SECURITIES AND EXCHANGE COMMISSION Washington, DC 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 March 25, 2001 -------------- OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from: ___________ to ___________ Commission file number: 333-74797 Domino's, Inc. (Exact name of registrant as specified in its charter) Delaware 38-3025165 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 30 Frank Lloyd Wright Drive Ann Arbor, Michigan 48106 (Address of principal executive offices) (734) 930-3030 (Registrant's telephone number, including area code) Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] The number of shares outstanding of the registrant's common stock as of April 30, 2001 was 10 shares.
Domino's, Inc. INDEX PART I. FINANCIAL INFORMATION Page No. -------- Item 1. Financial Statements Condensed Consolidated Balance Sheets - March 25, 2001 and December 31, 2000 3 Condensed Consolidated Statements of Income - Fiscal quarter ended March 25, 2001 and March 26, 2000 4 Condensed Consolidated Statements of Cash Flows - Fiscal quarter ended March 25, 2001 and March 26, 2000 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation 7 Item 3. Quantitative and Qualitative Disclosures About Market Risk 10 PART II. OTHER INFORMATION 11 SIGNATURES 11 2
PART I. FINANCIAL INFORMATION Item 1. Financial Statements Domino's, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (In thousands) March 25, 2001 December 31, 2000 Assets (Unaudited) (Note) -------------- ----------------- Current assets: Cash $ 20,743 $ 25,136 Accounts receivable 50,743 48,682 Notes receivable 3,465 3,833 Inventories 16,402 19,086 Prepaid expenses and other 6,920 6,580 Deferred income taxes 9,290 9,290 -------------- -------------- Total current assets 107,563 112,607 -------------- -------------- Property, plant and equipment: Land and buildings 14,890 14,917 Leasehold and other improvements 54,566 55,100 Equipment 116,385 114,456 Construction in progress 6,147 7,366 -------------- -------------- 191,988 191,839 Accumulated depreciation and amortization 106,474 106,526 -------------- -------------- Property, plant and equipment, net 85,514 85,313 -------------- -------------- Other assets: Deferred income taxes 71,391 71,253 Deferred financing costs 29,302 30,626 Goodwill 14,464 14,944 Covenants not-to-compete 4,515 5,851 Capitalized software 29,891 27,388 Other 20,611 21,647 -------------- -------------- Total other assets 170,174 171,709 -------------- -------------- Total assets $ 363,251 $ 369,629 ============== ============== Liabilities and stockholder's deficit Current liabilities: Current portion of long-term debt $ 19,440 $ 21,482 Accounts payable 33,396 38,335 Insurance reserves 7,080 6,793 Accrued income taxes 7,362 2,778 Other accrued liabilities 50,940 55,924 -------------- -------------- Total current liabilities 118,218 125,312 -------------- -------------- Long-term liabilities: Long-term debt, less current portion 659,728 664,592 Insurance reserves 8,872 9,633 Other accrued liabilities 24,125 24,899 -------------- -------------- Total long-term liabilities 692,725 699,124 -------------- -------------- Stockholder's deficit: Common stock - - Additional paid-in capital 120,202 120,202 Retained deficit (566,848) (574,657) Accumulated other comprehensive income (1,046) (352) -------------- -------------- Total stockholder's deficit (447,692) (454,807) -------------- -------------- Total liabilities and stockholder's deficit $ 363,251 $ 369,629 ============== ============== ________ Note: The balance sheet at December 31, 2000 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. See accompanying notes. 3
Domino's, Inc. and Subsidiaries Condensed Consolidated Statements of Income (Unaudited) Fiscal Quarter Ended March 25, March 26, (In thousands) 2001 2000 ------------------------ Revenues: Corporate stores $ 90,843 $ 90,240 Domestic franchise royalties 30,625 27,631 Domestic distribution 150,603 135,080 International 15,560 13,967 --------- --------- Total revenues 287,631 266,918 --------- --------- Operating expenses: Cost of sales 212,246 195,055 General and administrative 46,543 46,121 --------- --------- Total operating expenses 258,789 241,176 --------- --------- Income from operations 28,842 25,742 Interest income 595 531 Interest expense 16,591 17,470 --------- --------- Income before provision for income taxes 12,846 8,803 Provision for income taxes 5,037 3,756 --------- --------- Net income $ 7,809 $ 5,047 ========= ========= ________ See accompanying notes. 4
Domino's, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) Fiscal Quarter Ended March 25, March 26, 2001 2000 --------- --------- (In thousands) Cash flows from operating activities: Net cash provided by operating activities $ 10,262 $ 10,968 --------- --------- Cash flows from investing activities: Purchases of property, plant and equipment, and franchise stores and commissaries (9,735) (10,972) Other 2,001 (104) --------- --------- Net cash used in investing activities (7,734) (11,076) --------- --------- Cash flows from financing activities: Repayments of long-term debt (6,900) (9,475) Distributions - (338) --------- --------- Net cash used in financing activities (6,900) (9,813) --------- --------- Effect of exchange rate changes on cash (21) (46) --------- --------- Decrease in cash (4,393) (9,967) Cash, at beginning of period 25,136 30,278 --------- --------- Cash, at end of period $ 20,743 $ 20,311 ========= ========= ________ See accompanying notes. 5
