SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 29, 2002 OR [_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File No. 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 (Registrants telephone number, including area code) Securities registered pursuant to Section 12(b) of the Exchange Act: None ---- Securities registered pursuant to Section 12(g) of the Exchange Act: None ---- Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No [_] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act): Yes [_] No [X] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K: [_] The aggregate market value of the voting stock held by non-affiliates is zero. As of March 15, 2003, there were 10 shares of the registrant's common stock outstanding. Documents incorporated by reference: None ----
TABLE OF CONTENTS Part I Page No. -------- Item 1. Business. 2 Item 2. Properties. 14 Item 3. Legal Proceedings. 15 Item 4. Submission of Matters to a Vote of Security Holders. 15 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. 16 Item 6. Selected Financial Data. 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 18 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 29 Item 8. Financial Statements and Supplementary Data. 30 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 56 Part III Item 10. Directors and Executive Officers of the Registrant. 57 Item 11. Executive Compensation. 59 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters. 63 Item 13. Certain Relationships and Related Transactions. 65 Item 14. Controls and Procedures. 66 Part IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 67 SIGNATURES 73 CERTIFICATIONS 74 1
Part I Item 1. Business. Overview Domino's, Inc. (referred to as "the Company", "Domino's", or in the first person notations of "we", "us" and "our") is the number one pizza delivery company in the United States. We also have a leading presence internationally and our Domino's Pizza(R) brand is among the most recognized consumer brands in the world. We operate through a network of more than 7,200 Company-owned and franchise stores located in all 50 states and in more than 50 countries. In addition, we operate 18 regional dough manufacturing and distribution centers and one equipment and supply distribution center in the contiguous United States as well as dough manufacturing and distribution centers in Alaska, Hawaii, Canada, the Netherlands and France. Over our 42-year history, we have developed a simple, high-return business model focused on our core strength of delivering high-quality pizza in a timely manner. This model includes a delivery-oriented store design with low capital requirements, a focused menu of high-quality, affordable pizza and complementary side items, highly committed owner-operator franchisees and a vertically integrated supply distribution system. In fiscal 2002, system-wide sales generated by our stores increased 4.7% to nearly $4.0 billion, including over $2.9 billion domestically and over $1.0 billion internationally. Our year-over-year domestic same store sales increase of 2.6% outpaced both of our principal competitors for the second consecutive year, while our international same store sales increased 4.1%, on a constant dollar basis, over the prior year. Our earnings are driven largely through sales by franchise stores, which generate royalty payments and distribution sales. These earnings are supplemented by earnings generated by our Company-owned stores. We operate our business in three segments--domestic stores, domestic distribution and international. The domestic stores segment, comprised of 577 Company-owned stores and 4,271 franchise stores, generated revenues of $517.2 million, earnings before interest, taxes, depreciation and amortization, as defined ("EBITDA") of $137.6 million and income from operations of $126.7 million during fiscal 2002. Our domestic distribution segment, which distributes food, equipment and supplies to all of our domestic Company-owned stores and approximately 98% of our domestic franchise stores, generated revenues of $676.0 million, EBITDA of $50.0 million and income from operations of $43.2 million during fiscal 2002. Our international segment, which oversees our 2,382 stores outside the contiguous United States and also distributes food in a limited number of these markets, generated revenues of $81.8 million, EBITDA of $25.9 million and income from operations of $25.1 million during fiscal 2002. On a consolidated basis, we generated revenues of nearly $1.3 billion, EBITDA, including $24.2 million of unallocated corporate and administrative costs, of $189.3 million, income from operations of $156.2 million and net income of $60.7 million during fiscal 2002. Our revenues, EBITDA, income from operations and net income during fiscal 2002 grew 1.3%, 16.7%, 23.1% and 64.9%, respectively, over fiscal 2001. Our History We have been delivering high-quality pizza to our customers since 1960 when brothers Thomas and James Monaghan borrowed $900 and purchased a small pizza store in Ypsilanti, Michigan. Since that time, our store count and geographic reach have grown substantially. We opened our first franchise store in 1967, our first international store in 1983, and by 1995 we had expanded to over 5,200 stores, including more than 1,000 international stores on six continents. In our 1998 recapitalization, an investor group led by investment funds affiliated with Bain Capital, LLC acquired a 93% controlling economic interest in our Company from Thomas S. Monaghan and his family. At the time of the recapitalization, Mr. Monaghan retired and, in March 1999, David A. Brandon was named our Chairman and Chief Executive Officer. Continuing upon the strong growth of our Company since its founding, during 2002 our worldwide store count surpassed the 7,200 store level. 2
Throughout our history, we have continually responded to evolving consumer demands. Our focused menu now includes three pizza crusts--Traditional Hand-Tossed, Ultimate Deep Dish and Crunchy Thin Crust--and a variety of complementary side items, including bread sticks and buffalo wings. We believe we are a product and service innovator, as evidenced by our launch of the patented Domino's HeatWave(R) hot bag in 1998 as well as the recent introduction of several complementary side items, including Cinna Stix(R) and cheesy bread in 2001, Domino's Buffalo Chicken Kickers in 2002 and Domino's Dots(R) in 2003. Recently, we began rolling out the new Domino's PULSE(TM) point-of-sale computer system to our franchise and Company-owned stores. Domino's PULSE(TM) is now installed in every Company-owned store in the United States. This new touch screen technology is user friendly, and we believe it will reduce training time and cost, while increasing the efficiency of customer service, delivery accuracy and system-wide communications. Industry Overview Our business operates principally within the large, growing and fragmented U.S. pizza delivery channel. This channel generated sales of approximately $12 billion in 2002. The U.S. pizza category, with sales of $33 billion in 2002, is the second largest category within the $182 billion quick service restaurant, or QSR, sector, which consists of restaurants that offer a relatively focused menu of quickly prepared foods and beverages for consumption on- or off-premises. The U.S. pizza delivery channel is among the fastest growing components of the QSR sector. With a compound annual growth rate of approximately 4% between 1999 and 2002, pizza delivery has outpaced both the dine-in and the carry-out pizza channels. The U.S. pizza delivery channel has grown significantly over the past 10 years to 35% of the overall U.S. pizza category. We believe that this growth is the result of long-lasting demographic and lifestyle trends that include increasing numbers of dual career families, longer work weeks and increased consumer emphasis on convenience. In addition, we believe that the price and value proposition of delivered pizza allows for continued growth through economic cycles. We are the leader in the U.S. pizza delivery channel, with a 19.9% market share. The U.S. pizza delivery channel is highly fragmented. We and our top two competitors account for nearly 47% of the channel. The remaining 53% is comprised predominantly of small chains and individual establishments, with no single company having more than a 2% share of the channel, based on 2002 sales. Like the U.S. pizza delivery channel, the international pizza delivery channel is large and growing. In addition, this channel is relatively underdeveloped and only Domino's and one other brand have a significant multinational presence. Based upon our international presence and expansion efforts to date, we believe that there are substantial opportunities for growth in international markets. Share and compound annual growth rate information included in this industry overview has been provided by CREST(R), a service of NPD Foodworld(R), a division of the NPD Group ("CREST"). Sales information relating to the QSR sector, the U.S. pizza category and the U.S. pizza delivery channel represent consumer reported spending provided by CREST. Our Company's Strengths We believe that our Company's strengths include the following: Focused and Cost Efficient Store Operations We have developed a simple, high-return business model driven by capital-efficient sales volume. At the store level, we believe that the simplicity and efficiency of our operations gives us significant advantages over our competitors that do not focus principally on delivery. Our stores generally do not offer dine-in service and thus typically do not require expensive restaurant facilities. As a result, our stores are relatively small (1,000 to 1,300 square feet) and relatively inexpensive to build, furnish and maintain. In addition, we offer a focused menu of pizza and complementary side items, which simplifies and streamlines our production and delivery processes and maximizes economies of scale on purchases of our principal ingredients. The combination of this efficient store model and strong store sales volume has resulted in superior store-level financial returns for the Company and makes Domino's an attractive business opportunity for existing and prospective franchisees. 3
A substantial percentage of our earnings are generated by our highly committed owner-operator franchisees through royalty payments and revenues to our vertically integrated national supply distribution system. Because the generation and collection of the royalty revenues has minimal corresponding Company-level expenses and capital requirements associated with it, system-wide sales by franchise stores yield strong profitability. Leading Position with Strong Brand Awareness Our nearly 20% share makes us the clear leader of the large and growing U.S. pizza delivery channel. We believe that our globally recognized brand name is synonymous with high-quality pizza delivered in a timely manner, and that this leading position and brand strength results in cost and marketing advantages. Over the past five years, our domestic franchise and Company-owned stores have invested an estimated $1.2 billion on national and local advertising in the United States, and we continue to reinforce the strength of our brand name recognition with extensive advertising through television, radio and print. According to CREST, during 2002, we had a nearly 20% share of the $12 billion U.S. pizza delivery channel. Our domestic store delivery areas cover a majority of all U.S. households. We believe that our leading position and scale allow us to maintain and grow our reputation for timely delivery and to effectively serve our customers' increased demand for convenience. In 2002, we ranked second overall in customer service in the QSR sector according to the American Customer Satisfaction Index, an independent survey conducted by the University of Michigan and the National Quality Research Center. We have improved our quality and customer service for four consecutive years, as measured in this survey, reflecting our continued focus in these areas. Outside the United States, we have significant share positions in the key markets in which we compete, including, among other countries, Mexico, the United Kingdom, Australia, Canada, South Korea and Japan. Strong Franchise System and Relationships Our highly committed franchise network is a critical component of our system-wide success and our leading position in the U.S. pizza delivery channel. We offer franchisees an attractive investment opportunity in a highly recognizable brand that is uniquely positioned in this channel and offers strong returns on investment. In return for this opportunity, we expect our franchisees to uphold our rigorous quality standards and to invest in their stores and our brand. We provide franchisees with operational, marketing and technological support systems and services, performance incentives, innovative new products, periodic re-imaging designs, and economies of scale achieved through our collective purchasing power. In addition, we share 50% of the pre-tax profits generated by our regional dough manufacturing and distribution centers with those domestic franchisees who agree to purchase all of their food from our distribution system. These arrangements strengthen our ties with our franchisees, provide us with a continuing source of revenues and earnings, and provide incentives for franchisees to work closely with us to reduce costs. We believe our strong, mutually beneficial franchisee relationships are evidenced by the approximately 98% voluntary participation in our domestic distribution system, our over 99% domestic franchise contract renewal rate and our over 99% collection rate on domestic franchise royalty payments. Internationally, we have been able to attract well-financed franchisees with business experience and local market knowledge using our master franchisee model, which provides our international franchisees with exclusive rights to our well-recognized brand name in their markets. Our international operations have grown from 1,520 stores at year-end 1997 to 2,382 stores at year-end 2002. Internal Distribution Supply System In addition to generating significant revenues and earnings for our business, we believe that our vertically integrated national distribution system enhances the quality and consistency of our products, leverages economies of scale to provide low cost supplies to our stores, and allows our store managers to better focus on store operations and customer service. 4
We make approximately 640,000 full-service food deliveries per year to our domestic stores, or an average of over two deliveries per store per week, with a delivery accuracy rate of approximately 99%. All of our domestic Company-owned and approximately 98% of our domestic franchise stores purchase all of their food from our distribution system. This is accomplished through our network of 18 regional dough manufacturing and distribution centers, each of which is generally located within a one-day delivery radius of the stores it serves, and a leased fleet of over 200 tractors and trailers. We supply our domestic and international franchisees with equipment and supplies through our equipment and supply distribution center, which we operate as part of our domestic distribution segment. We ship a full range of products, including turnkey store packages, on a daily basis. By allowing us to control the sourcing of ingredients for substantially all of our domestic stores, our domestic distribution segment enables us to leverage and monitor our strong supplier relationships to achieve the cost benefits of scale and to ensure compliance with our rigorous quality standards. In addition, the "one-stop shop" nature of this system and our delivery accuracy allows our store managers to eliminate a significant component of the typical back-of-store activities that many of our competitors must undertake. This allows store managers to better focus their time and attention on store operations and customer satisfaction. Our Business Strategy We intend to achieve further growth and strengthen our competitive position through the continued implementation of our business strategy, which includes the following key elements: Adhere to Our Guiding Principles We pride ourselves on being "Exceptional people on a mission to be the best pizza delivery company in the world." We undertake this mission by focusing on four guiding principles of our business that we have termed PeopleFirst, Build the Brand, Maintain High Standards and Flawless Execution. . PeopleFirst--Attract and retain high-quality team members with the goals of reducing turnover and maintaining continuity in the workforce. We plan to meet our objective through a combination of performance-based compensation, learning and development programs and employee ownership to promote our entrepreneurial spirit. In addition to focusing on managers who impact the entire store, we intend to address overall compensation, incentives, training and professional development. . Build the Brand--Strengthen and build upon our strong brand name to solidify our position as the brand of first choice within the pizza delivery channel. We plan to achieve this through product and process innovation, aggressive promotional events and a strong brand message. . Maintain High Standards--Elevate and maintain quality throughout the system, with the goals of making quality and consistency a competitive advantage, controlling costs, and supporting our stores. We believe that our comprehensive store audits and internal distribution supply chain help us to consistently achieve high quality of operations across our system in a cost-efficient manner. . Flawless Execution--Perfect operations with the goals of making high-quality products, attaining consistency in execution, maintaining the best operating model, making our team members a competitive advantage, operating stores with smart hustle, and aligning us with our franchisees. Capitalize on Strong Industry Dynamics The U.S. pizza delivery channel has been one of the fastest growing components in the QSR sector. We believe this growth has been, and will continue to be, driven by long-lasting demographic and lifestyle trends such as the increasing numbers of dual career families, longer work weeks, and increased consumer emphasis on convenience. Furthermore, the U.S. pizza delivery channel remains highly fragmented, with small, local and regional establishments holding over half of the channel share. Leverage Our Strong Brand Awareness We believe that the strength of our brand makes us one of the first options consumers consider when seeking a convenient, high quality meal. We intend to continue to promote our brand name and enhance our reputation as the leader in pizza delivery. For example, we intend to continue to promote our highly recognizable advertising campaign, "Get the Door. It's Domino's(R).", through national and local media. We also intend to leverage our strong brand through the introduction of innovative, consumer-tested and profitable new pizza varieties and complementary side items. 5
Expand and Optimize Domestic Store Base We plan to continue expanding our base of domestic stores to take advantage of the attractive growth opportunities as well as the fragmented nature of the U.S. pizza delivery channel. We believe that our scale allows us to expand our store base with limited incremental infrastructure costs. While we plan to expand our domestic store base primarily through opening new franchise stores, we will also continually evaluate our mix of Company-owned and franchise stores and opportunistically refranchise Company-owned stores and acquire franchise stores. Increase Penetration of International Markets We believe that pizza has global appeal and that there is strong international acceptance of delivered pizza. We have successfully built a leading international platform, as evidenced by our 2,382 stores outside the contiguous United States. We believe that we have long-term growth opportunities in countries where we have established a presence but where our market penetration is currently relatively low. We also believe that expansion into selected new international markets will be attractive to potential international franchisees due to the strong store-level economics of our business model. Store Operations We believe that our focused and proven store model provides a significant competitive advantage relative to many of our competitors who focus on multiple channels. We have been focused on pizza delivery for over 40 years. Because our stores do not generally offer dine-in service, they typically do not require expensive real estate, are relatively small, and are relatively inexpensive to build, furnish and maintain. Our stores also benefit from lower maintenance costs as store assets have long lives and updates are not frequently required. Our simple and efficient operational processes, which we have refined through continuous improvement, include: . strategic store locations to facilitate delivery service; . production-oriented store designs; . product and process innovations; . a focused menu; . efficient order taking, production and delivery; . Domino's PULSE(TM) point-of-sale system; and . a comprehensive store audit program. Strategic Store Locations to Facilitate Delivery Service We locate our stores strategically to facilitate timely delivery service to our customers. The majority of our domestic stores are located in populated areas in or adjacent to large or mid-size cities, or on or near college campuses. We use geographic information software, which incorporates variables such as traffic volumes, competitor locations, household demographics and visibility, to evaluate and identify potential store locations and new markets. Production-Oriented Store Designs Our typical store is relatively small, occupying approximately 1,000 to 1,300 square feet, and is designed with a focus on efficient and timely production of consistent, high-quality pizza for delivery. The store layout has been refined over time to provide an efficient flow from order entry to delivery. Our stores are primarily production facilities and, accordingly, do not generally have a dine-in section. 6
