================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- FORM 10-Q ------------------- (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended November 28, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from .............. to ............... ------------------- 1-13666 Commission File Number ------------------- DARDEN RESTAURANTS, INC. (Exact name of registrant as specified in its charter) Florida 59-3305930 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 5900 Lake Ellenor Drive, Orlando, Florida 32809 (Address of principal executive offices) (Zip Code) 407-245-4000 (Registrant's telephone number, including area code) ------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No ------------------- APPLICABLE ONLY TO CORPORATE ISSUERS: Number of shares of common stock outstanding as of December 31, 1999: 128,142,791 (excluding 37,521,855 shares held in treasury). ================================================================================
DARDEN RESTAURANTS, INC. TABLE OF CONTENTS Page Part I - Financial Information Item 1. Financial Statements Consolidated Statements of Earnings 3 Consolidated Balance Sheets 5 Consolidated Statements of Changes in Stockholders' Equity 6 Consolidated Statements of Cash Flows 7 Notes to Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Part II - Other Information Item 4. Submission of Matters to a Vote of Security Holders 14 Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16 Index to Exhibits 17 2
PART I FINANCIAL INFORMATION Item 1. Financial Statements DARDEN RESTAURANTS, INC. CONSOLIDATED STATEMENTS OF EARNINGS (In Thousands, Except per Share Data) (Unaudited) <TABLE> <CAPTION> Thirteen Weeks Ended - -------------------------------------------------------------------------------------------------------------------- November 28, 1999 November 29, 1998 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Sales....................................................... $ 848,231 $ 791,168 Costs and Expenses: Cost of sales: Food and beverages..................................... 271,802 257,616 Restaurant labor....................................... 280,058 265,753 Restaurant expenses.................................... 127,162 120,688 ---------- ---------- Total Cost of Sales.................................. $ 679,022 $ 644,057 Selling, general and administrative...................... 94,208 86,357 Depreciation and amortization............................ 31,771 31,311 Interest, net............................................ 5,265 4,786 ---------- ---------- Total Costs and Expenses........................... $ 810,266 $ 766,511 ---------- ---------- Earnings before Income Taxes................................ 37,965 24,657 Income Taxes................................................ (13,511) (8,738) ---------- ---------- Net Earnings................................................ $ 24,454 $ 15,919 ========== ========== Net Earnings per Share: Basic ................................................... $ 0.19 $ 0.11 ========== ========== Diluted.................................................. $ 0.18 $ 0.11 ========== ========== Average Number of Common Shares Outstanding: Basic ................................................... 130,800 138,700 ========== ========== Diluted.................................................. 134,500 144,100 ========== ========== </TABLE> See accompanying notes to consolidated financial statements. 3
DARDEN RESTAURANTS, INC. CONSOLIDATED STATEMENTS OF EARNINGS (In Thousands, Except per Share Data) (Unaudited) <TABLE> <CAPTION> Twenty-Six Weeks Ended - -------------------------------------------------------------------------------------------------------------------- November 28, 1999 November 29, 1998 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Sales....................................................... $ 1,777,622 $ 1,677,225 Costs and Expenses: Cost of sales: Food and beverages..................................... 570,630 554,031 Restaurant labor....................................... 575,177 548,304 Restaurant expenses.................................... 259,283 252,675 ----------- ----------- Total Cost of Sales ................................. $ 1,405,090 $ 1,355,010 Selling, general and administrative...................... 188,358 171,143 Depreciation and amortization............................ 63,141 62,323 Interest, net............................................ 9,841 10,221 ----------- ----------- Total Costs and Expenses........................... $ 1,666,430 $ 1,598,697 ----------- ----------- Earnings before Income Taxes................................ 111,192 78,528 Income Taxes................................................ (39,425) (27,430) ----------- ----------- Net Earnings................................................ $ 71,767 $ 51,098 =========== =========== Net Earnings per Share: Basic ................................................... $ 0.55 $ 0.37 =========== =========== Diluted.................................................. $ 0.53 $ 0.35 =========== =========== Average Number of Common Shares Outstanding: Basic ................................................... 131,500 139,200 =========== =========== Diluted.................................................. 135,500 145,000 =========== =========== </TABLE> See accompanying notes to consolidated financial statements. 4