Domino's, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited; tabular amounts in thousands) March 25, 2001 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring items, considered necessary for a fair presentation have been included. Operating results for the fiscal quarter ended March 25, 2001 are not necessarily indicative of the results that may be expected for the year ended December 30, 2001. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2000 included in our Form 10-K. 2. Change in accounting principle On January 1, 2001, the Company adopted SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" and two related Statements. The Company recorded a $2.7 million derivative asset upon adoption, reflecting the cumulative effect of this change in accounting principle relating to the fair value of our interest rate swaps. 3. Comprehensive Income Fiscal Quarter Ended ---------------------- March 25, March 26, 2001 2000 ---------------------- Net income $ 7,809 $ 5,047 Cumulative effect of change in accounting principle 2,685 - Unrealized loss on derivative instruments (2,660) - Reclassification adjustment for gains included in net income (532) - Currency translation adjustment (187) (89) Unrealized loss on investments, net of tax - (23) --------- --------- Comprehensive income $ 7,115 $ 4,935 ========= ========= 4. Segment Information The following table summarizes revenues and earnings before interest, taxes, depreciation and amortization (EBITDA) for each of the Company's reportable segments. Fiscal quarter ended March 25, 2001 and March 26, 2000 ------------------------------------------------------ Domestic Domestic Intersegment Stores Distribution International Revenues Other Total -------- ------------ ------------- ------------ -------- -------- Revenues - 2001 $121,468 $175,484 $ 15,560 $(24,881) $ - $287,631 2000 117,871 158,543 13,967 (23,463) - 266,918 EBITDA - 2001 32,684 9,488 3,893 - (9,314) 36,751 2000 32,491 7,605 3,185 - (10,026) 33,255 6
The following table reconciles total EBITDA to consolidated income before provision for income taxes. Fiscal quarter ended ---------------------- March 25, March 26, 2001 2000 --------- --------- Total EBITDA $ 36,751 $ 33,255 Depreciation and amortization (6,965) (7,506) Interest expense (16,591) (17,470) Interest income 595 531 Loss on sale of plant and equipment (944) (7) --------- -------- Income before provision for income taxes $ 12,846 $ 8,803 ========= ======== Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation The 2001 and 2000 first fiscal quarters referenced herein represent the twelve- week periods ended March 25, 2001 and March 26, 2000, respectively. Results of Operations - --------------------- Revenues - -------- General. Revenues include retail sales of food by Company-owned stores, royalties and fees from domestic and international franchise stores, and sales of food, equipment and supplies by our distribution centers to domestic and international franchise stores. Total revenues increased 7.8% to $287.6 million in the first quarter of 2001, from $266.9 million for the comparable period in 2000. This increase in total revenues is due primarily to increased domestic distribution revenues and, to a lesser extent, increased revenues from domestic and international franchise royalties. These results are more fully described below. Domestic Stores - --------------- Corporate Stores. Revenues from corporate store operations increased 0.7% to $90.8 million in the first quarter of 2001, from $90.2 million for the comparable period in 2000. This increase in revenues is due primarily to an increase in same store sales offset in part by a decrease in the average number of Company-owned stores open during 2001 compared to the same period in 2000. Same store sales for Company- owned stores increased 8.2% for the first quarter of 2001, compared to the same period in 2000. The number of Company-owned stores was 605 and 662 as of March 25, 2001 and March 26, 2000, respectively. The average number of Company-owned stores open during the first quarter of 2001 decreased by 45 stores compared to the same period in 2000 primarily reflecting the strategic sales of certain Company-owned stores to franchisees. Domestic Franchise. Revenues from domestic franchise operations increased 10.8% to $30.6 million in the first quarter of 2001, from $27.6 million for the comparable period in 2000. This increase is due primarily to an increase in the number of domestic franchise stores and an increase in same store sales. Same store sales for domestic franchise stores increased 3.6% for the first quarter of 2001, compared to the same period in 2000. The number of domestic franchise stores was 4,218 and 4,015 as of March 25, 2001 and March 26, 2000, respectively. The average number of domestic franchise stores open during the first quarter of 2001 increased by 196 stores compared to the same period in 2000. Domestic Distribution - --------------------- Revenues from domestic distribution operations increased 11.5% to $150.6 million in the first quarter of 2001, from $135.1 million for the comparable period in 2000. This increase is due primarily to increased volumes relating to increases in domestic franchise same store sales and store count. Distribution volumes were also positively impacted by our CinnaStix(R) promotion which ran during the first quarter of 2001. 7
