on the total deferred amounts credited to the Participant’s Deferred Account and a Participant may make separate elections with respect to “rates of return” for past and future deferrals. Such “rates of return” are described in Section 5.3.

 

Section 5.2     FlexComp Accounts and Rates of Return on Amounts in FlexComp Accounts. A deferred FlexComp Award account (“FlexComp Account”) shall be established on behalf of each Participant who elects to defer a percentage of his or her FlexComp Awards. The amount of a Participant’s deferred FlexComp Awards shall be credited to such Participant’s FlexComp Account as soon as practicable after the amount would otherwise have been paid in the absence of a deferral election. Effective January 1, 1998, each Participant’s FlexComp Account shall be credited daily with a “rate of return” on the total deferred amounts credited to the Participant’s FlexComp Account and a Participant may make separate elections with respect to “rates of return” for past and future deferrals. Such “rates of return” are described in Section 5.3.

 

Section 5.3       Rates of Return. The “rates of return” credited to a Participant’s accounts under Sections 5.1 and 5.2 shall be based upon the actual investment performance of funds in the DSP, or at such other rates as may be made available to the Participant from time to time pursuant to the provisions of the Plan and the procedures established by the Committee. The Committee may delete funds, on a prospective basis, by notifying all Participants whose Accounts include rates of return based on such funds, in advance, and soliciting elections for transfer to other rates of return then available to such Participants.

 

Participants may elect to have any combination of the above “rates of return” accrue on amounts in their accounts, from 1% to 100%, provided that the sum of the percentages attributable to such rates equals 100%. A Participant may change the “rate(s) of return” to be credited to his or her accounts, on a daily basis, by notifying the Committee or its delegate, at

 

 

 

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such time and in such manner as approved by the Committee or its delegate. Effective January 1, 1998, each Participant’s accounts will be credited daily with the “rate(s) of return” elected by the Participant until the amount in each Participant’s Accounts is distributed to the Participant on the distribution date(s) elected by the Participant. Each Participant shall receive a quarterly statement of the balance of his or her accounts.

 

Section 5.4      Impact on Other Benefit Plans. The Company may maintain life and/or disability plans under which benefits earned or payable are related to a Participant’s earnings. Any such benefits will generally be based upon the earnings that a Participant would have earned in a given calendar year in the absence of any deferral hereunder.

 

ARTICLE VI

PAYMENT OF ACCOUNTS

 

Section 6.1    Hardship Distributions. At any time prior to the time an amount is otherwise payable hereunder, an active Participant may request a distribution of deferred amounts on account of the Participant’s financial hardship, subject to the following requirements:

 

 

(a)

Such distribution shall be made, in the sole discretion of the Minor Amendment Committee or its delegate or by the Compensation Committee if the Participant is subject to Section 16 of the Exchange Act, if the Participant has incurred an unforeseeable emergency.

 

 

(b)

For purposes of this plan, an “unforeseeable emergency” shall mean an unanticipated emergency that is caused by an event beyond the control of the Participant and that would result in severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant or of a Participant’s dependent (as defined in Code section 152(a)), loss of the Participant’s property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the Participant’s control. The circumstances that will constitute an unforeseeable emergency will depend upon the facts of each case and be based on the information supplied by the Participant, in writing, on the form provided by the Minor Amendment Committee or its delegate.

 

 

(c)

Notwithstanding the foregoing, payment under this Section 6.1 may not be made to the extent that such hardship is or may be relieved:

 

 

(i)

through reimbursement or compensation by insurance or otherwise,

 

 

(ii)

by liquidation of the participant’s assets, to the extent the liquidation of such assets would not itself cause severe financial hardship, or

 

 

(iii)

by cessation of deferrals under the Plan.

 

 

 

-14-

 

 

 

In addition to the foregoing, distributions under this Section 6.1 shall not be allowed for purposes of sending a child to college or the Participant’s desire to purchase a home or other residence. In all events, distributions made on account of an unforeseeable emergency are limited to the extent reasonably needed to satisfy the emergency need.

 

 

(d)

All distributions under this Section 6.1 shall be made as soon as practicable after the Minor Amendment Committee or its delegate or the Compensation Committee, as applicable, has approved the distribution and that the requirements of this Section 6.1 have been met.

 

Section 6.2       Payment of Deferred Amounts. At the time a Participant makes his or her election to defer any amounts under this Plan, the Participant must also elect a distribution date and a form of payment with respect to the deferral of each of the amounts subject to any such election, in accordance with subsections (a) and (b) and subject to subsection (c) below. A Participant who has a Supplemental Savings Account transferred to this Plan pursuant to Appendix A shall also elect a distribution date and form of payment with respect to his or her Supplemental Savings Account, in accordance with subsections (a) and (b) and subject to subsection (c) below. Each deferred amount under this Plan is paid separately according to the Participant’s deferred distribution date election. Notwithstanding any Participant election to the contrary, all distributions under this Plan shall be paid or commence to be paid as soon as practicable after the January 1 coincident with or next following the Participant’s termination of employment or retirement from the Company.

 

 

(a)

Distribution Date. The distribution date may be any date that is at least one year subsequent to the date the compensation, bonus, FlexComp Award or the Supplemental Savings Account (whichever is applicable) would otherwise be payable, but shall not be later than the date the Participant attains age 70.

 

 

(b)

Form of Payment. The Participant may elect to have his or her deferred amounts subject to such election, paid in:

 

 

(1)

a single payment,

 

 

(2)

substantially equal annual installments for a period not to exceed ten (10) years,

 

 

(3)

substantially equal annual installments for a period not to exceed fifteen (15) years for deferral elections made prior to December 31, 1985 (if so elected at the time of the original deferral), or

 

 

(4)

any other form of payment requested in writing by the Participant and approved by the Minor Amendment Committee or its delegate or by the Compensation Committee if the Participant is subject to Section 16 of the Exchange Act, with regard to amounts deferred under Article IV.

 

 

 

 

-15-

 

 

 

 

(c)

Special Rules. Notwithstanding the above, the following provisions shall apply:

 

 

(1)

Except as provided in Subsection 6.2(c)(3), if a Participant terminates employment for any reason other than Retirement or death, the Committee or its delegate shall require that full payment of all amounts deferred under this Plan be paid in the form of a single lump sum cash payment as soon as practicable after the January 1 coincident with or next following the Participant’s termination of employment.

 

 

(2)

As to all future and previous deferrals, an active Participant may request to amend his or her distribution date and/or form of payment with respect to a deferral provided: (i) the initial distribution date in the absence of such distribution election amendment is not within twelve (12) months of the date of the amendment; (ii) his or her amended distribution date is at least one year after the distribution date in the absence of such distribution election amendment; (iii) his or her amended form of payment is in substantially equal annual installments for a period not to exceed ten (10) years or a lump sum; and (iv) no modifications for distribution dates and/or forms of payment are permitted with respect to any deferrals after payment of such deferrals has commenced to be paid. No more than two amendments to the Participant’s initial distribution election with respect to a particular deferral shall be permitted. Any such amendment must be in writing and submitted to the Committee for approval.

 

 

(3)

Notwithstanding any other provision of this Plan to the contrary, a Participant may, at any time prior or subsequent to the distribution date selected by the Participant, request in writing to the Committee to have his or her form of payment of any or all amounts in his or her FlexComp Account, Deferred Compensation Account, and/or Supplemental Savings Account changed to an immediate lump-sum distribution, provided that the amount of any such lump-sum distribution shall be reduced by an amount equal to the product of (X) the total lump-sum distribution otherwise payable (based on the value of the Participant’s FlexComp Account, Deferred Compensation Account, or Supplemental Savings Account, as the case may be) as of the first day of the month in which the lump-sum amount is paid, adjusted by a pro-rata portion of the rate of return for the prior month in which the lump-sum is paid, determined by multiplying the actual rate of return for such prior month by a fraction, the numerator of which is the number of days in the month in which the request is received prior to the date of payment, and the denominator of which is the number of days in the month), and (Y) the rate set forth in Statistical Release H.15(519), or any successor publication, as published by the Board of Governors of the Federal Reserve System for one-year U.S. Treasury notes under the heading “Treasury Constant Maturities” for the first day of the calendar month in which the written request for an immediate lump-sum distribution is approved by the Committee. Any

 

 

 

-16-

 

 

such lump sum distribution shall be paid within one (1) business day of approval by the Committee of such request.

 

Section 6.3      Death of a Participant. If a Participant dies before the full distribution of his or her accounts under this Article VI, a lump sum payment of the remaining distribution amount shall be made to the beneficiary designated by the Participant. This payment shall be made as soon as practicable after the Committee receives notification of the Participant’s death. In the absence of any such designation, payment shall be made to the personal representative, executor or administrator of the Participant’s estate.

 

ARTICLE VII

ADMINISTRATION OF THE PLAN

 

Section 7.1      Committee. This Plan shall be administered by the Committee. The Committee shall act by affirmative vote of a majority of its members at a meeting or in writing without a meeting. The Committee shall appoint a secretary who may be but need not be one of its own members. The secretary shall keep complete records of the administration of the Plan. The Committee may authorize each and any one of its members to perform routine acts and to sign documents on its behalf.

 

Section 7.2     Plan Administration. The Committee may appoint such persons or establish such subcommittees, employ such attorneys, agents, accountants or investment advisors necessary or desirable to advise or assist it in the performance of its duties hereunder, and the Committee may rely upon their respective written opinions or certifications. Administration of the Plan shall consist of interpreting and carrying out the provisions of the Plan in the discretion of the Committee. The Committee shall, in its discretion, determine the eligibility of employees to participate in the different features of the Plan, their rights while Participants in the Plan and the nature and amounts of benefits to be received therefrom. The Committee shall, in its discretion, decide any disputes which may arise under the Plan. The Committee may provide rules and regulations for the administration of the Plan consistent with its terms and provisions. Any construction or interpretation of the Plan and any determination of fact in administering the Plan made in good faith by the Committee shall be final and conclusive for all Plan purposes.

 

 

 

Section 7.3

Claims Procedure.

 

 

(a)

The Minor Amendment Committee or its delegate shall prescribe a form for the presentation of claims under the terms of this Plan.

 

 

(b)

Upon presentation to the Minor Amendment Committee or its delegate of a claim on the prescribed form, the Minor Amendment Committee or its delegate shall make a determination of the validity thereof. If the determination is adverse to the claimant, the Minor Amendment Committee or its delegate shall furnish to the claimant within a reasonable period of time after the receipt of the claim a written notice setting forth the following:

 

 

 

-17-

 

 

 

 

(1)

The specific reason or reasons for the denial;

 

 

(2)

Specific reference to pertinent provisions of this Plan on which the denial is based;

 

 

(3)

A description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and

 

 

(4)

An explanation of this Plan’s claim review procedure.

 

 

(c)

If a claim is denied, the claimant may appeal such denial to the Minor Amendment Committee or its delegate for a full and fair review of the adverse determination. The claimant’s request for review must be in writing and be made to the Minor Amendment Committee or its delegate within 60 days after receipt by the claimant of the written notification required under subsection (b) above. The claimant or his or her duly authorized representative may submit issues and comments in writing which shall be given full consideration by the Minor Amendment Committee or its delegate in its review.

 

 

(d)

The Minor Amendment Committee or its delegate may, in its sole discretion, conduct a hearing. A request for a hearing will be given full consideration. At such hearing, the claimant shall be entitled to appear and present evidence and be represented by counsel.

 

 

(e)

A decision on a request for review shall be made by the Minor Amendment Committee or its delegate not later than 60 days after receipt of the request; provided, however, in the event of a hearing or other special circumstances, such decision shall be made not later than 120 days after receipt of such request.

 

 

(f)

The Minor Amendment Committee’s or its delegate’s decision on review shall state in writing the specific reasons and references to this Plan provisions on which it is based. Such decision shall be immediately provided to the claimant. In the event the claimant disagrees with the findings of the Minor Amendment Committee or its delegate, the matter shall be referred to arbitration in accordance with Section 7.6 hereof.

 

 

(g)

The Minor Amendment Committee or its delegate may allocate its responsibilities among its several members, except that all matters involving the hearing of and decision on claims and the review of the determination of benefits shall be made by the full Minor Amendment Committee or its delegate. No member of the Minor Amendment Committee or its delegate shall participate in any matter relating solely to himself or herself.

 

Section 7.4     Non-Assignability. The interests herein and the right to receive distributions from a Participant’s accounts under this Plan may not be anticipated, alienated,

 

 

 

-18-

 

 

sold, transferred, assigned, pledged, encumbered, or subjected to any charge or legal process, and if any attempt is made to do so, or a Participant becomes bankrupt, the interests of the Participant under this Plan in his or her accounts may be terminated by the Minor Amendment Committee or its delegate (or the Compensation Committee with respect to a Participant who is subject to Section 16 of the Exchange Act), which, in its sole discretion, may cause the same to be held or applied for the benefit of one or more of the dependents of such Participant or make any other disposition of such interests that it deems appropriate.

 

Section 7.5     Amendments to Plan. Darden Restaurants, Inc. reserves the right to suspend, amend or otherwise modify or terminate this Plan at any time, without notice. Such action shall be taken by the Board of Directors of Darden Restaurants, Inc. However, this Plan may not be suspended, amended, otherwise modified, or terminated after a Change in Control without the written consent of a majority of Participants determined as of the day before such Change in Control occurs. A “Change in Control” shall mean the occurrence of any of the following events:

 

 

(a)

any person (including a group as defined in Section 13(d)(3) of the Securities Exchange Act of 1934) becomes the beneficial owner, directly or indirectly, of twenty percent (20%) or more of the shares of Darden Restaurants, Inc. entitled to vote for the election of directors;

 

 

(b)

as a result of or in connection with any cash tender offer, exchange offer, merger or other business combination, sales of assets or contested election, or combination of the foregoing, the persons who were directors of Darden Restaurants, Inc. just before such event shall cease to constitute a majority of Darden Restaurants, Inc.’s Board of Directors; or

 

 

(c)

the shareholders of Darden Restaurants, Inc. approve an agreement providing for a transaction in which Darden Restaurants, Inc. will cease to be an independent publicly-owned corporation or a sale or other disposition of all or substantially all of the assets of Darden Restaurants, Inc. occurs.

 

Notwithstanding any other provision of this Plan to the contrary, the Minor Amendment Committee, or the Compensation Committee with respect to a Participant who is subject to Section 16 of the Exchange Act, may, in its sole discretion, direct that payments be made before such payments are otherwise due if, for any reason (including, but not limited to a change in the tax or revenue laws of the United States of America, a published ruling or similar announcement issued by the Internal Revenue Service, a regulation issued by the Secretary of the Treasury or his delegate, or a decision by a court of competent jurisdiction involving a Participant or Beneficiary), such Committee believes that Participants or their Beneficiaries have recognized or will recognize income for federal income tax purposes with respect to amounts that are or will be payable to such Participants under this Plan before such amounts are scheduled to be paid. In making this determination, such Committee shall take into account the hardship that would be imposed on Participants or their Beneficiaries by the payment of federal income taxes under such circumstances.

 

 

 

 

-19-

 

 

 

Section 7.6      Arbitration. Subject to the completion of the claims procedure described in Section 7.3, any controversy or claim arising out of or relating to this Plan, or any alleged breach of the terms or conditions contained herein, shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the “AAA”) as such rules may be modified herein.

 

 

(a)

An award rendered in connection with an arbitration pursuant to this Section 7.6 shall be final and binding and judgment upon such an award may be entered and enforced in any court of competent jurisdiction.

 

 

(b)

The forum for arbitration under this Plan shall be Orlando, Florida and the governing law for such arbitration shall be the laws of the State of Florida.

 

 

(c)

Arbitration under this Section 7.6 shall be conducted by a single arbitrator selected jointly by Darden Restaurants, Inc. and the Participant or Beneficiary, as applicable (the “Complainant”). If within thirty (30) days after a demand for arbitration is made, Darden Restaurants, Inc. and the Complainant are unable to agree on a single arbitrator, three arbitrators shall be appointed to conduct the arbitration. Each party shall select one arbitrator and those two arbitrators shall then select a third neutral arbitrator within thirty (30) days after their appointment. In connection with the selection of the third arbitrator, consideration shall be given to familiarity with executive compensation plans and experience in dispute resolution between parties, as a judge or otherwise. If the arbitrators selected by the parties cannot agree on the third arbitrator, they shall discuss the qualifications of such third arbitrator with the AAA before selection of such arbitrator, which selection shall be in accordance with the Commercial Arbitration Rules of the AAA.

 

 

(d)

If an arbitrator cannot continue to serve, a successor to an arbitrator selected by a party shall be also selected by the same party, and a successor to a neutral arbitrator shall be selected as specified in subsection (c) of this Section. A full rehearing will be held only if the neutral arbitrator is unable to continue to serve or if the remaining arbitrators unanimously agree that such a rehearing is appropriate.

 

 

(e)

The arbitrator or arbitrators shall be guided, but not bound, by the Federal Rules of Evidence and by the procedural rules, including discovery provisions, of the Federal Rules of Civil Procedure. Any discovery shall be limited to information directly relevant to the controversy or claim in arbitration.

 

 

(f)

The parties shall each be responsible for their own costs and expenses, except for the fees and expenses of the arbitrators, which shall be shared equally by Darden Restaurants, Inc. and the Complainant.

 

Section 7.7       Plan Unfunded. Nothing in this Plan shall be interpreted or construed to require the Company in any manner to fund any obligation to the Participants, terminated Participants or beneficiaries hereunder. Nothing contained in this Plan nor any action taken

 

 

 

-20-

 

 

hereunder shall create, or be construed to create, a trust of any kind, or a fiduciary relationship between the Company and the Participants, terminated Participants, beneficiaries, or any other persons. Any funds which may be accumulated in order to meet any obligation under this Plan shall for all purposes continue to be a part of the general assets of the Company; provided, however, that the Company may establish a trust to hold funds intended to provide benefits hereunder so long as the assets of such trust become subject to the claims of the general creditors of the Company in the event of bankruptcy or insolvency of the Company. To the extent that any Participant, terminated Participant, or Beneficiary acquires a right to receive payments from the Company under this Plan, such rights shall be no greater than the rights of any unsecured general creditor of the Company.

 

Section 7.8       Applicable Law. All questions pertaining to the construction, validity and effect of this Plan shall be determined in accordance with the laws of the State of Florida, to the extent not preempted by Federal law.

 

Section 7.9      Limitation of Rights. This Plan is a voluntary undertaking on the part of the Company. Neither the establishment of this Plan nor the payment of any benefits hereunder, nor any action of the Company, the Committee or the Minor Amendment Committee or its delegate shall be held or construed to be a contract of employment between the Company and any eligible employee or to confer upon any person any legal right to be continued in the employ of the Company. The Company expressly reserves the right to discharge, discipline or otherwise terminate the employment of any eligible employee at any time. Participation in this Plan gives no right or claim to any benefits beyond those which are expressly provided herein and all rights and claims hereunder are limited as set forth in this Plan.

 

Section 7.10     Severability. In the event any provision of this Plan shall be held illegal or invalid, or would serve to invalidate this Plan, that provision shall be deemed to be null and void, and this Plan shall be construed as if it did not contain that provision.

 

Section 7.11    Headings and Number. The headings to the Articles and Sections of this Plan are inserted for reference only, and are not to be taken as limiting or extending the provisions hereof.

 

Section 7.12    Incapacity. If the Minor Amendment Committee or its delegate determines that a Participant, a terminated Participant, or any Beneficiary under this Plan (each of which shall be referred to as the “Recipient”) is unable to care for his or her affairs because of illness, accident, or mental or physical incapacity, or because the Recipient is a minor, the Minor Amendment Committee or its delegate may direct that any benefit payment due the Recipient be paid to his or her duly appointed legal representative, or, if no such representative is appointed, to the Recipient’s spouse, child, parent, or other blood relative, or to a person with whom the Recipient resides or who has incurred expense on behalf of the Recipient. Any such payment so made shall be a complete discharge of the liabilities of this Plan with respect to the Recipient.

 

Section 7.13    Binding Effect and Release. All persons accepting benefits under this Plan shall be deemed to have consented to the terms of this Plan. Any final payment or distribution to any person entitled to benefits under this Plan shall be in full satisfaction of all

 

 

 

 

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claims against this Plan, the Committee, the Minor Amendment Committee or its delegate, and the Company arising by virtue of this Plan.

 

 

 

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APPENDIX A

SUPPLEMENTAL SAVINGS ACCOUNTS

 

Eligibility for Supplemental Savings Account. An individual who was employed by the Company on the distribution date and who had an account balance under the terms of the Supplemental Savings Plan as of such date, shall have a Supplemental Savings Plan Account established hereunder to the extent such liability is transferred to this Plan as of the one-year anniversary of the distribution date.

 

No Forfeitures of Supplemental Savings Account. All amounts credited to a Participant’s Supplemental Savings Account under the Plan shall be fully vested.

 

 

This Plan document has been updated to include the following amendments:

 

 

Amended and restated as of July 26, 2002

 

Further amended March 19, 2003

 

Further amended December 4, 2003

 

 

 

 

 

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EX-10 4 exhibit_10x.htm EXHIBIT 10X FORM 10K

EXHIBIT 10(x)

AWARD CERTIFICATE

Special Project Performance Stock Units Award

This certifies that

[name]

is granted an Award of **[number]* Performance Stock Units,

representing the opportunity to earn shares of Common Stock, no par value,

of Darden Restaurants, Inc., a Florida corporation, on the dates and in the amounts

set forth in the attached Special Project Performance Stock Units Award Agreement.