DARDEN RESTAURANTS, INC. CONSOLIDATED BALANCE SHEETS (In Thousands) <TABLE> <CAPTION> (Unaudited) - -------------------------------------------------------------------------------------------------------------------- November 28, 1999 May 30, 1999 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS Current Assets: Cash and cash equivalents................................ $ 19,947 $ 40,960 Receivables.............................................. 4,564 20,256 Refundable income taxes, net............................. 4,347 Inventories.............................................. 215,261 144,115 Net assets held for disposal............................. 29,466 35,269 Prepaid expenses and other current assets................ 19,743 21,475 Deferred income taxes.................................... 57,544 65,662 ----------- ----------- Total Current Assets................................... $ 350,872 $ 327,737 Land, Buildings and Equipment............................... 1,491,353 1,461,535 Other Assets................................................ 102,909 104,388 ----------- ----------- Total Assets......................................... $ 1,945,134 $ 1,893,660 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable......................................... $ 120,396 $ 144,725 Short-term debt.......................................... 138,700 23,500 Current portion of long-term debt........................ 2,386 2,386 Accrued payroll.......................................... 64,985 74,265 Accrued income taxes..................................... 16,544 Other accrued taxes...................................... 22,806 25,965 Other current liabilities................................ 222,617 234,830 ----------- ----------- Total Current Liabilities.............................. $ 571,890 $ 522,215 Long-term Debt.............................................. 311,370 314,065 Deferred Income Taxes....................................... 74,581 72,086 Other Liabilities........................................... 21,156 21,258 ----------- ----------- Total Liabilities...................................... $ 978,997 $ 929,624 ----------- ----------- Stockholders' Equity: Common stock and surplus................................. $ 1,344,990 $ 1,328,796 Retained earnings........................................ 244,548 178,008 Treasury stock........................................... (549,333) (466,902) Accumulated other comprehensive income................... (11,980) (12,115) Unearned compensation.................................... (62,088) (63,751) ----------- ----------- Total Stockholders' Equity............................. $ 966,137 $ 964,036 ----------- ----------- Total Liabilities and Stockholders' Equity........... $ 1,945,134 $ 1,893,660 =========== =========== </TABLE> See accompanying notes to consolidated financial statements. 5
DARDEN RESTAURANTS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Twenty-Six Weeks Ended November 28, 1999 and November 29, 1998 (In Thousands) (Unaudited) <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------------------------- Common Accumulated Stock Other Total and Retained Treasury Comprehensive Unearned Stockholders' Surplus Earnings Stock Income Compensation Equity - ---------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Balance at May 30, 1999.................... $1,328,796 $178,008 $(466,902) $(12,115) $(63,751) $ 964,036 Comprehensive income: Net earnings............................ 71,767 71,767 Other comprehensive income, foreign currency adjustment................... 135 135 ---------- Total comprehensive income.......... 71,902 Cash dividends declared.................... (5,227) (5,227) Stock option exercises (816 shares)........ 7,479 7,479 Issuance of restricted stock (179 shares), net of forfeiture adjustments........... 2,529 (2,536) (7) Earned compensation........................ 1,449 1,449 ESOP note receivable repayments............ 2,750 2,750 Income tax benefit credited to equity...... 4,109 4,109 Proceeds from issuance of equity put options................................. 1,139 1,139 Purchases of common stock for treasury (4,199 shares).......................... (83,473) (83,473) Issuance of treasury stock under Employee Stock Purchase Plan (110 shares)........ 938 1,042 1,980 - ---------------------------------------------------------------------------------------------------------------------------- Balance at November 28, 1999 $1,344,990 $244,548 $(549,333) $(11,980) $(62,088) $ 966,137 - ---------------------------------------------------------------------------------------------------------------------------- <CAPTION> - ---------------------------------------------------------------------------------------------------------------------------- Common Accumulated Stock Other Total and Retained Treasury Comprehensive Unearned Stockholders' Surplus Earnings Stock Income Compensation Equity - ---------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Balance at May 31, 1998.................... $1,286,191 $ 48,327 $(239,876) $(11,749) $(63,048) $1,019,845 Comprehensive income: Net earnings............................ 