=============================================================================== 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 29, 1998 [ ] 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 January 1, 1999: 137,758,717 (excluding 25,995,078 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 10 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 29, 1998 November 23, 1997 - ------------------------------------------------------------------------------------------ <S> <C> <C> Sales.......................................... $ 791,168 $ 745,263 Costs and Expenses: Cost of sales: Food and beverages......................... 257,616 241,859 Restaurant labor........................... 265,753 252,929 Restaurant expenses........................ 120,688 117,941 --------- --------- Total Cost of Sales...................... $ 644,057 $ 612,729 Selling, general and administrative.......... 86,357 84,412 Depreciation and amortization................ 31,311 31,613 Interest, net................................ 4,786 4,723 --------- --------- Total Costs and Expenses............... $ 766,511 $ 733,477 --------- --------- Earnings before Income Taxes................... 24,657 11,786 Income Taxes................................... (8,738) (4,256) --------- --------- Net Earnings................................... $ 15,919 $ 7,530 ========= ========= Net Earnings per Share: Basic ...................................... $ 0.11 $ 0.05 ========= ========= Diluted..................................... $ 0.11 $ 0.05 ========= ========= Average Number of Common Shares Outstanding: Basic ...................................... 138,700 150,300 ========= ========= Diluted..................................... 144,100 152,300 ========= ========= - ------------------------------------------------------------------------------------------ </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 29, 1998 November 23, 1997 - ------------------------------------------------------------------------------------------ <S> <C> <C> Sales......................................... $ 1,677,225 $ 1,554,594 Costs and Expenses: Cost of sales: Food and beverages........................ 554,031 507,809 Restaurant labor.......................... 548,304 511,946 Restaurant expenses....................... 252,675 240,685 ----------- ----------- Total Cost of Sales .................... $ 1,355,010 $ 1,260,440 Selling, general and administrative......... 171,143 173,617 Depreciation and amortization............... 62,323 63,085 Interest, net............................... 10,221 9,416 ----------- ----------- Total Costs and Expenses.............. $ 1,598,697 $ 1,506,558 ----------- ----------- Earnings before Income Taxes.................. 78,528 48,036 Income Taxes.................................. (27,430) (16,098) ----------- ----------- Net Earnings.................................. $ 51,098 $ 31,938 =========== =========== Net Earnings per Share: Basic ...................................... $ 0.37 $ 0.21 =========== =========== Diluted..................................... $ 0.35 $ 0.21 =========== =========== Average Number of Common Shares Outstanding: Basic ...................................... 139,200 151,500 =========== =========== Diluted..................................... 145,000 152,900 =========== =========== - ------------------------------------------------------------------------------------------ </TABLE> See accompanying notes to consolidated financial statements. 4
DARDEN RESTAURANTS, INC. CONSOLIDATED BALANCE SHEETS (In Thousands) <TABLE> <CAPTION> (Unaudited) - ------------------------------------------------------------------------------------------ November 29, 1998 May 31, 1998 - ------------------------------------------------------------------------------------------ <S> <C> <C> ASSETS Current Assets: Cash and cash equivalents................... $ 13,064 $ 33,505 Receivables................................. 26,224 27,312 Inventories................................. 137,112 182,399 Net assets held for disposal................ 39,673 49,230 Prepaid expenses and other current assets... 12,242 20,498 Deferred income taxes....................... 75,532 84,597 ----------- ----------- Total Current Assets...................... $ 303,847 $ 397,541 Land, Buildings and Equipment................. 1,478,651 1,490,348 Other Assets.................................. 96,923 96,853 ----------- ----------- Total Assets............................ $ 1,879,421 $ 1,984,742 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable............................ $ 121,769 $ 132,938 Short-term debt............................. 10,500 75,100 Current portion of long-term debt........... 5 5 Accrued payroll............................. 59,205 73,240 Accrued income taxes........................ 374 1,067 Other accrued taxes......................... 23,043 24,172 Other current liabilities................... 254,065 252,142 ----------- ----------- Total Current Liabilities................. $ 468,961 $ 558,664 Long-term Debt................................ 310,408 310,603 Deferred Income Taxes......................... 80,468 77,054 Other Liabilities............................. 