International - ------------- Revenues from international operations increased 11.4% to $15.6 million in the first quarter of 2001, from $14.0 million for the comparable period in 2000. This increase is due primarily to an increase in the number of international franchise stores and an increase in same store sales. On a constant dollar basis, same store sales increased by 9.8% for the first quarter of 2001, compared to the same period in 2000. On a historic dollar basis, same store sales increased by 2.4% for the first quarter of 2001, compared to the same period in 2000, reflecting a strengthening U.S. Dollar. The number of international stores was 2,223 and 1,975 as of March 25, 2001 and March 26, 2000, respectively. The average number of international stores open during the first quarter of 2001 increased by 245 stores compared to the same period in 2000. Operating Expenses - ------------------ Cost of sales increased 8.8% to $212.2 million in the first quarter of 2001, from $195.1 million for the comparable period in 2000. Gross profit increased 4.9% to $75.4 million in the first quarter of 2001, from $71.9 million for the comparable period in 2000. This increase in gross profit is due primarily to an increase in total revenues, primarily as a result of system-wide store and same store sales growth, as well as the increase in Distribution volumes. These increases in gross profit were offset in part by increases in food and labor costs in our Company-owned stores. General and administrative expenses increased 0.9% to $46.5 million in the first quarter of 2001, from $46.1 million for the comparable period in 2000. As a percentage of total revenues, general and administrative expenses decreased 1.1% to 16.2% in the first quarter of 2001, from 17.3% for the comparable period in 2000. This decrease is due primarily to a decrease in covenants not-to-compete amortization expense and a decrease in professional fees. Covenants not-to- compete amortization expense, primarily related to the covenant obtained as part of our parent company's recapitalization, decreased $1.3 million to $1.3 million in the first quarter of 2001, compared to the same period in 2000. This decrease is due to the use of an accelerated amortization method over the covenant's three-year term. Interest Expense - ---------------- Interest expense decreased $0.9 million to $16.6 million in the first quarter of 2001, from $17.5 million for the comparable period in 2000. This decrease is due primarily to a decrease in related variable interest rates and reduced debt levels. Provision for Income Taxes - -------------------------- Provision for income taxes increased $1.2 million to $5.0 million in the first quarter of 2001, from $3.8 million for the comparable period in 2000. This increase is due primarily to an increase in pre-tax income. Liquidity and Capital Resources - ------------------------------- We had negative working capital of $10.7 million and cash of $20.7 million at March 25, 2001. Historically, we have operated with minimal positive working capital or negative working capital primarily because our receivable collection periods and inventory turn rates are faster than the normal payment terms on our current liabilities. In addition, our sales are not typically seasonal, which further limits our working capital requirements. Our primary sources of liquidity are cash flows from operations and availability of borrowings under our revolving credit facility. We expect to fund planned capital expenditures and debt commitments from these sources. As of March 25, 2001, we had $679.2 million of long-term debt, of which $19.4 million was classified as a current liability. There were no borrowings under our $100 million revolving credit facility and letters of credit issued under the revolving credit facility were $14.2 million. The borrowings under the revolving credit facility are available to fund our working capital requirements, capital expenditures and other general corporate purposes. 8