51,098 51,098 Other comprehensive income, foreign currency adjustment................... (1,526) (1,526) ---------- Total comprehensive income.......... 49,572 Cash dividends declared.................... (5,531) (5,531) Stock option exercises (1,710 shares)...... 14,700 14,700 Issuance of restricted stock (303 shares), net of forfeiture adjustments........... 3,595 (3,567) 28 Earned compensation........................ 934 934 ESOP note receivable repayments............ 250 250 Income tax benefit credited to equity...... 5,158 5,158 Proceeds from issuance of equity put options................................. 2,184 2,184 Purchases of common stock for treasury (5,325 shares).......................... (86,695) (86,695) - ---------------------------------------------------------------------------------------------------------------------------- Balance at November 29, 1998 $1,311,828 $ 93,894 $(326,571) $(13,275) $(65,431) $1,000,445 - ---------------------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes to consolidated financial statements. 6
DARDEN RESTAURANTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited) <TABLE> <CAPTION> Thirteen Weeks Ended - -------------------------------------------------------------------------------------------------------------------- November 28, 1999 November 29, 1998 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Cash Flows--Operating Activities Net earnings.............................................. $ 24,454 $ 15,919 Adjustments to reconcile net earnings to cash flow: Depreciation and amortization........................... 31,771 31,311 Amortization of unearned compensation and loan costs.... 1,343 1,090 Change in current assets and liabilities................ (65,972) 2,102 Change in other liabilities ............................ (178) 297 Loss on disposal of land, buildings and equipment....... 362 264 Deferred income taxes................................... 5,538 7,955 Other, net.............................................. 146 256 ---------- ---------- Net Cash Provided by (Used by) Operating Activities... $ (2,536) $ 59,194 ---------- ---------- Cash Flows--Investment Activities Purchases of land, buildings and equipment................ (66,329) (31,091) Purchases of intangibles.................................. (778) (566) Increase in other assets.................................. (265) (428) Proceeds from disposal of land, buildings and equipment (including net assets held for disposal)...... 5,646 8,863 ---------- ---------- Net Cash Used by Investment Activities................ $ (61,726) $ (23,222) ---------- ---------- Cash Flows--Financing Activities Proceeds from issuance of common stock.................... 3,075 4,819 Income tax benefit credited to equity..................... 748 1,525 Dividends paid............................................ (5,227) (5,531) Purchases of treasury stock............................... (56,048) (34,069) ESOP note receivable repayment............................ 2,150 250 Increase (decrease) in short-term debt.................... 111,700 (19,000) Repayment of long-term debt............................... (2,150) (250) Proceeds from issuance of equity put options.............. 1,358 Payment of loan costs..................................... (324) ---------- ---------- Net Cash Provided by (Used by) Financing Activities... $ 53,924 $ (50,898) ---------- ---------- Decrease in Cash and Cash Equivalents........................ (10,338) (14,926) Cash and Cash Equivalents - Beginning of Period.............. 30,285 27,990 ---------- ---------- Cash and Cash Equivalents - End of Period.................... $ 19,947 $ 13,064 ========== ========== Cash Flow from Changes in Current Assets and Liabilities Receivables............................................... 17,962 (3,123) Refundable income taxes, net.............................. (4,347) Inventories............................................... (22,769) 8,065 Prepaid expenses and other current assets................. (3,416) 847 Accounts payable.......................................... (35,806) 17,365 Accrued payroll........................................... 1,039 (1,024) Accrued income taxes...................................... (18,923) (22,776) Other accrued taxes....................................... (3,767) (2,471) Other current liabilities................................. 4,055 5,219 ---------- ---------- Change in Current Assets and Liabilities.............. $ (65,972) $ 2,102 ========== ========== </TABLE> See accompanying notes to consolidated financial statements. 7