19,139 18,576 ----------- ----------- Total Liabilities......................... $ 878,976 $ 964,897 ----------- ----------- Stockholders' Equity: Common stock and surplus.................... $ 1,311,828 $ 1,286,191 Retained earnings........................... 93,894 48,327 Treasury stock.............................. (326,571) (239,876) Accumulated other comprehensive income...... (13,275) (11,749) Unearned compensation....................... (65,431) (63,048) ----------- ----------- Total Stockholders' Equity................ $ 1,000,445 $ 1,019,845 ----------- ----------- Total Liabilities and Stockholders' Equity................................ $ 1,879,421 $ 1,984,742 =========== =========== - ------------------------------------------------------------------------------------------ </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 29, 1998 and November 23, 1997 (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 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 - ------------------------------------------------------------------------------------------------------------------------------------ <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 25, 1997.......................... $1,268,656 $(41,706) $ (69,184) $(10,037) $(66,516) $1,081,213 Comprehensive income: Net earnings................................... 31,938 31,938 Other comprehensive income, foreign currency adjustment.................................. (1,053) (1,053) ---------- Total comprehensive income................ 30,885 Cash dividends declared.......................... (6,005) (6,005) Stock option exercises (392 shares).............. 2,496 2,496 Issuance of restricted stock (132 shares), net of forfeiture adjustments.................. 104 (124) (20) Earned compensation.............................. 485 485 ESOP note receivable repayments.................. 1,800 1,800 Income tax benefit credited to equity............ 579 579 Proceeds from issuance of equity put options..... 311 311 Purchases of common stock for treasury (4,474 shares)................................. (46,665) (46,665) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at November 23, 1997..................... $1,272,146 $(15,773) $(115,849) $(11,090) $(64,355) $1,065,079 - ------------------------------------------------------------------------------------------------------------------------------------ </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 29, 1998 November 23, 1997 - ----------------------------------------------------------------------------------------------------- <S> <C> <C> Cash Flows--Operating Activities Net earnings............................................. $ 15,919 $ 7,530 Adjustments to reconcile net earnings to cash flow: Depreciation and amortization............................ 31,311 31,613 Amortization of unearned compensation and loan costs..... 1,090 821 Change in current assets and liabilities................. 2,102 (65,498) Change in other liabilities ............................. 297 190 Loss on disposal of land, buildings and equipment........ 264 1,290 Deferred income taxes.................................... 7,955 5,798 Other, net............................................... 256 384 --------- --------- Net Cash Provided by (Used by) Operating Activities.. $ 59,194 $ (17,872) --------- --------- Cash Flows--Investment Activities Purchases of land, buildings and equipment............... (31,091) (27,544) Purchases of intangibles................................. (566) (524) Increase in other assets................................. (428) (721) Proceeds from disposal of land, buildings and equipment (including net assets held for disposal)..... 8,863 4,186 --------- --------- Net Cash Used by Investment Activities............... $ (23,222) $ (24,603) --------- --------- Cash Flows--Financing Activities Proceeds from issuance of common stock................... 4,819 2,086 Income tax benefit credited to equity.................... 1,525 352 Dividends paid........................................... (5,531) (6,005) Purchases of treasury stock.............................. (34,069) (24,855) ESOP note receivable repayment........................... 250 Increase (decrease) in short-term debt................... (19,000) 62,300 Repayment of long-term debt.............................. (250) Proceeds from issuance of equity puts.................... 1,358 311 --------- --------- Net Cash Provided by (Used by) Financing Activities......................................... $ (50,898) $ 34,189 --------- --------- Decrease in Cash and Cash Equivalents...................... (14,926) (8,286) Cash and Cash Equivalents - Beginning of Period............ 27,990 30,355 --------- --------- Cash and Cash Equivalents - End of Period.................. $ 13,064 $ 22,069 ========= ========= Cash Flow from Changes in Current Assets and Liabilities Receivables.............................................. (3,123) (3,281) Refundable income taxes, net............................. (5,489) Inventories.............................................. 8,065 (60,560) Prepaid expenses and other current assets................ 847 560 Accounts payable......................................... 