Cash provided by operating activities was $10.3 million and $11.0 million for the first quarters of 2001 and 2000, respectively. The $0.7 million decrease is due primarily to a $2.8 million net change in operating assets and liabilities, a $0.5 million decrease in depreciation and amortization, and a $1.0 million change in deferred income tax provision. These decreases in cash provided by operating activities were offset in part by a $2.8 million increase in net income and a $0.9 million increase in loss on sale of plant and equipment related to sales of Company-owned stores to franchisees and relocations of certain Company-owned stores. Cash used in investing activities was $7.7 million and $11.1 million for the first quarters of 2001 and 2000, respectively. The $3.4 million decrease is due primarily to a $4.8 million decrease in purchases of franchise operations and a $1.8 million net change in other assets. These decreases in cash used in investing activities were offset in part by a $3.6 million increase in purchases of property, plant and equipment due primarily to increased investments on our next generation store systems project. Cash used in financing activities was $6.9 million and $9.8 million for the first quarters of 2001 and 2000, respectively. The $2.9 million decrease is due primarily to additional cash sweep payments in 2000. Based upon the current level of operations and anticipated growth, we believe that the cash generated from operations and amounts available under the revolving credit facility will be adequate to meet our anticipated debt service requirements, capital expenditures and working capital needs for the next several years. There can be no assurance, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available under the senior credit facilities or otherwise to enable us to service our indebtedness, including the senior credit facilities and the Senior Subordinated Notes, to redeem or refinance TISM's, our Parent company, Cumulative Preferred Stock when required or to make anticipated capital expenditures. Our future operating performance and our ability to service or refinance the Senior Subordinated Notes and to service, extend or refinance the senior credit facilities will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. Forward-Looking Statements - -------------------------- Certain statements contained in this filing relating to capital spending levels and the adequacy of our capital resources are forward-looking. Also statements that contain words such as "believes," "expects," "anticipates," "intends," "estimates" or similar expressions are forward-looking statements. Forward- looking statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such forward- looking statements. Among these risks and uncertainties are competitive factors, increases in our operating costs, ability to retain our key personnel, our substantial leverage, ability to implement our growth and cost-saving strategies, industry trends and general economic conditions, adequacy of insurance coverage and other factors, all of which are described in the 10-K for the year ended December 31, 2000 and our other filings with the Securities and Exchange Commission. We do not undertake to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk Market Risk - ----------- The Company is exposed to market risks primarily from interest rate changes on our variable rate debt and foreign currency fluctuations relating to international revenues. Management actively monitors these exposures. As a policy, the Company does not engage in speculative transactions nor does it hold or issue financial instruments for trading purposes. Interest Rate Swaps - ------------------- The Company may enter into interest rate swaps or similar instruments with the objective of reducing our volatility in borrowing costs. In 1999, we entered into two interest rate swap agreements to effectively convert the Eurodollar interest rate component on a portion of our variable rate debt to a fixed rate of 5.12% through December 2001. As of March 25, 2001, the total notional amount of these swap agreements was $173.0 million. Interest Rate Risk - ------------------ The Company's variable interest expense is sensitive to changes in the general level of interest rates. As of March 25, 2001, a portion of the Company's debt is borrowed at Eurodollar rates plus a blended margin rate of approximately 3.2%. At March 25, 2001, the weighted average interest rate on our $241.0 million of variable interest debt was approximately 8.6%. The fair value of the Company's debt approximates its carrying value. The Company had total interest expense of approximately $16.6 million for the first quarter of 2001. The estimated increase in interest expense from a hypothetical 200 basis point adverse change in applicable variable interest rates would be approximately $1.1 million. 10
PART II. OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Changes in Securities and Use Of Proceeds None. Item 3. Defaults Under Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K a. Exhibits Exhibit Number Description ------ ----------- None. b. Current Reports on Form 8-K There were no reports filed on Form 8-K during the quarter ended March 25, 2001. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DOMINO'S, INC. (Registrant) Date: May 8, 2001 /s/ Harry J. Silverman ----------------------------------- Chief Financial Officer 11