DARDEN RESTAURANTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited) <TABLE> <CAPTION> Twenty-Six Weeks Ended - -------------------------------------------------------------------------------------------------------------------- November 28, 1999 November 29, 1998 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Cash Flows--Operating Activities Net earnings.............................................. $ 71,767 $ 51,098 Adjustments to reconcile net earnings to cash flow: Depreciation and amortization........................... 63,141 62,323 Amortization of unearned compensation and loan costs.... 2,749 2,189 Change in current assets and liabilities................ (116,456) 22,092 Change in other liabilities ............................ (102) 563 (Gain) loss on disposal of land, buildings and equipment..... 576 (602) Deferred income taxes................................... 10,613 12,479 Other, net.............................................. 527 (318) ---------- ---------- Net Cash Provided by Operating Activities............. $ 32,815 $ 149,824 ---------- ---------- Cash Flows--Investment Activities Purchases of land, buildings and equipment................ (106,931) (55,455) Purchases of intangibles.................................. (1,361) (1,074) Decrease (increase) in other assets....................... 1,006 (635) Proceeds from disposal of land, buildings and equipment (including net assets held for disposal)...... 12,719 21,688 ---------- ---------- Net Cash Used by Investment Activities................ $ (94,567) $ (35,476) ---------- ---------- Cash Flows--Financing Activities Proceeds from issuance of common stock.................... 9,321 14,700 Income tax benefit credited to equity..................... 4,109 5,158 Dividends paid............................................ (5,227) (5,531) Purchases of treasury stock............................... (83,473) (86,695) ESOP note receivable repayment............................ 2,750 250 Increase (decrease) in short-term debt.................... 115,200 (64,600) Repayment of long-term debt............................... (2,756) (255) Proceeds from issuance of equity put options.............. 1,139 2,184 Payment of loan costs..................................... (324) ---------- ---------- Net Cash Provided By (Used by) Financing Activities... $ 40,739 $ (134,789) ---------- ---------- Decrease in Cash and Cash Equivalents........................ (21,013) (20,441) Cash and Cash Equivalents - Beginning of Period.............. 40,960 33,505 ---------- ---------- Cash and Cash Equivalents - End of Period.................... $ 19,947 $ 13,064 ========== ========== Cash Flow from Changes in Current Assets and Liabilities Receivables............................................... 15,692 1,088 Refundable income taxes, net.............................. (4,347) Inventories............................................... (71,146) 45,287 Prepaid expenses and other current assets................. (5,626) 1,231 Accounts payable.......................................... (24,329) (11,169) Accrued payroll........................................... (9,280) (14,035) Accrued income taxes...................................... (16,544) (693) Other accrued taxes....................................... (3,159) (1,129) Other current liabilities................................. 2,283 1,512 ---------- ---------- Change in Current Assets and Liabilities.............. $ (116,456) $ 22,092 ========== ========== </TABLE> See accompanying notes to consolidated financial statements. 8
DARDEN RESTAURANTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollar Amounts in Thousands, Except per Share Data) Note 1. Background These consolidated financial statements do not include certain information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature. Operating results for the thirteen and twenty-six weeks ended November 28, 1999 are not necessarily indicative of the results that may be expected for the fiscal year ended May 28, 2000. These statements should be read in conjunction with the consolidated financial statements and footnotes included in our annual report on Form 10-K for the year ended May 30, 1999. See Note 5 related to reclassification made to May 30, 1999 balance sheet. The accounting policies used in preparing these consolidated financial statements are the same as those described in our annual report on Form 10-K. Note 2. Consolidated Statements of Cash Flows During the thirteen and twenty-six weeks ended November 28, 1999, Darden paid $1,263 and $9,165 respectively, for interest (net of amount capitalized) and $30,265 and $46,539 respectively, for income taxes. During the thirteen and twenty-six weeks ended November 29, 1998, Darden paid $0 and $8,673, respectively, for interest (net of amount capitalized) and $20,545 and $10,494, respectively, for income taxes. Note 3. Net Earnings Per Share Outstanding stock options issued by the Company represent the only dilutive effect reflected in diluted weighted average shares outstanding. Options to purchase 2,641,171 and 64,032 shares of common stock were excluded from the calculation of diluted EPS for the thirteen weeks ended November 28, 1999 and November 29, 1998, respectively, because their exercise prices exceeded the average market price of common shares for the period. Options to purchase 2,629,941 and 29,109 shares of common stock were excluded from the