Product and Process Innovations Our 42 years of experience and innovative culture have resulted in numerous new product and process developments that increase both quality and efficiency. These include our efficient distribution system, a sturdier corrugated pizza box and a mesh tray that helps cook pizza crust more evenly. We have also added a number of complementary side items such as buffalo wings, bread sticks, cheesy bread, Domino's Buffalo Chicken Kickers, Cinna Stix(R) and Domino's Dots(R). The Domino's HeatWave(R) hot bag, which was introduced in 1998, keeps our pizza hot during delivery. Recently, we began rolling out the new Domino's PULSE(TM) point-of-sale computer system to our franchise and Company-owned stores. Domino's PULSE(TM) is now installed in every Company-owned store in the United States. We believe this new, user-friendly touch screen technology will reduce training time and cost, while increasing the efficiency of customer service and system-wide communications. Focused Menu We maintain a focused menu that is designed to present an attractive, high-quality offering to customers, while minimizing errors in, and expediting, the order taking and food preparation processes. Our basic menu has three choices: pizza type, pizza size and pizza toppings. Most stores carry two sizes of Traditional Hand-Tossed, Ultimate Deep Dish and Crunchy Thin Crust pizza. The typical store also offers buffalo wings, bread sticks, cheesy bread, Domino's Buffalo Chicken Kickers, Cinna Stix(R), Domino's Dots(R) and Coca-Cola(R) soft drink products. We also occasionally offer other products on a promotional basis. We believe that our focused menu creates a strong identity among consumers, improves operating efficiency and maintains food quality and consistency. Efficient Order Taking, Production and Delivery Each store executes an operational process that includes order taking, pizza preparation, cooking (via automated, conveyor-driven ovens), boxing and delivery. The entire order taking and pizza production process is designed for completion in approximately 15 minutes. These operational processes are supplemented by an extensive employee training program designed to ensure world-class quality and customer service. It is our priority to ensure that every Domino's store operates in an efficient, consistent manner while maintaining our high standards of food quality and team member safety. Domino's PULSE(TM) Point-of-Sale System Our computerized management information systems are designed to improve operating efficiencies, provide corporate management with timely access to financial and marketing data and reduce store and corporate administrative time and expense. We are in the process of deploying our next generation point-of-sale store system that we refer to as Domino's PULSE(TM). Some enhanced features of Domino's PULSE(TM) over our previous point-of-sale system include: . touch screen ordering, which improves accuracy and facilitates more efficient order taking; . a delivery driver routing system, which improves delivery efficiency; . improved administrative and reporting capabilities, which enables store managers to better focus on store operations and customer satisfaction; and . a customer relationship management tool, which enables us to recognize customers and track ordering preferences. Comprehensive Store Audit Program We utilize a comprehensive store audit program to ensure that our domestic stores are meeting both our stringent standards as well as the expectations of our customers. The audit program focuses primarily on the quality of the pizza a store is producing, the out-the-door time and the condition of the store as viewed by the customer. We believe that this store audit program is an integral part of our strategy to maintain high standards in our domestic stores. 7
Segment Overview We operate in three business segments: . Domestic stores--Our domestic stores segment consists of domestic Company-owned store operations, which operates our domestic network of 577 Company-owned stores, and our domestic franchise operations, which oversees our domestic network of 4,271 franchise stores; . Domestic distribution--Our domestic distribution segment operates 18 regional dough manufacturing and food distribution centers and one distribution center supplying equipment and supplies to our domestic and international stores; and . International--Our international segment oversees our network of 2,367 international franchise stores in more than 50 countries and operates 15 Company-owned stores in the Netherlands. Our international segment also distributes food to a limited number of markets from eight dough manufacturing and distribution centers in Alaska, Hawaii, Canada(4), the Netherlands and France. Domestic Stores During 2002, our domestic stores segment accounted for $517.2 million, or 41%, of our consolidated revenues. Our domestic franchises are operated by entrepreneurs who own and operate an average of three stores. Only three of our domestic franchisees operate more than 50 stores. Our principal sources of revenues from domestic store operations are Company-owned store sales and royalty payments based on franchise store sales. Our domestic network of Company-owned stores also plays an important strategic role in our predominantly franchised operating structure. In addition to generating revenues and earnings, we use our domestic Company-owned stores as a forum for training new store managers and prospective franchisees, and as a test site for new products and promotions as well as store operational improvements. We also believe that our domestic Company-owned stores add to the economies of scale available for advertising, marketing and other costs that are primarily borne by our franchisees. Our domestic store operations are divided into three geographic zones and are managed through offices located in Georgia, California and Maryland. The offices provide direct supervision over our domestic Company-owned stores and also provide limited training, store operational audits and marketing services. These offices also provide financial analysis and store development services to our franchisees. We maintain a close relationship with our franchise stores through regional franchise teams, an array of computer-based training materials that help franchise stores comply with our standards and franchise advisory groups that facilitate communications between us and our franchisees. We continually evaluate our mix of domestic Company-owned and franchise stores in an effort to optimize our profitability. During 2001, we sold 95 of our domestic Company-owned stores to franchisees because we believed that these stores would be operated more efficiently and profitably by franchisees. In contrast, during the first fiscal quarter of 2002, we acquired 83 franchise stores in Arizona where we believe there are significant growth opportunities, and we believe that we can utilize our operational expertise to improve the operation of these stores, resulting in higher profitability. Domestic Distribution During 2002, our domestic distribution segment accounted for $676.0 million, or 53%, of our consolidated revenues. Our domestic distribution segment is comprised of dough manufacturing and distribution centers that manufacture fresh dough on a daily basis and purchase, receive, store and deliver uniform, high-quality pizza-related food products, complementary side items, and equipment to all of our Company-owned stores and approximately 98% of our domestic franchise stores. Each regional dough manufacturing and distribution center serves an average of approximately 265 stores, generally located within a one-day delivery radius. We regularly supply more than 4,700 stores with various supplies and ingredients, of which nine product groups account for nearly 90% of the volume. Our domestic distribution segment made an average of approximately 12,300 full service deliveries per week in 2002, or more than two deliveries per store per week, and we produced over 340 million pounds of dough during the same time period. 8
We believe that our 98% franchisee participation rate is particularly impressive given the fact that our domestic franchisees have the option to purchase products from approved alternate sources. We believe that franchisees choose to obtain food, supplies and equipment from us because we provide the most efficient, convenient and cost-effective alternative while also providing both quality and consistency. In addition, our domestic distribution segment offers a profit-sharing arrangement to stores that purchase all of their food from our domestic dough manufacturing and distribution centers. This profit-sharing arrangement provides domestic Company-owned stores and participating franchisees with 50% of their regional distribution center's pre-tax profits. Profits are shared with the franchisees based upon each franchisee's purchases from our distribution centers. We believe these arrangements strengthen our ties with these franchisees. The information systems used by our domestic dough manufacturing and distribution centers are an integral part of the high-quality service we provide our franchisees. We use routing strategies and software to optimize our daily delivery schedules, which maximizes on-time deliveries. Through our strategic dough manufacturing and distribution center locations and proven routing systems, we achieved on-time delivery rates of approximately 99% during 2002. Our distribution center drivers unload food and supplies and stock store shelves typically during non-peak store hours, which minimizes disruptions in store operations. International During 2002, international operations accounted for $81.8 million, or 6%, of our consolidated revenues. We have more than 450 franchise stores in Mexico, representing the largest presence of any QSR company in Mexico, more than 200 franchise stores in each of the United Kingdom, Australia and Canada and over 100 franchise stores in each of South Korea, Japan and Taiwan. The principal sources of revenues from our international operations are sales of food to franchisees in certain markets, royalty payments generated by sales from franchise stores and, to a lesser extent, Company-owned store sales and fees from master franchise agreements and store openings. We have grown by more than 650 international stores since our 1998 recapitalization. While our stores are designed for the less capital-intensive delivery and carry-out channels, we empower our managers and franchisees to adapt the standard operating model, within certain parameters, to satisfy the local eating habits and consumer preferences of various non-U.S. regions. Currently, most of our international stores are operated under master franchise agreements, and we plan to continue entering into master franchise agreements with qualified franchisees to expand our international operations in selected countries. We believe that our international franchise stores appeal to potential franchisees because of our well recognized brand name, the limited capital expenditures required to open our stores, and our system's favorable store economics. The following table shows our store count as of December 29, 2002 in our top ten international markets, which account for approximately 76% of our international stores: Market Number of Stores ------- ---------------- Mexico ................................... 455 United Kingdom ........................... 254 Australia ................................ 228 Canada ................................... 223 South Korea .............................. 194 Japan .................................... 160 Taiwan ................................... 103 India .................................... 81 Netherlands .............................. 54 France ................................... 47 Our Franchise Program Our 1,339 domestic franchisees (as of December 29, 2002) are a vital part of our continued growth and we believe our relationships with our franchisees are good. The success of our franchise formula, which enables franchisees to benefit from our brand name with a relatively low initial capital investment, has attracted a large number of highly motivated entrepreneurs as franchisees. As of December 29, 2002, the average domestic franchisee operated approximately three stores and had been in our franchise system for approximately eight years. At the same time, only three of our domestic franchisees operated more than 50 stores. 9
Domestic Franchisees We apply rigorous standards to prospective franchisees. We generally require prospective domestic franchisees to manage a store for at least one year before being granted a franchise. This enables us to observe the operational and financial performance of a potential franchisee prior to entering into a long-term contract. We also restrict the ability of domestic franchisees to become involved in other businesses, which focuses our franchisees' attention on operating their stores. We believe these standards are unique to the franchise industry and result in highly qualified and focused franchisees operating their stores. Franchise Agreements We enter into franchise agreements with domestic franchisees under which the franchisee is granted the right to operate a store in a particular location for a term of ten years, with an option to renew for an additional ten years. We currently have a franchise contract renewal rate of over 99%. Under the current standard franchise agreement, we assign an exclusive area of primary responsibility to each franchise store. During the term of the franchise agreement, the franchisee is required to pay a 5.5% royalty fee on sales, subject, in limited instances, to lower rates based on area development agreements, sales initiatives and new store incentives. We have the contractual right, subject to state law, to terminate a franchise agreement for a variety of reasons, including, but not limited to, a franchisee's failure to make required payments when due or failure to adhere to specified Company policies and standards. Franchise Store Development We provide domestic franchisees with assistance in selecting store sites and conforming the space to the physical specifications required for our stores. Each domestic franchisee selects the location and design for each store, subject to our approval, based on accessibility and visibility of the site and demographic factors, including population density and anticipated traffic levels. We provide design plans and sell fixtures and equipment for most of our franchise stores. Franchisee Financing We have offered a limited internal financing program to franchisees who meet our standards for creditworthiness. At December 29, 2002, loans outstanding to our domestic and international franchisees totaled $17.8 million. Franchise Training and Support Training store managers and employees is a critical component of our success. We require all domestic franchisees to complete initial and ongoing training programs provided by us. In addition, under the standard domestic franchise agreement, domestic franchisees are required to implement training programs for their store employees. We assist our domestic and international franchisees by making training materials available to franchisees for their use in training store managers and employees, including computer-based training materials, comprehensive operations manuals and franchise development classes. We also maintain communications with our franchisees online and through various newsletters. Franchise Operations We enforce stringent standards over franchise operations to protect our brand name. All franchisees are required to operate their stores in compliance with written policies, standards and specifications, which include matters such as menu items, ingredients, materials, supplies, services, furnishings, decor and signs. Each franchisee has full discretion to determine the prices to be charged to customers. We also provide ongoing support to our franchisees, including training, marketing assistance and consultation to franchisees who experience financial or operational difficulties. We have established several advisory boards, through which franchisees contribute to developing system-wide initiatives. 10
International Franchisees The vast majority of our franchisees outside of the contiguous United States are master franchisees with franchise and distribution rights for entire regions or countries. In select regions or countries, we franchise directly to individual store operators. Our master franchise agreements generally grant the franchisee exclusive rights to develop or sub-franchise stores and the right to operate distribution centers in a particular geographic area for a term of ten to twenty years, with an option to renew for an additional ten year term. The agreements typically contain growth clauses requiring franchisees to open a minimum number of stores within a specified period. Prospective master franchisees are required to possess or have access to local market knowledge required to establish and develop Domino's Pizza stores. The local market knowledge focuses on the ability to identify and access targeted real estate sites along with expertise in local customs, culture, consumer behavior and laws. We also seek candidates that have access to sufficient capital to meet their growth and development plans. The master franchisee is generally required to pay an initial, one-time franchise fee based on the size of the market covered by the master franchise agreement, as well as an additional franchise fee upon the opening of each new store. In addition, the master franchisee is required to pay a continuing royalty fee as a percentage of sales, which varies among international markets. Domino's Image Campaign We have implemented a relocation and re-imaging campaign aimed at increasing store sales and market share through improved brand visibility. This campaign involves relocating selected stores, upgrading store interiors, adding new store signs to draw attention to the stores and providing more contemporary uniforms for employees. If a store is already in a desirable location, the store signs and carry-out areas are updated as needed. At December 29, 2002, approximately 76% of our domestic stores had been re-imaged or relocated as part of our current campaign. We plan to continue to re-image and relocate our domestic stores until each store meets our new image standards. We expect to be significantly complete in relocating or re-imaging the remaining Company-owned stores by the end of 2003. Marketing Operations We require domestic stores to contribute 3% of their sales to fund national marketing and advertising campaigns. In addition to the required national advertising contributions, we require stores to contribute a minimum of 1% of their sales to local market level media campaigns. These funds are administered by Domino's National Advertising Fund, Inc. (DNAF), a not-for-profit subsidiary. The funds remitted to DNAF are used primarily to purchase television advertising, but also support market research, field communications, commercial production, talent payments and other activities supporting the Domino's Pizza brand. DNAF also provides cost-effective print materials to franchisees for use in local marketing that reinforce our national branding strategy. In addition to the national and local advertising contributions, domestic stores spend an additional percentage of their sales on local store marketing, including targeted database mailings, saturation print mailings and community involvement through school and civic organizations. By communicating a common brand message at the national, local market and store levels, we create and reinforce a powerful, consistent marketing message to consumers. This is evidenced by our successful marketing campaign with the slogan, "Get the Door. It's Domino's(R)." Over the past five years, we estimate that domestic stores have invested approximately $1.2 billion in system-wide advertising at the national and local market levels. Internationally, marketing efforts are primarily the responsibility of the franchisee in each local market. We assist international franchisees with their marketing efforts through marketing workshops and knowledge sharing of best practices. Suppliers We have maintained active relationships over the past 15 years with more than half of our major suppliers. Our suppliers are required to meet strict quality standards to ensure food safety. We review and evaluate our suppliers' quality assurance programs through on-site visits and store records to ensure compliance with our standards. We believe that the length and quality of our relationships with suppliers provides us with priority service and high-quality products at competitive prices. 11