Interim Grant

Yes ____ No _____

 

Annual Performance Period

Annual Performance Stock Units

Fiscal 20__

 

Fiscal 20__

 

Fiscal 20__

 

Fiscal 20__

 

Fiscal 20__

 

 

Social Security Number:

 

 

Grant Date:

 

                  , 200      

Awarded (subject to forfeiture) subject to the Darden Restaurants, Inc. Management and Professional Incentive Plan:

 

 

Yes ____ No _____

 

This Special Project Performance Stock Units Award is governed by, and subject in all respects to, the terms and conditions of the Special Project Performance Stock Units Award Agreement, a copy of which is attached to and made a part of this document, and the Darden Restaurants, Inc. 2002 Stock Incentive Plan, a copy of which is available upon request. This Award Certificate has been duly executed, by manual or facsimile signature, on behalf of Darden Restaurants, Inc.

[signature]

 

 

 

[signature]

 

 

 

 

 

Chairman of the Board
Chief Executive Officer

 

DARDEN RESTAURANTS, INC.

 

Senior Vice President
General Counsel and Secretary

 

 

 

 

DARDEN RESTAURANTS, INC.

2002 STOCK INCENTIVE PLAN

SPECIAL PROJECT PERFORMANCE STOCK UNITS AWARD AGREEMENT

This Special Project Performance Stock Units Award Agreement is between Darden Restaurants, Inc., a Florida corporation (the “Company”), and you, the person named in the attached Award Certificate who is an employee of the Company or one of its Affiliates. This Agreement is effective as of the date of grant set forth in the attached Award Certificate (the “Grant Date”).

The Company wishes to award to you Performance Stock Units representing the opportunity to earn shares of the Company’s Common Stock, no par value (the “Common Stock”), subject to the terms and conditions set forth in this Agreement, in order to carry out the purpose of the Company’s 2002 Stock Incentive Plan (the “Plan”).

Accordingly, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and you hereby agree as follows:

 

1.

Award of Performance Stock Units.

The Company hereby grants to you, effective as of the Grant Date, an Award of Performance Stock Units for that number of Units set forth in the attached Award Certificate (the “Performance Stock Units”), on the terms and conditions set forth in this Agreement and the Award Certificate and in accordance with the terms of the Plan.

 

2.

Rights with Respect to the Performance Stock Units.

(a)           The Performance Stock Units granted pursuant to the attached Award Certificate and this Agreement do not and shall not give you any of the rights and privileges of a shareholder of Common Stock. Your rights with respect to the Performance Stock Units shall remain forfeitable at all times prior to the date or dates on which such rights become vested, and the restrictions with respect to the Performance Stock Units lapse, in accordance with Section 3, 4 or 5 hereof.

(b)           As long as you hold Performance Stock Units granted pursuant to the attached Award Certificate and this Agreement, the Company shall make a cash payment to you, on each date that the Company pays a cash dividend to holders of Common Stock generally, in the amount equal to the dollar amount of the cash dividend paid per share of Common Stock on such date multiplied by the number of Annual Performance Stock Units (as defined below) relating to any Annual Performance Period (as defined below) for which a determination as to vesting or forfeiture has not yet occurred pursuant to the terms of this Agreement, less any tax withholding amount applicable to such payment.

 

2

 

 

 

 

3.

Vesting.

(a)           Subject to the terms and conditions of this Agreement, the Performance Stock Units shall vest, and the restrictions with respect to the Performance Stock Units shall lapse, on the date or dates and in the amount or amounts set forth in this Agreement if you remain continuously employed by the Company or an Affiliate of the Company until the respective vesting dates.

(b)           Twenty percent (20%) of the total number of Performance Stock Units set forth in the attached Award Certificate (the “Annual Performance Stock Units”) shall be targeted for vesting following the end of each of the first five fiscal years ending after the Grant Date (the “Annual Performance Periods”); provided, however, that if the Award Certificate attached to this Performance Stock Units Award Agreement states that this Performance Stock Units Award is an Interim Grant, then the number of Annual Performance Stock Units for the first Annual Performance Period shall be zero and the number of Annual Performance Stock Units for each of the second, third, fourth and fifth Annual Performance Periods shall be twenty-five percent (25%) of the total number of Performance Stock Units set forth in the attached Award Certificate. The number of Annual Performance Stock Units for each Annual Performance Period is set forth in the attached Award Certificate. The number of Annual Performance Stock Units for any Annual Performance Period shall not be increased or decreased as a result of the number of Annual Performance Stock Units that vested or were forfeited for any prior Annual Performance Period.

(c)           The number of Annual Performance Stock Units that vest, if any, following the end of the applicable Annual Performance Period shall be determined by multiplying the Annual Performance Stock Units for such Annual Performance Period by the Vesting Percentage, calculated as set forth in Exhibit A to this Agreement, and may range from zero to one hundred fifty percent (150%) of the Annual Performance Stock Units.

(d)           The calculations under this Section 3 shall be made on or before the June 30 immediately following the end of the applicable Annual Performance Period and any vesting resulting from such calculations shall be effective as of that June 30. Any Annual Performance Stock Units that do not vest following the end of such Annual Performance Period pursuant to the terms of this Section 3 shall be immediately and irrevocably forfeited, including the right to receive cash payments pursuant to Section 2(b) hereof, as of that June 30.

(e)           The Committee administering the Plan shall have the authority to make any determinations regarding questions arising from the application of the provisions of this Section 3, which determination shall be final, conclusive and binding on you and the Company.

 

4.

Change of Control.

Notwithstanding the vesting provisions contained in Section 3 above, but subject to the other terms and conditions of this Agreement, upon the occurrence of a Change of Control (as defined below) you shall become immediately and unconditionally vested in all Annual Performance Stock Units relating to any Annual Performance Period for which a determination as to vesting or forfeiture has not yet occurred pursuant to the terms of this Agreement, and the restrictions with respect to all such Annual Performance Stock Units shall lapse. For purposes of this Agreement, “Change of Control” shall mean any of the following events:

 

3

 

 

 

(a)           any person (including a group as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) becomes, directly or indirectly, the beneficial owner of 20% or more of the shares of the Company entitled to vote for the election of directors;

(b)           as a result of or in connection with any cash tender offer, exchange offer, merger or other business combination, sale of assets or contested election, or combination of the foregoing, the persons who were directors of the Company just prior to such event cease to constitute a majority of the Company’s Board of Directors; or

(c)           the consummation of a transaction in which the Company ceases to be an independent publicly-owned corporation or the consummation of a sale or other disposition of all or substantially all of the assets of the Company.

 

5.

Early Vesting; Forfeiture.

(a)           If you cease to be employed by the Company or an Affiliate of the Company prior to the vesting or forfeiture of all Annual Performance Stock Units pursuant to Section 3 or 4 hereof, your rights to all of the Annual Performance Stock Units relating to any Annual Performance Period for which a determination as to vesting or forfeiture has not yet occurred pursuant to the terms of this Agreement shall be immediately and irrevocably forfeited, including the right to receive cash payments pursuant to Section 2(b) hereof, except that:

(i)            if you retire on or after age 55 with ten years of service with the Company or an Affiliate of the Company prior to the vesting or forfeiture of all Annual Performance Stock Units pursuant to Section 3 or 4 hereof, all of the Annual Performance Stock Units relating to any Annual Performance Period for which a determination as to vesting or forfeiture has not yet occurred pursuant to the terms of this Agreement shall not be immediately and irrevocably forfeited on the date of your retirement but shall continue to be subject to the vesting and forfeiture provisions set forth in Sections 3, 4 and 5(a)(ii) hereof as if you had remained employed by the Company or an Affiliate of the Company; or

(ii)           if you die prior to the vesting or forfeiture of all Annual Performance Stock Units pursuant to Section 3 or 4 hereof, the Annual Performance Stock Units relating to any Annual Performance Period for which a determination as to vesting or forfeiture has not yet occurred pursuant to the terms of this Agreement shall vest on a pro rata basis on the date of your death, based on the number of full months of employment completed from the Grant Date to the date of your death divided by 60, and your rights to all of the unvested Annual Performance Stock Units shall be immediately and irrevocably forfeited. No transfer by will or the applicable laws of descent and distribution of any Performance Stock Units which vest by reason of your death shall be effective to bind the Company unless the Committee administering the Plan shall have been furnished with written notice of such transfer and a copy of the will or such other evidence as the Committee may deem necessary to establish the validity of the transfer.

 

4

 

 

 

(b)           If the Award Certificate attached to this Performance Stock Units Award Agreement states that this Performance Stock Units Award has been awarded subject to the Darden Restaurants, Inc. Management and Professional Incentive Plan (the “MIP”), then this Performance Stock Units Award shall be cancelled, forfeited and returned to the Company unless all of the requirements set forth in the MIP for the year to which the grant of this Performance Stock Units Award relates are satisfied.

 

6.

Restriction on Transfer.

None of the Performance Stock Units may be sold, assigned, transferred, pledged, attached or otherwise encumbered, and no attempt to transfer the Performance Stock Units, whether voluntary or involuntary, by operation of law or otherwise, shall vest the transferee with any interest or right in or with respect to the Performance Stock Units.

 

7.

Payment of Performance Stock Units; Issuance of Common Stock.

No shares of Common Stock shall be issued to you prior to the date on which the applicable Performance Stock Units vest in accordance with the terms and conditions of the attached Award Certificate and this Agreement. After any Performance Stock Units vest pursuant to Section 3, 4 or 5 hereof, the Company shall promptly cause to be issued in your name one share of Common Stock for each vested Performance Stock Unit. Following payment of the applicable withholding taxes pursuant to Section 9 hereof, the Company shall promptly cause the shares of Common Stock (less any shares withheld to pay taxes) to be delivered, either by book-entry registration or in the form of a certificate or certificates, registered in your name or in the names of your legal representatives, beneficiaries or heirs, as the case may be; provided, however, that any distribution to any “specified employee” (as determined in accordance with Section 409A of the Code) on account of a separation from service shall be made as soon as practicable after the first day of the calendar month which occurs six calendar months after such separation from service, but in no event later than the 15th day of the third month following the calendar year in which the end of such six-month period occurs. The Company will not deliver any fractional share of Common Stock but will pay, in lieu thereof, the Fair Market Value of such fractional share of Common Stock.

 

8.

Adjustments.

In the event that the Committee administering the Plan shall determine that any dividend or other distribution (whether in the form of cash, shares of Common Stock, other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of shares or other securities of the Company, issuance of warrants or other rights to purchase shares or other securities of the Company or other similar corporate transaction or event affects the Common Stock such that an adjustment of the Performance Stock Units is determined by the Committee administering the Plan to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the attached Award Certificate and this Agreement, then the Committee shall, in such manner as it may deem equitable, in its sole discretion, adjust any or all of the number and type of shares subject to the Performance Stock Units.

 

5

 

 

 

 

9.

Taxes.

(a)           You acknowledge that you will consult with your personal tax advisor regarding the income tax consequences of the grant of the Performance Stock Units, the receipt of cash payments pursuant to Section 2(b) hereof, the vesting of the Performance Stock Units and the receipt of shares of Common Stock, and any other matters related to this Agreement. In order to comply with all applicable federal, state, local or foreign income tax laws or regulations, the Company may take such action as it deems appropriate to ensure that all applicable federal, state, local or foreign payroll, withholding, income or other taxes, which are your sole and absolute responsibility, are withheld or collected from you.

(b)           In accordance with the terms of the Plan, and such rules as may be adopted by the Committee administering the Plan, you may elect to satisfy any applicable tax withholding obligations arising from the vesting of the Performance Stock Units and the corresponding receipt of shares of Common Stock by (i) delivering cash (including check, draft, money order or wire transfer made payable to the order of the Company), (ii) having the Company withhold a portion of the shares of Common Stock otherwise to be delivered having a Fair Market Value equal to the amount of such taxes, or (iii) delivering to the Company shares of Common Stock having a Fair Market Value equal to the amount of such taxes. The Company will not deliver any fractional share of Common Stock but will pay, in lieu thereof, the Fair Market Value of such fractional share of Common Stock. Your election must be made on or before the date that the amount of tax to be withheld is determined.

 

10.

General Provisions.

(a)           Interpretations. This Agreement is subject in all respects to the terms of the Plan. A copy of the Plan is available upon your request. Terms used herein which are defined in the Plan shall have the respective meanings given to such terms in the Plan, unless otherwise defined herein. In the event that any provision of this Agreement is inconsistent with the terms of the Plan, the terms of the Plan shall govern. Any question of administration or interpretation arising under this Agreement shall be determined by the Committee administering the Plan, and such determination shall be final, conclusive and binding upon all parties in interest.

(b)           No Right to Employment. Nothing in this Agreement or the Plan shall be construed as giving you the right to be retained as an employee of the Company or any Affiliate of the Company. In addition, the Company or an Affiliate of the Company may at any time dismiss you from employment, free from any liability or any claim under this Agreement, unless otherwise expressly provided in this Agreement.

(c)           Reservation of Shares. The Company shall at all times prior to the vesting of the Performance Stock Units reserve and keep available such number of shares of Common Stock as will be sufficient to satisfy the requirements of this Agreement.

(d)           Securities Matters. The Company shall not be required to deliver any shares of Common Stock until the requirements of any federal or state securities or other laws, rules or regulations (including the rules of any securities exchange) as may be determined by the Company to be applicable are satisfied.

(e)

 

6

 

 

 

Headings. Headings are given to the sections and subsections of this Agreement solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of this Agreement or any provision hereof.

(f)           Governing Law. The internal law, and not the law of conflicts, of the State of Florida will govern all questions concerning the validity, construction and effect of this Agreement.

(g)           Notices. You should send all written notices regarding this Agreement or the Plan to the Company at the following address:

Darden Restaurants, Inc.

Supervisor, Stock Compensation Plans

5900 Lake Ellenor Drive

Orlando, FL 32809

(h)           Award Certificate. This Special Project Performance Stock Units Award Agreement is attached to and made a part of an Award Certificate and shall have no force or effect unless such Award Certificate is duly executed and delivered by the Company to you.

* * * * * * * *

 

7

 

 

 

Exhibit A

VESTING OF PERFORMANCE STOCK UNITS

The number of Annual Performance Stock Units that shall vest, if any, following the end of the applicable Annual Performance Period shall be determined by multiplying the number of Annual Performance Stock Units for such Annual Performance Period by the “Vesting Percentage,” as determined below, provided that the maximum Vesting Percentage for any Annual Performance Period shall be 150% of the Annual Performance Stock Units.

Vesting Percentage = 5 x (Total Annual Sales Growth x Sales Multiple x ROGI Multiple)

“Total Annual Sales Growth” shall be as determined by the Company.

The “Sales Multiple” shall be determined as follows:

Total Annual Sales Growth*

Sales Multiple

Less than 4.00%

0

4.00% to 6.99%

2.00

7.00% to 7.99%

2.25

8.00% to 8.99%

2.50

9.00% to 9.99%

2.75

10.00% or Greater

3.00

*For the fiscal years ending May 27, 2007 and May 25, 2008, Total Annual Sales Growth shall be increased by 1.30%

 

The “ROGI Multiple” shall be determined as follows:

ROGI in Excess of ROGI Hurdle*

ROGI Multiple

-1.00% or Less

0.75

-0.99% to 0.99%

1.00

1.00% or Greater

1.25

*For the fiscal years ending May 27, 2007 and May 25, 2008, ROGI shall be compared to plan.

 

“ROGI” is the return on gross investment for new and relocated restaurants, as determined by the Company. The “ROGI Hurdle” is the hurdle rate for ROGI set each year by the Company. The ROGI Multiple shall automatically be set at 1.00 for any fiscal year if total sales for new and relocated restaurants that reached their eighteen-month anniversary during such fiscal year are less than 1% of the Company’s total sales for such fiscal year, as determined by the Company.

The Vesting Percentage shall be rounded to the nearest 1.0%, with .5% being rounded up. The number of Annual Performance Stock Units that vest pursuant to the Vesting Percentage shall be rounded to the nearest whole number, with .5 being rounded up.

 

 

A-1

 

 

 

EX-12 5 exhibit_12.htm FORM 10K 2006 EXHIBIT 12

EXHIBIT 12

 

DARDEN RESTAURANTS, INC.

COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS TO FIXED CHARGES

(Dollar Amounts in Thousands)

 

Fiscal Year Ended

 

 

May 28, 2006

 

May 29, 2005

 

May 30, 2004

 

May 25, 2003

 

May 26, 2002

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Earnings from Operations
before Income Taxes

 

$

482,518

 

$

423,917

 

$

332,776

 

$

337,603

 

$

355,435

 

Plus Fixed Charges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Interest Expense

 

 

48,922

 

 

47,657

 

 

47,710

 

 

47,566

 

 

41,493

 

40% of Restaurant and Equipment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum Rent Expense

 

 

26,862

 

 

24,849

 

 

22,608

 

 

21,536

 

 

20,600

 

Total Fixed Charges

 

$

75,784

 

$

72,506

 

$

70,318

 

$

69,102

 

$

62,093

 

Less Capitalized Interest

 

 

(2,696

)

 

(3,182

)

 

(3,500

)

 

(3,470

)

 

(3,653

)

Consolidated Earnings from Operations
before Income Taxes Available to
Cover Fixed Charges

 

$

555,606

 

$

493,241

 

$

399,594

 

$

403,325

 

$

413,875

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratio of Consolidated Earnings to Fixed
Charges

 

 

7.33

 

 

6.80

 

 

5.68

 

 

5.84

 

 