calculation of diluted EPS for the twenty-six weeks ended November 28, 1999 and November 29, 1998, respectively, for the same reason. Note 4. Accounts Receivable In the second quarter of fiscal 2000, the Company changed its contractual terms with a national storage and distribution company. Under the new contractual terms, Darden inventory items are no longer sold to and repurchased from the distribution company. Note 5. Restructuring Liability In 1997, the Company recorded restructuring charges of $70,900 in connection with the closing of certain restaurant properties. The related liabilities are included in other current liabilities in the accompanying balance sheet and were established to accrue for estimated carrying costs of buildings and equipment prior to disposal, employee severance costs, lease buy-out provisions and other costs associated with the restructuring action. All restaurant closings under this restructuring action have been completed. The remaining restructuring actions, including disposal of the closed owned properties and the lease buy-outs related to the closed leased properties, are expected to be substantially completed during 2001. 9
DARDEN RESTAURANTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) (Dollar Amounts in Thousands, Except per Share Data) Note 5. Restructuring Liability - Continued A summary of restructuring liability activity for the six months ended November 28, 1999 is as follows: Balance at May 30, 1999............................. $ 37,139 Non-cash Adjustment ------------------- Reclassification of asset impairment (described below)............................... (12,000) Cash Payments ------------- Carrying costs and employee severance payments.... (1,746) Lease payments including lease buy-outs........... (3,663) -------- Balance at November 28, 1999........................ $ 19,730 ======== Asset impairment charges of $12 million included in the May 30, 1999 restructuring liability have been reclassified to reduce the carrying value of land for all periods presented. This reclassification relates to asset impairment charges recorded in 1997 for long-lived assets associated with Canadian restaurants. 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following table sets forth selected restaurant operating data as a percentage of sales for the periods indicated. All information is derived from the consolidated statements of earnings for the thirteen and twenty-six weeks ended November 28, 1999 and November 29, 1998. <TABLE> <CAPTION> Thirteen Weeks Ended Twenty-Six Weeks Ended - -------------------------------------------------------------------------------------------------------------------- November 28, November 29, November 28, November 29, 1999 1998 1999 1998 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Sales..................................... 100.0% 100.0% 100.0% 100.0% Costs and Expenses: Cost of sales: Food and beverages................... 32.1 32.6 32.1 33.0 Restaurant labor..................... 33.0 33.6 32.3 32.7 Restaurant expenses.................. 15.0 15.2 14.6 15.1 ------ ------ ------ ------ Total Cost of Sales................ 80.1% 81.4% 79.0% 80.8% Selling, general and administrative.... 11.1 10.9 10.6 10.2 Depreciation and amortization.......... 3.7 4.0 3.6 3.7 Interest, net.......................... 0.6 0.6 0.6 0.6 ------ ------ ------ ------ Total Costs and Expenses......... 95.5% 96.9% 93.8% 95.3% ------ ------ ------ ------ Earnings before Income Taxes.............. 4.5 3.1 6.2 4.7 Income Taxes.............................. (1.6) (1.1) (2.2) (1.7) ------ ------ ------ ------ Net Earnings.............................. 2.9% 2.0% 4.0% 3.0% ====== ====== ====== ====== </TABLE> Financial Condition and Results of Operations For the fiscal 2000 second quarter ended November 28, 1999, earnings after tax were $24.5 million or 18 cents per diluted share, compared to earnings after tax of $15.9 million or 11 cents per diluted share in the second quarter of fiscal 1999. The increase in second quarter earnings was primarily attributable to strong same-restaurant sales at both Red Lobster and Olive Garden. Sales of $848.2 million for the second quarter were 7.2% higher than last year's second quarter. For the first six months of fiscal 2000, net earnings were $71.8 million or 53 cents per diluted share, compared to $51.1 million or 35 cents per diluted share in the same fiscal 1999 period. Sales approximating $1.78 billion for the first six months of fiscal 2000 were 6.0% higher than last year. Food and beverage costs for the quarter were 32.1% of sales, compared to 32.6% of sales last year primarily attributable to reduced product costs. Restaurant labor decreased to 33.0% of sales compared to last year's 33.6% due primarily to efficiencies resulting from higher sales volumes. Restaurant expenses, also benefiting from higher sales volumes, decreased to 15.0% of sales compared to 15.2% last year. The increase in second quarter selling, general and administrative expense to 11.1% of sales compared to 10.9% of sales last year was primarily attributable to increased marketing expenses and additional labor