We believe that two factors have been critical to maintaining long-lasting relationships and keeping our purchasing costs low. First, we are one of the largest domestic volume purchasers of pizza-related products such as flour, cheese, sauce and pizza boxes, which allows us to maximize leverage with our suppliers. Second, we use a combination of single-source and multi-source procurement strategies. Each supply category is evaluated along a number of criteria including value of purchasing leverage, consistency of quality and reliability of supply to determine the appropriate number of suppliers. As a result, we currently source cheese, chicken, meat toppings, and Crunchy Thin Crust dough products each from a single supplier and all other dough ingredients, boxes, and sauce from multiple suppliers. We continually evaluate each supply category to determine the optimal sourcing strategy. The Company has a long-term agreement with The Coca-Cola(R) Company making Coca-Cola our exclusive beverage supplier within the contiguous United States. We have not experienced any significant shortages of supplies or any delays in receiving our food or beverage inventories, restaurant supplies or products. Prices charged to us by our suppliers are subject to fluctuation and we have historically been able to pass increased costs and savings on to our franchisees. We do not employ any forward-price commodity purchasing contracts and do not engage in hedging. Competition The U.S. pizza delivery channel is highly competitive. We compete against regional and local companies as well as national chains, including Pizza Hut(R) and Papa John's(R). We generally compete on the basis of product quality, location, delivery time, service and price. We also compete on a broader scale with quick service and other international, national, regional and local restaurants. In addition, the overall food service industry and the QSR sector in particular is intensely competitive with respect to product quality, price, service, convenience and concept. The industry is often affected by changes in consumer tastes, economic conditions, demographic trends and consumers' disposable income. We compete within the food service industry and the QSR sector not only for customers, but also for personnel, suitable real estate sites and qualified franchisees. Government Regulation We are subject to various federal, state and local laws affecting the operation of our business, as are our franchisees, including various health, sanitation, fire and safety standards. Each store is subject to licensing and regulation by a number of governmental authorities, which include zoning, health, safety, sanitation, building and fire agencies in the jurisdiction in which the store is located. In connection with the re-imaging of our stores, we may be required to expend funds to meet certain federal, state and local regulations, including regulations requiring that remodeled or altered stores be accessible to persons with disabilities. Difficulties in obtaining, or the failure to obtain, required licenses or approvals could delay or prevent the opening of a new store in a particular area or cause an existing store to cease operations. Our distribution facilities are licensed and subject to similar regulations by federal, state and local health and fire codes. We are also subject to the Fair Labor Standards Act and various other laws governing such matters as minimum wage requirements, overtime and other working conditions and citizenship requirements. A significant number of our food service personnel are paid at rates related to the federal minimum wage, and past increases in the minimum wage have increased our labor costs as would future increases. We are subject to the rules and regulations of the Federal Trade Commission and various state laws regulating the offer and sale of franchises. The Federal Trade Commission and various state laws require that we furnish a franchise offering circular containing certain information to prospective franchisees and a number of states require registration of the franchise offering circular with state authorities. We are operating under exemptions from registration in several states based on the net worth of our operating subsidiary, Domino's Pizza LLC ("Domino's Pizza"), and experience. Substantive state laws that regulate the franchisor-franchisee relationship presently exist in a substantial number of states, and bills have been introduced in Congress from time to time that would provide for federal regulation of the franchisor-franchisee relationship. The state laws often limit, among other things, the duration and scope of non-competition provisions, the ability of a franchisor to terminate or refuse to renew a franchise and the ability of a franchisor to designate sources of supply. We believe that our uniform franchise offering circular, together with any applicable state versions or supplements, and franchising procedures comply in all material respects with both the Federal Trade Commission guidelines and all applicable state laws regulating franchising in those states in which we have offered franchises. 12
Internationally, our franchise stores are subject to national and local laws and regulations that often are similar to those affecting our domestic stores, including laws and regulations concerning franchises, labor, health, sanitation and safety. Our international franchise stores are also often subject to tariffs and regulations on imported commodities and equipment, and laws regulating foreign investment. We believe that our international disclosure statements, franchise offering documents and franchising procedures comply with the laws of the foreign countries in which we have offered franchises. Trademarks We have many registered trademarks and service marks and believe that the Domino's(R) and Domino's Pizza(R) marks, in particular, have significant value and are important to our business. Our policy is to pursue registration of our trademarks and to vigorously oppose the infringement of any of our trademarks. We license the use of our registered marks to franchisees through franchise agreements. Environmental Matters We are not aware of any federal, state or local environmental laws or regulations that will materially affect our earnings or competitive position, or result in material capital expenditures. However, we cannot predict the effect of possible future environmental legislation or regulations. During 2002, there were no material capital expenditures for environmental control facilities and no such material expenditures are anticipated in 2003. Employees As of December 29, 2002, we had approximately 13,800 employees in our Company-owned stores, dough manufacturing and distribution centers and our World Resource Center and zone offices. As franchisees are independent business owners, they and their employees are not included in our employee count. We consider our relationship with our employees and franchisees to be good. We estimate the total number of people who work in the Domino's Pizza system, including our employees, franchisees and the employees of franchisees was approximately 145,000 as of December 29, 2002. None of our employees are represented by a labor union or covered by a collective bargaining agreement other than statutorily mandated programs in European countries where we operate. Driver Safety Our commitment to safety is embodied in our hiring, training and review process. Before an applicant is considered for hire as a delivery driver, motor vehicle records are reviewed to ensure a minimum two-year safe driving record. In addition, we require regular checks of driving records and proof of insurance for delivery drivers throughout their employment with us. Each Domino's driver must complete our safe delivery training program. We have also implemented several Company-wide safe driving incentive programs. Our safety and security department oversees security matters for our stores. Regional security and safety directors oversee security measures at store locations, and assist local authorities in investigations of incidents involving our stores or personnel. Community Activities We believe strongly in supporting the communities we serve. This is evidenced by our strong support of the Domino's Pizza Partners Foundation ("Partners"). Partners is a separate, not-for-profit organization that was established in 1986 to assist Domino's Pizza team members in times of tragedy and special need. In 2002, our employees and franchisees contributed over $700,000 to Partners' efforts and, since its inception, Partners has supplied millions of dollars to team members in need. Additionally, in July 2001, we began a long-term national partnership with the Make-A-Wish Foundation. Through this alliance, we dedicated ourselves to deliver wishes to children with life threatening illnesses and assist the foundation with its benevolent volunteer efforts through heightened awareness and direct contributions. 13
Insurance We maintain insurance coverage for general liability, owned and non-owned automobile liability, workers' compensation, employment practices liability, director's and officer's liability, fiduciary, property (including leaseholds and equipment, as well as business interruption), commercial crime, global risks and other coverages in form and with such limits as we believe are customary for a business of our size and type. The Company is partially self-insured for workers' compensation, general liability and owned and non-owned automobile liabilities for certain periods prior to December 1998 and for periods after December 2001. The Company is generally responsible for up to $1.0 million per occurrence under these retention programs for workers' compensation and general liability. The Company is also generally responsible for between $500,000 and $3.0 million per occurrence under these retention programs for owned and non-owned automobile liabilities. Pursuant to the terms of our standard franchise agreement, franchisees are also required to maintain minimum levels of insurance coverage at their expense and to have us named as an additional insured on their liability policies. Research and Development We operate research and product development facilities at our World Resource Center in Ann Arbor, Michigan. Company-sponsored research and development costs, including DNAF activities, were approximately $3.3 million, $2.8 million, and $2.1 million in 2000, 2001, and 2002, respectively. Working Capital Information about the Company's working capital is included in Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7., page 25. Customers The Company's business is not dependent upon a single customer or small group of customers, including franchisees. No customer accounted for more than 10% of total consolidated revenues in 2000, 2001, or 2002. Seasonal Operations The Company's business is not typically seasonal. Backlog Orders The Company has no backlog orders as of December 29, 2002. Government Contracts No material portion of the Company's business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the United States government. Financial Information about Business Segments and Geographic Areas Financial information about international and United States markets and business segments is incorporated herein by reference from Selected Financial Data, Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related footnotes in Part II, Item 6., pages 16 through 17, Item 7., pages 18 through 28 and Item 8., pages 30 through 55, respectively of this Form 10-K. Item 2. Properties. We lease approximately 190,000 square feet for our World Resource Center and distribution facility located in Ann Arbor, Michigan under an operating lease with Domino's Farms Office Park Limited Partnership (Domino's Farms), a related party. The lease, as amended, expires in December 2013 and has two five-year renewal options. We own four domestic Company-owned stores and five distribution centers. We also own and lease 13 stores to domestic franchisees. All other domestic Company-owned stores are leased by us, typically with five-year leases with one or two five-year renewal options. All other domestic distribution centers are leased by us, typically with leases ranging between five and fifteen years with one or two five-year renewal options. All other franchise stores are leased or owned directly by the respective franchisees. 14
Item 3. Legal Proceedings. We are a party to lawsuits, revenue agent reviews by taxing authorities and legal proceedings, of which the majority involve workers' compensation, employment practices liability, general liability, automobile and franchisee claims arising in the ordinary course of business. We believe that these matters, individually and in the aggregate, will not have a significant adverse effect on our financial condition, and the established reserves adequately provide for the estimated resolution of such claims. Item 4. Submission of Matters to a Vote of Security Holders. None. 15
Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. As of March 15, 2003, Domino's had 3,000 authorized shares of common stock, par value $0.01 per share, of which 10 were issued and outstanding and held by TISM, Inc., our parent company ("TISM"). There were no equity securities sold by Domino's or TISM during the period covered by this report. There is no established public trading market for Domino's or TISM's common stock. Domino's ability to pay dividends is limited under the indenture related to the Senior Subordinated Notes and under our senior credit facility agreement. Item 6. Selected Financial Data. The selected financial data set forth below should be read in conjunction with, and is qualified by reference to, Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes included in this Form 10-K. The selected financial data below, with the exception of system-wide sales, store counts and same store sales growth, have been derived from the audited consolidated financial statements of Domino's, Inc. and subsidiaries. These historical data are not necessarily indicative of results to be expected for any future period. (In millions, except store data) Income Statement Data: 1998(3) 1999(4) 2000 2001 2002 ------- ------- ---- ---- ---- Revenues ............................................. $1,176.8 $1,156.6 $1,166.1 $1,258.3 $1,275.0 Income from operations ............................... 70.3 75.6 113.2 126.9 156.2 Interest expense, net ................................ 6.3 73.1 71.8 66.6 59.8 Income before provision (benefit) for income taxes ... 64.0 2.5 41.4 60.3 96.5 Provision (benefit) for income taxes (1) ............. (12.9) 0.4 16.2 23.5 35.8 Net income ........................................... 76.9 2.1 25.2 36.8 60.7 Other Financial Data: EBITDA (2) ........................................... $ 95.0 $ 131.1 $ 147.3 $ 162.2 $ 189.3 Net cash provided by operating activities ............ 64.7 67.3 66.3 87.2 105.0 Net cash used in investing activities ................ 39.1 26.4 34.8 34.8 72.0 Net cash used in financing activities ................ 25.6 6.9 28.0 35.2 65.8 Capital expenditures ................................. 48.4 27.9 37.9 40.6 53.9 Balance Sheet Data: Total assets ......................................... $ 388.2 $ 385.2 $ 382.4 $ 402.6 $ 394.2 Total debt ........................................... 728.1 717.6 686.1 654.7 602.0 Total stockholder's deficit .......................... (483.8) (479.0) (454.8) (424.9) (375.6) The following table sets forth information related to our business segments: System-wide Sales: 1998(3) 1999 2000 2001 2002 ------- ---- ---- ---- ---- Domestic stores ...................................... $2,506.0 $2,563.3 $2,647.2 $2,816.7 $2,926.7 International ........................................ 717.7 801.0 896.3 967.9 1,035.0 -------- -------- -------- -------- -------- Total .......................................... $3,223.7 $3,364.3 $3,543.5 $3,784.6 $3,961.7 ======== ======== ======== ======== ======== Revenues: Domestic Company-owned stores ........................ $ 409.4 $ 378.1 $ 378.0 $ 362.2 $ 376.5 Domestic franchise ................................... 112.3 116.7 120.6 134.2 140.7 -------- -------- -------- -------- -------- Domestic stores ................................ 521.7 494.8 498.6 496.4 517.2 Domestic distribution ................................ 599.1 603.4 604.1 691.9 676.0 International ........................................ 56.0 58.4 63.4 70.0 81.8 -------- -------- -------- -------- -------- Total .......................................... $1,176.8 $1,156.6 $1,166.1 $1,258.3 $1,275.0 ======== ======== ======== ======== ======== 16
Store Counts: 1998(3) 1999 2000 2001 2002 ------- ---- ---- ---- ---- Domestic Company-owned stores ............... 642 656 626 519 577 Domestic franchise (5) ...................... 3,847 3,973 4,192 4,294 4,271 ------- -------- -------- -------- -------- Domestic stores ...................... 4,489 4,629 4,818 4,813 4,848 International ............................... 1,730 1,930 2,159 2,259 2,382 ------- -------- -------- -------- -------- Total ................................ 6,219 6,559 6,977 7,072 7,230 ======= ======== ======== ======== ======== Same Store Sales Growth (6): Domestic Company-owned stores ............... 4.0% 1.7% (0.9)% 7.3% 0.0% Domestic franchise .......................... 4.6 2.9 0.1 3.6 3.0 ------- -------- -------- -------- -------- Domestic stores ....................... 4.5% 2.8% 0.0% 4.0% 2.6% ======= ======== ======== ======== ======== International ............................... 3.4% 3.6% 3.7% 6.4% 4.1% (1) On December 30, 1996, we elected to be an "S" corporation for federal income tax purposes. We reverted to "C" corporation status effective December 21, 1998. On a pro forma basis, had we been a "C" corporation throughout this period, income tax expense would have been higher by the following amount (unaudited): fiscal year 1998--$36.8 million. (2) EBITDA represents earnings before interest, taxes, depreciation, amortization, gain (loss) on sale/disposal of assets and other, gain (loss) on debt extinguishments and, in 1999, the legal settlement expense indemnified by a TISM stockholder. EBITDA information is provided as we use it extensively in internal management reporting to evaluate our business segments, we believe it assists the investing community in evaluating our Company, and it is an important measure in our debt agreements. EBITDA should not be considered as an alternative to cash flows provided by operating activities as a measure of liquidity, as an alternative to income from operations or net income as a measure of our financial performance or as an alternative to any other measure of performance in accordance with accounting principles generally accepted in the United States of America. The following table sets forth a reconciliation of income from operations to EBITDA: 1998(3) 1999(4) 2000 2001 2002 ------- ------- ---- ---- ---- Income from operations .......................................... $70.3 $ 75.6 $113.2 $126.9 $156.2 Depreciation and amortization ................................... 23.1 51.8 33.6 33.1 28.3 Legal settlement expense indemnified by a TISM stockholder ...... - 4.0 - - - Losses (gains) on sale/disposal of assets and other ............. 1.6 (0.3) 1.3 2.0 2.9 Loss (gain) on debt extinguishments ............................. - - (0.9) 0.2 1.8 ------- ------ ------ ------ ------ EBITDA .......................................................... $95.0 $131.1 $147.3 $162.2 $189.3 ======= ====== ====== ====== ====== (3) The 1998 fiscal year is comprised of 53 weeks, while the other fiscal years presented are comprised of 52 weeks. In 1998, we incurred significant debt as part of TISM's 1998 recapitalization. We distributed significantly all of the proceeds from the issuance of debt to TISM resulting in a significant charge to stockholder's equity. We also recorded significant long-term assets as part of the recapitalization including deferred tax assets, deferred financing costs and a covenant not-to-compete. (4) In 1999, we recognized $7.6 million in restructuring charges comprised primarily of staff reduction costs. (5) Includes a 51 store reduction in the 2001 ending store count as a result of our revised definition of a store. During the fourth quarter of 2001, we reviewed our store definition and decided to exclude from our total store count any retail location that was open less than 52 weeks and had annual sales of less than $100,000. Although these stores are no longer included in our store count, revenues and profits generated from these stores are recognized in our operating results. The 1998, 1999 and 2000 store count information has not been adjusted to reflect this change in store count methodology. (6) Same store sales growth is calculated on a weekly basis including only sales from stores that also had sales in the same week of the prior year but excluding sales from certain seasonal locations such as stadiums and concert arenas. International same store sales growth is calculated similarly to domestic same store sales growth, on a constant dollar basis. 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Overview Our revenues are driven primarily by system-wide sales, which generate royalty payments by our franchisees, revenues from our Company-owned stores and revenues to our distribution business. The following table sets forth our system-wide sales for the 2000, 2001 and 2002 fiscal years (dollars in millions). System-wide Sales: 2000 2001 2002 ---- ---- ---- Domestic Company-owned stores ....... $ 378.0 10.7% $ 362.2 9.6% $ 376.5 9.5% Domestic franchise .................. 2,269.2 64.0 2,454.5 64.8 2,550.2 64.4 International ....................... 896.3 25.3 967.9 25.6 1,035.0 26.1 -------- ----- -------- ----- -------- ----- Total system-wide sales ........ $3,543.5 100.0% $3,784.6 100.0% $3,961.7 100.0% ======== ===== ======== ===== ======== ===== We derive our revenues principally from sales at Company-owned stores, royalty revenues from our franchise stores and sales of food and supplies to franchise stores by our distribution business. The following table sets forth our revenues for the 2000, 2001 and 2002 fiscal years (dollars in millions). Revenues: 2000 2001 2002 ---- ---- ---- Domestic Company-owned stores ....... $ 378.0 32.4% $ 362.2 28.8% $ 376.5 29.5% Domestic franchise .................. 120.6 10.4 134.2 10.7 140.7 11.1 Domestic distribution ............... 604.1 51.8 691.9 55.0 676.0 53.0 International ....................... 63.4 5.4 70.0 5.5 81.8 6.4 -------- ----- -------- ----- -------- ----- Total revenues ................. $1,166.1 100.0% $1,258.3 100.0% $1,275.0 100.0% ======== ===== ======== ===== ======== ===== Critical Accounting Policies The following discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, our management evaluates its estimates, including those related to revenue recognition, uncollectible receivables, long-lived assets, insurance and legal matters, and income taxes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates. Changes in our estimates could materially impact our results of operations and financial condition for any particular period. We believe that our most critical accounting policies are: . Revenue Recognition--We earn revenues through our network of domestic Company-owned and franchise stores, dough manufacturing and distribution centers and international operations. Retail sales from Company-owned stores and royalty revenues resulting from the retail sales from franchise stores are recognized as revenues when the items are delivered to or carried out by customers. Sales of food from our distribution centers are recognized as revenues upon delivery of the food to franchisees while sales of equipment and supplies from our distribution centers are recognized as revenues upon shipment of the related products to franchisees. . Allowance for Uncollectible Receivables--We closely monitor our accounts and notes receivable balances and provide allowances for uncollectible amounts as a result of our reviews. These estimates are based on, among other factors, historical collection experience and a review of our receivables by aging category. Additionally, we may also provide allowances for uncollectible receivables based on specific customer collection issues that we have identified. While write-offs of bad debts have historically been within our expectations and the provisions established, management cannot guarantee that future write-offs will not exceed historical rates. Specifically, if the financial condition of our franchisees were to deteriorate resulting in an impairment of their ability to make payments, additional allowances may be required. 18