6.67

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EX-13 6 d68827_ex-13.txt EXHIBIT 13 FORM 10K 2006 EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion and analysis below for Darden Restaurants, Inc. (Darden, the Company, we, us or our) should be read in conjunction with our consolidated financial statements and related notes found elsewhere in this report. For financial reporting, we operate on a 52/53 week fiscal year ending on the last Sunday in May. Our 2006 fiscal year, which ended on May 28, 2006, and our 2005 fiscal year, which ended on May 29, 2005, each had 52 weeks. Our 2004 fiscal year, which ended on May 30, 2004, had 53 weeks. We have included in this discussion certain financial information for fiscal 2004 on a 52-week basis to assist investors in making comparisons to our 2006 and 2005 fiscal years. OVERVIEW OF OPERATIONS Our business operates in the casual dining segment of the restaurant industry, primarily in the United States. At May 28, 2006, we operated 1,427 Red Lobster, Olive Garden, Bahama Breeze, Smokey Bones Barbeque & Grill and Seasons 52 restaurants in the United States and Canada and licensed 42 Red Lobster restaurants in Japan. We own and operate all of our restaurants in the United States and Canada, with no franchising. Our sales were $5.72 billion in fiscal 2006 and $5.28 billion in fiscal 2005, an 8.4 percent increase. Net earnings for fiscal 2006 were $338 million ($2.16 per diluted share) compared with net earnings for fiscal 2005 of $291 million ($1.78 per diluted share). Net earnings for fiscal 2006 increased 16.4 percent and diluted net earnings per share increased 21.3 percent compared with fiscal 2005. The primary drivers of our increases in net earnings were Olive Garden's same-restaurant sales increases in each quarter of fiscal 2006, bringing its string of consecutive quarters with same-restaurant sales growth to 47, and Red Lobster's significantly improved business fundamentals which have resulted in lower operating costs and seven consecutive quarters with same-restaurant sales growth. Both Red Lobster and Olive Garden also produced record annual sales, operating profit and return on sales in fiscal 2006. Bahama Breeze made significant progress in fiscal 2006, as evidenced by same-restaurant sales growth in fiscal 2006, as compared to declining same-restaurant sales in prior years, by implementing a number of changes to become a more relevant brand for its guests, evolving its menu to make it more approachable yet still distinctive and improving the guest experience. Smokey Bones had a difficult year and its same-restaurant sales declined in fiscal 2006. In fiscal 2007, we expect a net increase of approximately 39-45 restaurants. We expect combined U.S. same-restaurant sales growth in fiscal 2007 of between 2 to 4 percent at Olive Garden and Red Lobster. We also expect further earnings improvement at Bahama Breeze in fiscal 2007 as we continue to focus on strengthening their restaurant level returns by removing costs and complexity that do not add value for their guests. At Smokey Bones, we have identified a new direction that eliminates the barbeque-centric parts of the brand that we believe are a barrier to greater breadth of occasion and increased frequency. Therefore, we will limit Smokey Bones' new restaurant growth to the five locations under construction at the end of fiscal 2006 and will test the new direction in several remodeled restaurants starting in the second quarter of fiscal 2007. Depending on test results, we may invest further in a significant repositioning of the Smokey Bones brand, which may include a change of the concept's name. We will adopt the provisions of Statement of Financial Accounting Standards (SFAS) No. 123 (Revised) "Share-Based Payment" (SFAS No. 123R) as of our first fiscal quarter in fiscal 2007. SFAS No. 123R requires us to begin recognizing the fair value of stock-based compensation expense in our consolidated statements of earnings. We will adopt the provisions of SFAS No. 123R according to the modified prospective method and therefore, will not restate our consolidated financial statements for periods prior to adoption. We estimate the adoption of SFAS No. 123R will impact diluted net earnings per share growth by approximately 4 percentage points in fiscal 2007. On a consolidated basis, we anticipate diluted net earnings per share growth in fiscal 2007 of approximately 9 percent to 10 percent, including the impact of adopting the provisions of SFAS No. 123R in fiscal 2007. 1 Our mission is to be the best in casual dining, now and for generations. We believe we can achieve this goal by continuing to build on our historical strength as a multi-brand casual dining company, which is grounded in: o A strong culture that inspires and engages our people, with firmly held values, a clear mission and a core purpose to nourish and delight everyone we serve; o Competitively superior leadership; o Brand management excellence; o Restaurant operating excellence; and o Restaurant support excellence. We seek to increase profits by leveraging our fixed and semi-fixed costs with sales from new restaurants and increased guest traffic and sales at existing restaurants. To evaluate our operations and assess our financial performance, we monitor a number of operating measures, with a special focus on two key factors: o Same-restaurant sales - which is a year-over-year comparison of each period's sales volumes for restaurants open at least 16 months; and o Restaurant earnings - which is restaurant level profitability (restaurant sales, less restaurant level cost of sales, marketing and depreciation). Increasing same-restaurant sales can increase restaurant earnings because these incremental sales provide better leverage of our fixed and semi-fixed costs. A restaurant concept can generate same-restaurant sales increases through increases in guest traffic, increases in the average guest check, or a combination of the two. The average guest check can be impacted by menu price changes and by the mix of menu items sold. For each restaurant concept, we gather daily sales data and regularly analyze the guest traffic counts and the mix of menu items sold to aid in developing menu pricing, product offerings and promotional strategies. We view same-restaurant guest counts as a measure of the long-term health of a restaurant concept, while increases in average check and menu mix may contribute more significantly to near-term profitability. We focus on balancing our pricing and product offerings with other initiatives to produce sustainable same-restaurant sales growth. We compute same-restaurant sales using restaurants open at least 16 months because new restaurants experience an adjustment period before sales levels and operating margins normalize. Sales at newly opened restaurants generally do not make a significant contribution to profitability in their initial months of operation. Our sales and expenses can be impacted significantly by the number and timing of the opening of new restaurants and the closing, relocation and remodeling of existing restaurants. Pre-opening expenses each period reflect the costs associated with opening new restaurants in current and future periods. There are significant risks and challenges that could impact our operations and ability to increase sales and net earnings. The casual dining restaurant industry is intensely competitive and sensitive to economic cycles and other business factors, including changes in consumer tastes and dietary habits. Other risks and uncertainties are discussed below in Forward-Looking Statements. 2 RESULTS OF OPERATIONS FOR FISCAL 2006, 2005 AND 2004 The following table sets forth selected operating data as a percentage of sales for the 52-week periods ended May 28, 2006 and May 29, 2005 and the 53-week period ended May 30, 2004. This information is derived from the consolidated statements of earnings, found elsewhere in this report, for the periods indicated.
Fiscal Years - ---------------------------------------------------------------------------------------- 2006 2005 2004 - ---------------------------------------------------------------------------------------- Sales ....................................................... 100.0% 100.0% 100.0% Costs and expenses: Cost of sales: Food and beverage ...................................... 29.6 30.2 30.5 Restaurant labor ....................................... 32.3 32.1 32.0 Restaurant expenses .................................... 15.5 15.3 15.5 ----- ----- ----- Total cost of sales, excluding restaurant depreciation and amortization of 3.6%, 3.8% and 3.9%, respectively ...................................... 77.4% 77.6% 78.0% Selling, general and administrative ...................... 9.4 9.5 9.4 Depreciation and amortization ............................ 3.9 4.0 4.2 Interest, net ............................................ 0.7 0.8 0.9 Asset impairment and restructuring charges, net .......... 0.2 0.1 0.9 ----- ----- ----- Total costs and expenses .......................... 91.6% 92.0% 93.4% ----- ----- ----- Earnings before income taxes ................................ 8.4 8.0 6.6 Income taxes ................................................ 2.5 2.5 2.1 ----- ----- ----- Net earnings ................................................ 5.9% 5.5% 4.5% ===== ===== ===== - ----------------------------------------------------------------------------------------
SALES Sales were $5.72 billion in fiscal 2006, $5.28 billion in fiscal 2005 and $5.00 billion in fiscal 2004. The 8.4 percent increase in company-wide sales for fiscal 2006 was primarily due to a net increase of 46 company-owned restaurants compared with fiscal 2005 and U.S. same-restaurant sales increases at Olive Garden, Red Lobster and Bahama Breeze. Olive Garden sales of $2.62 billion in fiscal 2006 were 9.0 percent above last year. Olive Garden opened 19 net new restaurants during fiscal 2006. U.S. same-restaurant sales for Olive Garden increased 5.5 percent due to a 3.4 percent increase in same-restaurant guest counts and a 2.1 percent increase in average check. Average annual sales per restaurant for Olive Garden were $4.6 million in fiscal 2006. Olive Garden reported its 47th consecutive quarter of U.S. same-restaurant sales growth at the end of fiscal 2006. Red Lobster sales of $2.58 billion in fiscal 2006 were 5.9 percent above last year. U.S. same-restaurant sales for Red Lobster increased 4.9 percent due to a 2.0 percent increase in same-restaurant guest counts and a 2.9 percent increase in average check. Average annual sales per restaurant for Red Lobster were $3.8 million in fiscal 2006. Red Lobster reported its seventh consecutive quarter of U.S. same-restaurant sales increases at the end of fiscal 2006. Bahama Breeze sales of $166 million in fiscal 2006 were 1.6 percent above last year. Same-restaurant sales for Bahama Breeze increased 1.7 percent for fiscal 2006. Average annual sales per restaurant for Bahama Breeze were $5.2 million in fiscal 2006. Smokey Bones sales of $337 million in fiscal 2006 were 25.3 percent above last year. Smokey Bones opened 22 net new restaurants during fiscal 2006 however, same-restaurant sales for Smokey Bones decreased 3.7 percent for fiscal 2006. Average annual sales per restaurant for Smokey Bones were $2.9 million in fiscal 2006. The 5.5 percent increase in company-wide sales for fiscal 2005 versus fiscal 2004 was primarily due to a net increase of 56 company-owned restaurants compared with fiscal 2004 and U.S. same-restaurant sales increases at Olive Garden. These sales increases were partially offset by the additional operating week in fiscal 2004. After reducing 3 fiscal 2004 sales by the $90 million contributed by the additional operating week, sales would have been $4.91 billion for fiscal 2004 on a 52-week basis, resulting in a 7.4 percent increase in fiscal 2005. Red Lobster's sales were $2.44 billion in both fiscal 2005 and 2004. In fiscal 2005, its U.S. same-restaurant sales increased 0.9 percent (on a comparable 52-week basis) due to a 1.9 percent increase in average check offset partially by a 1.0 percent decrease in same-restaurant guest counts. Average annual sales per restaurant for Red Lobster were $3.6 million in fiscal 2005. Olive Garden's fiscal 2005 sales of $2.40 billion were 8.5 percent above fiscal 2004. U.S. same-restaurant sales for Olive Garden increased 7.2 percent (on a comparable 52-week basis) in fiscal 2005 due to a 5.3 percent increase in same-restaurant guest counts and a 1.9 percent increase in average check. Average annual sales per restaurant for Olive Garden were $4.4 million in fiscal 2005. Bahama Breeze fiscal 2005 sales of $164 million decreased 7.2 percent from fiscal 2004. Bahama Breeze same-restaurant sales decreased 1.6 percent (on a comparable 52-week basis) and operated six fewer restaurants in fiscal 2005 than in 2004. Average annual sales per restaurant for Bahama Breeze in fiscal 2005 were $5.1 million. Smokey Bones sales of $269 million were 54.6 percent higher in fiscal 2005 than in fiscal 2004, its average annual sales per restaurant were $3.1 million and it opened 35 new restaurants during fiscal 2005. COSTS AND EXPENSES Total costs and expenses were $5.24 billion in fiscal 2006, $4.85 billion in fiscal 2005 and $4.67 billion in fiscal 2004. Total costs and expenses in fiscal 2006 were 91.6 percent of sales, a decrease from 92.0 percent of sales in fiscal 2005 and 93.4 percent of sales in fiscal 2004. Food and beverage costs increased $98 million, or 6.2 percent, from $1.59 billion to $1.69 billion in fiscal 2006 compared with fiscal 2005. Food and beverage costs increased $67 million, or 4.4 percent, from $1.53 billion to $1.59 billion in fiscal 2005 compared with fiscal 2004. As a percent of sales, food and beverage costs decreased from fiscal 2005 to fiscal 2006 primarily as a result of cost savings initiatives. Food and beverage costs, as a percent of sales, also decreased as a result of the larger contribution of Olive Garden, which has historically had lower food and beverage costs, to our overall sales and operating results. As a percent of sales, food and beverage costs decreased from fiscal 2004 to fiscal 2005 primarily as a result of favorable changes in promotional and menu mix of sales and pricing changes, which were partially offset by higher dairy, beef, chicken and seafood costs. Restaurant labor increased $154 million, or 9.0 percent, from $1.70 billion to $1.85 billion in fiscal 2006 compared with fiscal 2005. Restaurant labor increased $95 million, or 5.9 percent, from $1.60 billion to $1.70 billion in fiscal 2005 compared with fiscal 2004. As a percent of sales, restaurant labor increased in fiscal 2006 primarily as a result of an increase in wage rates and benefit costs and an increase in FICA taxes on higher reported tips, which was partially offset by the favorable impact of higher sales volumes. As a percent of sales, restaurant labor also increased as a result of the larger contribution by Olive Garden to our overall sales and operating results, as Olive Garden has historically had higher restaurant labor costs. As a percent of sales, restaurant labor increased in fiscal 2005 from fiscal 2004 primarily as a result of a modest increase in wage rates and higher manager bonuses at Olive Garden and Red Lobster as a result of their increased operating performance in fiscal 2005. These impacts were only partially offset by the favorable impact of higher sales volumes. Restaurant expenses (which include lease, property tax, credit card, utility, workers' compensation, insurance, new restaurant pre-opening and other restaurant-level operating expenses) increased $79 million, or 9.8 percent, from $806 million to $885 million in fiscal 2006 compared with fiscal 2005. Restaurant expenses increased $31 million, or 4.1 percent, from $775 million to $806 million in fiscal 2005 compared with fiscal 2004. As a percent of sales, restaurant expenses increased in fiscal 2006 as compared with fiscal 2005 as a result of higher utility expenses, repair and maintenance expenses and credit card fees, partially offset by the favorable impact of higher sales volumes and decreases in our insurance and workers' compensation expenses. As a percent of sales, restaurant expenses decreased in fiscal 2005 compared with fiscal 2004 primarily due to decreased insurance, workers' compensation and new restaurant pre-opening costs, which were partially offset by increased utility expenses and repair and maintenance expenses. Restaurant expenses were also favorably impacted by higher sales volumes in fiscal 2005. Selling, general and administrative expenses increased $39 million, or 7.8 percent, from $497 million to $536 million in fiscal 2006 compared with fiscal 2005. Selling, general and administrative expenses increased $25 million, or 5.4 percent, from $472 million to $497 million in fiscal 2005 compared with fiscal 2004. As a percent of sales, selling, general and administrative expenses decreased in fiscal 2006 primarily as a result of the favorable impact of higher sales volumes, partially offset by higher marketing expenses and an increase in litigation related costs. As a percent of sales, selling, general and administrative expenses increased in fiscal 2005 from fiscal 2004 4 primarily as a result of increased bonus costs which were partially offset by decreased marketing expenses as a percent of sales and the favorable impact of higher sales volumes. Depreciation and amortization expense increased $8 million, or 3.9 percent, from $213 million to $221 million in fiscal 2006 compared with fiscal 2005. Depreciation and amortization expense increased $3 million, or 1.5 percent, from $210 million to $213 million in fiscal 2005 compared with fiscal 2004. As a percent of sales, depreciation and amortization decreased from fiscal 2005 to fiscal 2006 and from fiscal 2004 to fiscal 2005 primarily as a result of the continued use of fully depreciated, well maintained equipment and the favorable impact of higher sales volumes, which were only partially offset by new restaurant and remodel activities. Net interest expense of $43 million in fiscal 2006 was comparable with fiscal 2005. Net interest expense decreased $1 million, or 1.2 percent, from $44 million to $43 million in fiscal 2005 compared with fiscal 2004. As a percent of sales, net interest expense decreased in fiscal 2006 compared with fiscal 2005, as a result of higher interest income in fiscal 2006, and the favorable impact of higher sales volumes, partially offset by increased costs associated with the issuance of long-term debt in fiscal 2006. As a percent of sales, net interest expense decreased in fiscal 2005 compared with fiscal 2004, primarily as a result of higher interest income in fiscal 2005 and the favorable impact of higher sales volumes. During fiscal 2006, 2005 and 2004, we recognized asset impairment charges in the amount of $6 million, $1 million and $6 million, respectively, related to the closure, relocation or rebuilding of certain restaurants. Asset impairment credits related to the sale of assets that were previously impaired amounted to $1 million, $3 million and $1 million in fiscal 2006, 2005 and 2004, respectively. During fiscal 2006, we also recorded charges of $4 million for the write-down of carrying value of two Smokey Bones restaurants, which we continue to operate. During fiscal 2005, we also recorded charges of $6 million for the write-down of carrying value of two Olive Garden restaurants, one Red Lobster restaurant and one Smokey Bones restaurant, all of which closed in fiscal 2006. In addition to the asset impairment charges described above, during the fourth quarter of fiscal 2004, we recorded a $37 million pre-tax ($23 million after-tax) charge for long-lived asset impairments associated with the closing of six Bahama Breeze restaurants and the write-down of the carrying value of four other Bahama Breeze restaurants, one Olive Garden restaurant and one Red Lobster restaurant, which continued to operate, except for the Olive Garden restaurant, which was closed in fiscal 2006. We also recorded a $1 million pre-tax ($0.7 million after-tax) restructuring charge primarily related to severance payments made to certain restaurant employees and exit costs associated with the closing of the six Bahama Breeze restaurants. During fiscal 2004, changes were made at Bahama Breeze to improve its sales, financial performance and overall long-term potential, including the addition of lunch at most restaurants and introduction of a new dinner menu. The decision to close certain Bahama Breeze restaurants and write down the carrying value of others was based on our on-going review of each individual restaurant's performance against our expectations and the restaurant's ability to successfully implement these changes. Based on our review of the Bahama Breeze restaurants not impaired or closed, we believed their locations and ability to execute these and future initiatives would reduce the likelihood that additional impairment charges would be required. The write-down of the carrying value of one Olive Garden restaurant and one Red Lobster restaurant was a result of less-than-optimal locations. INCOME TAXES The effective income tax rates for fiscal 2006, 2005 and 2004 were 29.9 percent, 31.4 percent and 31.7 percent, respectively. The rate decreases in fiscal 2006 and fiscal 2005 were primarily due to an increase in FICA tax credits for reported tips and the favorable resolution of prior year tax matters. NET EARNINGS AND NET EARNINGS PER SHARE Net earnings for fiscal 2006 were $338 million ($2.16 per diluted share) compared with net earnings for fiscal 2005 of $291 million ($1.78 per diluted share) and net earnings for fiscal 2004 of $227 million ($1.34 per diluted share). Net earnings for fiscal 2006 increased 16.4 percent and diluted net earnings per share increased 21.3 percent compared with fiscal 2005. The increases in net earnings and diluted net earnings per share were primarily due to decreases in food and beverage costs, selling, general and administrative expenses, depreciation and amortization expenses and interest expenses as a percent of sales, which were only partially offset by increases in restaurant labor and restaurant expenses as a percent of sales. The increase in diluted net earnings per share was also due to a 5 reduction in the average diluted shares outstanding from fiscal 2005 to fiscal 2006 primarily as a result of our continuing repurchase of our common stock. Fiscal 2005 net earnings increased 27.9 percent and diluted net earnings per share increased 32.8 percent compared with fiscal 2004. The increases in net earnings and diluted net earnings per share were primarily due to decreases in food and beverage costs, restaurant expenses, depreciation and amortization expenses and interest expenses as a percent of sales, which were only partially offset by increases in restaurant labor expenses and selling, general and administrative expenses as a percent of sales. Fiscal 2004 net earnings were also impacted by the $37 million pre-tax ($23 million after-tax) asset impairment and restructuring charges recognized related to the closing of six Bahama Breeze restaurants and the write down of another four Bahama Breeze restaurants, one Olive Garden restaurant and one Red Lobster restaurant. The increase in diluted net earnings per share also resulted from a reduction in the average diluted shares outstanding from fiscal 2004 to fiscal 2005 primarily as a result of our continuing repurchase of our common stock. SEASONALITY Our sales volumes fluctuate seasonally. During fiscal 2006 and fiscal 2005, our sales were highest in the spring and winter, followed by the summer, and lowest in the fall. During fiscal 2004, our sales were highest in the spring, lowest in the fall, and comparable during winter and summer. Holidays, severe weather and similar conditions may impact sales volumes seasonally in some operating regions. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year. IMPACT OF INFLATION We do not believe inflation had a significant overall effect on our operations during fiscal 2006, 2005 and 2004. We believe we have historically been able to pass on increased operating costs through menu price increases and other strategies. CRITICAL ACCOUNTING POLICIES We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates. Critical accounting policies are those we believe are both most important to the portrayal of our financial condition and operating results and require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. We consider the following policies to be most critical in understanding the judgments that are involved in preparing our consolidated financial statements. Land, Buildings and Equipment Land, buildings and equipment are recorded at cost less accumulated depreciation. Building components are depreciated over estimated useful lives ranging from seven to 40 years using the straight-line method. Leasehold improvements, which are reflected on our consolidated balance sheets as a component of buildings, are amortized over the lesser of the expected lease term, including cancelable option periods, or the estimated useful lives of the related assets using the straight-line method. Equipment is depreciated over estimated useful lives ranging from two to 10 years, also using the straight-line method. Our accounting policies regarding land, buildings and equipment, including leasehold improvements, include our judgments regarding the estimated useful lives of these assets, the residual values to which the assets are depreciated or amortized, the determination of what constitutes expected lease term and the determination as to what constitutes enhancing the value of or increasing the life of existing assets. These judgments and estimates may produce materially different amounts of reported depreciation and amortization expense if different assumptions were used. 6 As discussed further below, these judgments may also impact our need to recognize an impairment charge on the carrying amount of these assets as the cash flows associated with the assets are realized. Leases We are obligated under various lease agreements for certain restaurants. We recognize rent expense on a straight-line basis over the expected lease term, including cancelable option periods as described below. Within the provisions of certain of our leases, there are rent holidays and escalations in payments over the base lease term, as well as renewal periods. The effects of the holidays and escalations have been reflected in rent expense on a straight-line basis over the expected lease term, which includes cancelable option periods where failure to exercise such options would result in an economic penalty to the Company. The lease term commences on the date when we have the right to control the use of the leased property, which is typically before rent payments are due under the terms of the lease. Many of our leases have renewal periods totaling between five and 20 years, exercisable at our option, and require payment of property taxes, insurance and maintenance costs in addition to the rent payments. The consolidated financial statements reflect the same lease term for amortizing leasehold improvements as we use to determine capital versus operating lease classifications and in calculating straight-line rent expense for each restaurant. Percentage rent expense is generally based on sales levels and is accrued when we determine that it is probable that those sales levels will be achieved. Our judgments related to the probable term for each restaurant affect the classification and accounting for leases as capital versus operating, the rent holidays and escalation in payments that are included in the calculation of straight-line rent and the term over which leasehold improvements for each restaurant are amortized. These judgments may produce materially different amounts of depreciation, amortization and rent expense than would be reported if different assumed lease terms were used. Impairment of Long-Lived Assets Land, buildings and equipment and certain other assets, including capitalized software costs and liquor licenses, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future undiscounted net cash flows expected to be generated by the assets. Identifiable cash flows are measured at the lowest level for which they are largely independent of the cash flows of other groups of assets and liabilities, generally at the restaurant level. If these assets are determined to be impaired, the amount of impairment recognized is the amount by which the carrying amount of the assets exceeds their fair value. Fair value is generally determined by appraisals or sales prices of comparable assets. Restaurant sites and certain other assets to be disposed of are reported at the lower of their carrying amount or fair value, less estimated costs to sell. Restaurant sites and certain other assets to be disposed of are included in assets held for sale when certain criteria are met. These criteria include the requirement that the likelihood of disposing of these assets within one year is probable. Assets whose disposal is not probable within one year remain in land, buildings and equipment until their disposal is probable within one year. 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, changes in usage or operating performance, desirability of the restaurant sites and other factors, such as brand repositioning efforts, as in the case of Smokey Bones. 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. During fiscal 2006, we recognized charges of $10 million ($6 million after-tax) primarily related to the closing of three Smokey Bones restaurants and the impairment of two other Smokey Bones restaurants based on an evaluation of expected cash flows. The two impaired restaurants continued to operate subsequent to fiscal 2006. During fiscal 2005, we recognized asset impairment charges of $6 million ($4 million after-tax) for the write-down of two Olive Garden restaurants, one Red Lobster restaurant and one Smokey Bones restaurant based on an evaluation of expected cash flows, all of which closed in fiscal 2006. In the fourth quarter of fiscal 2004, we recognized asset impairment charges of $37 million ($23 million after-tax) for the closing of six Bahama Breeze restaurants, and the write-down of four other Bahama Breeze restaurants, one Olive Garden restaurant and one Red Lobster restaurant based on an evaluation of expected cash flows. The Olive Garden restaurant was closed in fiscal 2006. 7 Insurance Accruals Through the use of insurance program deductibles and self-insurance, we retain a significant portion of expected losses under our workers' compensation, employee medical and general liability programs. However, we carry insurance for individual claims that generally exceed $250 thousand for workers' compensation and general liability claims. Accrued liabilities have been recorded based on our estimates of the anticipated ultimate costs to settle all claims, both reported and not yet reported. Our accounting policies regarding these insurance programs include our judgments and independent actuarial assumptions about economic conditions, the frequency or severity of claims and claim development patterns and claim reserve, management and settlement practices. Unanticipated changes in these factors may produce materially different amounts of reported expense under these programs. Income Taxes We estimate certain components of our provision for income taxes. These estimates include, among other items, depreciation and amortization expense allowable for tax purposes, allowable tax credits for items such as taxes paid on reported employee tip income, effective rates for state and local income taxes and the tax deductibility of certain other items. We adjust our annual effective income tax rate as additional information on outcomes or events becomes available. We base our estimates on the best available information at the time that we prepare the provision. We generally file our annual income tax returns several months after our fiscal year-end. Income tax returns are subject to audit by federal, state and local governments, generally years after the returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws. LIQUIDITY AND CAPITAL RESOURCES Cash flows generated from operating activities provide us with a significant source of liquidity, which we use to finance the purchases of land, buildings and equipment and to repurchase shares of our common stock. Since substantially all our sales are for cash and cash equivalents and accounts payable are generally due in five to 30 days, we are able to carry current liabilities in excess of current assets. In addition to cash flows from operations, we use a combination of long-term and short-term borrowings to fund our capital needs. We manage our business and our financial ratios to maintain an investment grade bond rating, which allows flexible access to financing at reasonable costs. Currently, our publicly issued long-term debt carries "Baa1" (Moody's Investors Service), "BBB+" (Standard & Poor's) and "BBB+" (Fitch) ratings. Our commercial paper has ratings of "P-2" (Moody's Investors Service), "A-2" (Standard & Poor's) and "F-2" (Fitch). These ratings are as of the date of this annual report and have been obtained with the understanding that Moody's Investors Service, Standard & Poor's and Fitch will continue to monitor our credit and make future adjustments to these ratings to the extent warranted. The ratings are not a recommendation to buy, sell or hold our securities, may be changed, superseded or withdrawn at any time and should be evaluated independently of any other rating. Our commercial paper program serves as our primary source of short-term financing. To support our commercial paper program, we have a credit facility under a Credit Agreement dated August 16, 2005, with a consortium of banks, under which we can borrow up to $500 million. As part of this credit facility, we may request issuance of up to $100 million in letters of credit, the outstanding amount of which reduces the net borrowing capacity under the Credit Agreement. The borrowings and letters of credit obtained under the Credit Agreement may be denominated in U.S. dollars or other currencies approved by the banks. The Credit Agreement allows us to borrow at interest rates that vary based on a spread over (i) LIBOR or (ii) a base rate that is the higher of the prime rate or one-half of one percent above the federal funds rate, at our option. The interest rate spread over LIBOR is determined by our debt rating. We may also request that loans be made at interest rates offered by one or more of the banks in the consortium, which may vary from the LIBOR or the base rate. The Credit Agreement expires on August 15, 2010, 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 0.65 to 1.00 and a limit on secured debt and debt owed by subsidiaries, subject to certain exceptions, of 10 percent of our consolidated tangible net worth. The Credit Agreement does not prohibit borrowing in the event of a ratings downgrade or a Material Adverse Effect, as defined in the Credit Agreement. We do not expect any of these covenants to limit our liquidity or capital resources. As of May 28, 2006, there were no borrowings outstanding under the Credit Agreement. However, as of May 28, 8 2006, there was $44 million of commercial paper and $15 million of letters of credit outstanding, which are backed by this facility. As of May 28, 2006, we were in compliance with all covenants under the Credit Agreement. On August 12, 2005, we issued $150 million of unsecured 4.875 percent senior notes due in August 2010 and $150 million of unsecured 6.000 percent senior notes due in August 2035 under our shelf registration statement on file with the Securities and Exchange Commission (SEC). The net proceeds of $295 million from the issuance of these senior notes were used to repay at maturity our $150 million of 8.375 percent senior notes on September 15, 2005 and our $150 million of 6.375 percent notes on February 1, 2006. At May 28, 2006, our long-term debt consisted principally of: o $150 million of unsecured 4.875 percent senior notes due in August 2010: o $75 million of unsecured 7.450 percent medium-term notes due in April 2011: o $100 million of unsecured 7.125 percent debentures due in February 2016; o $150 million of unsecured 6.000 percent senior notes due August 2035; and o An unsecured, variable rate $22 million commercial bank loan due in December 2018 that is used to support two loans from us to the Employee Stock Ownership Plan portion of the Darden Savings Plan. We also have $150 million of unsecured 5.750 percent medium-term notes due in March 2007 included in current liabilities as current portion of long-term debt, which we plan to repay through cash flows from operations or the issuance of unsecured debt securities in fiscal 2007. Through our shelf registration statement on file with the SEC, we may issue up to an additional $300 million of unsecured debt securities from time to time. The debt securities may bear interest at either fixed or floating rates and may have maturity dates of nine months or more after issuance. A summary of our contractual obligations and commercial commitments at May 28, 2006, is as follows (in thousands):