costs associated with new concept expansion and development. Depreciation and amortization expense as a percentage of sales decreased to 3.7% from 4.0% last year primarily as a result of higher sales volumes. The effective tax rate for the second quarter of fiscal 2000 was 35.6% compared to 35.4% in last year's second quarter. The increase in the effective tax rate reflects a higher level of expected pre-tax income for fiscal 2000. Food and beverage costs for the first six months of fiscal 2000 were 32.1% of sales, down from last year's 33.0% primarily attributable to reduced product costs, pricing, and a lower margin promotion run by Red Lobster during the first quarter last year. Restaurant labor decreased to 32.3% of sales compared to last year's 32.7% primarily due to efficiencies resulting from higher sales volumes. Restaurant expenses decreased to 14.6% of sales compared to 15.1% last year primarily as a result of higher sales volumes and the fixed component of these expenses which are not impacted by higher sales volumes. The increase in first half selling, general and 11
administrative expense to 10.6% of sales compared to 10.2% of sales last year was attributable to increased marketing expenses and additional labor costs associated with new concept expansion and development. Depreciation and amortization expense as a percentage of sales decreased to 3.6% from 3.7% last year. The effective tax rate for the first six months of fiscal 2000 was 35.5% compared to 34.9% last year due to a higher level of expected pre-tax income for the year. Inventories totaled $215.3 million as of November 28, 1999, up from $144.1 million at May 30, 1999. The increase resulted primarily from purchases of seafood during the first quarter of fiscal 2000 at prices which the Company believes were favorable. This additional seafood is expected to be used during the current fiscal year. Inventories also increased, and accounts receivable and accounts payable decreased, due to changes made in the second quarter of fiscal 2000 to contractual terms with our national storage and distribution company. Short-term debt totaled $138.7 million as of November 28, 1999, up from $23.5 million at May 30, 1999. The increase resulted primarily from increased share repurchase activity due to favorable Company stock prices over the first half of fiscal 2000 as well as the increased inventory levels discussed above. Division Results Red Lobster sales of $461.9 million were 6.3% above last year's second quarter. Same-restaurant sales in the United States were up 8.2% for the quarter, marking the eighth consecutive quarter of same-restaurant sales increases. Second quarter operating profits were substantially improved over the prior year due primarily to favorable food and beverage costs and restaurant expenses as a percentage of sales. Through the first six months of fiscal 2000, Red Lobster's sales increased 3.9% to $984.4 million and same-restaurant sales in the United States increased by 5.9%. These results were achieved even though Red Lobster operated 26 fewer restaurants at the end of the second quarter compared to last year and did not repeat its high volume "Bottomless Crab" promotion that helped generate high sales and traffic volumes in the first quarter of last year. Olive Garden continued its positive momentum in the second quarter of fiscal 2000 with a 6.8% increase in sales to $376.0 million. Same-restaurant sales in the United States increased 6.8%, marking the twenty-first consecutive quarter of same-restaurant sales increases. Second quarter operating profits were substantially improved over the prior year primarily due to increased sales and lower restaurant labor expenses as a percentage of sales. Through the first six months of fiscal 2000, Olive Garden sales increased 7.3% to $772.0 million and same-restaurant sales in the United States increased by 7.5%. Bahama Breeze continues to produce strong sales at each of its eight restaurants. Four additional restaurants are currently under construction, all of which have expected fiscal 2000 opening dates. Darden's latest test concept, Smokey Bones BBQ and Hometown Sports Bar, opened its first restaurant on September 13, 1999 in Orlando, FL. This restaurant's sales have exceeded management's initial expectations. 12
The table below details the number of restaurants open at the end of the second quarter of fiscal 2000, compared with the number open at the end of May 1999 and the end of last fiscal year's second quarter. NUMBER OF RESTAURANTS <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------------------------- November 28, 1999 May 30, 1999 November 29, 1998 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Red Lobster - USA........................... 618 635 642 Red Lobster - Canada........................ 32 34 34 ----- ----- ----- Total.................................. 650 669 676 Olive Garden - USA.......................... 458 459 459 Olive Garden - Canada....................... 5 5 5 ----- ----- ----- Total.................................. 463 464 464 Bahama Breeze............................... 