. Long-lived Assets--We generally record long-lived assets, including property, plant and equipment and capitalized software, at cost. For acquisitions of franchise operations, we estimate the fair values of the assets and liabilities acquired based on physical inspection of assets, historical experience and/or other information available to us regarding the acquisition. We depreciate and amortize long-lived assets using useful lives determined by us based on historical experience and other information available to us including industry practice. We review long-lived assets for impairment when events or circumstances indicate that the related amounts might be impaired. We evaluate goodwill for impairment on an annual basis by comparing the fair value of our reporting units to their carrying values. Substantially all of our goodwill relates to our Company-owned stores in our domestic stores segment. The fair value of our stores significantly exceeds the recorded carrying value. Given the current and expected future performance of our domestic stores, we do not anticipate a material goodwill impairment to be recorded in the near term. . Insurance and Legal Matters--We are a party to lawsuits and legal proceedings arising in the ordinary course of business. Management closely monitors these legal matters and estimates the probable costs for the resolution of such matters. These estimates are primarily determined by consulting with both internal and external parties handling the matters and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. If our estimates relating to legal matters proved inaccurate for any reason, we may be required to increase or decrease the related expense in future periods. For certain periods prior to December 1998 and for periods after December 2001 we maintain insurance coverage for workers' compensation, general liability and owned and non-owned auto liability under insurance policies requiring payment of a deductible for each occurrence up to between $500,000 and $3.0 million, depending on the policy year and line of coverage. The related insurance reserves are determined using actuarial estimates, which are based on historical information along with assumptions about future events. Changes in assumptions for such factors as medical costs and legal actions, as well as changes in actual experience, could cause these estimates to change in the near term which could result in an increase or decrease in the related expense in future periods. . Income Taxes--Our net deferred tax assets assume that we will generate sufficient taxable income in specific tax jurisdictions, based on estimates and assumptions. The amounts relating to taxes recorded on the balance sheet, including tax reserves, also consider the ultimate resolution of revenue agent reviews based on estimates and assumptions. If these estimates and assumptions change in the future, we may be required to adjust our valuation allowance or other tax reserves resulting in additional income tax expense or benefit in future periods. Results of Operations The following tables set forth income statement data expressed in dollars and as a percentage of revenues for the periods indicated (dollars in millions): Income Statement Data: 2000 2001 2002 ---- ---- ---- Revenues ........................................................ $1,166.1 $1,258.3 $1,275.0 Cost of sales ................................................... 862.2 937.9 939.0 General and administrative ...................................... 190.7 193.5 179.8 -------- -------- -------- Income from operations .......................................... 113.2 126.9 156.2 Interest expense, net ........................................... 71.8 66.6 59.8 -------- -------- -------- Income before provision for income taxes ........................ 41.4 60.3 96.5 Provision for income taxes ...................................... 16.2 23.5 35.8 -------- -------- -------- Net income ...................................................... $ 25.2 $ 36.8 $ 60.7 ======== ======== ======== Income Statement Data: 2000 2001 2002 ---- ---- ---- Revenues ........................................................ 100.0% 100.0% 100.0% Cost of sales ................................................... 73.9 74.5 73.6 General and administrative ...................................... 16.4 15.4 14.1 -------- -------- -------- Income from operations .......................................... 9.7 10.1 12.3 Interest expense, net ........................................... 6.2 5.3 4.7 -------- -------- -------- Income before provision for income taxes ........................ 3.5 4.8 7.6 Provision for income taxes ...................................... 1.4 1.9 2.8 -------- -------- -------- Net income ...................................................... 2.2% 2.9% 4.8% ======== ======== ======== 19
Store Growth Activity The following is a summary of the Company's store growth activity for fiscal 2002: Beginning End of of Period Opened Closed Transfers Period --------- ------ ------ --------- ------ Domestic Company-owned stores ........ 519 5 (16) 69 577 Domestic franchise ................... 4,294 140 (94) (69) 4,271 ----- ---- ---- ---- ----- Domestic stores ................ 4,813 145 (110) - 4,848 International ........................ 2,259 220 (97) - 2,382 ----- ---- ---- ---- ----- Total .......................... 7,072 365 (207) - 7,230 ===== ==== ==== ==== ===== 2002 Compared to 2001 (tabular amounts in millions, except percentages) Revenues Revenues include retail sales 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 franchise and certain international stores. Consolidated revenues rose slightly in 2002 to $1.27 billion. This increase in revenues was due primarily to increases in revenues from domestic stores and international operations, offset in part by a decrease in revenues from domestic distribution operations. This increase in revenues is more fully described below. Domestic Stores Domestic stores is comprised of domestic Company-owned store operations and domestic franchise store operations, as summarized in the following table: Domestic Stores 2001 2002 --------------- ---- ---- Domestic Company-owned stores .......... $362.2 73.0% $376.5 72.8% Domestic franchise ..................... 134.2 27.0 140.7 27.2 ------ ----- ------ ----- Total domestic stores revenues ......... $496.4 100.0% $517.2 100.0% ====== ===== ====== ===== Domestic stores revenues increased $20.8 million or 4.2% to $517.2 million in 2002, from $496.4 million in 2001. This increase was due primarily to increases in system-wide sales at both our franchise and Company-owned stores. This increase is more fully described below. Domestic Company-Owned Stores Revenues from domestic Company-owned store operations increased $14.3 million or 4.0% to $376.5 million in 2002, from $362.2 million in 2001. This increase was due primarily to an increase in the average number of domestic Company-owned stores open during 2002. There were 519 and 577 domestic Company-owned stores in operation as of December 30, 2001 and December 29, 2002, respectively. This increase was due primarily to the purchase of 83 stores from our former franchisee in Arizona. Same store sales for domestic Company-owned stores were flat in 2002 compared to 2001. Domestic Franchise Revenues from domestic franchise operations increased $6.5 million or 4.8% to $140.7 million in 2002, from $134.2 million in 2001. This increase was due primarily to an increase in same store sales offset in part by a decrease in the average number of domestic franchise stores open during 2002. Same store sales for domestic franchise stores increased 3.0% in 2002 compared to 2001. There were 4,294 and 4,271 domestic franchise stores in operation as of December 30, 2001 and December 29, 2002, respectively. This decrease in store count was due primarily to the aforementioned sale of 83 domestic franchise stores in Arizona offset in part by net new store openings. 20
Domestic Distribution Revenues from domestic distribution operations decreased $15.9 million or 2.3% to $676.0 million in 2002, from $691.9 million in 2001. This decrease was due primarily to a market decrease in overall food prices, primarily cheese, and a decrease in the average number of domestic franchise stores open in 2002, offset in part by an increase in volumes relating to increases in domestic franchise same store sales. International Revenues from international operations increased $11.8 million or 16.8% to $81.8 million in 2002, from $70.0 million in 2001. This increase was due primarily to the acquisition of the Netherlands franchise operations, which includes 39 franchise stores, 15 Company-owned stores and a distribution center, in the fourth quarter of 2001 ($7.1 million year over year impact on revenues), as well as increases in same store sales and the average number of international stores open during 2002. On a constant dollar basis, same store sales increased 4.1% in 2002 compared to 2001. On a historical dollar basis, same store sales increased 3.2% in 2002 compared to 2001, reflecting a generally stronger U.S. dollar in those markets that we compete. There were 2,259 and 2,382 international stores in operation as of December 30, 2001 and December 29, 2002, respectively. Cost of Sales / Operating Margin The consolidated operating margin, which we define as revenues less cost of sales, increased $15.6 million or 4.9% to $336.0 million in 2002, from $320.4 million in 2001, as summarized in the following table. 2001 2002 ---- ---- Revenues ...................... $1,258.3 100.0% $1,275.0 100.0% Cost of sales ................. 937.9 74.5 939.0 73.6 -------- ----- -------- ----- Operating margin .............. $ 320.4 25.5% $ 336.0 26.4% ======== ===== ======== ===== Consolidated cost of sales is comprised primarily of Company-owned store and domestic distribution costs incurred to generate revenues. Components of consolidated cost of sales primarily include food, labor and occupancy costs. Consolidated cost of sales increased $1.1 million or 0.1% to $939.0 million in 2002, from $937.9 million in 2001. This increase in consolidated cost of sales was driven primarily by cost of sales changes at domestic Company-owned stores and domestic distribution, as more fully described below. Domestic Company-Owned Stores The domestic Company-owned store operating margin increased $2.7 million or 3.3% to $84.1 million in 2002, from $81.4 million in 2001, as summarized in the following table. Domestic Company-Owned Stores 2001 2002 ----------------------------- ---- ---- Revenues ...................... $ 362.2 100.0% $ 376.5 100.0% Cost of sales ................. 280.8 77.5 292.4 77.6 -------- ----- -------- ----- Store operating margin ........ $ 81.4 22.5% $ 84.1 22.4% ======== ===== ======== ===== Cost of sales increased slightly as a percentage of store revenues in 2002 compared to 2001 primarily due to increases in labor, insurance, and occupancy costs offset in part by a decrease in food costs. As a percentage of store revenues, labor costs increased 0.4% to 30.2% in 2002, from 29.8% in 2001, reflecting increased average wage rates at our stores. As a percentage of store revenues, insurance costs increased 1.0% to 4.4% in 2002, from 3.4% in 2001. This increase in insurance costs was driven primarily by the increased cost of workers' compensation and automobile liability premiums. As a percentage of store revenues, occupancy costs, which include rent, telephone, utilities and other related costs, increased 0.2% to 9.7% in 2002, from 9.5% in 2001. This increase in occupancy costs was due primarily to increases in rents. These increases in cost of sales were offset in part by a decrease in food costs as a percentage of store revenues. Food costs decreased 1.7% to 26.2% in 2002, from 27.9% in 2001 due primarily to lower cheese prices during 2002 as compared to 2001. The cheese block price per pound averaged $1.19 in 2002 compared to $1.43 in 2001. 21
Domestic Distribution The domestic distribution operating margin increased $4.7 million or 6.6% to $75.7 million in 2002, from $71.0 million in 2001, as summarized in the following table. Domestic Distribution 2001 2002 --------------------- ---- ---- Revenues ....................... $ 691.9 100.0% $ 676.0 100.0% Cost of sales .................. 620.9 89.7 600.3 88.8 -------- ----- -------- ----- Distribution operating margin .. $ 71.0 10.3% $ 75.7 11.2% ======== ===== ======== ===== Cost of sales as a percentage of distribution revenues was positively impacted by increases in volumes and efficiencies in the areas of operations and purchasing as well as reductions in certain commodity prices, specifically cheese. Reductions in certain commodity prices has a positive effect on cost of sales as a percentage of revenues due to the fixed dollar margin earned by domestic distribution on certain food items, including cheese. Had cheese prices remained constant with fiscal 2001 levels, distribution operating margin would have decreased to approximately 10.6% of distribution revenues, or 0.6% less than the reported amounts. These decreases in cost of sales were offset in part by increases in insurance costs. The increases in insurance costs were driven by the increased cost of workers' compensation and automobile liability premiums. General and Administrative Expenses General and administrative expenses decreased $13.7 million or 7.1% to $179.8 million in 2002, from $193.5 million in 2001. As a percentage of total revenues, general and administrative expenses decreased 1.3% to 14.1% in 2002, from 15.4% in 2001. This improvement in general and administrative expenses as a percentage of revenues was due in part to management's continued focus on controlling overhead costs, and improved collections, as well as the following: . The absence of covenant not-to-compete amortization expense in 2002 relating to our covenant with our former majority stockholder ($5.3 million in 2001); . The reversal in 2002 of a $2.5 million reserve originally recorded in 2001 relating to an international contingent liability which was favorably resolved in 2002, as well as a related $1.4 million reserve for doubtful accounts receivable originally recorded in 2000 and 2001 which was reversed upon collection of the receivable in 2002 ($7.2 million year over year impact); and . The absence of goodwill expense in 2002 relating to our adoption of SFAS No. 142 ($2.0 million in 2001). These decreases in general and administrative expenses in 2002 were offset in part by a $1.0 million net increase in loss on the sale/disposal of assets, which includes approximately $5.3 million of certain capitalized software costs that were expensed in 2002. Interest Expense Interest expense decreased $8.1 million or 13.4% to $60.3 million in 2002, from $68.4 million in 2001. This decrease was due primarily to a decrease in variable interest rates and interest rate margins on our senior credit facility and reduced debt levels. The Company repaid approximately $52.7 million of debt in 2002. This decrease in interest expense was offset in part by a $4.5 million write-off of financing fees related to the Company's refinancing of its senior credit facility. Provision for Income Taxes Provision for income taxes increased $12.3 million to $35.8 million in 2002, from $23.5 million in 2001. This increase was due primarily to an increase in pre-tax income. 22
2001 Compared to 2000 (tabular amounts in millions, except percentages) Revenues Consolidated revenues increased $92.2 million or 7.9% to $1.26 billion in 2001, from $1.17 billion in 2000. This increase in consolidated revenues was due primarily to increases in revenues from domestic distribution operations. This increase in revenues is more fully described below. Domestic Stores Domestic Stores 2000 2001 --------------- ---- ---- Domestic Company-owned stores ................. $378.0 75.8% $362.2 73.0% Domestic franchise ............................ 120.6 24.2 134.2 27.0 ------ ----- ------ ----- Total domestic stores revenues ................ $498.6 100.0% $496.4 100.0% ====== ===== ====== ===== The domestic stores revenues decreased $2.2 million or 0.4% to $496.4 million in 2001, from $498.6 million in 2000. This decrease was due primarily to decreases in revenues from Company-owned stores as a result of strategic store sales, offset in part by increases in system-wide sales at our franchise stores. This decrease is more fully described below. Domestic Company-Owned Stores Revenues from domestic Company-owned store operations decreased $15.8 million or 4.2% to $362.2 million in 2001, from $378.0 million in 2000. This decrease was due primarily to a decrease in the average number of domestic Company-owned stores open during 2001. There were 626 and 519 domestic Company-owned stores in operation as of December 31, 2000 and December 30, 2001, respectively. This decrease was due primarily to the strategic sales of 95 domestic Company-owned stores to franchisees during 2001. This decrease was offset in part by an increase in same store sales at Company-owned stores of 7.3% in 2001 compared to 2000. Domestic Franchise Revenues from domestic franchise operations increased $13.6 million or 11.3% to $134.2 million in 2001, from $120.6 million in 2000. This increase was due primarily to increases in same store sales and the average number of domestic franchise stores open during 2001. Same store sales for domestic franchise stores increased 3.6% in 2001 compared to 2000. There were 4,192 and 4,294 domestic franchise stores in operation as of December 31, 2000 and December 30, 2001, respectively. This increase in store count was due primarily to a 153 net increase in domestic franchise store openings, including the aforementioned transfer of 95 Company-owned stores that were sold to franchisees during 2001. This increase was offset in part by the results of the Company's review of its store definition in 2001. Based on this review, the Company decided to exclude from its store count any retail location that was open less than 52 weeks and had annual sales of less than $100,000. As a result of this change, the Company reduced its domestic franchise store counts by 51 units. Although these units are no longer included in the Company's store counts, revenues and profits generated from these units continue to be recognized in the Company's operating results. Domestic Distribution Revenues from domestic distribution operations increased $87.8 million or 14.5% to $691.9 million in 2001, from $604.1 million in 2000. This increase was due primarily to a market increase in overall food prices, primarily cheese prices, as well as an increase in volumes relating to increases in domestic franchise store sales. International Revenues from international operations increased $6.6 million or 10.4% to $70.0 million in 2001, from $63.4 million in 2000. This increase was due primarily to an increase in same store sales and an increase in the average number of international stores open during 2001. On a constant dollar basis, same store sales increased 6.4% in 2001 compared to 2000. On a historical dollar basis, same store sales increased 0.7% in 2001 compared to 2000, reflecting a generally stronger U.S. dollar in those markets that we compete. There were 2,159 and 2,259 international stores in operation as of December 31, 2000 and December 30, 2001, respectively. 23
Cost of Sales / Operating Margin The consolidated operating margin increased $16.5 million or 5.4% to $320.4 million in 2001, from $303.9 million in 2000, as summarized in the following table. 2000 2001 ---- ---- Revenues .................. $1,166.1 100.0% $1,258.3 100.0% Cost of sales ............. 862.2 73.9 937.9 74.5 -------- ----- -------- ----- Operating margin .......... $ 303.9 26.1% $ 320.4 25.5% ======== ===== ======== ===== Consolidated cost of sales increased $75.7 million or 8.8% to $937.9 million in 2001, from $862.2 million in 2000. This increase in consolidated cost of sales was driven primarily by cost of sales changes at domestic Company-owned stores and domestic distribution, as more fully described below. Domestic Company-Owned Stores The domestic Company-owned store operating margin decreased $7.2 million or 8.1% to $81.4 million in 2001, from $88.6 million in 2000, as summarized in the following table. Domestic Company-Owned Stores 2000 2001 ----------------------------- ---- ---- Revenues .................. $ 378.0 100.0% $ 362.2 100.0% Cost of sales ............. 289.4 76.6 280.8 77.5 -------- ----- -------- ----- Store operating margin .... $ 88.6 23.4% $ 81.4 22.5% ======== ===== ======== ===== Cost of sales increased as a percentage of store revenues in 2001 compared to 2000 primarily due to rising food and occupancy costs offset in part by a decrease in labor costs. As a percentage of store revenues, food costs increased 1.8% to 27.9% in 2001, from 26.1% in 2000. Company-owned stores were negatively impacted primarily by higher cheese prices during 2001 as compared to 2000. The cheese block price per pound averaged $1.43 in 2001 compared to $1.15 in 2000. As a percentage of store revenues, occupancy costs increased 0.4% to 9.5% in 2001, from 9.1% in 2000. This increase in occupancy costs was due primarily to increases in energy costs in 2001. These increases in cost of sales were offset in part by a decrease in labor costs as a percentage of revenues. As a percentage of store revenues, labor costs decreased 0.7% to 29.8% in 2001, from 30.5% in 2000. This decrease was due to an increase in existing same store sales and the strategic sales of Company-owned stores to franchisees offset in part by an increase in the average wage rates at the stores. Domestic Distribution The Company's domestic distribution operating margin increased $7.2 million or 11.3% to $71.0 million in 2001, from $63.8 million in 2000, as summarized in the following table. Domestic Distribution 2000 2001 --------------------- ---- ---- Revenues .................................... $604.1 100.0% $691.9 100.0% Cost of sales ............................... 540.3 89.4 620.9 89.7 ------ ----- ------ ----- Distribution operating margin ............... $ 63.8 10.6% $ 71.0 10.3% ====== ===== ====== ===== Cost of sales as a percentage of distribution revenues was negatively impacted by increases in certain commodity prices, specifically cheese, offset by increases in volumes and efficiencies in the areas of operations and purchasing. Increases in commodity prices has a negative impact on operating margins as a percentage of revenues due to the fixed dollar margin earned by domestic distribution on certain food items, including cheese. Had cheese prices remained constant with fiscal 2000 levels, distribution operating margin would have increased to approximately 10.9% of revenues, or 0.6% greater than the reported amounts. General and Administrative Expenses General and administrative expenses increased $2.8 million or 1.5% to $193.5 million in 2001, from $190.7 million in 2000. As a percentage of total revenues, general and administrative expenses decreased 1.0% to 15.4% in 2001, from 16.4% in 2000. 24