17,365 7,784 Accrued payroll.......................................... (1,024) 1,256 Accrued income taxes..................................... (22,776) Other accrued taxes...................................... (2,471) (1,894) Other current liabilities................................ 5,219 (3,874) --------- --------- Change in Current Assets and Liabilities................... $ 2,102 $ (65,498) ========= ========= - ----------------------------------------------------------------------------------------------------- </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 29, 1998 November 23, 1997 - ----------------------------------------------------------------------------------------------------- <S> <C> <C> Cash Flows--Operating Activities Net earnings............................................. $ 51,098 $ 31,938 Adjustments to reconcile net earnings to cash flow: Depreciation and amortization.......................... 62,323 63,085 Amortization of unearned compensation and loan costs... 2,189 1,717 Change in current assets and liabilities............... 22,092 (27,746) Change in other liabilities ........................... 563 266 (Gain) loss on disposal of land, buildings and equipment............................................ (602) 1,551 Deferred income taxes.................................. 12,479 7,041 Other, net............................................. (318) 106 ---------- ---------- Net Cash Provided by Operating Activities.......... $ 149,824 $ 77,958 ---------- ---------- Cash Flows--Investment Activities Purchases of land, buildings and equipment............... (55,455) (56,113) Purchases of intangibles................................. (1,074) (871) Increase in other assets................................. (635) (3,067) Proceeds from disposal of land, buildings and equipment (including net assets held for disposal)..... 21,688 9,061 ---------- ---------- Net Cash Used by Investment Activities............. $ (35,476) $ (50,990) ---------- ---------- Cash Flows--Financing Activities Proceeds from issuance of common stock................... 14,700 2,496 Income tax benefit credited to equity.................... 5,158 579 Dividends paid........................................... (5,531) (6,005) Purchases of treasury stock.............................. (86,695) (46,665) ESOP note receivable repayment........................... 250 1,800 Increase (decrease) in short-term debt................... (64,600) 18,900 Repayment of long-term debt.............................. (255) (1,805) Proceeds from issuance of equity puts.................... 2,184 311 ---------- ---------- Net Cash Used by Financing Activities.............. $ (134,789) $ (30,389) ---------- ---------- Decrease in Cash and Cash Equivalents....................... (20,441) (3,421) Cash and Cash Equivalents - Beginning of Period............. 33,505 25,490 ---------- ---------- Cash and Cash Equivalents - End of Period................... $ 13,064 $ 22,069 ========== ========== Cash Flow from Changes in Current Assets and Liabilities Receivables.............................................. 1,088 (3,167) Refundable income taxes, net............................. 5,015 Inventories.............................................. 45,287 (50,593) Prepaid expenses and other current assets................ 1,231 2,262 Accounts payable......................................... (11,169) 19,157 Accrued payroll.......................................... (14,035) 1,152 Accrued income taxes..................................... (693) Other accrued taxes...................................... (1,129) 1,162 Other current liabilities................................ 1,512 (2,734) ---------- ---------- Change in Current Assets and Liabilities................... $ 22,092 $ (27,746) ========== ========== - -------------------------------------------------------------------------------------------------------------------- </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 29, 1998 are not necessarily indicative of the results that may be expected for the fiscal year ending May 30, 1999. 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 31, 1998. The accounting policies used in preparing these consolidated financial statements are the same as those described in our annual report on Form 10-K, except that during the current period the Company adopted the provisions of Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income". The Company adopted SFAS 130 by reporting all items of comprehensive income in the consolidated statements of changes in stockholders' equity. Note 2. Consolidated Statements of Cash Flows ------------------------------------- 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. During the thirteen and twenty-six weeks ended November 23, 1997, Darden paid $0 and $8,194, respectively, for interest (net of amount capitalized) and $3,691 and $4,071, respectively, for income taxes. Note 3. Net Earnings Per Share ---------------------- Options to purchase 64,032 and 5.3 million shares of common stock were excluded from the calculation of diluted EPS for the thirteen weeks ended November 29, 1998 and November 23, 1997, respectively, because their exercise prices exceeded the average market price of common shares for the period. Options to purchase 29,109 and 8.9 million shares of common stock were excluded from the calculation of diluted