- ------------------------------------------------------------------------------------------ Payments Due by Period - ------------------------------------------------------------------------------------------ Contractual Less than 1-3 3-5 More than 5 Obligations Total 1 Year Years Years Years - ------------------------------------------------------------------------------------------ Short-term debt $ 44,000 $ 44,000 $ -- $ -- $ -- - ------------------------------------------------------------------------------------------ Long-term debt (1) 1,053,728 192,244 64,295 287,948 509,241 - ------------------------------------------------------------------------------------------ Operating leases 425,414 72,876 124,505 93,046 134,987 - ------------------------------------------------------------------------------------------ Purchase obligations (2) 607,864 586,688 12,926 8,250 -- - ------------------------------------------------------------------------------------------ Benefit obligations (3) 198,833 14,343 31,111 35,811 117,568 - ------------------------------------------------------------------------------------------ Total contractual obligations $2,329,839 $ 910,151 $ 232,837 $ 425,055 $ 761,796 - ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------ Amount of Commitment Expiration Per Period - ------------------------------------------------------------------------------------------ Total Other Commercial Amounts Less than 1-3 3-5 More than 5 Commitments Committed 1 Year Years Years Years - ------------------------------------------------------------------------------------------ Standby letters of credit (4) $ 77,181 $ 77,181 $ -- $ -- $ -- - ------------------------------------------------------------------------------------------ Guarantees (5) 1,269 388 553 246 82 - ------------------------------------------------------------------------------------------ Total commercial commitments $ 78,450 $ 77,569 $ 553 $ 246 $ 82 - ------------------------------------------------------------------------------------------
1) Includes interest payments associated with existing long-term debt, including the current portion. Variable-rate interest payments associated with the ESOP loan were estimated based on the interest rate in effect at May 28, 2006 (5.41 percent). Excludes issuance discount of $2,829. 2) Includes commitments for food and beverage items and supplies, capital projects and other miscellaneous commitments. 3) Includes expected payments associated with our defined benefit plans, postretirement benefit plan and our non-qualified deferred compensation plan through fiscal 2016. 9 4) Includes letters of credit for $64,556 of workers' compensation and general liabilities accrued in our consolidated financial statements; includes letters of credit for $4,495 of lease payments included in contractual operating lease obligation payments noted above and other letters of credit totaling $8,130. 5) Consists solely of guarantees associated with leased properties that have been assigned to third parties. We are not aware of any non-performance under these arrangements that would result in us having to perform in accordance with the terms of the guarantees. Our fixed-charge coverage ratio, which measures the number of times each year that we earn enough to cover our fixed charges, amounted to 7.3 times and 6.8 times for the fiscal years ended May 28, 2006 and May 29, 2005, respectively. Our adjusted debt to adjusted total capital ratio (which includes 6.25 times the total annual restaurant minimum rent ($67 million and $62 million for the fiscal years ended May 28, 2006 and May 29, 2005, respectively) and 3.00 times the total annual restaurant equipment minimum rent ($0 million for the fiscal years ended May 28, 2006 and May 29, 2005, respectively) as components of adjusted debt and adjusted total capital) was 47 percent and 45 percent at May 28, 2006 and May 29, 2005, respectively. We use the lease-debt equivalent in our adjusted debt to adjusted total capital ratio reported to shareholders, as we believe its inclusion better represents the optimal capital structure that we target from period to period. Based on these ratios, we believe our financial condition is strong. The composition of our capital structure is shown in the following table. (In millions, except ratios) May 28, 2006 May 29, 2005 - ------------------------------------------------------------------------------- CAPITAL STRUCTURE - ------------------------------------------------------------------------------- Short-term debt $ 44 $ -- Current portion of long-term debt 150 300 Long-term debt 495 350 Stockholders' equity 1,230 1,273 - ------------------------------------------------------------------------------- Total capital $ 1,919 $ 1,923 =============================================================================== ADJUSTMENTS TO CAPITAL - ------------------------------------------------------------------------------- Short-term debt $ 44 $ -- Current portion of long-term debt 150 300 Long-term debt 495 350 Lease-debt equivalent 415 385 - ------------------------------------------------------------------------------- Adjusted debt $ 1,104 $ 1,035 Stockholders' equity 1,230 1,273 - ------------------------------------------------------------------------------- Adjusted total capital $ 2,334 $ 2,308 =============================================================================== CAPITAL STRUCTURE RATIOS - ------------------------------------------------------------------------------- Debt to total capital ratio 36% 34% Adjusted debt to adjusted total capital ratio 47% 45% =============================================================================== Net cash flows provided by operating activities were $717 million, $583 million and $525 million in fiscal 2006, 2005 and 2004, respectively. Net cash flows provided by operating activities include net earnings of $338 million, $291 million and $227 million in fiscal 2006, 2005 and 2004, respectively. Fiscal 2004 net earnings included a $37 million pre-tax ($23 million after-tax) charge for long-lived asset impairments associated with the closing of six Bahama Breeze restaurants and the write-down of the carrying value of four other Bahama Breeze restaurants, one Olive Garden restaurant and one Red Lobster restaurant. Net cash flows provided by operating activities also reflect income tax payments of $126 million, $111 million and $92 million in fiscal 2006, 2005 and 2004, respectively. The increase in tax payments in fiscal 2006 and 2005 resulted primarily from accelerated deductions allowable for depreciation of certain capital expenditures for only a portion of fiscal 2005 and all of fiscal 2004, which lowered our income tax payments in those fiscal years. In fiscal 2006 and fiscal 2005, however, the impact of the reduction in accelerated depreciation deductions was partially offset by increases in income tax benefits associated with the exercise of employee stock options. 10 Net cash flows used in investing activities were $325 million, $313 million and $343 million in fiscal 2006, 2005 and 2004, respectively. Net cash flows used in investing activities included capital expenditures incurred principally to build new restaurants, replace equipment and remodel existing restaurants. Capital expenditures were $338 million in fiscal 2006, compared with $329 million in fiscal 2005 and $354 million in fiscal 2004. The decreased expenditures in fiscal 2005 resulted primarily from decreased spending associated with building fewer new restaurants and fewer remodels. We estimate that our fiscal 2007 capital expenditures will approximate $350 million. Net cash flows used in financing activities were $393 million, $264 million and $194 million in fiscal 2006, 2005 and 2004, respectively. Net cash flows used in financing activities included our repurchase of 11.9 million shares of our common stock for $434 million in fiscal 2006, compared with 11.3 million shares for $312 million in fiscal 2005 and 10.7 million shares for $235 million in fiscal 2004. As of May 28, 2006, our Board of Directors had authorized us to repurchase up to 137.4 million shares of our common stock and a total of 132.5 million shares had been repurchased under the authorization. The repurchased common stock is reflected as a reduction of stockholders' equity. In June 2006, our Board of Directors authorized an additional 25 million shares for repurchase, bringing our unused authorization to 29.9 million. During fiscal 2006 we completed the offering of $300 million in senior notes, resulting in net proceeds of $295 million, which were used to repay, at maturity, $300 million in notes outstanding. We also received proceeds from the issuance of common stock upon the exercise of stock options of $62 million, $75 million and $40 million in fiscal 2006, 2005 and 2004, respectively. Net cash flows used in financing activities also included dividends paid to stockholders of $59 million, $13 million and $13 million in fiscal 2006, 2005 and 2004, respectively. The increase in dividend payments reflects the increase in our annual dividend rate from $0.08 per share in fiscal 2005 and fiscal 2004 to $0.40 per share in fiscal 2006. Our defined benefit and other postretirement benefit costs and liabilities are determined using various actuarial assumptions and methodologies prescribed under the Financial Accounting Standards Board's (FASB) SFAS No. 87, "Employers' Accounting for Pensions" and No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." We use certain assumptions including, but not limited to, the selection of a discount rate, expected long-term rate of return on plan assets and expected health care cost trend rates. We set the discount rate assumption annually for each plan at its valuation date to reflect the yield of high quality fixed-income debt instruments, with lives that approximate the maturity of the plan benefits. At May 28, 2006, our discount rate was 5.75 percent. The expected long-term rate of return on plan assets and health care cost trend rates are based upon several factors, including our historical assumptions compared with actual results, an analysis of current market conditions, asset allocations and the views of leading financial advisers and economists. Our assumed expected long-term rate of return on plan assets was 9.0 percent for each of the fiscal years reported. At May 28, 2006, the expected health care cost trend rates assumed for fiscal 2007 ranged from 8.0 percent to 9.0 percent, depending on the medical service category. The rates gradually decrease to 5.0 percent through fiscal 2011 and remain at that level thereafter. We made contributions of approximately $0.3 million, $0.1 million and $0.1 million in fiscal years 2006, 2005 and 2004, respectively, to our defined benefit pension plan to maintain its fully funded status as of each annual valuation date (the most recent of which was February 28, 2006). The expected long-term rate of return on plan assets component of our net periodic benefit cost is calculated based on the market-related value of plan assets. Our target asset allocation is 35 percent U.S. equities, 30 percent high-quality, long-duration fixed-income securities, 15 percent international equities, 10 percent private equities and 10 percent real assets. We monitor our actual asset allocation to ensure that it approximates our target allocation and believe that our long-term asset allocation will continue to approximate our target allocation. Our historical ten-year rate of return on plan assets, calculated using the geometric method average of returns, is approximately 10.7 percent as of May 28, 2006. We have an unrecognized net actuarial loss for the defined benefit plans and postretirement benefit plan as of May 28, 2006 of $47 million and $4 million, respectively. The unrecognized net actuarial loss represents changes in the amount of the projected benefit obligation and plan assets resulting from differences in the assumptions used and actual experience. The amortization of the unrecognized net actuarial loss component of our fiscal 2007 net periodic benefit cost for the defined benefit plans and postretirement benefit plan is expected to be approximately $5 million and $0.2 million, respectively. We believe our defined benefit and postretirement benefit plan assumptions are appropriate based upon the factors discussed above. However, other assumptions could also be reasonably applied that could differ from the assumptions used. A quarter-percentage point change in the defined benefit plans' discount rate and the expected 11 long-term rate of return on plan assets would increase or decrease earnings before income taxes by $0.7 million and $0.4 million, respectively. A quarter-percentage point change in our postretirement benefit plan discount rate would increase or decrease earnings before income taxes by $0.1 million. A one-percentage point increase in the health care cost trend rates would increase the accumulated postretirement benefit obligation (APBO) by $4 million at May 28, 2006 and the aggregate of the service cost and interest cost components of net periodic postretirement benefit cost by $0.6 million for fiscal 2006. A one-percentage point decrease in the health care cost trend rates would decrease the APBO by $3 million at May 28, 2006 and the aggregate of the service cost and interest cost components of net periodic postretirement benefit cost by $0.5 million for fiscal 2006. These changes in assumptions would not significantly impact our funding requirements. We are not aware of any trends or events that would materially affect our capital requirements or liquidity. We believe that our internal cash-generating capabilities, borrowings available under our shelf registration for unsecured debt securities and short-term commercial paper program should be sufficient to finance our capital expenditures, debt maturities, stock repurchase program and other operating activities through fiscal 2007. OFF-BALANCE SHEET ARRANGEMENTS We are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, sales or expenses, results of operations, liquidity, capital expenditures or capital resources. FINANCIAL CONDITION Our total current assets were $378 million at May 28, 2006, compared with $407 million at May 29, 2005. The decrease resulted primarily from decreases in inventories of $37 million related to opportunistic product purchases made near the end of fiscal 2005, which were not repeated as of the end of fiscal 2006. Additionally, the lower fiscal 2006 balance reflects the results of successful inventory management initiatives. Our total current liabilities were $1.03 billion at May 28, 2006, compared with $1.04 billion at May 29, 2005. The decrease in current liabilities is primarily due to the net decrease in current debt maturities of $150 million, partially offset by an increase in short-term debt of $44 million, an increase in other current liabilities of $29 million, primarily due to a $16 million increase in liabilities associated with our non-qualified deferred compensation plan and an increase in accounts payable of $22 million, primarily due to the timing of our inventory and capital expenditures at the end of fiscal 2006. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to a variety of market risks, including fluctuations in interest rates, foreign currency exchange rates, compensation and commodity prices. To manage this exposure, we periodically enter into interest rate, foreign currency exchange, equity forwards and commodity instruments for other than trading purposes (see Notes 1 and 9 of the Notes to Consolidated Financial Statements, included elsewhere in this report). We use the variance/covariance method to measure value at risk, over time horizons ranging from one week to one year, at the 95 percent confidence level. At May 28, 2006, 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 $7 million over a period of one year (including the impact of the interest rate swap agreements discussed in Note 9 of the Notes to Consolidated Financial Statements, included elsewhere in this report). 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 $49 million. The fair value of our long-term fixed rate debt during fiscal 2006 averaged $762 million, with a high of $967 million and a low of $640 million. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows by targeting an appropriate mix of variable and fixed rate debt. FUTURE APPLICATION OF ACCOUNTING STANDARDS In December 2004, the FASB issued SFAS No. 123 (Revised), "Share-Based Payment." SFAS No. 123R revises SFAS No. 123, "Accounting for Stock-Based Compensation" and generally requires the cost associated with employee services received in exchange for an award of equity instruments be measured based on the grant-date fair value of the award and recognized in the financial statements over the period during which employees are required to 12 provide service in exchange for the award. SFAS No. 123R is effective for annual reporting periods beginning after June 15, 2006. Therefore, we will adopt the provisions of SFAS No. 123R as of our first fiscal quarter of 2007. Based on the current assumptions and calculations used, had we recognized compensation expense based on the fair value of awards of equity instruments, net earnings would have been reduced by approximately $14 million, $18 million and $15 million for fiscal 2006, 2005 and 2004, respectively. As disclosed in Note 1 of Notes to Consolidated Financial Statements, included elsewhere in this report, we will adopt SFAS No. 123R according to the modified prospective method and will continue using the Black Scholes option-pricing model to estimate the fair value of awards granted. Modified prospective application recognizes compensation expense for new awards granted after the effective date of SFAS No. 123R and for unvested awards as of the effective date of SFAS No. 123R over the remaining employee service period. We estimate the impact of adopting SFAS No. 123R will reduce net earnings by approximately $11 million or approximately $0.08 per diluted share in fiscal 2007. This estimate includes expense related to unvested stock options as of the date of adoption and other forms of stock-based compensation, not previously required to be recognized in net earnings. SFAS 123R also requires amounts related to tax deductions on benefits provided in excess of recognized stock-based compensation expense to be classified as financing activity in our consolidated statements of cash flows, whereas these amounts are currently reported as operating activities in accordance with current guidance. This requirement will reduce net operating cash flows and increase net financing cash flows subsequent to the adoption of SFAS 123R. During fiscal 2006, 2005 and 2004, we reported $34 million, $43 million and $16 million, respectively, as tax deductions on benefits provided in excess of recognized stock-based compensation expense as a component of operating cash flows in our consolidated statements of cash flows. We cannot estimate what these amounts will be in the future as they depend on, among other things, when employees exercise stock options. In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of SFAS No. 109" (FIN 48). FIN 48 clarifies the accounting for uncertain income tax positions accounted for in accordance with SFAS No. 109. The Interpretation stipulates recognition and measurement criteria in addition to classification, interim period accounting and significantly expanded disclosure provisions for uncertain tax positions that are expected to be taken in a company's tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. We have not yet determined the impact the adoption of FIN 48 will have on 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 the Private Securities Litigation Reform Act of 1995, as codified in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Words or phrases such as "believe," "plan," "will," "expect," "intend," "estimate," and "project" and similar expressions are intended to identify forward-looking statements. All of these statements, and any other statements in this report that are not historical facts, are forward-looking. 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 those discussed below and in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended May 28, 2006: o The intensely competitive nature of the restaurant industry, especially pricing, service, location, personnel and type and quality of food; o Economic and business factors, both specific to the restaurant industry and generally, including changes in consumer preferences, demographic trends, fuel prices, severe weather conditions including hurricanes, a protracted economic slowdown or worsening economy, industry-wide cost pressures and public safety conditions, including actual or threatened armed conflicts or terrorist attacks; o The price and availability of food, ingredients and utilities, including the general risk of inflation; o Labor and insurance costs, including increased labor costs as a result of federal and state-mandated increases in minimum wage rates and increased insurance costs as a result of increases in our current insurance premiums; o Increased advertising and marketing costs; o Higher-than-anticipated costs to open, close, relocate or remodel restaurants; 13 o Litigation by employees, consumers, suppliers, shareholders or others, regardless of whether the allegations made against us are valid or we are ultimately found liable; o Unfavorable publicity relating to food safety or other concerns; o A lack of suitable new restaurant locations or a decline in the quality of the locations of our current restaurants; o Federal, state and local regulation of our business, including laws and regulations relating to our relationships with our employees, zoning, land use, environmental matters and liquor licenses; o Growth objectives, including lower-than-expected sales and profitability of newly-opened restaurants, our expansion of newer concepts that have not yet proven their long-term viability, our ability to develop new concepts, risks associated with growth through acquisitions, and our ability to manage risks relating to the opening of new restaurants, including real estate development and construction activities, union activities, the issuance and renewal of licenses and permits, the availability of funds to finance growth and our ability to hire and train qualified personnel; and o Our plans to improve the financial performance of Bahama Breeze and Smokey Bones and reposition the Smokey Bones brand. Since it is not possible to foresee all such factors, risks and uncertainties, investors should not consider these factors to be a complete list of all risks or uncertainties. 14 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 U.S. generally accepted accounting principles, using management's best estimates and judgments where appropriate. The financial information throughout this report is consistent with our consolidated financial statements. Management has established a system of internal controls that provides reasonable assurance that assets are adequately safeguarded and transactions are recorded accurately, in all material respects, in accordance with management's authorization. We maintain a strong audit program that independently evaluates the adequacy and effectiveness of internal controls. Our internal controls provide for appropriate segregation of duties and responsibilities and there are documented policies regarding utilization of our assets and proper financial reporting. These formally stated and regularly communicated policies set high standards of ethical conduct for all employees. The Audit Committee of the Board of Directors meets at least quarterly to determine that management, internal auditors and the independent registered public accounting firm are properly discharging their duties regarding internal control and financial reporting. The independent registered public accounting firm, internal auditors and employees have full and free access to the Audit Committee at any time. KPMG LLP, an independent registered public accounting firm, is retained to audit our consolidated financial statements. Their report follows. /s/ Clarence Otis, Jr. Clarence Otis, Jr. Chairman of the Board and Chief Executive Officer MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). The Company's internal control over financial reporting is designed to provide reasonable assurance to the Company's management and Board of Directors regarding the preparation and fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Management assessed the effectiveness of the Company's internal control over financial reporting as of May 28, 2006. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Management has concluded that, as of May 28, 2006, the Company's internal control over financial reporting was effective based on these criteria. The Company's independent registered public accounting firm, KPMG LLP, has issued an audit report on our assessment of our internal control over financial reporting, which follows. 15 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING The Board of Directors and Stockholders Darden Restaurants, Inc. We have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that Darden Restaurants, Inc. maintained effective internal control over financial reporting as of May 28, 2006 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Darden Restaurants, Inc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that Darden Restaurants, Inc. maintained effective internal control over financial reporting as of May 28, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Darden Restaurants, Inc. maintained, in all material respects, effective internal control over financial reporting as of May 28, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Darden Restaurants, Inc. and subsidiaries as of May 28, 2006 and May 29, 2005, and the related consolidated statements of earnings, changes in stockholders' equity and accumulated other comprehensive income (loss), and cash flows for each of the years in the three-year period ended May 28, 2006, and our report dated July 27, 2006 expressed an unqualified opinion on those consolidated financial statements. /s/ KPMG LLP Orlando, FL July 27, 2006 Certified Public Accountants 16 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Darden Restaurants, Inc. We have audited the accompanying consolidated balance sheets of Darden Restaurants, Inc. and subsidiaries as of May 28, 2006 and May 29, 2005, and the related consolidated statements of earnings, changes in stockholders' equity and accumulated other comprehensive income (loss), and cash flows for each of the years in the three-year period ended May 28, 2006. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Darden Restaurants, Inc. and subsidiaries as of May 28, 2006 and May 29, 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended May 28, 2006 in conformity with U. S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Darden Restaurants, Inc.'s internal control over financial reporting as of May 28, 2006 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated July 27, 2006 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting. /s/ KPMG LLP Orlando, Florida July 27, 2006 Certified Public Accountants 17 CONSOLIDATED STATEMENTS OF EARNINGS