This increase in general and administrative expenses was due primarily to an increase in labor costs and a $2.5 million reserve recorded in 2001 relating to an international contingent liability. These increases were offset in part by a decrease in covenant not-to-compete amortization expense and a decrease in store costs as a result of domestic Company-owned store divestitures. Covenant not-to-compete amortization expense, primarily relating to our covenant with our former majority stockholder, decreased $5.7 million to $5.5 million in 2001, from $11.2 million in 2000. Interest Expense Interest expense decreased $7.4 million or 9.8% to $68.4 million in 2001, from $75.8 million in 2000. This decrease was due primarily to a decrease in variable interest rates on our senior credit facility and reduced debt levels. The Company repaid approximately $40.6 million of debt in 2001. Provision for Income Taxes Provision for income taxes increased $7.3 million to $23.5 million in 2001, from $16.2 million in 2000. This increase was due primarily to an increase in pre-tax income. Liquidity and Capital Resources We had negative working capital of $10.3 million and cash and cash equivalents of $22.5 million at December 29, 2002. 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 repayments from these sources. As of December 29, 2002, we had $602.0 million of long-term debt, of which $2.8 million was classified as a current liability. There were no borrowings under our $100 million revolving credit facility. Letters of credit issued under the revolving credit facility were $17.9 million. Borrowings under the revolving credit facility are available to fund our working capital requirements, capital expenditures and other general corporate purposes. Cash provided by operating activities was $105.0 million and $87.2 million in 2002 and 2001, respectively. The $17.8 million increase was due primarily to a $23.9 million increase in net income, an $8.2 million increase in provision for deferred income taxes and a $3.9 million increase in amortization of deferred financing costs. These increases were offset in part by a $10.9 million net change in operating assets and liabilities, a $4.8 million decrease in depreciation and amortization and a $3.4 million decrease in provision for losses on accounts and notes receivable. Cash used in investing activities was $72.0 million and $34.8 in 2002 and 2001, respectively. The $37.2 million increase was due primarily to a $20.8 million increase in acquisitions of franchise operations and a $13.3 million increase in capital expenditures. The increase in acquisitions of franchise operations was due primarily to the Company's purchase of 83 domestic franchise stores in Arizona during the first quarter of 2002. Cash used in financing activities was $65.8 million and $35.2 million in 2002 and 2001, respectively. The $30.6 million increase was due primarily to a $20.4 million increase in net repayments of long-term debt, a $7.0 million increase in distributions to TISM and a $3.6 million increase in cash paid for financing costs. On July 29, 2002, we entered into a senior credit facility with a consortium of banks. The senior credit facility consists of a $365 million term loan expiring in June 2008 and a $100 million revolving credit facility expiring in June 2007. Our previous senior credit facility was paid in full and canceled upon consummation of this senior credit facility. The senior credit facility requires amortization of the term loan of $3.65 million per year during the first five years of the agreement and $346.75 million in the final year of the agreement, payable in equal quarterly installments. The senior credit facility contains customary financial and non-financial covenants and is guaranteed by TISM and each of our material domestic subsidiaries. The senior credit facility is secured by a first priority lien on substantially all of the assets of the Company. Borrowings under the senior credit facility bear interest at Eurodollar plus an applicable margin not to exceed 250 basis points or a base rate plus an applicable margin not to exceed 150 basis points. 25
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 flows from operations or that future borrowings will be available under the senior credit facility or otherwise to enable us to service our indebtedness, including the senior credit facility and the senior subordinated notes, 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 facility will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. Additionally, the Company may be requested to provide funds to TISM for stock dividends, distributions and/or other cash needs of TISM. Impact of Inflation We believe that our results of operations are not materially impacted upon moderate changes in the inflation rate. Inflation and changing prices did not have a material impact on our operations in 2000, 2001, or 2002. Severe increases in inflation, however, could affect the global and U.S. economies and could have an adverse impact on our business, financial condition and results of operations. New Accounting Pronouncements We adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangibles", effective December 31, 2001 and, accordingly, ceased amortizing goodwill. In addition, we performed the required transition impairment test and determined that no impairment adjustment was required as of the date of adoption. We also performed the annual impairment test at December 29, 2002 and determined that no impairment adjustment was required. SFAS No. 142 requires prospective application and does not permit restatement of prior period financial statements. Had this Statement been applied in prior years, net income would have been approximately $26.7 million and $38.1 million in 2000 and 2001, respectively. In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections", which, among other things, eliminates the requirement to report certain extinguishment of debt as extraordinary items. As a result, gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." We adopted SFAS No. 145 effective December 31, 2001. Accordingly, the gain on extinguishment of debt of approximately $181,000 (net of tax provision of approximately $111,000) in 2000 and loss of approximately $327,000 (net of tax benefit of approximately $207,000) in 2001 have been reclassified in accordance with this Statement. In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 clarifies the requirements of SFAS No. 5 "Accounting for Contingencies", relating to a guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. The interpretation's guidance is required to be followed beginning in fiscal 2003 and is not expected to have a material effect on the Company's results of operations or financial condition. Contractual Obligations The following is a summary of our significant contractual obligations at December 29, 2002: (in millions) Obligation 2003 2004 2005 2006 2007 Thereafter Total - ---------- ---- ---- ---- ---- ---- ---------- ----- Long-term debt ....................................... $ 2.8 $ 4.6 $ 3.7 $ 3.7 $ 88.5 $ 498.7 $ 602.0 Operating leases (1) ................................. 32.3 22.5 23.5 18.6 15.2 65.7 177.7 (1) We lease retail store and distribution center locations, distribution vehicles, various equipment and our World Resource Center, which is our corporate headquarters, under operating leases with expiration dates through 2018. 26
As part of TISM's 1998 recapitalization, we and our subsidiaries entered into a management agreement with an affiliate of one of TISM's stockholders to provide specified management services. We are committed to pay an amount not to exceed $2.0 million per year, excluding out-of-pocket expenses on an ongoing basis for management services as defined in the management agreement. We are contingently liable to pay our former majority TISM stockholder and his wife an amount not exceeding approximately $15 million under a note payable, plus 8% interest per annum beginning in 2003, in the event the majority of TISM stockholders sell a specified percentage of their common stock to an unaffiliated party. Separately, we may be required to purchase the Domino's, Inc. senior subordinated notes upon a change of control, as defined in the indenture governing those notes. As of December 29, 2002, there was $238.4 million in aggregate principal amount of senior subordinated notes outstanding. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: Certain statements contained in this report relating to our anticipated profitability and operating performance are forward-looking and 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 this and other filings made with the Securities and Exchange Commission. See Exhibit 99.1. We do not undertake to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. FORWARD LOOKING STATEMENTS The matters discussed in this Form 10-K, as well as in future oral and written statements by our management, that are forward-looking statements are based on current management expectations that involve substantial risks and uncertainties which could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. These statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words such as "aim," "anticipate," "believe" "could," "estimate," "expect," "intend," "may," "plan," "project," "should," "will be," "will continue," "will likely result," "would," and other words and terms of similar meaning in conjunction with a discussion of future operating or financial performance. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial position or state other "forward-looking" information. We believe that it is important to communicate our future expectations to our stakeholders. However, there may be events in the future that we are not able to accurately predict or control. The factors listed in Exhibit 99.1 "Risk Factors," as well as any cautionary language in this Form 10-K, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Although we believe that our expectations are based on reasonable assumptions, actual results may differ materially from those in the forward looking statements as a result of various factors, including but not limited to, those described in Exhibit 99.1 "Risk Factors." Forward-looking statements speak only as of the date of this Form 10-K. Except as required under federal securities laws and the rules and regulations of the Securities and Exchange Commission, we do not have any intention to update any forward-looking statements to reflect events or circumstances arising after the date of this Form 10-K, whether as a result of new information, future events or otherwise. As a result of these risks and uncertainties, readers are cautioned not to place undue reliance on the forward-looking statements included in this Form 10-K or that may be made elsewhere from time to time by, or on behalf of, us. All forward-looking statements attributable to us are expressly qualified by these cautionary statements. 27
This Form 10-K contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"), including information within Management's Discussion and Analysis of Financial Condition and Results of Operations. The following cautionary statements are being made pursuant to the provisions of the Act and with the intention of obtaining the benefits of the "safe harbor" provisions of the Act. Although we believe that our expectations are based on reasonable assumptions, actual results may differ materially from those in the forward looking statements as a result of various factors, including but not limited to, the following: .. Our ability to maintain good relationships with our franchisees .. Our ability to grow and implement cost-saving strategies .. Increases in our operating costs, including cheese, fuel and other commodity costs and the minimum wage .. Our ability to compete domestically and internationally in our intensely competitive industry .. Our ability to retain or replace our executive officers and other key members of management and our ability to adequately staff our stores and distribution centers with qualified personnel .. Our ability to pay principal and interest on our substantial debt .. Our ability to borrow in the future .. Our ability to find and/or retain suitable real estate for our stores and distribution centers .. Adverse legislation or regulation .. Adverse legal settlements .. Changes in consumer taste, demographic trends and traffic patterns .. Our ability to sustain or increase historical revenues and profit margins .. Continuation of certain trends and general economic conditions in the industry .. Adequacy of insurance coverage We do not undertake to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Market Risk We are exposed to market risks from interest rate changes on our variable rate debt. Management actively monitors this exposure. We do not engage in speculative transactions nor do we hold or issue financial instruments for trading purposes. We are also exposed to market risks from changes in commodity prices. During the normal course of business, we purchase cheese and certain other food products that are affected by commodity prices and as a result, we are subject to volatility in our food costs. Management actively monitors this exposure. However, we do not enter into financial instruments to hedge commodity prices. The cheese block price per pound averaged $1.19 in 2002. The estimated increase in Company-owned store food costs from a hypothetical $0.20 adverse change in the average cheese block price per pound would have been approximately $3.5 million in 2002. Financial Derivatives We enter into interest rate swaps, collars or similar instruments with the objective of reducing our volatility in borrowing costs. We have entered into an interest rate collar agreement and four interest rate swap agreements to effectively convert the variable Eurodollar component of the effective interest rate on a portion of our term debt under our senior credit facility to various fixed rates over various terms. These agreements are summarized as follows: Total Notional Derivative Amount Term Rate - ------------------------- --------------- ----------------------------------------- ------------------- Interest Rate Collar $70.0 million June 2001 - June 2003 3.86%-Floor 6.00%-Ceiling Interest Rate Swap $70.0 million June 2001 - June 2004 4.90% Interest Rate Swap $35.0 million September 2001 - September 2003 3.645% Interest Rate Swap $35.0 million September 2001 - September 2004 3.69% Interest Rate Swap $75.0 million August 2002 - June 2005 3.25% Interest Rate Risk Our variable interest expense is sensitive to changes in the general level of interest rates. As of December 29, 2002, a portion of our debt is borrowed at Eurodollar rates plus a margin rate of 2.5%. At December 29, 2002, the weighted average interest rate on our $78.6 million of variable interest debt was approximately 4.3%. We had total interest expense of approximately $60.3 million in 2002. The estimated increase in interest expense from a hypothetical 200 basis point adverse change in applicable variable interest rates would have been approximately $2.5 million. Foreign Currency Exchange Rate Risk We have exposure to various foreign currency exchange rate fluctuations for revenues generated by our operations outside the United States, which can adversely impact our net income and cash flows. Approximately 6.4% of our revenues in 2002 were derived from sales to customers and royalties from franchisees outside the contiguous United States. This business is conducted in the local currency. We anticipate that revenues from operations outside the United States will continue to grow as a percentage of our total revenues. This exposes us to risks associated with changes in foreign currency that can adversely affect revenues, net income and cash flows. 29
Item 8. Financial Statements and Supplementary Data. Report of Independent Accountants To Domino's, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of comprehensive income, of stockholder's deficit and of cash flows present fairly, in all material respects, the financial position of Domino's, Inc. and its subsidiaries (the "Company") at December 30, 2001 and December 29, 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 29, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 1 to the financial statements, the Company changed its method of accounting for goodwill in 2002. /s/ PricewaterhouseCoopers LLP Detroit, Michigan February 3, 2003 30
DOMINO'S, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) December 30, December 29, ASSETS 2001 2002 ------ -------------- -------------- CURRENT ASSETS: Cash and cash equivalents $ 55,147 $ 22,472 Accounts receivable, net of reserves of $6,071 in 2001 and $3,764 in 2002 54,225 57,497 Inventories 22,088 21,832 Notes receivable, net of reserves of $1,546 in 2001 and $1,785 in 2002 4,024 3,398 Prepaid expenses and other 4,892 6,673 Deferred income taxes 9,330 6,809 -------------- -------------- Total current assets 149,706 118,681 -------------- -------------- PROPERTY, PLANT AND EQUIPMENT: Land and buildings 15,983 15,986 Leasehold and other improvements 50,684 57,029 Equipment 114,904 145,513 Construction in progress 5,837 5,727 -------------- -------------- 187,408 224,255 Accumulated depreciation and amortization 99,763 103,708 -------------- -------------- Property, plant and equipment, net 87,645 120,547 -------------- -------------- OTHER ASSETS: Investments in marketable securities, restricted 3,602 3,172 Notes receivable, less current portion, net of reserves of $1,947 in 2001 and $1,899 in 2002 14,720 10,755 Deferred financing costs, net of accumulated amortization of $18,040 in 2001 and $22,436 in 2002 24,594 18,264 Goodwill, net of accumulated amortization of $8,127 in 2001 and $7,934 in 2002 12,673 27,232 Capitalized software, net of accumulated amortization of $28,349 in 2001 and $25,930 in 2002 34,408 28,313 Other assets, net of accumulated amortization and reserves of $2,103 in 2001 and $1,880 in 2002 7,008 6,945 Deferred income taxes 68,242 60,287 -------------- -------------- Total other assets 165,247 154,968 -------------- -------------- Total assets $ 402,598 $ 394,196 ============== ============== The accompanying notes are an integral part of these consolidated balance sheets. 31
DOMINO'S, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) (In thousands, except share and per share amounts) December 30, December 29, LIABILITIES AND STOCKHOLDER'S DEFICIT 2001 2002 ------------------------------------- ------------ ------------ CURRENT LIABILITIES: Current portion of long-term debt $ 43,157 $ 2,843 Accounts payable 50,430 46,131 Accrued compensation 26,620 26,723 Accrued interest 14,674 12,864 Accrued income taxes 2,164 1,173 Insurance reserves 7,365 8,452 Other accrued liabilities 30,029 30,811 --------- --------- Total current liabilities 174,439 128,997 --------- --------- LONG-TERM LIABILITIES: Long-term debt, less current portion 611,532 599,180 Insurance reserves 6,334 12,510 Other accrued liabilities 35,167 29,090 --------- --------- Total long-term liabilities 653,033 640,780 --------- --------- COMMITMENTS AND CONTINGENCIES STOCKHOLDER'S DEFICIT: Common stock, par value $0.01 per share; 3,000 shares authorized; 10 shares issued and outstanding - - Additional paid-in capital 120,202 120,723 Retained deficit (542,540) (491,793) Accumulated other comprehensive loss (2,536) (4,511) --------- --------- Total stockholder's deficit (424,874) (375,581) --------- --------- Total liabilities and stockholder's deficit $ 402,598 $ 394,196 ========= ========= The accompanying notes are an integral part of these consolidated balance sheets. 32
DOMINO'S, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands) For the Years Ended ------------------------------------------------ December 31, December 30, December 29, 2000 2001 2002 ------------ ------------ ------------ REVENUES: Domestic Company-owned stores $ 377,971 $ 362,189 $ 376,533 Domestic franchise 120,608 134,195 140,667 Domestic distribution 604,096 691,902 676,018 International 63,405 69,995 81,762 ------------ ------------ ------------ Total revenues 1,166,080 1,258,281 1,274,980 ------------ ------------ ------------ OPERATING EXPENSES: Cost of sales 862,161 937,899 938,972 General and administrative 190,690 193,494 179,774 ------------ ----------- ------------ Total operating expenses 1,052,851 1,131,393 1,118,746 ------------ ----------- ------------ INCOME FROM OPERATIONS 113,229 126,888 156,234 INTEREST INCOME 3,961 1,778 537 INTEREST EXPENSE (75,800) (68,380) (60,321) ------------ ----------- ------------ INCOME BEFORE PROVISION FOR INCOME TAXES 41,390 60,286 96,450 PROVISION FOR INCOME TAXES 16,184 23,506 35,789 ------------ ----------- ------------ NET INCOME $ 25,206 $ 36,780 $ 60,661 ============ =========== ============ The accompanying notes are an integral part of these consolidated statements. 33
DOMINO'S, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) For the Years Ended -------------------------------------------- December 31, December 30, December 29, 2000 2001 2002 ------------ ------------ ------------ NET INCOME $ 25,206 $ 36,780 $ 60,661 -------- -------- -------- OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX: Currency translation adjustment (147) (259) 1,082 Cumulative effect of change in accounting for derivative instruments - 2,685 - Unrealized losses on derivative instruments - (8,124) (10,241) Reclassification adjustment for (gains) losses included in net income (548) 2,384 5,389 -------- -------- -------- (695) (3,314) (3,770) TAX ATTRIBUTES OF ITEMS IN OTHER COMPREHENSIVE LOSS 219 1,130 1,795 -------- -------- -------- OTHER COMPREHENSIVE LOSS, NET OF TAX (476) (2,184) (1,975) -------- -------- -------- COMPREHENSIVE INCOME $ 24,730 $ 34,596 $ 58,686 ======== ======== ======== The accompanying notes are an integral part of these consolidated statements. 34