EPS for the twenty-six weeks ended November 29, 1998 and November 23, 1997, respectively, for the same reason. Note 4. Derivative Financial and Commodity Instruments ---------------------------------------------- On January 31, 1997, the Securities and Exchange Commission (SEC) issued amended disclosure rules for derivatives and exposures to market risk from derivative and other financial and certain commodity instruments. Enhanced accounting policy disclosures in accordance with this SEC release follow. The Company may, from time to time, use financial and commodities derivatives in the management of interest rate and commodities pricing risks that are inherent in its business operations. Such instruments are not held or issued for trading or speculative purposes. The Company may, from time to time, use interest rate swap and cap agreements in the management of interest rate exposure. The interest rate differential to be paid or received is normally accrued as interest rates change, and is recognized as a component of interest expense over the life of the agreements. If an agreement is terminated prior to the maturity date and is characterized as a hedge, any accrued rate differential would be deferred and recognized as interest expense over the life of the hedged item. The Company uses commodities hedging instruments, including forwards, futures and options, to reduce the risk of price fluctuations related to future raw materials requirements for commodities such as coffee, soybean oil, and shrimp. The terms of such instruments generally do not exceed twelve months, and depend on the 9
commodity and other market factors. Deferred gains and losses are subsequently recorded as cost of products sold in the consolidated statements of earnings when the inventory is sold. If the inventory is not acquired and the hedge is disposed of, the deferred gain or loss is recognized immediately in cost of products sold. The Company does not have any material risk from any of the above financial instruments, and the Company does not anticipate any material losses from the use of such instruments. 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 29, 1998 and November 23, 1997. <TABLE> <CAPTION> Thirteen Weeks Ended Twenty-Six Weeks Ended - ------------------------------------------------------------------------------------------------------------------- November 29, November 23, November 29, November 23, 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Sales.................................... 100.0% 100.0% 100.0% 100.0% Costs and Expenses: Cost of sales: Food and beverages................... 32.6 32.5 33.0 32.7 Restaurant labor..................... 33.6 33.9 32.7 32.9 Restaurant expenses.................. 15.2 15.8 15.1 15.5 ------ ------ ------ ------ Total Cost of Sales................ 81.4% 82.2% 80.8% 81.1% Selling, general and administrative.... 10.9 11.3 10.2 11.2 Depreciation and amortization.......... 4.0 4.3 3.7 4.0 Interest, net.......................... 0.6 0.6 0.6 0.6 ------ ------ ------ ------ Total Costs and Expenses......... 96.9% 98.4% 95.3% 96.9% ------ ------ ------ ------ Earnings before Income Taxes............. 3.1 1.6 4.7 3.1 Income Taxes............................. (1.1) (0.6) (1.7) (1.0) ------ ------ ------ ------ Net Earnings............................. 2.0% 1.0% 3.0% 2.1% ====== ====== ====== ====== - ------------------------------------------------------------------------------------------------------------------- </TABLE> Results of Operations - --------------------- For the fiscal 1999 second quarter ended November 29, 1998, earnings after tax were $15.9 million or eleven cents per diluted share, compared to earnings after tax of $7.5 million or five cents per diluted share in the second quarter of fiscal 1998. The increase in second quarter earnings was primarily attributable to strong same restaurant sales at both Red Lobster and The Olive Garden. Sales of $791.2 million for the quarter were over 6% higher than last year. For the first six months of fiscal 1999, net earnings were $51.1 million or 35 cents per diluted share, compared to $31.9 million or 21 cents per diluted share in the same fiscal 1998 period. Sales approximating $1.68 billion for the first six months of fiscal 1999 were 7.9% higher than last year. Food and beverage costs for the quarter were 32.6% of sales, compared to 32.5% of sales last year. Restaurant labor decreased to 33.6% of sales compared to last year's 33.9% due to efficiencies resulting from higher sales volumes. Restaurant expenses, also benefiting from higher sales volumes, decreased to 15.2% of sales compared to 15.8% last year. The decrease in second quarter selling, general and administrative expense to 10.9% of sales compared to 11.3% of sales last year was attributable to reduced marketing expenses. Although the dollar amount of depreciation and amortization expense for the quarter was comparable to last year, that expense as a percentage of sales decreased to 4.0% from 4.3% last year. That percentage of sales decrease also resulted from higher sales volumes. 10