Fiscal Year Ended - ----------------------------------------------------------------------------------------------------------- (In thousands, except per share data) May 28, 2006 May 29, 2005 May 30, 2004 - ----------------------------------------------------------------------------------------------------------- Sales $ 5,720,640 $ 5,278,110 $ 5,003,355 Costs and expenses: Cost of sales: Food and beverage 1,691,906 1,593,709 1,526,875 Restaurant labor 1,850,199 1,695,805 1,601,258 Restaurant expenses 885,403 806,314 774,806 - ----------------------------------------------------------------------------------------------------------- Total cost of sales, excluding restaurant depreciation and amortization of $205,375, $198,422 and $195,486, respectively $ 4,427,508 $ 4,095,828 $ 3,902,939 Selling, general and administrative 536,379 497,478 472,109 Depreciation and amortization 221,456 213,219 210,004 Interest, net 43,105 43,119 43,659 Asset impairment and restructuring charges, net 9,674 4,549 41,868 - ----------------------------------------------------------------------------------------------------------- Total costs and expenses $ 5,238,122 $ 4,854,193 $ 4,670,579 - ----------------------------------------------------------------------------------------------------------- Earnings before income taxes 482,518 423,917 332,776 Income taxes 144,324 133,311 105,603 - ----------------------------------------------------------------------------------------------------------- Net earnings $ 338,194 $ 290,606 $ 227,173 =========================================================================================================== Net earnings per share: Basic $ 2.26 $ 1.85 $ 1.39 Diluted $ 2.16 $ 1.78 $ 1.34 =========================================================================================================== Average number of common shares outstanding: Basic 149,700 156,700 163,500 Diluted 156,900 163,400 169,700 ===========================================================================================================
See accompanying notes to consolidated financial statements. 18 CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------- (In thousands) May 28, 2006 May 29, 2005 - ---------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 42,334 $ 42,801 Receivables, net 37,111 36,510 Inventories, net 198,723 235,444 Prepaid expenses and other current assets 29,889 28,927 Deferred income taxes 69,550 63,584 - ---------------------------------------------------------------------------------------------- Total current assets $ 377,607 $ 407,266 Land, buildings and equipment, net 2,446,035 2,351,454 Other assets 186,528 179,051 - ---------------------------------------------------------------------------------------------- Total assets $ 3,010,170 $ 2,937,771 ============================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 213,239 $ 191,197 Short-term debt 44,000 -- Accrued payroll 123,176 114,602 Accrued income taxes 64,792 52,404 Other accrued taxes 46,853 43,825 Unearned revenues 100,761 88,472 Current portion of long-term debt 149,948 299,929 Other current liabilities 283,309 254,178 - ---------------------------------------------------------------------------------------------- Total current liabilities $ 1,026,078 $ 1,044,607 Long-term debt, less current portion 494,653 350,318 Deferred income taxes 90,573 114,846 Deferred rent 138,530 130,872 Other liabilities 30,573 24,109 - ---------------------------------------------------------------------------------------------- Total liabilities $ 1,780,407 $ 1,664,752 - ---------------------------------------------------------------------------------------------- Stockholders' equity: Common stock and surplus, no par value. Authorized 500,000 shares; issued 274,683 and 271,102 shares, respectively; outstanding 146,998 and 154,391 shares, respectively $ 1,806,367 $ 1,703,336 Preferred stock, no par value. Authorized 25,000 shares; none issued and outstanding -- -- Retained earnings 1,684,742 1,405,754 Treasury stock, 127,685 and 116,711 shares, at cost, respectively (2,211,222) (1,784,835) Accumulated other comprehensive income (loss) (5,570) (8,876) Unearned compensation (44,186) (41,685) Officer notes receivable (368) (675) - ---------------------------------------------------------------------------------------------- Total stockholders' equity $ 1,229,763 $ 1,273,019 - ---------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 3,010,170 $ 2,937,771 ==============================================================================================
See accompanying notes to consolidated financial statements. 19 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
- --------------------------------------------------------------------------------------------------------------------------- Common Stock Accumulated Other And Retained Treasury Comprehensive (In thousands, except per share data) Surplus Earnings Stock Income (Loss) - --------------------------------------------------------------------------------------------------------------------------- Balance at May 25, 2003 $1,525,957 $ 913,464 $(1,254,293) $(10,646) - --------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net earnings -- 227,173 -- -- Other comprehensive income (loss): Foreign currency adjustment -- -- -- 337 Change in fair value of derivatives, net of tax of $51 -- -- -- 205 Minimum pension liability adjustment, net of tax benefit of $45 -- -- -- (69) Total comprehensive income Cash dividends declared ($0.08 per share) -- (12,984) -- -- Stock option exercises (3,464 shares) 30,972 -- 3,685 -- Issuance of restricted stock (409 shares), net of forfeiture adjustments 7,605 -- 173 -- Earned compensation -- -- -- -- ESOP note receivable repayments -- -- -- -- Income tax benefits credited to equity 15,650 -- -- -- Purchases of common stock for treasury (10,749 shares) -- -- (235,462) -- Issuance of treasury stock under Employee Stock Purchase Plan and other plans (357 shares) 3,931 -- 2,129 -- Repayment of officer notes -- -- -- -- - --------------------------------------------------------------------------------------------------------------------------- Balance at May 30, 2004 $1,584,115 $1,127,653 $(1,483,768) $(10,173) - --------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net earnings -- 290,606 -- -- Other comprehensive income (loss): Foreign currency adjustment -- -- -- 1,450 Change in fair value of derivatives, net of tax of $1,503 -- -- -- (243) Minimum pension liability adjustment, net of tax benefit of $56 -- -- -- 90 Total comprehensive income Cash dividends declared ($0.08 per share) -- (12,505) -- -- Stock option exercises (6,615 shares) 62,464 -- 7,081 -- Issuance of restricted stock (378 shares), net of forfeiture adjustments 9,535 -- -- -- Earned compensation -- -- -- -- ESOP note receivable repayments -- -- -- -- Income tax benefits credited to equity 42,996 -- -- -- Purchases of common stock for treasury (11,343 shares) -- -- (311,686) -- Issuance of treasury stock under Employee Stock Purchase Plan and other plans (296 shares) 4,226 -- 1,932 -- Issuance of treasury stock under Employee Stock Ownership Plan (50 shares) -- -- 1,606 -- Repayment of officer notes -- -- -- -- - --------------------------------------------------------------------------------------------------------------------------- Balance at May 29, 2005 $1,703,336 $1,405,754 $(1,784,835) $ (8,876) - --------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net earnings -- 338,194 -- -- Other comprehensive income (loss): Foreign currency adjustment -- -- -- 3,878 Change in fair value of derivatives, net of tax of $418 -- -- -- (532) Minimum pension liability adjustment, net of tax benefit of $25 -- -- -- (40) Total comprehensive income Cash dividends declared ($0.40 per share) -- (59,206) -- -- Stock option exercises (3,909 shares) 49,260 -- 6,346 -- Issuance of restricted stock (403 shares), net of forfeiture adjustments 13,467 -- -- -- Earned compensation -- -- -- -- ESOP note receivable repayments -- -- -- -- Income tax benefits credited to equity 34,316 -- -- -- Purchases of common stock for treasury (11,943 shares) -- -- (434,187) -- Issuance of treasury stock under Employee Stock Purchase Plan and other plans (237 shares) 5,988 -- 1,454 -- Repayment of officer notes -- -- -- -- - --------------------------------------------------------------------------------------------------------------------------- Balance at May 28, 2006 $1,806,367 $1,684,742 $(2,211,222) $ (5,570) =========================================================================================================================== - ------------------------------------------------------------------------------------------------------------- Officer Total Unearned Notes Stockholders' (In thousands, except per share data) Compensation Receivable Equity - ------------------------------------------------------------------------------------------------------------- Balance at May 25, 2003 $(42,848) $(1,579) $1,130,055 - ------------------------------------------------------------------------------------------------------------- Comprehensive income: Net earnings -- -- 227,173 Other comprehensive income (loss): Foreign currency adjustment -- -- 337 Change in fair value of derivatives, net of tax of $51 -- -- 205 Minimum pension liability adjustment, net of tax benefit of $45 -- -- (69) ----------- Total comprehensive income 227,646 Cash dividends declared ($0.08 per share) -- -- (12,984) Stock option exercises (3,464 shares) -- -- 34,657 Issuance of restricted stock (409 shares), net of forfeiture adjustments (7,778) -- Earned compensation 4,198 -- 4,198 ESOP note receivable repayments 5,027 -- 5,027 Income tax benefits credited to equity -- -- 15,650 Purchases of common stock for treasury (10,749 shares) -- -- (235,462) Issuance of treasury stock under Employee Stock Purchase Plan and other plans (357 shares) -- -- 6,060 Repayment of officer notes -- 441 441 - ------------------------------------------------------------------------------------------------------------- Balance at May 30, 2004 $(41,401) $(1,138) $1,175,288 - ------------------------------------------------------------------------------------------------------------- Comprehensive income: Net earnings -- -- 290,606 Other comprehensive income (loss): Foreign currency adjustment -- -- 1,450 Change in fair value of derivatives, net of tax of $1,503 -- -- (243) Minimum pension liability adjustment, net of tax benefit of $56 -- -- 90 ----------- Total comprehensive income 291,903 Cash dividends declared ($0.08 per share) -- -- (12,505) Stock option exercises (6,615 shares) -- -- 69,545 Issuance of restricted stock (378 shares), net of forfeiture adjustments (9,535) -- -- Earned compensation 7,464 -- 7,464 ESOP note receivable repayments 3,393 -- 3,393 Income tax benefits credited to equity -- -- 42,996 Purchases of common stock for treasury (11,343 shares) -- -- (311,686) Issuance of treasury stock under Employee Stock Purchase Plan and other plans (296 shares) -- -- 6,158 Issuance of treasury stock under Employee Stock Ownership Plan (50 shares) (1,606) -- -- Repayment of officer notes -- 463 463 - ------------------------------------------------------------------------------------------------------------- Balance at May 29, 2005 $(41,685) $ (675) $1,273,019 - ------------------------------------------------------------------------------------------------------------- Comprehensive income: Net earnings -- -- 338,194 Other comprehensive income (loss): Foreign currency adjustment -- -- 3,878 Change in fair value of derivatives, net of tax of $418 -- -- (532) Minimum pension liability adjustment, net of tax benefit of $25 -- -- (40) ----------- Total comprehensive income 341,500 Cash dividends declared ($0.40 per share) -- -- (59,206) Stock option exercises (3,909 shares) -- -- 55,606 Issuance of restricted stock (403 shares), net of forfeiture adjustments (13,467) -- -- Earned compensation 7,386 -- 7,386 ESOP note receivable repayments 3,580 -- 3,580 Income tax benefits credited to equity -- -- 34,316 Purchases of common stock for treasury (11,943 shares) -- -- (434,187) Issuance of treasury stock under Employee Stock Purchase Plan and other plans (237 shares) -- -- 7,442 Repayment of officer notes -- 307 307 - ------------------------------------------------------------------------------------------------------------- Balance at May 28, 2006 $(44,186) $ (368) $1,229,763 =============================================================================================================
See accompanying notes to consolidated financial statements. 20 CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended - ----------------------------------------------------------------------------------------------------------------------------- (In thousands) May 28, 2006 May 29, 2005 May 30, 2004 - ----------------------------------------------------------------------------------------------------------------------------- Cash flows - operating activities Net earnings $ 338,194 $ 290,606 $ 227,173 Adjustments to reconcile net earnings to cash flows: Depreciation and amortization 221,456 213,219 210,004 Asset impairment charges, net 9,674 4,549 40,756 Restructuring charge -- -- 1,112 Amortization of loan costs 3,020 3,577 3,401 Change in current assets and liabilities 121,401 28,967 2,207 Contribution to postretirement plan (410) (472) (172) Loss on disposal of land, buildings and equipment 2,719 1,164 104 Change in cash surrender value of trust-owned life insurance (6,032) (3,451) (6,106) Deferred income taxes (29,796) (24,722) 16,688 Change in deferred rent 7,658 7,993 7,583 Change in other liabilities 6,874 11,920 1,490 Income tax benefits credited to equity 34,316 42,996 15,650 Amortization of unearned compensation and other non-cash compensation expense 8,611 8,470 5,059 Other, net (595) (1,574) 462 - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities $ 717,090 $ 583,242 $ 525,411 - ----------------------------------------------------------------------------------------------------------------------------- Cash flows - investing activities Purchases of land, buildings and equipment (338,155) (329,238) (354,326) Increase in other assets (7,021) (1,931) (5,128) Proceeds from disposal of land, buildings and equipment 20,560 18,028 16,197 - ----------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities $ (324,616) $ (313,141) $ (343,257) - ----------------------------------------------------------------------------------------------------------------------------- Cash flows - financing activities Proceeds from issuance of common stock 61,783 74,697 39,856 Dividends paid (59,206) (12,505) (12,984) Purchases of treasury stock (434,187) (311,686) (235,462) ESOP note receivable repayments 3,580 3,393 5,027 Increase (decrease) in short-term debt 44,000 (14,500) 14,500 Proceeds from issuance of long-term debt 294,669 -- -- Repayment of long-term debt (303,580) (3,393) (5,027) - ----------------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities $ (392,941) $ (263,994) $ (194,090) - ----------------------------------------------------------------------------------------------------------------------------- (Decrease) increase in cash and cash equivalents (467) 6,107 (11,936) Cash and cash equivalents - beginning of year 42,801 36,694 48,630 - ----------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents - end of year $ 42,334 $ 42,801 $ 36,694 ============================================================================================================================= Cash flows from changes in current assets and liabilities Receivables (601) (5,533) (279) Inventories 36,721 (36,663) (25,137) Prepaid expenses and other current assets (2,325) (4,463) (190) Accounts payable 22,042 16,573 (1,027) Accrued payroll 8,574 11,275 17,352 Accrued income taxes 12,388 3,651 (19,222) Other accrued taxes 3,028 5,385 3,371 Unearned revenues 12,289 12,959 2,815 Other current liabilities 29,285 25,783 24,524 - ----------------------------------------------------------------------------------------------------------------------------- Change in current assets and liabilities $ 121,401 $ 28,967 $ 2,207 =============================================================================================================================
See accompanying notes to consolidated financial statements. 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except per share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Operations and Principles of Consolidation The accompanying consolidated financial statements include the operations of Darden Restaurants, Inc. and its wholly owned subsidiaries (Darden, the Company, we, us or our). We own and operate the Red Lobster(R), Olive Garden(R), Bahama Breeze(R), Smokey Bones Barbeque & Grill(R) and Seasons 52(R) restaurant concepts located in the United States and Canada, with no franchising. We also license 42 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 2006 and 2005 both consisted of 52 weeks of operation. Fiscal 2004 consisted of 53 weeks of operation. Use of Estimates We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents Cash equivalents include highly liquid investments such as U.S. treasury bills, taxable municipal bonds and money market funds that have a maturity of three months or less. Amounts receivable from credit card companies are also considered cash equivalents because they are both short-term and highly liquid in nature and are typically converted to cash within three days of the sales transaction. Accounts Receivable Accounts receivable, net of the allowance for doubtful accounts, represents their estimated net realizable value. Provisions for doubtful accounts are recorded based on historical collection experience and the age of the receivables. Accounts receivable are written off when they are deemed uncollectible. See Note 2 - Accounts Receivable for additional information. Inventories Inventories consist of food and beverages and are valued at the lower of weighted-average cost or market. Land, Buildings and Equipment, Net Land, buildings and equipment are recorded at cost less accumulated depreciation. Repair and maintenance costs incurred to maintain the appearance and functionality of the land, buildings and equipment that do not extend its useful life or that are less than $1 are expensed as incurred. Building components are depreciated over estimated useful lives ranging from seven to 40 years using the straight-line method. Leasehold improvements, which are reflected on our consolidated balance sheets as a component of buildings, are amortized over the lesser of the expected lease term, including cancelable option periods, or the estimated useful lives of the related assets using the straight-line method. Equipment is depreciated over estimated useful lives ranging from two to ten years also using the straight-line method. Accelerated depreciation methods are generally used for income tax purposes. Depreciation and amortization expense associated with buildings and equipment amounted to $214,272, $206,552 and $203,349, in fiscal 2006, 2005 and 2004, respectively. In fiscal 2006, 2005 and 2004, we had losses on disposal of land, buildings and equipment of $2,719, $1,164 and $104, respectively, which were included in selling, general and administrative expenses. See Note 4 - Land, Buildings and Equipment, net for additional information. 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 as of May 28, 2006 and May 29, 2005, amounted to $56,412 and $51,292, 22 respectively. Accumulated amortization as of May 28, 2006 and May 29, 2005, amounted to $25,437 and $19,877, respectively. Amortization expense associated with capitalized software amounted to $7,184, $6,667 and $6,655, in fiscal 2006, 2005 and 2004, 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 for each policy is included in other assets while changes in cash surrender values 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 and included in other assets. Annual liquor license renewal fees are expensed. Impairment of Long-Lived Assets Land, buildings and equipment and certain other assets, including capitalized software costs and liquor licenses, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future undiscounted net cash flows expected to be generated by the assets. Identifiable cash flows are measured at the lowest level for which they are largely independent of the cash flows of other groups of assets and liabilities, generally at the restaurant level. If such assets are determined to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value. Fair value is generally determined based on appraisals or sales prices of comparable assets. Restaurant sites and certain other assets to be disposed of are reported at the lower of their carrying amount or fair value, less estimated costs to sell. Restaurant sites and certain other assets to be disposed of are included in assets held for disposal when certain criteria are met. These criteria include the requirement that the likelihood of disposing of these assets within one year is probable. Assets not meeting the held for sale criteria remain in land, buildings and equipment until their disposal is probable within one year. Insurance Accruals Through the use of insurance program deductibles and self-insurance, we retain a significant portion of expected losses under our workers' compensation, employee medical and general liability programs. However, we carry insurance for individual claims that generally exceed $250 for workers' compensation and general liability claims. Accrued liabilities have been recorded based on our estimates of the anticipated ultimate costs to settle all claims, both reported and unreported. Revenue Recognition Revenue from restaurant sales is recognized when food and beverage products are sold. Unearned revenues represent our liability for gift cards and certificates that have been sold but not yet redeemed and are recorded at their expected redemption value. When the gift cards and certificates are redeemed, we recognize restaurant sales and reduce unearned revenues. Food and Beverage Costs Food and beverage costs include inventory, warehousing and related purchasing and distribution costs. Vendor allowances received in connection with the purchase of a vendor's products are recognized as a reduction of the related food and beverage costs as earned. Advance payments are made by the vendors based on estimates of volume to be purchased from the vendors and the terms of the agreement. As we make purchases from the vendors each period, we recognize the pro rata portion of allowances earned as a reduction of food and beverage costs for that period. Differences between estimated and actual purchases are settled in accordance with the terms of the agreements. Vendor agreements are generally for a period of one year or more and payments received are initially recorded as long-term liabilities. Amounts which are expected to be earned within one year are recorded as a current liability. 23 Income Taxes We provide for federal and state income taxes currently payable as well as for those deferred because of temporary differences between reporting income and expenses for financial statement purposes versus tax purposes. Federal income tax credits are recorded as a reduction of income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. Income tax benefits credited to equity relate to tax benefits associated with amounts that are deductible for income tax purposes but do not affect earnings. These benefits are principally generated from employee exercises of non-qualified stock options and vesting of employee restricted stock awards. See Note 14 - Income Taxes for additional information. Derivative Instruments and Hedging Activities We use financial and commodities derivatives to manage interest rate, compensation and commodities pricing risks inherent in our business operations. Our use of derivative instruments is currently limited to interest rate hedges, equity forwards contracts and commodities futures and options contracts. These instruments are structured as hedges of forecasted transactions or the variability of cash flows to be paid related to a recognized asset or liability (cash flow hedges). No derivative instruments are entered into for trading or speculative purposes. All derivatives are recognized on the balance sheet at fair value. On the date the derivative contract is entered into, we document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking the various hedge transactions. This process includes linking all derivatives designated as cash flow hedges to specific assets and liabilities on the consolidated balance sheet or to specific forecasted transactions. We also formally assess, both at the hedge's inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. Changes in the fair value of derivatives that are highly effective and that are designated and qualify as cash flow hedges are recorded in other comprehensive income (loss) until earnings are affected by the variability in cash flows of the designated hedged item. Where applicable, we discontinue hedge accounting prospectively when it is determined that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item or the derivative is terminated. Any changes in the fair value of a derivative where hedge accounting has been discontinued or is ineffective are recognized immediately in earnings. Cash flows related to derivatives are included in operating activities. See Note 9 - Derivative Instruments and Hedging Activities for additional information. Operating Leases We recognize rent expense on a straight-line basis over the expected lease term, including cancelable option periods where failure to exercise the options would result in an economic penalty to the Company. Differences between amounts paid and amounts expensed are recorded as deferred rent. Within the provisions of certain of our leases, there are rent holidays and escalations in payments over the base lease term, as well as renewal periods. The effects of the holidays and escalations have been reflected in rent expense on a straight-line basis over the expected lease term, which includes cancelable option periods where failure to exercise such options would result in an economic penalty to the Company. The lease term commences on the date when we have the right to control the use of the leased property, which is typically before rent payments are due under the terms of the lease. Many of our leases have renewal periods totaling five to 20 years, exercisable at our option and require payment of property taxes, insurance and maintenance costs in addition to the rent payments. Percentage rent expense is generally based on sales levels and is accrued at the point in time we determine that it is probable that such sales levels will be achieved. 24 Pre-Opening Expenses Non-capital expenditures associated with opening new restaurants are expensed as incurred. Advertising Production costs of commercials are charged to operations in the fiscal period the advertising is first aired. The costs of programming and other advertising, promotion and marketing programs are charged to operations in the fiscal period incurred. Advertising expense, included in selling, general and administrative expenses, amounted to $229,693, $214,608 and $210,989, in fiscal 2006, 2005 and 2004, respectively. Stock-Based Compensation Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," encourages the use of a fair-value method of accounting for stock-based awards under which the fair value of stock options is determined on the date of grant and expensed over the vesting period. As allowed by SFAS No. 123, we have elected to account for our stock-based compensation plans under an intrinsic value method that requires compensation expense to be recorded only if, on the date of grant, the current market price of our common stock exceeds the exercise price the employee must pay for the stock. Our policy is to grant stock options at the fair market value of our underlying stock on the date of grant. Accordingly, no compensation expense has been recognized for stock options granted under any of our stock plans because the exercise price of all options granted was equal to the current market value of our stock on the grant date. 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 - -------------------------------------------------------------------------------------------------------- 2006 2005 2004 - -------------------------------------------------------------------------------------------------------- Net earnings, as reported $ 338,194 $ 290,606 $ 227,173 Add: Stock-based compensation expense included in reported net earnings, net of related tax effects 5,366 5,134 3,158 Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects (19,648) (22,719) (17,980) ------------------------------------------- Pro forma $ 323,912 $ 273,021 $ 212,351 =========================================== Basic net earnings per share As reported $ 2.26 $ 1.85 $ 1.39 Pro forma $ 2.16 $ 1.74 $ 1.30 Diluted net earnings per share As reported $ 2.16 $ 1.78 $ 1.34 Pro forma $ 2.06 $ 1.67 $ 1.25 ========================================================================================================
To determine pro forma net earnings, reported net earnings have been adjusted for compensation expense associated with stock options granted that are expected to vest. The preceding pro forma results were determined using the Black Scholes option-pricing model, which values options based on the stock price at the grant date, the expected life of the option, the estimated volatility of the stock, expected dividend payments and the risk-free interest rate over the expected life of the option. The weighted-average fair value of non-qualified stock options granted during fiscal 2006, 2005 and 2004 used in computing pro forma compensation expense was $10.68, $7.75 and $6.83, respectively. The dividend yield was calculated by dividing the current annualized dividend by the option exercise price for each grant. The expected volatility was determined considering stock prices for the fiscal year the grant occurred and prior fiscal years, as well as considering industry volatility data. The risk-free interest rate was the rate available on zero coupon U.S. government obligations with a term equal to the expected life of each grant. The expected life of the option was estimated based on the exercise history from previous grants. 25 The weighted-average assumptions used in the Black Scholes model were as follows:
Stock Options Granted in Fiscal Year - ------------------------------------------------------------------------------------------- 2006 2005 2004 - ------------------------------------------------------------------------------------------- Risk-free interest rate 3.91% 3.75% 2.62% Expected volatility of stock 30.0% 30.0% 30.0% Dividend yield 1.20% 0.3% 0.2% Expected option life 6.0 years 6.0 years 6.0 years ===========================================================================================
Restricted stock and restricted stock unit (RSU) awards are recognized as unearned compensation, a component of stockholders' equity, based on the fair market value of our common stock on the award date. These amounts are amortized to compensation expense, using the straight-line method, over the vesting period using assumed forfeiture rates for different types of awards. Compensation expense is adjusted in future periods if actual forfeiture rates differ from initial estimates. In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (Revised), "Share-Based Payment" (SFAS No. 123R), which requires companies to begin expensing the estimated fair value of employee stock options and similar awards. SFAS No. 123R is effective for our first fiscal quarter of 2007. We will adopt SFAS No. 123R according to the modified prospective method and will continue using the Black Scholes option-pricing model to estimate the fair value of awards granted. Modified prospective application recognizes compensation expense for new awards granted after the effective date of SFAS No. 123R and for unvested awards as of the effective date of SFAS No. 123R over the remaining employee service period. See Note 16 - Stock Plans for additional information on our various forms of stock-based compensation. Net Earnings Per Share Basic net earnings per share are computed by dividing net earnings by the weighted-average number of common shares outstanding for the reporting period. Diluted net earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Outstanding stock options and restricted stock granted by us represent the only dilutive effect reflected in diluted weighted-average shares outstanding. Options and restricted stock do not impact the numerator of the diluted net earnings per share computation. The following table presents the computation of basic and diluted earnings per common share:
Fiscal Year - ------------------------------------------------------------------------------------------- 2006 2005 2004 - ------------------------------------------------------------------------------------------- Net earnings $ 338,194 $ 290,606 $ 227,173 ===================================== Average common shares outstanding - Basic 149,700 156,700 163,500 Effect of dilutive stock-based compensation 7,200 6,700 6,200 ------------------------------------- Average common shares outstanding - Diluted 156,900 163,400 169,700 ===================================== Basic net earnings per share $ 2.26 $ 1.85 $ 1.39 Diluted net earnings per share $ 2.16 $ 1.78 $ 1.34 ===========================================================================================