DOMINO'S, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT (In thousands) Accumulated Other Comprehensive Loss ----------------------------------------------- Unrealized Gain on Additional Currency Investments Fair Value Common Paid-in Retained Translation in Marketable of Derivative Stock Capital Deficit Adjustment Securities Instruments ----- ------- ------- ---------- ---------- ----------- BALANCE AT JANUARY 2, 2000 $ - $120,202 $(599,292) $ (205) $ 329 $ - Net income - - 25,206 - - - Distributions to Parent - - (571) - - - Currency translation adjustment - - - (147) - - Reclassification adjustment for gains included in net income - - - - (329) - --------- -------- --------- ------- ------ ------- BALANCE AT DECEMBER 31, 2000 - 120,202 (574,657) (352) - - Net income - - 36,780 - - - Distributions to Parent - - (4,663) - - - Currency translation adjustment - - - (259) - - Cumulative effect of change in accounting for derivative instruments, net of tax - - - - - 1,692 Unrealized losses on derivative instruments, net of tax - - - - - (5,119) Reclassification adjustment for losses included in net income - - - - - 1,502 --------- -------- --------- ------- ------ ------- BALANCE AT DECEMBER 30, 2001 - 120,202 (542,540) (611) - (1,925) Net income - - 60,661 - - - Distributions to Parent - - (9,914) - - - Capital contribution - 521 - - - - Currency translation adjustment - - - 1,082 - - Unrealized losses on derivative instruments, net of tax - - - - - (6,452) Reclassification adjustment for losses included in net income - - - - - 3,395 --------- -------- --------- ------- ------ ------- BALANCE AT DECEMBER 29, 2002 $ - $120,723 $(491,793) $ 471 $ - $(4,982) ========= ======== ========= ======= ====== ======= The accompanying notes are an integral part of these consolidated statements. 35
DOMINO'S, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) For the Years Ended ---------------------------------------------- December 31, December 30, December 29, 2000 2001 2002 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 25,206 $ 36,780 $ 60,661 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization 33,604 33,092 28,273 Provision (benefit) for losses on accounts and notes receivable 2,201 2,996 (441) Losses on sale/disposal of assets and other 1,338 1,964 2,919 Provision for deferred income taxes 2,993 4,101 12,271 Amortization of deferred financing costs 6,582 6,031 9,966 Changes in operating assets and liabilities- Increase in accounts receivable (10,095) (10,050) (2,252) Decrease (increase) in inventories, prepaid expenses and other (290) 3,427 (1,196) Increase (decrease) in accounts payable and accrued liabilities 10,972 11,567 (12,488) Increase (decrease) in insurance reserves (6,211) (2,727) 7,263 --------- --------- --------- Net cash provided by operating activities 66,300 87,181 104,976 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (37,903) (40,606) (53,931) Proceeds from sale of property, plant and equipment 5,034 2,225 719 Acquisitions of franchise operations (5,072) (1,362) (22,157) Repayments of notes receivable, net 5,334 4,807 3,247 Other (2,144) 180 108 --------- --------- --------- Net cash used in investing activities (34,751) (34,756) (72,014) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt - - 365,000 Repayments of long-term debt (31,475) (32,332) (417,736) Cash paid for financing costs - - (3,636) Distributions to Parent (571) (2,893) (9,914) Capital contributions from Parent 4,000 - 521 --------- --------- --------- Net cash used in financing activities (28,046) (35,225) (65,765) --------- --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 53 41 128 --------- --------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,556 17,241 (32,675) CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD 34,350 37,906 55,147 --------- --------- --------- CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 37,906 $ 55,147 $ 22,472 ========= ========= ========= The accompanying notes are an integral part of these consolidated statements. 36
DOMINO'S, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of Domino's, Inc. (Domino's), a Delaware corporation, and its subsidiaries (collectively, the Company). All significant intercompany accounts and transactions have been eliminated. Domino's is a wholly-owned subsidiary of TISM, Inc. (the Parent). The Parent is the surviving entity from a leveraged recapitalization in December 1998 (the Recapitalization). Description of Business The Company is primarily engaged in the following business activities: (1) retail sales through Company-owned Domino's Pizza stores, (2) sales of food, equipment and supplies to Company-owned and franchised Domino's Pizza stores through Company-owned distribution centers, and (3) receipt of royalties and fees from domestic and international Domino's Pizza franchisees. Fiscal Year The Company's fiscal year ends on the Sunday closest to December 31. The 2000 fiscal year ended December 31, 2000; the 2001 fiscal year ended December 30, 2001; and the 2002 fiscal year ended December 29, 2002. Each of these fiscal years consists of fifty-two weeks. Cash and Cash Equivalents Cash equivalents consist of highly liquid investments with maturities of three months or less at the date of purchase. These investments are carried at cost, which approximates fair value. Inventories Inventories are valued at the lower of cost (on a first-in, first-out basis) or market. Inventories at December 30, 2001 and December 29, 2002 are comprised of the following (in thousands): 2001 2002 ------- ------- Food $15,479 $16,123 Equipment and supplies 6,609 5,709 ------- ------- Inventories $22,088 $21,832 ======= ======= 37
DOMINO'S, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Notes Receivable During the normal course of business, the Company may provide financing to franchisees (i) to stimulate franchise store growth, (ii) to finance the sale of Company-owned stores to franchisees, (iii) to facilitate new equipment rollouts, or (iv) to otherwise assist a franchisee. Substantially all of the related notes receivable require monthly payments of principal and interest, or monthly payments of interest only, generally ranging from 10% to 12%, with balloon payments of the remaining principal due one to ten years from the original issuance date. Related interest income is included in revenues. Such notes are generally secured by the related assets or business. The carrying amounts of these notes approximate fair value. Property, Plant and Equipment Additions to property, plant and equipment are recorded at cost. Repair and maintenance costs are expensed as incurred. Depreciation for financial reporting purposes is provided using the straight-line method over the estimated useful lives of the related assets. Estimated useful lives are generally as follows (in years): Buildings 20 Leasehold and other improvements 10 Equipment 3 - 12 Depreciation expense was approximately $14.1 million, $16.0 million and $19.5 million in 2000, 2001 and 2002, respectively. Impairments of Long-Lived Assets In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the Company evaluates the potential impairment of long-lived assets based on various analyses including the projection of undiscounted cash flows, whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the carrying amount of a long-lived asset exceeds the amount of the expected future undiscounted cash flows, an impairment loss is recognized and the asset is written down to its estimated fair value. No impairment losses of long-lived assets have been recognized in 2000, 2001 or 2002. Investments in Marketable Securities Investments in marketable securities include investments in various funds made by eligible individuals as part of our deferred compensation plan (Note 5). These investments are stated at aggregate fair value, are restricted and have been placed in a rabbi trust whereby the amounts are irrevocably set aside to fund the Company's obligations under the deferred compensation plan. 38
DOMINO'S, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Deferred Financing Costs Deferred financing costs include debt issuance costs primarily incurred by the Company as part of the Recapitalization. Amortization is provided using the effective interest rate method over the terms of the respective debt instruments to which the costs relate and is included in interest expense. In connection with the consummation of the 2002 Agreement (Note 2), the Company expensed financing costs of approximately $4.5 million. Amortization of deferred financing costs, including the aforementioned $4.5 million, was approximately $6.6 million, $6.0 million and $10.0 million in 2000, 2001 and 2002, respectively. Goodwill Goodwill, primarily arising from franchise store acquisitions, was amortized using the straight-line method over periods not exceeding ten years for fiscal years prior to 2002. Amortization expense was approximately $2.3 million and $2.0 million in 2000 and 2001, respectively. The Company adopted SFAS No. 142, "Goodwill and Other Intangibles", effective December 31, 2001 and, accordingly, ceased amortizing goodwill. In addition, the Company performed the required transition impairment test and determined that no impairment adjustment was required as of the date of adoption. The Company also performed its annual impairment test at December 29, 2002 and determined that no impairment adjustment was required. SFAS No. 142 requires prospective application and does not permit restatement of prior period financial statements. Had this Statement been applied in prior years, net income would have been approximately $26.7 million and $38.1 million in 2000 and 2001, respectively. During 2002, the Company recorded approximately $14.6 million of goodwill in connection with the acquisition of the Arizona Stores (Note 9). This goodwill is expected to be deductible for tax purposes. Capitalized Software Capitalized software is recorded at cost and includes purchased, internally developed and externally developed software used in the Company's operations. Amortization for financial reporting purposes is provided using the straight-line method over the estimated useful lives of the software, which range from two to seven years. During 2002, the Company expensed approximately $5.3 million of certain capitalized software costs, which is included in general and administrative expense as a loss on disposal of assets. Amortization expense was approximately $5.9 million, $9.4 million and $8.5 million in 2000, 2001 and 2002, respectively. 39
DOMINO'S, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Other Assets Other assets primarily include deposits, investments in international franchisees, covenants not-to-compete and other intangibles primarily arising from franchise acquisitions, and, at December 30, 2001, assets relating to the fair value of derivatives. Amortization expense of covenants not-to-compete is provided using the straight-line method or an accelerated method (Note 7) and was approximately $11.2 million, $5.5 million and $185,000 in 2000, 2001 and 2002, respectively. Amortization of certain other intangible assets is provided using the straight-line method and was approximately $94,000 in 2000 and 2001, respectively, and $42,000 in 2002. Insurance Reserves The Company's health insurance program provides coverage for life, medical, dental and accidental death and dismemberment (AD&D) claims. Self-insurance limitations for medical per a covered individual's lifetime are $2.0 million in 2000, 2001 and 2002. The AD&D and life insurance components of the health insurance program are fully insured by the Company through third-party insurance carriers. In December 1998, the Company entered into a guaranteed cost, combined casualty insurance program that is effective for the period from December 1998 to December 2001. This program covers insurance claims on a first dollar basis for workers' compensation, general liability and owned and non-owned automobile liabilities. Total insurance limits under this program are $106.0 million per occurrence for general liability and owned and non-owned automobile liabilities and up to the applicable statutory limits for workers' compensation. The Company is partially self-insured for workers' compensation, general liability and owned and non-owned automobile liabilities for certain periods prior to December 1998 and for periods after December 2001. The Company is generally responsible for up to $1.0 million per occurrence under these retention programs for workers' compensation and general liability. The Company is also generally responsible for between $500,000 and $3.0 million per occurrence under these retention programs for owned and non-owned automobile liabilities. Total insurance limits under these retention programs vary depending on the year covered and range up to $108.0 million per occurrence for general liability and owned and non-owned automobile liabilities and up to the applicable statutory limits for workers' compensation. Insurance reserves, other than health insurance reserves, are determined using actuarial estimates from an independent third party. These estimates are based on historical information along with certain assumptions about future events. Changes in assumptions for such factors as medical costs and legal actions, as well as changes in actual experience, could cause these estimates to change in the near term. In management's opinion, the insurance reserves at December 29, 2002 are sufficient to cover related losses. 40
DOMINO'S, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Other Accrued Liabilities Current and long-term other accrued liabilities primarily include accruals for sales, income and other taxes, legal matters, marketing and advertising expenses, store operating expenses, deferred gains on store sales, liabilities relating to the fair value of derivatives, deferred compensation liabilities and, at December 30, 2001, a consulting fee payable to our former majority stockholder (Note 7). Gains on store sales that are financed by the Company with a note receivable are deferred and are recognized in income as the related note receivable payments are received. Foreign Currency Translation The Company's foreign entities use their local currency or the U.S. dollar as the functional currency, in accordance with the provisions of SFAS No. 52, "Foreign Currency Translation." Where the functional currency is the local currency, the Company translates net assets into U.S. dollars at yearend exchange rates, while income and expense accounts are translated at average annual exchange rates. Currency translation adjustments are included in accumulated other comprehensive loss and other foreign currency transaction gains and losses are included in determining net income. Revenue Recognition Domestic Company-owned store revenues are comprised of retail sales through Company-owned stores located in the contiguous U.S. and are recognized when the items are delivered to or carried out by customers. Domestic franchise revenues are primarily comprised of royalties and, to a lesser extent, fees and other income from franchisees with operations in the contiguous U.S. Royalty revenues are recognized when the items are delivered to or carried out by franchise customers. Domestic distribution revenues are primarily comprised of sales of food, equipment and supplies to franchised stores located in the contiguous U.S. Revenues from the sales of food are recognized upon delivery of the food to franchisees while revenues from the sales of equipment and supplies are recognized upon shipment of the related products to franchisees. International revenues are primarily comprised of sales of food, and royalties and fees from foreign, Alaskan and Hawaiian franchisees and are recognized consistently with the policies applied for revenues generated in the contiguous U.S. Advertising Advertising costs are expensed as incurred. Advertising expense, which relates primarily to Company-owned stores, was approximately $38.1 million, $35.3 million and $36.0 million during 2000, 2001 and 2002, respectively. 41
DOMINO'S, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Domestic Stores (Note 8) are required to contribute a certain percentage of sales to the Domino's National Advertising Fund, Inc. (DNAF), a not-for-profit subsidiary that administers the Domino's Pizza system's national and local advertising activities. Included in advertising expense was national advertising contributions from Company-owned stores to DNAF of approximately $11.3 million, $10.9 million and $11.3 million in 2000, 2001 and 2002, respectively. DNAF also received national advertising contributions from franchisees of approximately $68.1 million, $73.6 million and $76.5 million during 2000, 2001 and 2002, respectively. Franchisee contributions and offsetting expenses are presented net in the accompanying statements of income. Derivative Instruments During 1999, the Company entered into two interest rate swap agreements (the 1999 Swap Agreements) to effectively convert the variable Eurodollar component of the effective interest rate on a portion of the Company's debt under the 1998 Agreement (Note 2) to a fixed rate of 5.12% beginning in January 1999 and continuing through December 2001, in an effort to reduce the impact of interest rate changes on income. The total notional amount under the 1999 Swap Agreements was initially $179.0 million and decreased over time to a total notional amount of $167.0 million in December 2001. The 1999 Swap Agreements expired on December 31, 2001. On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", and two related Statements which require that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Adoption of these Statements resulted in the recognition of an approximately $2.7 million derivative asset relating to the fair value of the 1999 Swap Agreements which the Company designated as cash flow hedges. During 2001 and 2002, the Company entered into several interest rate agreements to effectively convert the variable Eurodollar component of the effective interest rate on a portion of the Company's debt under the 1998 Agreement and the 2002 Agreement to various fixed rates, in an effort to reduce the impact of interest rate changes on income. The Company has designated all of these agreements as cash flow hedges. The Company has determined that no ineffectiveness exists related to these derivatives. Related gains and losses upon settlement of these derivatives are recorded in interest expense. These agreements are summarized as follows: Total Notional Derivative Amount Term Rate --------------------- ------------- ---------------------------- ---------------- Interest Rate Collar $70.0 million June 2001 - June 2003 3.86% - Floor 6.00% - Ceiling Interest Rate Swap $70.0 million June 2001 - June 2004 4.90% Interest Rate Swap $35.0 million September 2001 - September 2003 3.645% Interest Rate Swap $35.0 million September 2001 - September 2004 3.69% Interest Rate Swap $75.0 million August 2002 - June 2005 3.25% 42
DOMINO'S, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) At December 29, 2002, the fair value of all of the Company's derivative instruments is a net liability of approximately $7.9 million, of which $6.0 million is included in current other accrued liabilities and $1.9 million is included in long-term other accrued liabilities. New Accounting Pronouncements In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections", which, among other things, eliminates the requirement to report certain extinguishments of debt as extraordinary items. As a result, gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The Company adopted SFAS No. 145 effective December 31, 2001. Accordingly, the gain on extinguishment of debt of approximately $181,000 (net of tax provision of approximately $111,000) in 2000 and loss on extinguishment of debt of approximately $327,000 (net of tax benefit of approximately $207,000) in 2001, both previously recorded as extraordinary, have been reclassified in the accompanying statements of income. In November 2002, the FASB issued FASB Interpretation No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 clarifies the requirements of SFAS No. 5 "Accounting for Contingencies", relating to a guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. The interpretation's guidance is required to be followed beginning in fiscal 2003 and is not expected to have a material effect on the Company's results of operations or financial condition. Supplemental Disclosures of Cash Flow Information The Company paid interest of approximately $69.9 million, $60.6 million and $51.8 million during 2000, 2001 and 2002, respectively. Cash paid for income taxes was approximately $8.7 million, $11.4 million and $24.0 million in 2000, 2001 and 2002, respectively. The Company financed the sale of certain Company-owned stores to franchisees with notes totaling approximately $5.6 million, $7.0 million and $811,000 in 2000, 2001 and 2002, respectively, including $4.4 million of notes to a former minority Parent stockholder in 2000 and $450,000 of notes to a former minority Parent stockholder in 2002. During 2001, the Company distributed approximately $1.8 million of accounts receivable to the Parent. 43
DOMINO'S, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain amounts from fiscal 2000 and 2001 have been reclassified to conform to the fiscal 2002 presentation. (2) FINANCING ARRANGEMENTS At December 30, 2001 and December 29, 2002, long-term debt consisted of the following (in thousands): 2001 2002 ----------- ------- 2002 Agreement - Term Loan $ - $363,175 1998 Agreement - Term Loan A 139,114 - 1998 Agreement - Term Loan B 127,563 - 1998 Agreement - Term Loan C 127,965 - Other borrowings 1,047 408 Senior subordinated notes, 10 3/8% 259,000 238,440 ---------- -------- 654,689 602,023 Less- current portion 43,157 2,843 ---------- -------- $ 611,532 $599,180 ========== ======== On December 21, 1998, Domino's and a subsidiary entered into a credit agreement (the 1998 Agreement) with a consortium of banks primarily to finance a portion of the Recapitalization, to repay existing indebtedness under a previous credit agreement and to provide available borrowings for use in the normal course of business. The 1998 Agreement consisted of a $100 million revolving credit facility and three term loans (Term Loan A, Term Loan B and Term Loan C, respectively) totaling $445 million in aggregate initial borrowings. Effective July 29, 2002, the Company entered into a new credit agreement (the 2002 Agreement) with a consortium of banks and used the proceeds to repay borrowings outstanding under the 1998 Agreement. The 2002 Agreement contains more favorable interest rate margins and improved flexibility as compared to the 1998 Agreement. The 2002 Agreement provides the following credit facilities: a term loan (the Term Loan) and a revolving credit facility (the Revolver). The aggregate borrowings available under the 2002 Agreement are $465 million. 44