The effective tax rate for the second quarter of fiscal 1999 was 35.4%, compared to 36.1% last year. Last year's second quarter effective tax rate was unusually high because it included the cumulative impact of raising 1998's annual expected tax rate. Food and beverage costs for the first six months of fiscal 1999 were 33.0% of sales, up from last year's 32.7% primarily attributable to two very successful high volume, lower margin promotions run by Red Lobster during the first quarter. Restaurant labor decreased to 32.7% of sales compared to last year's 32.9% also due to efficiencies resulting from higher sales volumes. Restaurant expenses decreased to 15.1% of sales compared to 15.5% last year. The decrease in first half selling, general and administrative expense to 10.2% of sales compared to 11.2% of sales last year was also attributable to reduced marketing expenses. Although the dollar amount of depreciation and amortization expense for the first half of fiscal 1999 was comparable to last year, that expense as a percentage of sales decreased to 3.7% from 4.0% last year. That percentage of sales decrease also resulted from higher sales volumes. The effective tax rate for the first six months of fiscal 1999 was 34.9% compared to 33.5% last year due to a higher level of expected pre-tax income for the year. Division Results - ---------------- Red Lobster sales of $434.6 million were 4.0% above last year's second quarter. Same-restaurant sales in the United States were up 5.4% for the quarter. Second quarter operating profits were substantially improved over the prior year due primarily to decreased restaurant labor as a percentage of sales and an overall decrease in marketing expenses. Through the first six months of fiscal 1999, Red Lobster's sales increased 6.8% to $947.9 million and same-restaurant sales in the United States increased by 8.7%. The Olive Garden continued its positive momentum in the second quarter of fiscal 1999 with an 8.6% increase in sales to $352.1 million. Same-restaurant sales in the United States increased 8.7%, marking the seventeenth consecutive quarter of same-restaurant sales increases. Second quarter operating profits were substantially improved over the prior year primarily due to decreases as a percentage of sales in food and beverage costs, restaurant labor, restaurant expenses and marketing expenses. Through the first six months of fiscal 1999, Olive Garden sales increased 9.0% to $719.4 million and same-restaurant sales in the United States increased by 9.7%. Darden's newest concept, Bahama Breeze, continued to produce strong sales at all three restaurants. A fourth restaurant opened November 30th. Two additional restaurants are currently under construction, both with projected fiscal 1999 opening dates. Additional locations are also under development throughout the United States. The table below details the number of restaurants open at the end of the second quarter, compared with the number open at the end of May 1998 and the end of last fiscal year's second quarter. NUMBER OF RESTAURANTS <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------------------------- November 29, 1998 May 31, 1998 November 23, 1997 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Red Lobster - USA........................... 642 648 649 Red Lobster - Canada........................ 34 34 35 ------ ------ ------ Total.................................. 676 682 684 Olive Garden - USA.......................... 459 461 460 Olive Garden - Canada....................... 5 5 5 ------ ------ ------ Total.................................. 464 466 465 Bahama Breeze............................... 3 3 2 ------ ------ ------ Total.................................. 1,143 1,151 1,151 ====== ====== ====== - -------------------------------------------------------------------------------------------------------------------- </TABLE> 11
Year 2000 - --------- Background In the past, many computers, software programs, and other information technology ("IT systems"), as well as other equipment relying on microprocessors or similar circuitry ("non-IT systems"), were written or designed using two digits, rather than four, to define the applicable year. As a result, date-sensitive systems (both IT systems and non-IT systems) may recognize a date identified with "00" as the year 1900, rather than the year 2000. This is generally described as the Year 2000 issue. If this situation occurs, the potential exists for system failures or miscalculations, which could impact business operations. The Securities and Exchange Commission ("SEC") has asked public companies to disclose four general types of information related to Year 2000 preparedness: the company's state of readiness, costs (historical and prospective), risks, and contingency plans. See SEC Release No. 33-7558 (July 29, 1998). Accordingly, the Company has included the following discussion in this report, in addition to the Year 2000 disclosures previously filed with the SEC. State of Readiness The Company began a concerted effort and established a dedicated project team to address its Year 2000 issues in fiscal year 1997. In fiscal year 1998, the Company formalized a task force (the "Year 2000 Project Office") to coordinate the Company's response to Year 2000 issues. The Year 2000 Project Office reports to the Chief Executive Officer, his executive team, and the Audit Committee of the Company's Board of