Options to purchase 79 shares, 2,680 shares and 4,643 shares of common stock were excluded from the calculation of diluted net earnings per share for fiscal 2006, 2005 and 2004, respectively, because their exercise prices exceeded the average market price of common shares for the period. 26 Comprehensive Income (Loss) Comprehensive income (loss) includes net earnings and other comprehensive income (loss) items that are excluded from net earnings under U.S. generally accepted accounting principles. Other comprehensive income (loss) items include foreign currency translation adjustments, the effective unrealized portion of changes in the fair value of cash flow hedges and amounts associated with minimum pension liability adjustments. See Note - 11 Stockholders' Equity for additional information. Foreign Currency The Canadian dollar is the functional currency for our Canadian restaurant operations. Assets and liabilities denominated in Canadian dollars are translated into U.S. dollars using the exchange rates in effect at the balance sheet date. Results of operations are translated using the average exchange rates prevailing throughout the period. Translation gains and losses are reported as a separate component of accumulated other comprehensive income (loss) in stockholders' equity. Aggregate cumulative translation losses were $4,846 and $8,724 at May 28, 2006 and May 29, 2005, respectively. Gain (losses) from foreign currency transactions, which amounted to $60, ($18) and ($53), are included in selling, general and administrative expenses for fiscal 2006, 2005 and 2004, respectively. Segment Reporting As of May 28, 2006, we operated 1,427 Red Lobster, Olive Garden, Bahama Breeze, Smokey Bones Barbeque & Grill and Seasons 52 restaurants in North America as operating segments. The restaurants operate principally in the U.S. within the casual dining industry, providing similar products to similar customers. The restaurants also possess similar pricing structures, resulting in similar long-term expected financial performance characteristics. Revenues from external customers are derived principally from food and beverage sales. We do not rely on any major customers as a source of revenue. We believe we meet the criteria for aggregating our operating segments into a single reporting segment. Future Application of Accounting Standards In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." SFAS No. 151 clarifies the accounting for abnormal amounts of idle facilities expense, freight, handling costs and wasted material. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not believe the adoption of SFAS No. 151 will have a material impact on our consolidated financial statements. As previously disclosed, in December 2004, the FASB issued SFAS No. 123R, which revised the guidance in SFAS No. 123 and generally requires the cost of awards of equity instruments granted in exchange for employee services be measured based on the grant-date fair value of the award and recognized in the financial statements over the period during which employees are required to provide service in exchange for the award. SFAS No. 123R is effective for annual reporting periods beginning after June 15, 2005. SFAS 123R also requires amounts related to tax deductions on benefits provided in excess of recognized stock-based compensation expense to be classified as a financing activity in our consolidated statements of cash flows, whereas these amounts are currently reported as operating activities in accordance with current guidance. This requirement will reduce net operating cash flows and increase net financing cash flows in periods subsequent to the adoption of SFAS 123R. During fiscal 2006, 2005 and 2004, we reported $34,316, $42,996 and $15,650, respectively, as tax deductions in excess of recognized stock-based compensation expense as a component of operating cash flows in our consolidated statements of cash flows. We cannot estimate what these amounts will be in the future as they depend on, among other things, when employees exercise stock options. In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of SFAS No. 109" (FIN 48). FIN 48 clarifies the accounting for uncertain income tax positions accounted for in accordance with SFAS No. 109. The Interpretation stipulates recognition and measurement criteria in addition to classification, interim period accounting and significantly expanded disclosure provisions for uncertain tax positions that are expected to be taken in a company's tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. We have not yet determined the impact the adoption of FIN 48 will have on our consolidated financial statements. 27 Reclassification Certain fiscal 2005 and 2004 amounts have been reclassified within net cash provided by operating activities in the accompanying consolidated statements of cash flows to conform to 2006 classifications. These reclassifications do not have an impact on the consolidated statements of earnings, consolidated balance sheets or consolidated statements of changes in stockholders' equity and accumulated other comprehensive income (loss). NOTE 2 - ACCOUNTS RECEIVABLE Our accounts receivable is primarily comprised of receivables from national storage and distribution companies with which we contract to provide services that are billed to us on a per-case basis. In connection with these services, certain of our inventory items are conveyed to these storage and distribution companies to transfer ownership and risk of loss prior to delivery of the inventory to our restaurants. We reacquire these items when the inventory is subsequently delivered to our restaurants. These transactions do not impact the consolidated statements of earnings. Receivables from national storage and distribution companies amounted to $20,466 and $20,296 at May 28, 2006 and May 29, 2005, respectively. The allowance for doubtful accounts associated with all of our receivables amounted to $400 at May 28, 2006 and May 29, 2005. NOTE 3 - RESTRUCTURING AND ASSET IMPAIRMENT ACTIVITIES Asset impairment charges related to the decision to close, relocate or rebuild certain restaurants amounted to $5,958, $900 and $5,667 in fiscal 2006, 2005 and 2004, respectively. Asset impairment credits related to assets sold that were previously impaired amounted to $596, $2,786 and $1,437 in fiscal 2006, 2005 and 2004, respectively. During fiscal 2006, we also recorded asset impairment charges of $4,312 for the write-down of carrying value of two Smokey Bones restaurants, which we continue to operate. During fiscal 2005, we also recorded asset impairment charges of $6,407 for the write-down of carrying value of two Olive Garden restaurants, one Red Lobster restaurant and one Smokey Bones restaurant, which continued to operate through fiscal 2005 but were subsequently closed in fiscal 2006. All impairment amounts are included in asset impairment and restructuring charges in the consolidated statements of earnings. During fiscal 2004, we recorded pre-tax asset impairment charges of $36,526 for long-lived asset impairments associated with the closing of six Bahama Breeze restaurants and the write-down of the carrying value of four other Bahama Breeze restaurants, one Olive Garden restaurant and one Red Lobster restaurant, which continued to operate, except for the Olive Garden restaurant, which closed in fiscal 2006. We also recorded a restructuring charge of $1,112 primarily related to severance payments made to certain restaurant employees and exit costs associated with the closing of the six Bahama Breeze restaurants in accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." All restructuring charges accrued were paid as of May 29, 2005. The results of operations for all restaurants closed in fiscal 2006, 2005 and 2004 are not material to our consolidated financial position, results of operations or cash flows and, therefore, have not been presented as discontinued operations. NOTE 4 - LAND, BUILDINGS AND EQUIPMENT, NET The components of land, buildings and equipment, net, are as follows: May 28, 2006 May 29, 2005 - ---------------------------------------------------------------------------- Land $ 603,203 $ 565,965 Buildings 2,472,206 2,306,342 Equipment 1,052,214 1,036,143 Construction in progress 100,932 107,750 - ---------------------------------------------------------------------------- Total land, buildings and equipment 4,228,555 4,016,200 Less accumulated depreciation (1,782,520) (1,664,746) - ---------------------------------------------------------------------------- Land, buildings, and equipment, net $ 2,446,035 $ 2,351,454 ============================================================================ 28 NOTE 5 - OTHER ASSETS The components of other assets are as follows:
May 28, 2006 May 29, 2005 - -------------------------------------------------------------------------------------------------- Prepaid pension costs $ 58,365 $ 63,475 Trust-owned life insurance 49,905 43,873 Capitalized software costs, net 30,975 31,165 Liquor licenses 24,988 24,570 Loan costs 9,746 8,008 Miscellaneous 12,549 7,960 - -------------------------------------------------------------------------------------------------- Total other assets $186,528 $ 179,051 ==================================================================================================
NOTE 6 - SHORT-TERM DEBT Short-term debt at May 28, 2006 and May 29, 2005 consisted of $44,000 and $0, respectively, of unsecured commercial paper borrowings with original maturities of one month or less. The debt bore an interest rate of 5.08 percent at May 28, 2006. NOTE 7 - OTHER CURRENT LIABILITIES The components of other current liabilities are as follows:
May 28, 2006 May 29, 2005 - -------------------------------------------------------------------------------------------------- Employee benefits $152,687 $ 134,272 Sales and other taxes 43,695 39,011 Insurance 40,639 35,938 Miscellaneous 36,660 34,458 Accrued interest 9,628 10,499 - -------------------------------------------------------------------------------------------------- Total other current liabilities $283,309 $ 254,178 ==================================================================================================
NOTE 8 - LONG-TERM DEBT The components of long-term debt are as follows:
May 28, 2006 May 29, 2005 - -------------------------------------------------------------------------------------------------- 8.375% senior notes due September 2005 $ -- $ 150,000 6.375% notes due February 2006 -- 150,000 5.750% medium-term notes due March 2007 150,000 150,000 4.875% senior notes due August 2010 150,000 -- 7.450% medium-term notes due April 2011 75,000 75,000 7.125% debentures due February 2016 100,000 100,000 6.000% senior notes due August 2035 150,000 -- ESOP loan with variable rate of interest (5.41% at May 28, 2006) due December 2018 22,430 26,010 - -------------------------------------------------------------------------------------------------- Total long-term debt 647,430 651,010 Less issuance discount (2,829) (763) - -------------------------------------------------------------------------------------------------- Total long-term debt less issuance discount 644,601 650,247 Less current portion (149,948) (299,929) - -------------------------------------------------------------------------------------------------- Long-term debt, excluding current portion $ 494,653 $ 350,318 ==================================================================================================
On July 29, 2005, we filed a registration statement with the SEC to register an additional $475,000 of debt securities using a shelf registration process as well as to carry forward the $125,000 of debt securities available under our prior registration statement filed in July 2000. Under this registration statement, which became effective on August 5, 2005, we may offer, from time to time, up to $600,000 of our debt securities. On August 12, 2005, we issued $150,000 of unsecured 4.875 percent senior notes due in August 2010 and $150,000 of unsecured 6.000 percent 29 senior notes due in August 2035 under the registration statement. Discount and issuance costs, which were $2,430 and $2,901, respectively, are being amortized over the terms of the senior notes using the straight-line method, the results of which approximate those of the effective interest rate method. The proceeds from the issuance of the senior notes were used to repay at maturity our outstanding $150,000 of 8.375 percent senior notes on September 15, 2005 and our outstanding $150,000 of 6.375 percent notes on February 1, 2006. Following the issuance of these senior notes, $300,000 of capacity remains available for the issuance of additional unsecured debt securities under our shelf registration statement. We also maintain a credit facility under a Credit Agreement dated August 16, 2005 with a consortium of banks under which we can borrow up to $500,000. As part of this credit facility, we may request issuance of up to $100,000 in letters of credit, the outstanding amount of which reduces the net borrowing capacity under the agreement. The credit facility allows us to borrow at interest rates that vary based on a spread over (i) LIBOR or (ii) a base rate that is the higher of the prime rate or one-half of one percent above the federal funds rate, at our option. The interest rate spread over LIBOR is determined by our debt rating. We may also request that loans be made at interest rates offered by one or more of the banks, which may vary from the LIBOR or base rate. The credit facility supports our commercial paper borrowing program and expires on August 15, 2010. We are required to pay a facility fee of 10 basis points per annum on the average daily amount of loan commitments by the consortium. The amount of interest and 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. As of May 28, 2006 and May 29, 2005, no borrowings under the credit facility were outstanding. However, as of May 28, 2006, there was $44,000 of commercial paper and $15,000 of letters of credit outstanding, which are backed by this facility. As of May 29, 2005, there was no commercial paper or letters of credit outstanding under the facility in place at that time. As of May 28, 2006, we were in compliance with all covenants under the credit facility. All of our long-term debt currently outstanding is expected to be repaid entirely at maturity with interest being paid semi-annually over the life of the debt. The aggregate maturities of long-term debt for each of the five fiscal years subsequent to May 28, 2006, and thereafter are $150,000 in 2007, $0 in 2008, 2009 and 2010, $225,000 in 2011 and $272,430 thereafter. NOTE 9 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES We use interest rate related derivative instruments to manage our exposure on debt instruments, as well as commodities derivatives to manage our exposure to commodity price fluctuations. We also use equity related derivative instruments to manage our exposure on cash compensation arrangements indexed to the market price of our common stock. By using these instruments, we expose ourselves, from time to time, to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. We minimize this credit risk by entering into transactions with high quality counterparties. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates, commodity prices, or market price of our common stock. We minimize this market risk by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. Option Contracts and Commodity Swaps During fiscal 2006 and 2005, we entered into option contracts and commodity swaps to reduce the risk of natural gas price fluctuations. To the extent these derivatives are effective in offsetting the variability of the hedged cash flows, changes in the derivatives' fair value are not included in current earnings but are reported as accumulated other comprehensive income (loss). These changes in fair value are subsequently reclassified into earnings when the natural gas is purchased and used by us in our operations. Net gains (losses) of $4,281 and ($311) related to these derivatives were reclassified to earnings during fiscal 2006 and 2005, respectively, in connection with the settlement of our contracts. The fair value of these contracts was a net loss of $3,042 at May 28, 2006 and is expected to be reclassified from accumulated other comprehensive income (loss) into restaurant expenses during fiscal 2007. To the extent these derivatives are not effective, changes in their fair value are immediately recognized in current earnings. The fair value of outstanding derivatives is included in other current assets or other current liabilities. At May 28, 2006, the maximum length of time over which we are hedging our exposure to the variability in future natural gas cash flows is 12 months. No gains or losses were reclassified into earnings during fiscal 2006 or fiscal 2005 as a result of the discontinuance of natural gas cash flow hedges. 30 Interest Rate Lock Agreement During fiscal 2002, we entered into a treasury interest rate lock agreement (treasury lock) to hedge the risk that the cost of a future issuance of fixed-rate debt may be adversely affected by interest rate fluctuations. The treasury lock, which had a $75,000 notional principal amount of indebtedness, was used to hedge a portion of the interest payments associated with $150,000 of debt subsequently issued in March 2002. The treasury lock was settled at the time of the related debt issuance with a net gain of $267 being recognized in other comprehensive income (loss). The net gain on the treasury lock is being amortized into earnings as an adjustment to interest expense over the same period in which the related interest costs on the new debt issuance are being recognized in earnings. Annual amortization of $53 was recognized in earnings as an adjustment to interest expense during fiscal 2006, 2005 and 2004. We expect that the remaining $40 of this gain will be recognized in earnings as an adjustment to interest expense during fiscal 2007. Interest Rate Swaps During fiscal 2005 and fiscal 2004, we entered into interest rate swap agreements (swaps) to hedge the risk of changes in interest rates on the cost of a future issuance of fixed-rate debt. The swaps, which had a $100,000 notional principal amount of indebtedness, were used to hedge a portion of the interest payments associated with $150,000 of unsecured 4.875 percent senior notes due in August 2010, which were issued in August 2005. The interest rate swaps were settled at the time of the related debt issuance with a net loss of $1,177 being recognized in accumulated other comprehensive income (loss). The net loss on the interest rate swaps 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. A loss of $177 was recognized in earnings during fiscal 2006 as an adjustment to interest expense. We also 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, related to the issuance of our $150,000 6.375 percent notes due February 2006 and our $100,000 7.125 percent debentures due February 2016. 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. A portion of the cost was recognized as an adjustment to interest expense over the term of our 10-year 6.375 percent notes that were settled at maturity in February 2006. The remaining portion continues to be recognized as an adjustment to interest expense over the term of our 20-year 7.125 percent debentures due 2016. Equity Forwards During fiscal 2006 and 2005, we entered into equity forward contracts to hedge the risk of changes in future cash flows associated with the unvested unrecognized Darden stock units granted during the first quarters of fiscal 2006 and 2005 (see Note 16 - Stock Plans for additional information). The equity forward contracts will be settled at the end of the vesting periods of their underlying Darden stock units, which range between four and five years. In total, the equity forward contracts are indexed to 330 shares of our common stock, have an $8,264 notional amount and can only be net settled in cash. To the extent the equity forward contracts are effective in offsetting the variability of the hedged cash flows, changes in the fair value of the equity forward contracts are not included in current earnings but are reported as accumulated other comprehensive income (loss). A deferred gain of $2,348 related to the equity forward contracts was recognized in accumulated other comprehensive income (loss) at May 28, 2006. As the Darden stock units vest, we will effectively de-designate that portion of the equity forward contract that no longer qualifies for hedge accounting and changes in fair value associated with that portion of the equity forward contract will be recognized in current earnings. Gains of $965 and $471 were recognized in earnings as a component of restaurant labor during fiscal 2006 and 2005, respectively. During May 2006, we entered into an equity forward contract to hedge the risk of changes in future cash flows associated with employee directed investments in Darden stock within the non-qualified deferred compensation plan (see Note 15 - Retirement Plans for additional information). The equity forward contract is indexed to 100 shares of our common stock, has a $3,744 notional amount, can only be net settled in cash and expires in May 2011. We did not elect hedge accounting with the expectation that changes in the fair value of the equity forward contract would offset changes in the fair value of the Darden stock investments in the non-qualified deferred compensation plan within net earnings in our consolidated statements of earnings. A loss of $93 related to the equity forward contract was recognized in net earnings during fiscal 2006. 31 NOTE 10 - FINANCIAL INSTRUMENTS The fair values of cash equivalents, accounts receivable, accounts payable and short-term debt approximate their carrying amounts due to their short duration. The carrying value and fair value of long-term debt at May 28, 2006 was $644,601 and $645,600, respectively. The carrying value and fair value of long-term debt at May 29, 2005 was $650,247 and $686,040, respectively. The fair value of long-term debt is determined based on market prices or, if market prices are not available, the present value of the underlying cash flows discounted at our incremental borrowing rates. NOTE 11 - STOCKHOLDERS' EQUITY Treasury Stock On June 16, 2006, our Board of Directors authorized an additional share repurchase authorization totaling 25,000 shares in addition to the previous authorization of 137,400 shares. In fiscal 2006, 2005 and 2004, we purchased treasury stock totaling $434,187, $311,686 and $235,462, respectively. At May 28, 2006, a total of 132,528 shares have been repurchased under the authorizations. 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, respectively. Effective July 30, 2002, and in compliance with the Sarbanes-Oxley Act of 2002, we no longer issue new loans under the Loan Program. We account for outstanding officer notes receivable as a reduction of stockholders' equity. Stockholders' Rights Plan Under our Rights Agreement dated May 16, 2005, each share of our common stock has associated with it one right to purchase one-thousandth of a share of our Series A Participating Cumulative Preferred Stock at a purchase price of $120, subject to adjustment under certain circumstances to prevent dilution. The rights are exercisable when, and are not transferable apart from our common stock until, a person or group has acquired 15 percent or more, or makes a tender offer for 15 percent or more, of our common stock. If the specified percentage of our common stock is then acquired, each right will entitle the holder (other than the acquiring company) to receive, upon exercise, common stock of either us or the acquiring company having a value equal to two times the exercise price of the right. The rights are redeemable by our Board of Directors under certain circumstances and expire on May 25, 2015. Accumulated Other Comprehensive Income (Loss) The components of accumulated other comprehensive income (loss) are as follows:
May 28, 2006 May 29, 2005 - --------------------------------------------------------------------------------------------------- Foreign currency translation adjustment $ (4,846) $ (8,724) Unrealized gains (losses) on derivatives, net of tax (187) 345 Minimum pension liability adjustment, net of tax (537) (497) - --------------------------------------------------------------------------------------------------- Total accumulated other comprehensive income (loss) $ (5,570) $ (8,876) ===================================================================================================
Reclassification adjustments associated with pre-tax net derivative income (losses) realized in net earnings for fiscal 2006, 2005 and 2004 amounted to $5,029, $213 and $(386), respectively. 32 NOTE 12 - LEASES An analysis of rent expense incurred under operating leases is as follows: Fiscal Year - ------------------------------------------------------------------------------- 2006 2005 2004 - ------------------------------------------------------------------------------- Restaurant minimum rent $ 67,150 $ 62,116 $ 56,462 Restaurant percentage rent 4,708 4,036 3,820 Restaurant equipment minimum rent 5 7 57 Restaurant rent averaging expense 6,886 7,636 7,522 Transportation equipment 2,580 3,083 2,514 Office equipment 1,112 1,200 1,302 Office space 1,296 1,129 1,286 Warehouse space 354 325 315 - ------------------------------------------------------------------------------- Total rent expense $ 84,091 $ 79,532 $ 73,278 =============================================================================== The annual non-cancelable future lease commitments for each of the five fiscal years subsequent to May 28, 2006 and thereafter are: $72,876 in 2007, $66,646 in 2008, $57,859 in 2009, $49,776 in 2010, $43,270 in 2011 and $134,987 thereafter, for a cumulative total of $425,414. NOTE 13 - INTEREST, NET The components of interest, net, are as follows: Fiscal Year - -------------------------------------------------------------------------------- 2006 2005 2004 - -------------------------------------------------------------------------------- Interest expense $ 48,922 $ 47,656 $ 47,710 Capitalized interest (2,696) (3,182) (3,500) Interest income (3,121) (1,355) (551) - -------------------------------------------------------------------------------- Interest, net $ 43,105 $ 43,119 $ 43,659 ================================================================================ Capitalized interest was computed using our average borrowing rate. We paid $40,305, $39,083 and $39,661 for interest (net of amounts capitalized) in fiscal 2006, 2005 and 2004, respectively. NOTE 14 - INCOME TAXES The components of earnings before income taxes and the provision for income taxes thereon are as follows: Fiscal Year - ------------------------------------------------------------------------------- 2006 2005 2004 - ------------------------------------------------------------------------------- Earnings before income taxes: U.S. $ 475,017 $ 416,905 $ 328,577 Canada 7,501 7,012 4,199 - ------------------------------------------------------------------------------- Earnings before income taxes $ 482,518 $ 423,917 $ 332,776 - ------------------------------------------------------------------------------- Income taxes: Current: Federal $ 147,174 $ 137,549 $ 75,121 State and local 26,900 20,438 13,663 Canada 46 46 131 - ------------------------------------------------------------------------------- Total current $ 174,120 $ 158,033 $ 88,915 - ------------------------------------------------------------------------------- Deferred (principally U.S.) (29,796) (24,722) 16,688 - ------------------------------------------------------------------------------- Total income taxes $ 144,324 $ 133,311 $ 105,603 =============================================================================== During fiscal 2006, 2005 and 2004, we paid income taxes of $126,279, $111,386 and $92,265, respectively. 33 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 - ------------------------------------------------------------------------------- 2006 2005 2004 - ------------------------------------------------------------------------------- U.S. statutory rate 35.0% 35.0% 35.0% State and local income taxes, net of federal tax benefits 3.1 2.9 3.2 Benefit of federal income tax credits (5.8) (5.0) (5.2) Other, net (2.4) (1.5) (1.3) - ------------------------------------------------------------------------------- Effective income tax rate 29.9% 31.4% 31.7% =============================================================================== The tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows: May 28, 2006 May 29, 2005 - -------------------------------------------------------------------------------- Accrued liabilities $ 16,988 $ 18,016 Compensation and employee benefits 91,479 76,680 Deferred rent and interest income 35,735 33,149 Asset disposition 705 2,239 Other 6,160 4,537 - -------------------------------------------------------------------------------- Gross deferred tax assets $ 151,067 $ 134,621 - -------------------------------------------------------------------------------- Buildings and equipment (134,358) (145,421) Prepaid pension costs (22,090) (24,115) Prepaid interest (1,102) (1,205) Capitalized software and other assets (10,572) (11,334) Other (3,968) (3,808) - -------------------------------------------------------------------------------- Gross deferred tax liabilities $ (172,090) $ (185,883) - -------------------------------------------------------------------------------- Net deferred tax liabilities $ (21,023) $ (51,262) ================================================================================ A valuation allowance for deferred tax assets is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Realization is dependent upon the generation of future taxable income or the reversal of deferred tax liabilities during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. At May 28, 2006 and May 29, 2005, no valuation allowance has been recognized for deferred tax assets because we believe that sufficient projected future taxable income will be generated to fully utilize the benefits of these deductible amounts. NOTE 15- RETIREMENT PLANS Defined Benefit Plans and Postretirement Benefit Plan Substantially all of our employees are eligible to participate in a retirement plan. We sponsor non-contributory defined benefit pension plans for our salaried employees, in which benefits are based on various formulas that include years of service and compensation factors and for a group of hourly employees, in which a fixed level of benefits is provided. Pension plan assets are primarily invested in U.S., international and private equities, long duration fixed-income securities and real assets. Our policy is to fund, at a minimum, the amount necessary on an actuarial basis to provide for benefits in accordance with the requirements of the Employee Retirement Income Security Act of 1974, as amended. We also sponsor a contributory postretirement benefit plan that provides health care benefits to our salaried retirees. During fiscal 2006, 2005 and 2004, we funded the defined benefit pension plans in the amount of $270, $103 and $85, respectively. We expect to contribute approximately $400 to our defined benefit pension plans during fiscal 2007. During fiscal 2006, 2005 and 2004, we funded the postretirement benefit plan in the amount of $410, $472 and $172, respectively. We expect to contribute approximately $400 to our postretirement benefit plan during fiscal 2007. 34 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, 2006 and 2005:
Defined Benefit Plans Postretirement Benefit Plan - -------------------------------------------------------------------------------------------------------- 2006 2005 2006 2005 - -------------------------------------------------------------------------------------------------------- Change in Benefit Obligation: Benefit obligation at beginning of period $ 158,196 $ 143,689 $ 16,370 $ 16,885 Service cost 5,199 4,840 679 699 Interest cost 8,059 7,315 933 1,006 Participant contributions -- -- 167 145 Benefits paid (6,993) (5,387) (646) (544) Actuarial loss (gain) 3,845 7,739 187 (1,821) - -------------------------------------------------------------------------------------------------------- Benefit obligation at end of period $ 168,306 $ 158,196 $ 17,690 $ 16,370 ======================================================================================================== Change in Plan Assets: Fair value at beginning of period $ 158,115 $ 145,252 $ -- $ -- Actual return on plan assets 23,989 18,162 -- -- Employer contributions 209 88 479 399 Participant contributions -- -- 167 145 Benefits paid (6,993) (5,387) (646) (544) - -----------------------------------------------------------------------------------------------------=-- Fair value at end of period $ 175,320 $ 158,115 $ -- $ -- ======================================================================================================== Reconciliation of the Plan's Funded Status: Funded status at end of period $ 7,014 $ (81) $ (17,690) $(16,370) Unrecognized prior service cost 319 (22) -- -- Unrecognized actuarial loss 46,700 59,379 4,272 4,292 Contributions for March to May 98 37 81 150 - -------------------------------------------------------------------------------------------------------- Prepaid (accrued) benefit costs $ 54,131 $ 59,313 $ (13,337) $(11,928) ======================================================================================================== Components of the Consolidated Balance Sheets: Prepaid benefit costs $ 58,365 $ 63,475 $ -- $ -- Accrued benefit costs (5,110) (4,974) (13,337) (11,928) Accumulated other comprehensive loss 876 812 -- -- - -------------------------------------------------------------------------------------------------------- Net asset (liability) recognized $ 54,131 $ 59,313 $ (13,337) $ (11,928) ========================================================================================================
The accumulated benefit obligation for all pension plans was $160,835 and $150,841 at May 28, 2006 and May 29, 2005, respectively. The accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $5,209 and $0, respectively, at February 28, 2006 and $5,011 and $0, respectively, at February 28, 2005. The projected benefit obligation for pension plans with projected benefit obligations in excess of plan assets approximated their accumulated benefit obligation at February 28, 2006 and February 28, 2005. 35 The following table presents the weighted-average assumptions used to determine benefit obligations and net expense:
Defined Benefit Plans Postretirement Benefit Plan - -------------------------------------------------------------------------------------------------------------- 2006 2005 2006 2005 - -------------------------------------------------------------------------------------------------------------- Weighted-average assumptions used to determine benefit obligations at May 28 and May 29, (1) Discount rate 5.75% 5.75% 5.75% 5.75% Rate of future compensation increases 3.75% 3.75% N/A N/A Weighted-average assumptions used to determine net expense for fiscal years ended May 28 and May 29,(2) Discount rate 5.75% 6.00% 5.75% 6.00% Expected long-term rate of return on plan assets 9.00% 9.00% N/A N/A Rate of future compensation increases 3.75% 3.75% N/A N/A ==============================================================================================================
(1) Determined as of the end of fiscal year (2) Determined as of the beginning of fiscal year We set the discount rate assumption annually for each of the plans at their valuation dates to reflect the yield of high-quality fixed-income debt instruments, with lives that approximate the maturity of the plan benefits. The expected long-term rate of return on plan assets and health care cost trend rates are based upon several factors, including our historical assumptions compared with actual results, an analysis of current market conditions, asset allocations and the views of leading financial advisers and economists. Our target asset allocation is 35 percent U.S. equities, 30 percent high-quality, long-duration fixed-income securities, 15 percent international equities, 10 percent real assets and 10 percent private equities. We monitor our actual asset allocation to ensure that it approximates our target allocation and believe that our long-term asset allocation will continue to approximate our target allocation. The defined benefit pension plans have the following asset allocations at their measurement dates of February 28, 2006 and 2005, respectively:
- ----------------------------------------------------------------------------------------------- 2006 2005 - ----------------------------------------------------------------------------------------------- U.S. equities 37% 37% High-quality, long-duration fixed-income securities 21% 24% International equities 21% 20% Real assets 12% 13% Private equities 9% 6% - ----------------------------------------------------------------------------------------------- Total 100% 100% ===============================================================================================
For fiscal 2004 through 2006 we have used an expected long-term rate of return on plan assets for our defined benefit plan of 9.0 percent. Our historical ten-year rate of return on plan assets, calculated using the geometric method average of returns, is approximately 10.7 percent as of May 28, 2006. 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 $709 and $367, respectively. The assumed health care cost trend rate increase in the per-capita charges for benefits ranged from 8.0 percent to 9.0 percent for fiscal 2007, depending on the medical service category. The rates gradually decrease to 5.0 percent through fiscal 2011 and remain at that level thereafter. The assumed health care cost trend rate has a significant effect on amounts reported for retiree health care plans. A one-percentage-point variance in the assumed health care cost trend rate would increase or decrease the total of the service and interest cost components of net periodic postretirement benefit cost by $630 and $489, respectively, and would increase or decrease the accumulated postretirement benefit obligation by $3,890 and $3,040, respectively. 36 Components of net periodic benefit cost are as follows:
Defined Benefit Plans Postretirement Benefit Plan - -------------------------------------------------------------------------------------------------------------------- 2006 2005 2004 2006 2005 2004 - -------------------------------------------------------------------------------------------------------------------- Service cost $ 5,199 $ 4,840 $ 4,516 $ 679 $ 699 $ 626 Interest cost 8,059 7,315 7,076 933 1,005 919 Expected return on plan assets (13,216) (12,841) (12,821) -- -- -- Amortization of unrecognized prior service cost 85 (348) (348) -- -- 29 Recognized net actuarial loss 5,324 4,992 3,710 207 346 334 - -------------------------------------------------------------------------------------------------------------------- Net periodic benefit cost $ 5,451 $ 3,958 $ 2,133 $ 1,819 $ 2,050 $ 1,908 ====================================================================================================================
The following benefit payments are expected to be paid:
- ----------------------------------------------------------------------------------------------------------------- Defined Benefit Postretirement Plans Benefit Plan - ----------------------------------------------------------------------------------------------------------------- 2007 $ 7,319 $ 340 2008 7,069 386 2009 7,034 453 2010 7,045 503 2011 7,140 571 2012-2016 39,412 4,099
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 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 $527,653 at May 28, 2006 and $498,125 at May 29, 2005. Expense recognized in fiscal 2006, 2005 and 2004 was $1,446, $2,713 and $2,666, respectively. Employees classified as "highly compensated" under the Internal Revenue Code are not eligible to participate in this plan. Instead, highly compensated employees are eligible to participate in a separate non-qualified deferred compensation plan. This plan allows eligible employees to defer the payment of all or part of their annual salary and bonus and provides for awards that approximate the matching contributions and other amounts that participants would have received had they been eligible to participate in our defined contribution and defined benefit plans. Amounts payable to highly compensated employees under the non-qualified deferred compensation plan totaled $124,668 and $108,407 at May 28, 2006 and May 29, 2005, 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 2006, 2005 and 2004, the ESOP incurred interest expense of $1,060, $677 and $473, respectively, and used dividends received of $2,978, $1,235 and $454, respectively, and contributions received from us of $1,668, $3,389 and $4,093, respectively, to pay principal and interest on our debt. ESOP shares are included in average common shares outstanding for purposes of calculating net earnings per share. At May 28, 2006, the ESOP's debt to us had a balance of $22,430 with a variable rate of interest of 5.41 percent; $5,530 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 held in the ESOP at May 28, 2006 approximated 8,829 shares, representing 4,119 allocated shares, 2 committed-to-be-released shares and 4,708 suspense shares. At the end of fiscal 2005, the ESOP borrowed $1,606 from us at a variable interest rate and acquired an additional 50 shares of our common stock, which were held in suspense within the ESOP at May 29, 2005. The loan, which had a variable interest rate of 5.41 percent at May 28, 2006, is due to be repaid no later than December 2018. The 37 shares acquired under this loan are accounted for in accordance with Statement of Position (SOP) 93-6, "Employers Accounting for Employee Stock Ownership Plans." Fluctuations in our stock price are recognized as adjustments to common stock and surplus when the shares are committed to be released. These ESOP shares are not considered outstanding until they are committed to be released and, therefore, have been excluded for purposes of calculating basic and diluted net earnings per share at May 28, 2006. The fair value of these shares at May 28, 2006 was $1,727. NOTE 16 - STOCK PLANS We maintain one active stock option and stock grant plan under which new awards may still be issued: the 2002 Stock Incentive Plan (2002 Plan). We also have three other stock option and stock grant plans under which we no longer can grant new awards, although awards outstanding under the plans may still vest and be exercised in accordance with their terms: the Stock Plan for Directors (Director Stock Plan), the Stock Option and Long-Term Incentive Plan of 1995 (1995 Plan) and the Restaurant Management and Employee Stock Plan of 2000 (2000 Plan). All of the plans are administered by the Compensation Committee of the Board of Directors. The 2002 Plan provides for the issuance of up to 8,550 common shares in connection with the granting of non-qualified stock options, incentive stock options, stock appreciation rights, stock awards, restricted stock, RSUs, stock awards and other stock-based awards to key employees and non-employee directors. Up to 1,700 shares may be granted under the plan as restricted stock and RSUs. The Director Stock Plan provided for the issuance of up to 375 common shares out of our treasury in connection with the granting of non-qualified stock options, restricted stock and RSUs to non-employee directors. No new awards could be granted under the Director Stock Plan after September 30, 2005. The 1995 Plan provided for the issuance of up to 33,300 common shares in connection with the granting of non-qualified stock options, restricted stock or RSUs to key employees. The 2000 Plan provided for the issuance of up to 5,400 shares of common stock out of our treasury as non-qualified stock options, restricted stock, or RSUs. As noted above, no new awards may be made under the Director Stock Plan, the 1995 Plan or the 2000 Plan, although awards outstanding under those plans may still vest and be exercised in accordance with their terms. Under all of the plans, stock options are granted at a price equal to the fair value of the shares at the date of grant, for terms not exceeding ten years and have various vesting periods at the discretion of the Compensation Committee. Outstanding options generally vest over one to four years. Restricted stock and RSUs granted under the 1995, 2000 and 2002 Plans generally vest over periods ranging from three to five years and no sooner than one year from the date of grant. The restricted period for certain grants may be accelerated based on performance goals established by the Compensation Committee. On June 16, 2006, the Board of Directors adopted amendments to the 2002 Plan, subject to approval by the Company's shareholders at the 2006 annual meeting of shareholders. If approved by the shareholders, the amendments would, among other things: (a) increase the maximum number of shares that are authorized for issuance under the 2002 Plan from 8,550 to 9,550; (b) implement a "fungible share pool" approach to manage authorized shares in order to improve the flexibility of awards going forward, and eliminate the limits on the number of restricted stock and restricted stock unit awards and the number of awards to non-employee directors; and (c) provide that, in determining the number of shares available for grant, a formula will be applied such that all future awards other than stock options and stock appreciation rights will be counted as double the number of shares covered by such award. We also maintained the Compensation Plan for Non-Employee Directors. This plan provided that non-employee directors could elect to receive their annual retainer and meeting fees in any combination of cash, deferred cash or our common shares and authorized the issuance of up to 106 common shares out of our treasury for this purpose. The common shares were issued under the plan at a value equal to the market price in consideration of foregone retainer and meeting fees. No new awards could be made under the Compensation Plan for Non-Employee Directors after September 30, 2005. On December 15, 2005, the Board of Directors approved the Director Compensation Program, effective as of October 1, 2005, which replaced the Director Stock Plan and the Compensation Plan for Non-Employee Directors. The Director Compensation Program provides for payments to non-employee directors of: (a) an annual retainer and meeting fees for regular or special Board meetings and committee meetings; (b) an initial award of non-qualified stock options to purchase 12.5 shares of common stock upon becoming a director of the Company for the first time; (c) an additional award of non-qualified stock options to purchase 3 shares of common stock annually upon election or re-election to the Board; and (d) an annual award of common stock with a fair market value of $100 on the date of 38 grant. Directors may elect to have their cash compensation paid in any combination of current or deferred cash, common stock or salary replacement options. Deferred cash compensation may be invested on a tax-deferred basis in the same manner as deferrals under the Company's non-qualified deferred compensation plan. Directors may elect to have their annual stock award paid in the form of common stock or cash, or a combination thereof, or deferred. All stock options and other stock or stock-based awards that are part of the compensation paid or deferred pursuant to the Director Compensation Program are awarded under the 2002 Plan. 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 25, 2003 13,481 $ 9.59 26,692 $ 13.73 - ---------------------------------------------------------------------------------------------------------------- Options granted 3,337 20.36 Options exercised (3,464) 10.01 Options cancelled (911) 18.98 - ---------------------------------------------------------------------------------------------------------------- Balance at May 30, 2004 14,380 $ 11.00 25,654 $ 14.91 - ---------------------------------------------------------------------------------------------------------------- Options granted 2,148 21.88 Options exercised (6,615) 10.51 Options cancelled (608) 21.20 - ---------------------------------------------------------------------------------------------------------------- Balance at May 29, 2005 11,880 $ 13.28 20,579 $ 16.86 - ---------------------------------------------------------------------------------------------------------------- Options granted 2,086 33.29 Options exercised (3,909) 14.23 Options cancelled (528) 22.43 - ---------------------------------------------------------------------------------------------------------------- Balance at May 28, 2006 11,970 $ 15.71 18,228 $ 19.15 - ----------------------------------------------------------------------------------------------------------------
The following table provides information regarding exercisable and outstanding options at May 28, 2006:
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 - $10.00 850 $ 6.14 850 $ 6.14 1.2 $10.01 - $15.00 5,378 12.01 5,378 12.01 3.2 $15.01 - $20.00 3,464 17.40 4,675 17.89 5.9 $20.01 - $25.00 882 22.44 3,039 21.82 7.6 Over $25.00 1,396 27.36 4,286 30.16 7.6 - -------------------------------------------------------------------------------------------------------------- 11,970 $ 15.71 18,228 $ 19.15 5.6 ==============================================================================================================
We granted restricted stock and RSUs during fiscal 2006, 2005 and 2004 totaling 514, 501 and 513, respectively. The per share weighted-average fair value of the awards granted in fiscal 2006, 2005 and 2004 was $33.39, $21.82 and $19.45, respectively. After giving consideration to vesting terms, assumed forfeiture rates and subsequent forfeiture adjustments, compensation expense recognized in net earnings for awards granted in fiscal 2006, 2005 and 2004 amounted to $7,386, $7,464 and $4,198, respectively. At May 28, 2006 and May 29, 2005, we had 1,479 and 1,334, respectively, of restricted stock and RSU's outstanding. During fiscal 2006 and 2005, we issued Darden stock units to certain key employees. The Darden stock units were granted at a value equal to the market price of our common stock at the date of grant and will be settled in cash at the end of their vesting periods, which range between four and five years, at the then market price of our common stock. Compensation expense is measured based on the market price of our common stock each period and is amortized over the vesting period. At May 28, 2006 and May 29, 2005, we had 675 and 437, respectively, Darden stock units outstanding. No Darden stock units were outstanding during fiscal 2004. 39 NOTE 17 - EMPLOYEE STOCK PURCHASE PLAN We maintain the Darden Restaurants Employee Stock Purchase Plan to provide eligible employees who have completed one year of service (excluding senior officers subject to Section 16(b) of the Securities Exchange Act of 1934) an opportunity to purchase shares of our common stock, subject to certain limitations. Under the plan, up to an aggregate of 3,600 shares are available for purchase by employees at the lower of 85 percent of the fair market value of our common stock as of the first or last trading days of each quarterly participation period. During fiscal 2006, 2005 and 2004, employees purchased shares of common stock under the plan totaling 227, 266 and 319, respectively. At May 28, 2006, an additional 1,466 shares were available for issuance. No compensation expense has been recognized for shares issued under the plan. The impact of recognizing compensation expense for purchases made under the plan in accordance with the fair value method specified in SFAS No. 123 is less than $1,200, net of related tax effects, in each of fiscal 2006, 2005 and 2004 and would have had no impact on reported basic or diluted net earnings per share. Upon adoption of SFAS No. 123R in the first quarter of fiscal 2007, expenses related to the plan will be required to be recognized in net earnings. The impact of the plan will approximate the amounts determined under the fair value method specified in SFAS No. 123 disclosed above and are included in the total estimated fiscal 2007 impact of adoption of SFAS No. 123R disclosed in Note 1. NOTE 18 - COMMITMENTS AND CONTINGENCIES As collateral for performance on contracts and as credit guarantees to banks and insurers, we were contingently liable for guarantees of subsidiary obligations under standby letters of credit. At May 28, 2006 and May 29, 2005, we had $77,181 and $72,677, respectively, of standby letters of credit related to workers' compensation and general liabilities accrued in our consolidated financial statements. At May 28, 2006 and May 29, 2005, we had $12,625 and $13,829, respectively, of standby letters of credit related to contractual operating lease obligations and other payments. All standby letters of credit are renewable annually. At May 28, 2006 and May 29, 2005, we had $1,269 and $1,768, respectively, of guarantees associated with leased properties that have been assigned to third parties. These amounts represent the maximum potential amount of future payments under the guarantees. The fair value of these potential payments discounted at our pre-tax cost of capital at May 28, 2006 and May 29, 2005, amounted to $1,022 and $1,395, respectively. We did not accrue for the guarantees, as the likelihood of the third parties defaulting on the assignment agreements was less than probable. In the event of default by a third party, the indemnity and default clauses in our assignment agreements govern our ability to recover from and pursue the third party for damages incurred as a result of its default. We do not hold any third-party assets as collateral related to these assignment agreements, except to the extent that the assignment allows us to repossess the building and personal property. These guarantees expire over their respective lease terms, which range from fiscal 2007 through fiscal 2012. We are subject to private lawsuits, administrative proceedings and claims that arise in the ordinary course of our business. A number of these lawsuits, proceedings and claims may exist at any given time. These matters typically involve claims from guests, employees and others related to operational issues common to the restaurant industry, and can also involve infringement of, or challenges to, our trademarks. While the resolution of a lawsuit, proceeding or claim may have an impact on our financial results for the period in which it is resolved, we believe that the final disposition of the lawsuits, proceedings and claims in which we are currently involved, either individually or in the aggregate, will not have a material adverse effect on our financial position, results of operations or liquidity. The following is a brief description of the more significant of these matters. In view of the inherent uncertainties of litigation, the outcome of any unresolved matters described below cannot be predicted at this time, nor can the amount of any potential loss be reasonably estimated. Like other restaurant companies and retail employers, we have been faced in a few states with allegations of purported class-wide wage and hour violations. In March 2002 and March 2003, two purported class action lawsuits were brought against us in the Superior Court of Orange County, California by three current and former hourly restaurant employees alleging violations of California labor laws with respect to providing meal and rest breaks. Although we continue to believe we provided the required meal and rest breaks to our employees, to avoid potentially costly and protracted litigation, we agreed during the second quarter of fiscal 2005 to settle both lawsuits and a similar case filed in Sacramento County, for approximately $9,500. Terms of the settlement did not include 40 any admission of liability by us, and all settlement proceeds were paid as of the end of the third quarter of fiscal 2006. In August 2003, three former employees in Washington filed a similar purported class action in Washington State Superior Court in Spokane County alleging violations of Washington labor laws with respect to providing rest breaks. The Court stayed the action and ordered the plaintiffs into our mandatory arbitration program. We believe we provided the required meal and rest breaks to our employees, and we intend to vigorously defend our position in this case. Beginning in 2002, a total of five purported class action lawsuits were filed in Superior Courts of California (two each in Los Angeles County and Orange County, and one in Sacramento County) in which the plaintiffs allege that they and other current and former service managers, beverage and hospitality managers and culinary managers were improperly classified as exempt employees under California labor laws. The plaintiffs sought unpaid overtime wages and penalties. Two of the cases were removed to arbitration under our mandatory arbitration program, one was stayed to allow consideration of judicial coordination with the other cases, one is proceeding as an individual claim, and one remains a purported class action litigation matter. Although we continue to believe we correctly classified these employees, to avoid potentially costly and protracted litigation, we agreed in February 2006 to a tentative settlement. Without admitting any liability, we agreed to pay up to a maximum total of $11,000 to settle all five cases, of which $9,000 was recognized during fiscal 2006, and is included in selling, general and administrative expenses. The settlement amounts of these lawsuits are included in other current liabilities at May 28, 2006. The tentative settlement will be documented in a full settlement agreement and must have court approval. We cannot predict when the settlement will be final, but estimate preliminary court approval will occur in the first half of fiscal 2007, with final court approval and payment of the settlement proceeds no earlier than the second quarter of fiscal 2007. On March 23, 2006, we received a notice that the staff of the U.S. Federal Trade Commission (FTC) was conducting an inquiry into the marketing of our gift cards. We have been cooperating with the staff, providing information and making some voluntary adjustments to the disclosure of dormancy fees that may be imposed on the cards. On July 26, 2006, we were notified that the FTC staff had concluded that we had violated Section 5 of the FTC Act, which prohibits unfair or deceptive acts and practices. The staff asserts that we did not give adequate notice to consumers that our gift cards, if not used for 24 consecutive months, are subject to a gradual reduction in value by a dormancy fee. The notice included a proposed consent order, and indicated that if negotiations based on the order were not successful within 30 days, the staff would recommend to the FTC Bureau Director that a complaint, a copy of which was enclosed, be filed in federal district court. The proposed consent order included, among other things for negotiation, an opening suggestion that we provide equitable monetary relief in the amount of $31,006, suspend the collection of dormancy fees on previously issued gift cards, and make certain disclosures relating to dormancy fees. We believe that our gift card marketing practices comply with applicable laws. We have not yet determined a course of action, but have continued to discuss the matter with the FTC staff. 41 NOTE 19 - QUARTERLY DATA (UNAUDITED) The following table summarizes unaudited quarterly data for fiscal 2006 and 2005:
Fiscal 2006 - Quarters Ended - ------------------------------------------------------------------------------------------------------------ Aug. 28 Nov. 27 Feb. 26 May 28 Total - ------------------------------------------------------------------------------------------------------------ Sales $1,409,167 $ 1,325,093 $ 1,474,181 $ 1,512,199 $ 5,720,640 Earnings before income taxes 127,998 80,869 139,136 134,515 482,518 Net earnings 85,514 55,057 105,318 92,305 338,194 Net earnings per share: Basic 0.56 0.37 0.70 0.63 2.26 Diluted 0.53 0.35 0.67 0.60 2.16 Dividends paid per share -- 0.20 -- 0.20 0.40 Stock price: High 34.81 36.09 42.48 42.75 42.75 Low 30.92 28.80 33.86 35.60 28.80 ============================================================================================================
Fiscal 2005 - Quarters Ended - ------------------------------------------------------------------------------------------------------------ Aug. 29 Nov. 28 Feb. 27 May 29 Total - ------------------------------------------------------------------------------------------------------------ Sales $1,278,644 $ 1,229,373 $ 1,375,879 $ 1,394,214 $ 5,278,110 Earnings before income taxes 108,086 63,368 130,824 121,639 423,917 Net earnings 71,012 42,975 92,630 83,989 290,606 Net earnings per share: Basic 0.45 0.27 0.59 0.54 1.85 Diluted 0.44 0.26 0.56 0.52 1.78 Dividends paid per share -- 0.04 -- 0.04 0.08 Stock price: High 22.61 27.70 29.63 33.11 33.11 Low 19.30 20.33 26.17 25.78 19.30 ============================================================================================================
42 Five-Year Financial Summary (In thousands, except per share data)
Fiscal Year Ended - --------------------------------------------------------------------------------------------------------------------------- May 28, May 29, May 30, May 25, May 26, Operating Results 2006 2005 2004 (1) 2003 2002 - --------------------------------------------------------------------------------------------------------------------------- Sales $ 5,720,640 $ 5,278,110 $ 5,003,355 $ 4,654,971 $ 4,366,911 - --------------------------------------------------------------------------------------------------------------------------- Costs and expenses: Cost of sales: Food and beverage 1,691,906 1,593,709 1,526,875 1,449,162 1,384,481 Restaurant labor 1,850,199 1,695,805 1,601,258 1,485,046 1,373,416 Restaurant expenses 885,403 806,314 774,806 713,699 636,575 - --------------------------------------------------------------------------------------------------------------------------- Total cost of sales, excluding restaurant depreciation and amortization (2) $ 4,427,508 $ 4,095,828 $ 3,902,939 $ 3,647,907 $ 3,394,472 Selling, general and administrative 536,379 497,478 472,109 431,722 417,158 Depreciation and amortization 221,456 213,219 210,004 191,218 165,829 Interest, net 43,105 43,119 43,659 42,597 36,585 Asset impairment and restructuring charges (credits), net 9,674 4,549 41,868 3,924 (2,568) - --------------------------------------------------------------------------------------------------------------------------- Total costs and expenses $ 5,238,122 $ 4,854,193 $ 4,670,579 $ 4,317,368 $ 4,011,476 - --------------------------------------------------------------------------------------------------------------------------- Earnings before income taxes 482,518 423,917 332,776 337,603 355,435 Income taxes 144,324 133,311 105,603 111,624 122,664 - --------------------------------------------------------------------------------------------------------------------------- Net earnings $ 338,194 $ 290,606 $ 227,173 $ 225,979 $ 232,771 - --------------------------------------------------------------------------------------------------------------------------- Net earnings per share: Basic $ 2.26 $ 1.85 $ 1.39 $ 1.33 $ 1.33 Diluted $ 2.16 $ 1.78 $ 1.34 $ 1.27 $ 1.27 - --------------------------------------------------------------------------------------------------------------------------- Average number of common shares outstanding: Basic 149,700 156,700 163,500 170,300 174,700 Diluted 156,900 163,400 169,700 177,400 183,500 ============================================================================================================================ Financial Position Total assets $ 3,010,170 $ 2,937,771 $ 2,780,348 $ 2,664,633 $ 2,529,736 Land, buildings and equipment 2,446,035 2,351,454 2,250,616 2,157,132 1,926,947 Working capital (deficit) (648,471) (637,341) (337,174) (314,280) (157,662) Long-term debt, less current portion 494,653 350,318 653,349 658,086 662,506 Stockholders' equity 1,229,763 1,273,019 1,175,288 1,130,055 1,069,606 Stockholders' equity per outstanding shares 8.37 8.25 7.42 6.85 6.21 ============================================================================================================================ Other Statistics Cash flow from operations $ 717,090 $ 583,242 $ 525,411 $ 508,635 $ 508,101 Capital expenditures 338,155 329,238 354,326 423,273 318,392 Dividends paid 59,206 12,505 12,984 13,501 9,225 Dividends paid per share 0.400 0.080 0.080 0.080 0.053 Advertising expense 229,693 214,608 210,989 200,020 184,163 Stock price: High 42.75 33.11 25.60 27.83 29.77 Low 28.80 19.30 17.80 16.46 15.40 Close $ 36.51 $ 32.80 $ 22.50 $ 18.35 $ 25.03 Number of employees 157,300 150,100 141,300 140,700 133,200 Number of restaurants 1,427 1,381 1,325 1,271 1,211 ============================================================================================================================
(1) Fiscal year 2004 consisted of 53 weeks while all other fiscal years presented on this summary consisted of 52 weeks. (2) Excludes restaurant depreciation and amortization of $205,375, $198,422, $195,486, $177,127 and $155,837, respectively. 43
EX-21 7 exhibit_21.htm EXHIBIT 21 FORM 10K 2006