DOMINO'S, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The 2002 Agreement provides borrowings of $365 million under the Term Loan. The Term Loan was initially fully borrowed. Borrowings under the Term Loan bear interest, payable at least quarterly, at either (i) the higher of (a) the specified bank's prime rate (4.25% at December 29, 2002) and (b) 0.50% above the Federal Reserve reported overnight funds rate, each plus an applicable margin of between 1.25% to 1.50%, or (ii) the Eurodollar rate (1.80% at December 29, 2002) plus an applicable margin of between 2.25% to 2.50%, with margins determined based upon the Company's ratio of indebtedness to earnings before interest, taxes, depreciation and amortization (EBITDA) (Note 8), as defined. At December 29, 2002, the Company's effective borrowing rate was 4.30% for the Term Loan. As of December 29, 2002, all borrowings under the Term Loan were under a Eurodollar contract with an interest period of 90 days. The 2002 Agreement requires Term Loan principal payments of $3.65 million per year during the first five years of the agreement with equal quarterly payments totaling $346.75 million in the final year of the agreement. The final scheduled principal payment on the outstanding borrowings under the Term Loan is due in June 2008. The 2002 Agreement also provides for borrowings of up to $100 million under the Revolver, of which up to $60 million is available for letter of credit advances. Borrowings under the Revolver (excluding letters of credit) bear interest, payable at least quarterly, at either (i) the higher of (a) the specified bank's prime rate and (b) 0.50% above the Federal Reserve reported overnight funds rate, each plus an applicable margin of between 0.50% to 1.50%, or (ii) the Eurodollar rate plus an applicable margin of between 1.50% to 2.50%, with margins determined based upon the Company's ratio of indebtedness to EBITDA, as defined. The Company also pays a commitment fee on the unused portion of the Revolver ranging from 0.375% to 0.50%, determined based upon the Company's ratio of indebtedness to EBITDA, as defined. At December 29, 2002, the commitment fee for such unused borrowings is 0.50%. The fee for letter of credit amounts outstanding ranges from 1.50% to 2.50%. At December 29, 2002, the fee for letter of credit amounts outstanding is 2.50%. At December 29, 2002, there is $82.1 million in available borrowings under the Revolver, with $17.9 million of letters of credit outstanding. The Revolver expires in June 2007. The borrowings under the 2002 Agreement are guaranteed by the Parent, are jointly and severally guaranteed by each of Domino's domestic subsidiaries, and are secured by substantially all of the assets of the Company. The 2002 Agreement contains certain financial and non-financial covenants that, among other restrictions, require the maintenance of certain financial ratios related to interest coverage and leverage, as defined in the 2002 Agreement. At December 29, 2002, the Company is in compliance with its covenants. The 2002 Agreement also restricts the Company's ability to pay dividends on or redeem or purchase the Company's capital stock, incur additional indebtedness, make investments, use assets as security in other transactions and sell certain assets or merge with or into other companies. 45
DOMINO'S, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) On December 21, 1998, the Company issued $275 million of 10 3/8% Senior Subordinated Notes due 2009 (the Notes) requiring semi-annual interest payments, which began July 15, 1999. Before January 15, 2004, the Company may, at a price above par, redeem all, but not part, of the Notes if a change in control occurs, as defined in the Notes. Beginning January 15, 2004, the Company may redeem some or all of the Notes at fixed redemption prices, ranging from 105.19% of par in 2004 to 100% of par in 2007 through maturity. In the event of a change in control, as defined, the Company will be obligated to repurchase Notes tendered at the option of the holders at a fixed price. The Notes are guaranteed by certain Domino's subsidiaries (non-guarantor subsidiaries do not represent a significant amount of revenues and assets) and are subordinated in right of payment to all existing and future senior debt of the Company. The indenture related to the Notes restricts the Company and certain subsidiaries from, among other restrictions, paying dividends or redeeming equity interests, with certain specified exceptions, unless a minimum fixed charge coverage ratio is met and, in any event, such payments are limited to 50% of the Company's cumulative net income from January 4, 1999 to the payment date plus the net proceeds from any capital contributions or the sale of equity interests. As of December 29, 2002, management estimates the fair value of the Notes to be approximately $259.3 million. The carrying amounts of the Company's other debt approximate fair value. In 2000, the Company amended the 1998 Agreement whereby an amount not to exceed $30.0 million was made available for the early retirement of Notes at the Company's option. With the execution of the 2002 Agreement, an additional amount not to exceed $30.0 million was made available for the early retirement of Notes at the Company's option. In 2000, 2001 and 2002, the Company retired $10.0 million, $6.0 million and $20.6 million, respectively, of the Notes through open market transactions using funds generated from operations. These retirements resulted in an after-tax gain of approximately $181,000 in 2000 and after-tax losses of approximately $327,000 in 2001, and $1.7 million in 2002. These items include approximately $583,000, $317,000 and $944,000 in deferred financing cost amortization expense in 2000, 2001 and 2002, respectively, and $207,000 in 1998 Agreement amendment fees in 2000. As of December 29, 2002, the Company had $23.0 million remaining under the 2002 Agreement for future Notes repurchases. At December 29, 2002 an affiliate of a stockholder of the Parent had Term Loan holdings of $42.9 million and Notes holdings of $16.5 million. Interest expense to this affiliate related to the 1998 Agreement, the 2002 Agreement and the Notes was approximately $3.4 million, $3.8 million, and $2.0 million in 2000, 2001 and 2002, respectively. As of December 29, 2002, maturities of long-term debt are as follows (in thousands): 2003 $ 2,843 2004 4,620 2005 3,683 2006 3,683 2007 88,545 Thereafter 498,649 ---------- $ 602,023 ========== 46
DOMINO'S, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (3) COMMITMENTS AND CONTINGENCIES Lease Commitments The Company leases equipment, vehicles, retail store and distribution center locations and its corporate headquarters under operating leases with expiration dates through 2018. Rent expenses totaled approximately $23.1 million, $23.4 million and $25.5 million during 2000, 2001 and 2002, respectively. As of December 29, 2002, the future minimum rental commitments for all noncancellable leases, which include approximately $54.6 million in commitments to related parties and is net of approximately $4.8 million in future minimum rental commitments which have been assigned to certain franchisees, are as follows (in thousands): 2003 $ 32,291 2004 22,544 2005 23,473 2006 18,566 2007 15,165 Thereafter 65,653 --------- $ 177,692 ========= Legal Proceedings and Related Matters The Company is a party to lawsuits, revenue agent reviews by taxing authorities and legal proceedings, of which the majority involve workers' compensation, employment practices liability, general liability, and automobile and franchisee claims arising in the ordinary course of business. In management's opinion, these matters, individually and in the aggregate, will not have a significant adverse effect on the financial condition of the Company, and the established reserves adequately provide for the estimated resolution of such claims. (4) INCOME TAXES The Parent files a consolidated Federal income tax return which includes the Company's operations. For financial reporting purposes and in accordance with a tax-sharing agreement, the Company accounts for income taxes as if it files its own consolidated Federal income tax return. 47
DOMINO'S, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The differences between the United States Federal statutory income tax provision (using the statutory rate of 35%) and the Company's consolidated income tax provision for 2000, 2001 and 2002 are as follows (in thousands): 2000 2001 2002 ------------ ------------ -------- Federal income tax provision based on the statutory rate $14,487 $21,100 $33,758 State and local income taxes, net of related Federal income taxes 906 1,588 1,908 Non-resident withholding and foreign income taxes 3,382 3,726 3,829 Foreign tax and other tax credits (3,709) (4,158) (4,506) Losses attributable to foreign subsidiaries 389 281 325 Non-deductible expenses 351 498 471 Other 378 471 4 ------- ------- ------- $16,184 $23,506 $35,789 ======= ======= ======= The components of the 2000, 2001 and 2002 provision for income taxes are as follows (in thousands): 2000 2001 2002 ----------- ----------- -------- Provision for Federal income taxes- Current provision $ 4,084 $11,674 $18,685 Deferred provision 7,324 5,663 10,340 ------- ------- ------- Total provision for Federal income taxes 11,408 17,337 29,025 Provision (benefit) for state and local income taxes- Current provision 5,725 4,005 1,004 Deferred provision (benefit) (4,331) (1,562) 1,931 ------- ------- ------- Total provision for state and local income taxes 1,394 2,443 2,935 Provision for non-resident withholding and foreign income taxes 3,382 3,726 3,829 ------- ------- ------- $16,184 $23,506 $35,789 ======= ======= ======= 48
DOMINO'S, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) As of December 30, 2001 and December 29, 2002, the significant components of net deferred income taxes are as follows (in thousands): 2001 2002 ----------- --------- Deferred Federal income tax assets- Step-up of basis on subsidiaries sale of certain assets $38,828 $35,580 Covenants not-to-compete 13,956 12,789 Insurance reserves 4,395 6,996 Other accruals and reserves 7,635 6,599 Bad debt reserves 3,220 2,465 Depreciation, amortization and asset basis differences 3,717 - Deferred gains 2,503 1,310 Derivatives liability 1,130 2,925 Foreign net operating loss carryovers 3,370 4,481 Other 1,285 1,124 ------- ------- 80,039 74,269 ------- ------- Valuation allowance on foreign net operating loss carryovers (3,370) (4,481) ------- ------- Total deferred Federal income tax assets 76,669 69,788 ------- ------- Deferred Federal income tax liabilities- Capitalized software 7,187 6,893 Depreciation, amortization and asset basis differences - 1,962 Other 4 - ------- ------- Total deferred Federal income tax liabilities 7,191 8,855 ------- ------- Net deferred Federal income tax asset 69,478 60,933 Net deferred state and local income tax asset 8,094 6,163 ------- ------- Net deferred income taxes $77,572 $67,096 ======= ======= As of December 30, 2001, the classification of net deferred income taxes is summarized as follows (in thousands): Current Long-term Total ------- --------- ----- Deferred tax assets $9,330 $75,433 $84,763 Deferred tax liabilities - (7,191) (7,191) ------ ------- ------- Net deferred income taxes $9,330 $68,242 $77,572 ====== ======= ======= 49
DOMINO'S, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) As of December 29, 2002, the classification of net deferred income taxes is summarized as follows (in thousands): Current Long-term Total ------- --------- ------- Deferred tax assets $6,809 $69,142 $75,951 Deferred tax liabilities - (8,855) (8,855) ------ ------- ------- Net deferred income taxes $6,809 $60,287 $67,096 ====== ======= ======= Realization of the Company's deferred tax assets is dependent upon many factors, including, but not limited to, the Company's ability to generate sufficient taxable income. Although realization of the Company's net deferred tax assets is not assured, management believes it is more likely than not that the net deferred tax assets will be realized. On an ongoing basis, management will assess whether it remains more likely than not that the net deferred tax assets will be realized. As of December 29, 2002, the Company has approximately $4.5 million of foreign loss carryovers expiring from 2004 through 2007 for which a valuation allowance has been provided. (5) EMPLOYEE BENEFITS The Company has a retirement savings plan which qualifies under Internal Revenue Code Section 401(k). All employees of the Company who have completed 1,000 hours of service and are at least 21 years of age are eligible to participate in the plan. The plan requires the Company to match 50% of the first 6% of employee contributions per participant. These matching contributions vest immediately. The charges to operations for Company contributions to the plan were $2.2 million, $2.3 million and $2.4 million for 2000, 2001 and 2002, respectively. The Company has established a nonqualified deferred compensation plan available for the members of the Company's leadership team and certain other key employees. Under this plan, the participants may defer up to 40% of their annual compensation. The participants direct the investment of their deferred compensation within several investment funds. The Company is not required to contribute and has not contributed to this plan during 2000, 2001 and 2002. (6) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Company is a party to letters of credit with off-balance sheet risk. The Company's exposure to credit loss for letters of credit and financial guarantees is represented by the contractual amounts of these instruments. The Company uses the same credit policies in making conditional obligations as it does for on-balance sheet instruments. Total conditional commitments under letters of credit as of December 29, 2002 are $17.9 million. At December 30, 2001, $2.5 million of letters of credit were included in current other accrued liabilities. 50
DOMINO'S, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (7) RELATED PARTY TRANSACTIONS Leases The Company leases its corporate headquarters under an operating lease agreement with a partnership owned by our former majority Parent stockholder. Total lease expense related to this lease was $4.4 million, $4.5 million and $4.6 million for 2000, 2001 and 2002, respectively. At December 29, 2002, aggregate future minimum lease commitments under this lease are as follows (in thousands): 2003 $ 4,544 2004 - 2005 5,033 2006 5,108 2007 5,236 Thereafter 34,716 -------- $ 54,637 ======== Distributions During the normal course of business, the Company may make discretionary distributions to the Parent. During 2001, the Company distributed approximately $2.7 million to the Parent, which used the proceeds to satisfy Recapitalization-related obligations to our former majority Parent stockholder and certain members of his family. During 2002, the Company distributed approximately $9.9 million to the Parent, which primarily used the proceeds to repurchase Parent stock. Consulting Agreement As part of the Recapitalization, the Company entered into a $5.5 million, ten-year consulting agreement with our former majority Parent stockholder. The Company paid $500,000 in each of 2000 and 2001 under this agreement. During 2002, the Company and our former majority Parent stockholder mutually agreed to terminate the consulting agreement. The Company paid $2.9 million to our former majority Parent stockholder to effect such termination. 51
DOMINO'S, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Covenant Not-to-Compete As part of the Recapitalization, the Parent entered into a covenant not-to-compete with our former majority Parent stockholder. The Parent contributed this asset to the Company in 1998. Amortization expense for this covenant not-to-compete was provided using an accelerated method over a three-year period and was approximately $10.9 million and $5.3 million in 2000 and 2001, respectively. As of December 30, 2001, this asset was fully amortized. Management Agreement and Consulting Services As part of the Recapitalization, the Parent and its subsidiaries (collectively, the Group) entered into a management agreement with an affiliate of a stockholder of the Parent to provide the Group with certain management services. The Company is committed to pay an amount not to exceed $2.0 million per year on an ongoing basis for management services as defined in the management agreement. The Company incurred and paid $2.0 million for management services in each of 2000, 2001 and 2002, respectively. These amounts are included in general and administrative expense. Furthermore, the Group must allow the affiliate to participate in the negotiation and consummation of future senior financing for any acquisition or similar transaction and pay the affiliate a fee, as defined in the management agreement. Stockholder Indemnification of Legal Settlement In 2000, the Company settled a lawsuit that was outstanding at January 2, 2000 in which the Company agreed to pay the plaintiffs $5.0 million for a full release of all related claims. This amount was recorded in general and administrative expense in 1999. The Company also recorded a related $1.8 million benefit for income taxes. Additionally, our former majority Parent stockholder agreed to indemnify the Parent and paid the Parent $4.0 million and $521,000 in 2000 and 2002, respectively. The Parent then contributed these amounts to the Company. The Company recorded the $4.0 million and $521,000 as capital contributions in 1999 and 2002, respectively. The former majority Parent stockholder has no further obligation to the Company under the related indemnification agreement. Financing Arrangements As part of the 2002 Agreement, the Company paid approximately $2.3 million of financing costs to an affiliate of a Parent stockholder. A separate affiliate is counterparty to the $70.0 million interest rate collar agreement (Note 1). 52
DOMINO'S, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (8) SEGMENT INFORMATION The Company has three reportable segments as determined by management using the "management approach" as defined in SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information": (1) Domestic Stores, (2) Domestic Distribution, and (3) International. The Company's operations are organized by management on the combined bases of line of business and geography. The Domestic Stores segment includes Company operations with respect to all franchised and Company-owned stores throughout the contiguous United States. The Domestic Distribution segment primarily includes the distribution of food, equipment and supplies to the Domestic Stores segment from the Company's regional distribution centers. The International segment primarily includes Company operations related to its franchising business in foreign and non-contiguous United States markets and its food distribution business in Canada, France, the Netherlands, Alaska and Hawaii. The accounting policies of the reportable segments are the same as those described in Note 1. The Company evaluates the performance of its segments and allocates resources to them based on EBITDA. The tables below summarize the financial information concerning the Company's reportable segments for 2000, 2001 and 2002. Intersegment Revenues are comprised of sales of food, equipment and supplies from the Domestic Distribution segment to the Company-owned stores in the Domestic Stores segment. Intersegment sales prices are market based. The "Other" column as it relates to EBITDA and income from operations information below primarily includes corporate administrative costs. The "Other" column as it relates to capital expenditures primarily includes capitalized software and certain equipment and leasehold improvements. All amounts presented below are in thousands. Domestic Domestic Intersegment Stores Distribution International Revenues Other Total -------- ------------ ------------- ------------ --------- ---------- Revenues- 2000 $ 498,579 $ 707,224 $63,405 $(103,128) $ - $ 1,166,080 2001 496,384 796,808 69,995 (104,906) - 1,258,281 2002 517,200 779,684 81,762 (103,666) - 1,274,980 EBITDA- 2000 $ 120,940 $ 35,681 $15,190 N/A $(24,515) $ 147,296 2001 126,569 44,323 16,346 N/A (25,077) 162,161 2002 137,626 49,953 25,910 N/A (24,227) 189,262 Income from Operations- 2000 $ 109,713 $ 30,123 $14,422 N/A $(41,029) $ 113,229 2001 114,253 38,068 15,162 N/A (40,595) 126,888 2002 126,714 43,155 25,141 N/A (38,776) 156,234 Capital Expenditures- 2000 $ 17,439 $ 7,720 $ 1,393 N/A $ 11,351 $ 37,903 2001 15,984 6,949 352 N/A 17,321 40,606 2002 26,218 7,690 722 N/A 19,301 53,931 53
DOMINO'S, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table reconciles total EBITDA to consolidated income before provision for income taxes: 2000 2001 2002 ---------- ---------- ---------- Total EBITDA $ 147,296 $ 162,161 $ 189,262 Depreciation and amortization (33,604) (33,092) (28,273) Interest income 3,961 1,778 537 Interest expense (75,800) (68,380) (60,321) Losses on sale/disposal of assets and other (1,338) (1,964) (2,919) Gain (loss) on debt extinguishment 875 (217) (1,836) ---------- ---------- ---------- Income before provision for income taxes $ 41,390 $ 60,286 $ 96,450 ========== ========== ========== The following table summarizes the Company's identifiable asset information as of December 30, 2001 and December 29, 2002: 2001 2002 ---------- ---------- Domestic Stores $ 87,972 $ 120,242 Domestic Distribution 90,564 94,460 ---------- ---------- Total Domestic Assets 178,536 214,702 International 19,624 23,167 Unallocated 204,438 156,327 ---------- ---------- Total Consolidated Assets $ 402,598 $ 394,196 ========== ========== Unallocated assets primarily include cash and cash equivalents, investments in marketable securities, deferred financing costs, certain long-lived assets, deferred income taxes and, in 2001, assets relating to the fair value of derivatives. Significantly all of the Company's goodwill is included in the Domestic Stores segment. (9) ACQUISITION On February 25, 2002, the Company purchased the assets of 83 Domino's Pizza stores (the Arizona Stores) from our former franchisee in Arizona using funds generated from operations. The Company paid approximately $21.5 million to acquire these assets. The results of the Arizona Stores' operations have been included in the Domestic Stores segment in the consolidated financial statements since that date. 54