8 6 3 ----- ----- ----- Smokey Bones................................ 1 0 0 ----- ----- ----- Total.................................. 1,122 1,139 1,143 ===== ===== ===== </TABLE> Year 2000 The total cost to the Company of Year 2000 activities has not been and is not anticipated to be material to its financial position or results of operations in any given year. As of November 28, 1999, the Company had spent approximately $3.3 million on Year 2000 issues. This amount does not include the costs incurred to develop and install new systems resulting from the Company's seafood inventory accounting system project which was already contemplated for replacement. The total cost to the Company of addressing Year 2000 issues has been estimated to be less than $5 million. This amount was based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third-party modification plans and other factors. While there can be no guarantee that these estimates will be achieved, and actual results could differ from these estimates, management now anticipates that the total cost to the Company of addressing Year 2000 issues will be well under $5 million. As of the filing date of this report, the Company's business and operations have not been materially impacted by Year 2000 matters. For a more in-depth discussion of Year 2000, reference is made to the Company's Annual Report on Form 10-K for the fiscal year ended May 30, 1999. Forward-Looking Statements Certain information included in this report and other materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or written statements made or to be made by the Company) may contain statements that are forward-looking within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements include information relating to current expansion plans, business development activities, and Year 2000 compliance. Such forward-looking information is based on assumptions concerning important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, those relating to real estate development and construction activities, the issuance and renewal of licenses and permits for restaurant development and operation, economic conditions, changes in federal or state laws or the administration of such laws, and the Year 2000 readiness of suppliers, banks, vendors and others having a direct or indirect business relationship with the Company. 13
PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders Information contained on pages 4 through 15 of the Company's Proxy Statement dated August 10, 1999, filed with the Securities and Exchange Commission as of August 13, 1999, describing matters submitted to a vote at the Annual Meeting of Shareholders on September 23, 1999, is incorporated by reference in this report. (a) The Annual Meeting of Shareholders was held on September 23, 1999. (b) The name of each director elected at the meeting is provided in Item 4(c) of this report. There are no other directors with a term of office that continued after the Annual Meeting. All nominees described in the Proxy Statement, referenced above, were elected. (c) At the Annual Meeting, the Shareholders took the following actions: (i) Elected the following eleven directors: Bradley D. Blum For 120,413,476 Withheld 621,431 Daniel B. Burke For 120,381,876 Withheld 653,031 Odie C. Donald For 120,398,466 Withheld 636,441 Julius Erving, II For 120,300,698 Withheld 734,209 Joe R. Lee For 120,407,911 Withheld 626,996 Richard E. Rivera For 120,398,224 Withheld 636,683 Michael D. Rose For 120,381,383 Withheld 653,524 Hector de J. Ruiz For 120,382,402 Withheld 652,505 Maria A. Sastre For 120,354,113 Withheld 680,793 Jack A. Smith For 120,348,963 Withheld 685,944 Blaine Sweatt, III For 120,406,374 Withheld 628,532 (ii) Approved appointment of KPMG LLP as independent auditor. For 119,993,008 Against 313,346 Abstain 728,553 14
(iii) Approved the Darden Restaurants, Inc. Amended and Restated Stock Option and Long-Term Incentive Plan of 1995, as further described in that portion of the Proxy Statement referenced above. For 103,083,739 Against 10,329,040 Abstain 1,159,965 Broker Non-Vote 6,642,163 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. Exhibit 12 Computation of Ratio of Consolidated Earnings to Fixed Charges Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K. On September 24, 1999, the Company filed a current report on Form 8-K to announce first quarter financial results for fiscal year 2000, the appointment of Bob Mock to President of Smokey Bones BBQ and Hometown Sports Bar, and the appointment of Dave Pickens to Executive Vice President of Operations of Olive Garden. 15
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DARDEN RESTAURANTS, INC. Dated: January 11, 2000 By: /s/ Paula J. Shives ----------------------------------- Paula J. Shives Senior Vice President, General Counsel and Secretary Dated: January 11, 2000 By: /s/ Clarence Otis, Jr. ----------------------------------- Clarence Otis, Jr. Senior Vice President, Chief Financial Officer (Principal financial officer) 16
INDEX TO EXHIBITS Exhibit Number Exhibit Title Page 12 Computation of Ratio of Consolidated Earnings to Fixed Charges 18 27 Financial Data Schedule 19 17