EXHIBIT 21

 

SUBSIDIARIES OF DARDEN RESTAURANTS, INC.

 

 

As of May 28, 2006, we had three “significant subsidiaries”, as defined in Regulation S-X, Rule 1-02(w), identified as follows:

 

GMRI, Inc., a Florida corporation, doing business as Red Lobster, Olive Garden, Bahama Breeze, Smokey Bones Barbeque & Grill, and Seasons 52.

 

GMRI Florida, Inc., a Florida corporation, owning a 99 percent limited partnership interest in GMRI Texas, L.P.

 

GMRI Texas, L.P., a Texas limited partnership, doing business as Red Lobster, Olive Garden, Bahama Breeze and Smokey Bones Barbeque & Grill.

 

We also had other direct and indirect subsidiaries as of May 28, 2006. None of these subsidiaries would constitute a “significant subsidiary” as defined in Regulation S-X, Rule 1-02(w).

 

 

 

 

 

EX-23 8 exhibit_23.htm EX. 23 KPMG CONSENT FORM 10K 2006

EXHIBIT 23

 

 

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors

Darden Restaurants, Inc.:

 

We consent to the incorporation by reference in the registration statements on Form S-3 (Nos. 33-93854, 333-41350 and 333-127046) and on Form S-8 (Nos. 333-57410, 333-91579, 333-69037, 333-105056, 333-106278, 333-124363 and 333-122560) of Darden Restaurants, Inc. of our reports dated July 27, 2006, with respect to the consolidated balance sheets of Darden Restaurants, Inc. and subsidiaries as of May 28, 2006 and May 29, 2005, and the related consolidated statements of earnings, changes in stockholders’ equity and accumulated other comprehensive income (loss), and cash flows for each of the fiscal years in the three-year period ended May 28, 2006, management’s assessment of the effectiveness of internal control over financial reporting as of May 28, 2006, and the effectiveness of internal control over financial reporting as of May 28, 2006, which reports are included in the 2006 Annual Report to Shareholders included as an exhibit to this annual report on Form 10-K of Darden Restaurants, Inc.

 

/s/ KPMG LLP

 

Orlando, Florida

July 27, 2006

Certified Public Accountants

 

 

 

 

 

EX-24 9 exhibit_24.htm EXHIBIT 24 POA 10K 2006

EXHIBIT 24

 

POWER OF ATTORNEY

 

KNOW ALL BY THESE PRESENTS, that the undersigned constitutes and appoints Paula J. Shives, Clarence Otis, Jr. and Linda J. Dimopoulos, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for and in his or her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended May 28, 2006 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 8th day of June, 2006, by the following persons.

 

 

 

 

 

 

By: /s/ Leonard L. Berry

 

 

By: /s/ Clarence Otis, Jr.

 

Leonard L. Berry

 

 

 

Clarence Otis, Jr.

  

 

 

 

 

By: /s/ Odie C. Donald

 

 

By: /s/ Michael D. Rose

 

Odie C. Donald

 

 

 

Michael D. Rose

 

 

 

 

 

By: /s/ David H. Hughes

 

 

By: /s/ Maria A. Sastre

 

David H. Hughes

 

 

 

Maria A. Sastre

 

 

 

 

 

By: /s/ Charles A. Ledsinger, Jr.

 

 

By: /s/ Jack A. Smith

 

Charles A. Ledsinger, Jr.

 

 

 

Jack A. Smith

 

 

 

 

 

By: /s/ William M. Lewis, Jr.

 

 

By: /s/ Blaine Sweatt, III

 

William M. Lewis, Jr.

 

 

 

Blaine Sweatt, III

 

 

 

 

 

By: /s/ Cornelius McGillicuddy, III

 

 

By: /s/ Rita P. Wilson

 

Cornelius McGillicuddy, III

 

 

 

Rita P. Wilson

 

 

 

 

 

By: /s/ Andrew H. Madsen

 

 

 

 

Andrew H. Madsen

 

 

 

 

 

 

 

 

 

EX-31 10 exhibit_31a.htm EX. 31A - OTIS 302 CERT. 10K 2006

EXHIBIT 31(a)

 

CERTIFICATION PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

 

I, Clarence Otis, Jr., certify that:

 

1.

I have reviewed this annual report on Form 10-K of Darden Restaurants, Inc.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of this annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

 

 

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

July 27, 2006

 

 


/s/ Clarence Otis, Jr.

Clarence Otis, Jr.

Chairman and Chief Executive Officer

 

 

 

 

 

 

 

EX-31 11 exhibit_31b.htm EX.31B DIMOPOULOS 302 CERT. 10K 2006

EXHIBIT 31(b)

 

CERTIFICATION PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

 

I, Linda J. Dimopoulos, certify that:

 

1.

I have reviewed this annual report on Form 10-K of Darden Restaurants, Inc.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of this annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

 

 

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

July 27, 2006

 

 


/s/ Linda J. Dimopoulos

Linda J. Dimopoulos

Senior Vice President and

Chief Financial Officer

 

 

 

 

 

 

EX-32 12 exhibit_32a.htm EX. 32A OTIS 906 CERT. FORM 10K 2006

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 28, 2006, as filed with the Securities and Exchange Commission (“Report”), I, Clarence Otis, Jr., Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

 

1.

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

 

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

 

 

 

 

 

 


/s/ Clarence Otis, Jr.

 

 

 

Clarence Otis, Jr.
Chairman and Chief Executive Officer
July 27, 2006

 

 

 

 

 

 

EX-32 13 exhibit_32b.htm EX.32B DIMOPOULOS 906 CERT. FORM 10K 2006

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 28, 2006, as filed with the Securities and Exchange Commission (“Report”), I, Linda J. Dimopoulos, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

 

1.

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

 

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

 

 

 

 

 

 


/s/ Linda J. Dimopoulos

 

 

 

Linda J. Dimopoulos
Senior Vice President and
Chief Financial Officer
July 27, 2006

 

 

 

 

 

 

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