Directors. Under the auspices of the Year 2000 Project Office, the Company believes that it has identified all significant IT systems and non-IT systems that require modification in connection with Year 2000 issues. Internal and external resources have been used and are continuing to be used, to make the required modifications and test Year 2000 readiness. The required modifications of all significant systems are well under way. The Company plans on completing the modifications and testing of all significant systems by the end of fiscal 1999. In addition, through its Year 2000 Project Office, the Company has communicated with suppliers, banks, vendors and others with whom it does significant business (collectively, its "business partners") to determine their Year 2000 readiness and the extent to which the Company is vulnerable to any other organization's Year 2000 issues. Based on these communications and related responses, the Company is monitoring the Year 2000 preparations and state of readiness of its business partners. Although the Company is not aware of any significant Year 2000 problems with its business partners, there can be no guarantee that the systems of other organizations on which the Company's systems rely will be converted in a timely manner, or that a failure to convert by another organization, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company. Costs 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 the end of the second quarter of fiscal 1999, the Company had spent approximately $2.1 million on Year 2000 issues. The total costs to the Company of addressing Year 2000 issues is estimated to be less than $5 million. These total costs, as well as the date on which the Company plans to complete the Year 2000 modification and testing processes, are 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. However, there can be no guarantee that these estimates will be achieved, and actual results could differ from those estimates. 12
Risks The Company utilizes IT systems and non-IT systems in many aspects of its business. Year 2000 problems in some of the Company's systems could possibly disrupt operations at some restaurants, but the Company does not expect that any such disruption would have a material adverse impact on the Company's operating results. The Company is also exposed to the risk that one or more of its suppliers or vendors could experience Year 2000 problems that could impact the ability of such suppliers or vendors to provide goods and services. Although this risk is lessened by the availability of alternative suppliers, the disruption of certain services, such as utilities, could, depending upon the extent of the disruption, potentially have a material adverse impact on the Company's operations. Contingency Plans The Year 2000 Project Office is in the process of developing contingency plans for the Company's significant IT systems and non-IT systems requiring Year 2000 modification. In addition, the Company is developing contingency plans to deal with the possibility that some suppliers or vendors might fail to provide goods and services on a timely basis as a result of Year 2000 problems. These contingency plans will include the identification, acquisition and/or preparation of backup systems, suppliers and vendors. 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 3 through 11 of the Company's Proxy Statement dated August 10, 1998, filed with the Securities and Exchange Commission on August 10, 1998, describing matters submitted to a vote at the Annual Meeting of Shareholders on September 24, 1998, is incorporated by reference in this report. (a) The Annual Meeting of Shareholders was held on September 24, 1998. (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 ten directors: H. B. Atwater, Jr. For 123,502,296 Withheld 889,476 Bradley D. Blum For 123,744,036 Withheld 647,736 Daniel B. Burke For 123,728,584 Withheld 663,188 Odie C. Donald For 123,670,044 Withheld 721,728 Joe R. Lee For 123,669,020 Withheld 722,752 Richard E. Rivera For 123,738,689 Withheld 653,083 Michael D. Rose For 123,662,885 Withheld 728,888 Maria A. Sastre For 123,694,923 Withheld 696,808 Jack A. Smith For 123,634,786 Withheld 756,986 Blaine Sweatt, III For 123,691,606 Withheld 700,156 (ii) Approved appointment of KPMG Peat Marwick LLP as independent auditor. For 123,610,162 Against 238,974 Abstain 542,636 14
(iii) Approved the Darden Restaurants, Inc. Employee Stock Purchase Plan, as further described in that portion of the Proxy Statement referenced above. For 122,089,170 Against 782,876 Abstain 507,909 Broker Non-Vote 1,011,817 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. The Company filed one report on Form 8-K on September 24, 1998, reporting certain financial results for the first quarter of fiscal year 1999. 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 6, 1998 By: /s/ C.L. Whitehill -------------------------------------------- C.L. Whitehill Senior Vice President, General Counsel and Secretary Dated: January 6, 1998 By: /s/ Linda Dimopoulos -------------------------------------------- Linda Dimopoulos Senior Vice President - Corporate Controller and Business Information Systems (Principal accounting 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