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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
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(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 .................
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1-13666
Commission File Number
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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).
===============================================================================
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
Exhibit 12
----------
DARDEN RESTAURANTS, INC.
COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS TO FIXED CHARGES
(Dollar Amounts in Thousands)
<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>
Consolidated Earnings from Operations
Before Income Taxes..................... $ 24,657 $ 11,786 $ 78,528 $ 48,036
Plus Fixed Charges........................ 9,921 9,259 20,447 18,311
Less Capitalized Interest................. (260) (295) (520) (581)
---------- ---------- --------- ---------
Consolidated Earnings from Operations
Before Income Taxes Available to
Cover Fixed Charges..................... $ 34,318 $ 20,750 $ 98,455 $ 65,766
========= ========= ========= =========
Ratio of Consolidated Earnings to Fixed
Charges................................. 3.46 2.24 4.82 3.59
========= ========= ========= =========
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of Darden Restaurants, Inc. and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-30-1999
<PERIOD-END> NOV-29-1998
<CASH> 13,064
<SECURITIES> 0
<RECEIVABLES> 26,224
<ALLOWANCES> (332)
<INVENTORY> 137,112
<CURRENT-ASSETS> 303,847
<PP&E> 2,389,627
<DEPRECIATION> (910,976)
<TOTAL-ASSETS> 1,879,421
<CURRENT-LIABILITIES> 468,961
<BONDS> 310,413
0
0
<COMMON> 1,311,828
<OTHER-SE> (311,383)
<TOTAL-LIABILITY-AND-EQUITY> 1,879,421
<SALES> 1,677,225
<TOTAL-REVENUES> 1,677,225
<CGS> 554,031
<TOTAL-COSTS> 1,355,010
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 97
<INTEREST-EXPENSE> 10,221
<INCOME-PRETAX> 78,528
<INCOME-TAX> 27,430
<INCOME-CONTINUING> 51,098
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,098
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.35
</TABLE>