DOMINO'S, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (10) PERIODIC FINANCIAL DATA (Unaudited, in thousands) The Company's convention with respect to reporting periodic financial data is such that each of the first three fiscal quarters consist of twelve weeks while the last fiscal quarter consists of sixteen weeks. For the Fiscal For the Fiscal Quarter Ended Year Ended ----------------------------------------------------------- -------------- March 25, June 17, September 9, December 30, December 30, 2001 2001 2001 2001 2001 --------- --------- ------------ ------------ -------------- Total revenues $287,631 $283,752 $289,456 $397,442 $1,258,281 Income before provision for income taxes 12,846 14,540 13,003 19,897 60,286 Net income 7,809 8,876 7,932 12,163 36,780 For the Fiscal For the Fiscal Quarter Ended Year Ended ----------------------------------------------------------- -------------- March 24, June 16, September 8, December 29, December 29, 2002 2002 2002 2002 2002 --------- --------- ------------ ------------ -------------- Total revenues $308,056 $294,062 $277,060 $395,802 $1,274,980 Income before provision for income taxes 25,246 17,155 17,146 36,903 96,450 Net income 15,905 10,809 10,801 23,146 60,661 55
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. In a meeting held on March 15, 2002, the Audit Committee of the Company's Board of Directors recommended that the Board of Directors not renew Arthur Andersen LLP's ("Andersen") engagement as independent auditor for fiscal year 2002 and recommended that the Company engage PricewaterhouseCoopers LLP ("PwC") as independent auditor. The Board of Directors instructed the Company to effect such actions as soon as reasonably practicable. On March 21, 2002, the Company notified Andersen that it would not renew its engagement as independent auditor for fiscal year 2002 and appointed PwC as its new independent auditor. Andersen's reports on the Company's consolidated financial statements for the years ended December 30, 2001 and December 31, 2000 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. During the years ended December 30, 2001 and December 31, 2000 and through the date hereof, there were no disagreements with Andersen on any matter of accounting principle or practice, financial statement disclosure, or auditing scope or procedure which, if not resolved to Andersen's satisfaction, would have caused them to make reference to the subject matter in connection with their report on the Company's consolidated financial statements for such years; and there were no reportable events as defined in Item 304 (a) (1) (v) of Regulation S-K. The Company provided Andersen with a copy of the foregoing disclosure. Exhibit 16.1 is a copy of Andersen's letter, dated March 22, 2002, stating its agreement with such statements. During the years ended December 30, 2001 and December 31, 2000 and through March 21, 2002, the Company did not consult PwC with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's consolidated financial statements, or any other matters or reportable events as set forth in Items 304 (a) (2) (i) and (ii) of Regulation S-K. 56
Part III Item 10. Directors and Executive Officers of the Registrant. The following is a list of directors for each of TISM and Domino's. All directors of TISM and Domino's serve until a successor is duly elected and qualified or until the earlier of his death, resignation or removal. There are no family relationships between any of the directors or executive officers of TISM, Domino's or Domino's Pizza. Name Age ---- --- David A. Brandon* .............. 50 Andrew B. Balson ............... 36 Dennis F. Hightower ............ 61 Mark E. Nunnelly ............... 44 Robert M. Rosenberg ............ 65 Robert Ruggiero, Jr. ........... 43 *Chairman of the Board of Directors The following is a list of each person who is a Named Executive Officer of one or more of Domino's, TISM and Domino's Pizza. The executive officers of TISM, Domino's and Domino's Pizza are elected by and serve at the discretion of their respective Board of Directors. Name Age Position ---- --- -------- David A. Brandon ............... 50 Chief Executive Officer of each of TISM, Domino's and Domino's Pizza Harry J. Silverman ............. 44 Chief Financial Officer, Executive Vice President ("EVP"), Finance of Domino's Pizza; Vice President of each of TISM and Domino's Michael D. Soignet ............. 43 EVP, Maintain High Standards - Distribution of Domino's Pizza Patrick W. Knotts .............. 48 EVP, Flawless Execution - Domestic Stores of Domino's Pizza J. Patrick Doyle ............... 39 EVP, International of Domino's Pizza David A. Brandon has served as Chairman, Chief Executive Officer and as a Director of each of TISM and Domino's since March 1999. Mr. Brandon has also served as Chairman, Chief Executive Officer and as a Manager of Domino's Pizza since March 1999. Mr. Brandon was President and Chief Executive Officer of Valassis Communications, Inc., a company in the sales promotion and coupon industries, from 1989 to 1998 and Chairman of the Board of Directors of Valassis Communications, Inc. from 1997 to 1998. Mr. Brandon serves on the Board of Directors of The TJX Companies, Inc. Mr. Brandon also serves on the Board of Regents for the University of Michigan. Andrew B. Balson has served as a Director of each of TISM and Domino's since March 1999. Mr. Balson has been a Managing Director of Bain Capital, an investment company, since January 2001. Mr. Balson became a Principal of Bain Capital in June 1998, prior to which he was an Associate from 1996 to 1998. From 1994 to 1996, Mr. Balson was a consultant at Bain & Company. Mr. Balson serves on the Board of Directors of a number of private companies. Dennis F. Hightower has served as a Director of each of TISM and Domino's and serves as the Chair of the Audit Committee of the Board of Directors of Domino's since February 2003. Mr. Hightower served as Chief Executive Officer of Europe Online Networks, S.A., a broadband interactive entertainment provider, from June 2000 to February 2001. He was Professor of Management at the Harvard Business School from July 1997 to June 2000 and a Senior Lecturer from July 1996 to July 1997. He was previously employed by The Walt Disney Company, serving as President of Walt Disney Television & Telecommunications, President-Disney Consumer Products (Europe, Middle East and Africa), and related executive positions in Europe. He is a director of The Gillette Company, Northwest Airlines, Inc., The TJX Companies, Inc., PanAmSat Corporation and Phillips-Van Heusen Corporation. 57
Mark E. Nunnelly has served as a Director of TISM since December 1998 and as a Director of Domino's since February 1999. Mr. Nunnelly has been a Managing Director of Bain Capital since 1990. Prior to that time, Mr. Nunnelly was a Partner of Bain & Company, where he managed several relationships in the manufacturing sector, and was employed by Procter & Gamble Company Inc., a consumer products company, in product management. Mr. Nunnelly serves on the Board of Directors of CTC Communications, Inc. and DoubleClick, Inc., as well as a number of private companies. Robert M. Rosenberg has served as a Director of each of TISM and Domino's since April 1999. Mr. Rosenberg served as President and Chief Executive Officer of Allied Domecq Retailing, USA from 1993 to August 1999 when he retired. Allied Domecq Retailing, USA is comprised of Dunkin' Donuts, Baskin-Robbins and Togo's Eateries. Mr. Rosenberg also serves on the Board of Directors of Sonic Industries, Inc. Robert Ruggiero, Jr. has served as a Director of each of TISM and Domino's since February 2003. Mr. Ruggiero is a partner of J.P. Morgan Partners, LLC and has been an investment professional with J.P. Morgan Partners LLC, and its predecessor companies, since 1996. Mr. Ruggiero, Jr. serves on the Board of Directors of a number of private companies. Harry J. Silverman has served as Chief Financial Officer, Executive Vice President of Finance and as a Manager of Domino's Pizza since 1993. Mr. Silverman has served as Vice President of each of TISM and Domino's since December 1998 and as Treasurer of each of TISM and Domino's from February 2000 to September 2001. Mr. Silverman joined Domino's Pizza in 1985. Mr. Silverman serves on the Board of Directors of Able Laboratories, Inc. Michael D. Soignet has served as Executive Vice President of Maintain High Standards - Distribution of Domino's Pizza, overseeing global distribution center operations since 1993. Mr. Soignet joined the Company in 1981. Patrick W. Knotts has served as Executive Vice President of Flawless Execution - Domestic Stores of Domino's Pizza since June 2001. Mr. Knotts was Executive Vice President of Flawless Execution - Corporate of Domino's from January 2001 to June 2001. Mr. Knotts served as Senior Vice President of Operations for Mrs. Fields Original Cookie, Inc., a retail food service company, from September 1996 to January 2001. Mr. Knotts served in various positions, including Executive Vice President of Operations, at Midial S.A. U.S. Retail Group from January 1992 to September 1996. J. Patrick Doyle has served as Executive Vice President of International of Domino's Pizza since May 1999 and as interim Executive Vice President, Build the Brand from December 2000 to July 2001. Mr. Doyle served as Senior Vice President of Marketing from the time he joined Domino's Pizza in 1997 until May 1999. From 1991 to 1997, Mr. Doyle served as Vice President and General Manager of Gerber Products Company for the United States baby food business and as Vice President and General Manager of their Canadian subsidiary. Christopher C. Behrens and Robert F. White resigned as members of the Board of Directors of each of TISM and Domino's effective February 25, 2003. There were no disagreements with management. 58
Item 11. Executive Compensation. The following table sets forth information concerning the compensation for the fiscal year ended December 29, 2002 of David A. Brandon, Chairman and Chief Executive Officer, and the four other most highly compensated executive officers of the Company (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE Long- Term Annual Compensation Compensation ------------------------------------------- ------------ Other Securities Name and Annual Underlying All Other Principal Position Year Salary Bonus Compensation(1) Options(2) Compensation(3) ------------------ ---- ------ ----- --------------- ---------- --------------- David A. Brandon 2002 $600,000 $1,200,000 $59,454 250,000 $20,863 Chairman and Chief 2001 600,000 1,100,000 - - 1,575 Executive Officer 2000 600,000 805,000 - - 1,575 Harry J. Silverman 2002 310,000 510,000 - 50,000 6,700 Chief Financial 2001 310,000 550,000 - - 6,173 Officer, Executive 2000 309,122 345,696 - - 4,956 Vice President Michael D. Soignet 2002 285,000 470,000 - 50,000 7,594 Executive Vice 2001 285,000 505,000 - - 6,143 President 2000 284,185 300,692 - - 4,346 Patrick W. Knotts 2002 285,000 465,000 - 50,000 5,453 Executive Vice 2001 268,558 500,000 - 150,000 33,015 President (4) J. Patrick Doyle 2002 260,000 415,000 - 40,000 5,768 Executive Vice 2001 260,000 455,000 - - 6,080 President 2000 241,885 275,473 - - 6,017 (1) This amount primarily represents amounts related to the use of the Company's airplane. (2) The options are for the purchase of Class A-3 Common Stock of TISM. (3) These amounts primarily represent contributions made under our 401(k) plan, relocation expenses, automobile allowances, reimbursement for certain medical bills and term life insurance premiums paid by the Company for the benefit of the Named Executive Officers. (4) Mr. Knotts was hired in January 2001. 59
Option Grants The following table sets forth information concerning TISM Class A-3 Common Stock ($0.01 par value, per share) options granted to Named Executive Officers during the 2002 fiscal year. Potential Realizable Value at Percent of Total Assumed Annual Rates of Stock Number of Options Granted to Exercise Price Appreciation for Option Securities Underlying Employees in Price Expiration Term (2) Name Options Granted (1) Fiscal Year ($/Share) Date 5% 10% ---- ------------------- ----------- --------- ---- -- --- David A. Brandon 250,000 21.8% $3.50 1/1/12 550,283 1,394,525 Harry J. Silverman 50,000 4.4% $3.50 1/1/12 110,057 278,905 Michael D. Soignet 50,000 4.4% $3.50 1/1/12 110,057 278,905 Patrick W. Knotts 50,000 4.4% $3.50 1/1/12 110,057 278,905 J. Patrick Doyle 40,000 3.5% $3.50 1/1/12 88,045 223,124 (1) Options were awarded by the Board of Directors under the TISM, Inc. Stock Option Plan. Options granted are generally granted at fair value of the underlying stock, as determined by the Board of Directors, expire ten years from the date of grant and vest within five years from the grant date. All options vest immediately in the event of a change in control, as defined. (2) Assumed annual appreciation rates are established by regulations and are not a forecast of future appreciation. The amounts shown are pre-tax and assume the options will be held throughout the entire ten-year term. If TISM's Class A-3 Common Stock does not increase in value after the grant date of the options, the options are valueless. Option Exercises and Fiscal Year-End Values The following table sets forth certain information concerning the number and value of unexercised stock options of TISM held by each of the Named Executive Officers as of December 29, 2002. FISCAL YEAR-END OPTIONS VALUES Number of Securities Value of Unexercised Underlying Unexercised In-The-Money Options At Options At Fiscal Year-End (1) Fiscal Year-End (2) Shares Acquired ------------------------------ ------------------- Name on Exercise Exercisable Unexercisable Exercisable Unexercisable ---- ----------- ----------- ------------- ----------- ------------- David A. Brandon - 605,006 1,157,510 $3,751,040 $6,426,560 Harry J. Silverman - 451,111 160,000 3,002,553 842,000 Michael D. Soignet - 411,111 150,000 2,754,553 780,000 Patrick W. Knotts - 30,000 170,000 186,000 904,000 J. Patrick Doyle - 200,000 90,000 1,240,000 438,000 (1) The numbers reported reflect that Messrs. Brandon, Silverman, Soignet, Knotts and Doyle each have the option to purchase TISM Class A-3 Common Stock. Mr. Brandon has the option to purchase 1,762,516 Class A-3 shares. Mr. Silverman has the option to purchase 600,000 Class A-3 shares. Mr. Soignet has the option to purchase 550,000 Class A-3 shares. Mr. Knotts has the option to purchase 200,000 Class A-3 shares. Mr. Doyle has the option to purchases 290,000 Class A-3 shares. Additionally, Messrs. Silverman and Soignet each have the option to purchase 11,111 of TISM Class L Common Stock. The Class L options are fully vested as of December 29, 2002. The in-the-money value reported for Messrs. Silverman and Soignet include an estimate of fair value on the Class L Common Stock equal to the 12% priority return compounded quarterly from the date of grant until December 29, 2002. (2) There was no public trading market for the Class A-3 Common Stock of TISM as of December 29, 2002. Accordingly, these values have been calculated on the basis of the estimated fair market value of such securities on December 29, 2002, as determined by the Board of Directors, less applicable exercise prices. 60
Compensation of Directors TISM and Domino's reimburse members of the Board of Directors for any out-of-pocket expenses incurred by them in connection with services provided in such capacity. In addition, TISM and Domino's may compensate independent members of the Board of Directors for services provided in such capacity. In April 1999, Mr. Rosenberg, an independent Director, was granted options for 55,555 shares of TISM Class A-3 Common Stock. These options vest 20% annually beginning on March 31, 2000. As of December 29, 2002, these options were still held by Mr. Rosenberg. Mr. Rosenberg was also paid $10,000 per year in 2002, 2001 and 2000 for his service to the Board of Directors. Mr. Hightower, an independent Director appointed in February 2003, was granted options for 7,500 shares of TISM Class A-3 Common Stock, 100% of which will vest and become exercisable on February 25, 2004. Mr. Hightower, who chairs the Audit Committee of the Board of Directors, will receive $35,000 per year for his services plus $1,000 per Board of Directors and/or Audit Committee meeting. The remaining directors do not receive compensation for their service. Employment Contracts and Termination of Employment and Change in Control Arrangements Employment Agreements Mr. Brandon is employed as Chairman and Chief Executive Officer pursuant to a written employment agreement that terminates on December 31, 2003. Under the employment agreement, Mr. Brandon is entitled to receive an annual salary of $600,000 and is eligible for an annual bonus based on achievement of performance objectives. If Mr. Brandon is terminated other than for cause or resigns voluntarily for good reason, he is entitled to receive continued salary for two years. Each of the other Named Executive Officers is employed pursuant to a written employment agreement, terminable at will by either party. Under each employment agreement, the Named Executive Officer is entitled to receive an annual salary and an annual formula bonus based on achievement of Company performance objectives and a discretionary bonus. If the employment of any of the other Named Executive Officers is terminated other than for cause or resigns voluntarily for good reason, the affected Named Executive Officer is entitled to continue to receive his salary for twelve months plus any earned but unpaid bonus. If the employment of any of the Named Executive Officers is terminated by reason of physical or mental disability, he is entitled to receive continued salary less the amount of disability income benefits received by him and continued coverage under group medical plans for 18 months. Each of the Named Executive Officers is subject to certain non-competition, non-solicitation and confidentiality provisions. Change-of-Control Provisions The TISM Stock Option Plan provides that upon a change in control of TISM, the options granted to the Named Executive Officers shall become immediately vested, but exercisable only as to an additional 20% per year. After a change in control, however, should the Named Executive Officer terminate his employment for good cause (as defined) or, if the Company terminates the Named Executive Officer without good reason (as defined), all options shall become immediately exercisable. Deferred Compensation Plan Domino's Pizza has adopted a deferred compensation plan for the benefit of certain of its executive and managerial employees, including the Named Executive Officers. Under the plan, eligible employees are permitted to defer up to 40% of their compensation. The Company does not match contributions. The amounts under the plan are required to be paid out upon termination of employment or a change in control of Domino's Pizza. 61
Senior Executive Deferred Bonus Plan Prior to TISM's recapitalization in December 1998, Domino's Pizza entered into bonus agreements with Messrs. Silverman and Soignet. The bonus agreements, as amended, provided for bonus payments, a portion of which were payable in cash upon the closing of the recapitalization and a portion of which were deferred under the Senior Executive Deferred Bonus Plan. Domino's Pizza adopted the Senior Executive Deferred Bonus Plan, effective December 21, 1998, which established deferred bonus accounts for the benefit of the two executives listed above. Domino's Pizza must pay the deferred amounts in each account to the respective executive upon the earlier of (i) a change of control, (ii) a qualified public offering, (iii) the cancellation or forfeiture of stock options held by such executive, or (iv) ten years and 180 days after December 21, 1998. If the plan is terminated, deferred bonus accounts to the participating executives may be paid at that time or may be paid as if the plan had continued to be in effect. Compensation Committee Interlocks and Insider Participation The Company does not have a compensation committee. Compensation decisions for 2002 regarding the Company's executive officers were made by the Board of Directors. Mr. Brandon participated in discussions with the Board of Directors concerning executive officer compensation. 62
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters. All of Domino's issued and outstanding common stock is owned by TISM. As of December 29, 2002, the issued and outstanding capital stock of TISM consists of (i) 49,064,405 shares of Class A Common Stock, of which 9,641,874 shares are Class A-1 Common Stock, par value $0.001 per share, 9,866,633 shares are Class A-2 Common Stock, par value $0.001 per share, and 29,555,898 shares are Class A-3 Common Stock, par value $0.001 per share, (ii) 5,422,305 shares of Class L Common Stock, par value $0.001 per share, and (iii) 980,108 shares of 11.5% Cumulative Preferred Stock, par value $0.001 per share, liquidation value $105 per share. Only Class A-1 Common Stock shares have voting rights. The Class L Common Stock is the same as the Class A-1 Common Stock except that the Class L Common Stock is nonvoting and is entitled to a preference over the Class A Common Stock, with respect to any distribution by TISM to holders of its capital stock, equal to the original cost of such share plus an amount which accrues at a rate of 12% per annum, compounded quarterly. The Class L Common Stock is convertible upon an initial public offering, or certain other dispositions, of TISM into Class A Common Stock upon a vote of the Board of Directors of TISM. The Cumulative Preferred Stock has no voting rights except as required by law. The following table sets forth information with respect to ownership of TISM Class A-1 Common Stock as of March 15, 2003 (i) by each person known to the Company to own beneficially more than 5% of such class of securities, and (ii) by each Director and Named Executive Officer, and (iii) all Directors and executive officers as a group. Unless otherwise noted, to our knowledge, each of such stockholders has sole voting and investment power as to the shares shown. Amount and Nature of Percentage of Outstanding Name and Address Beneficial Ownership Voting Securities - ---------------- -------------------- ----------------- Principal Stockholders: Bain Capital Fund VI, L.P. and Related Funds 4,724,518 (1) 49.0% c/o Bain Capital, LLC 111 Huntington Avenue Boston, Massachusetts 02199 Thomas S. Monaghan 2,595,008 26.9% 24 Frank Lloyd Wright Drive Ann Arbor, Michigan 48106 Directors and Named Executive Officers: David A. Brandon*+ -- -- Harry J. Silverman* -- -- Michael D. Soignet* -- -- Patrick W. Knotts* -- -- J. Patrick Doyle* -- -- Andrew B. Balson+ 3,996,158 (2)** 41.4% Dennis F. Hightower+ -- -- Mark E. Nunnelly+ 4,155,811 (3)** 43.1% Robert M. Rosenberg+ -- -- Robert Ruggiero, Jr.+ 944,904 (4) 9.8% All Directors and executive 53.2% officers as a group (16 Persons) 63
+ Director * Named Executive Officer ** Messrs. Balson and Nunnelly are Managing Directors of Bain Capital. Amounts disclosed for Messrs. Balson and Nunnelly are also included above in the amounts disclosed for Bain Capital Fund VI, L.P. and related funds. (1) Consists of (i) 1,849,036 shares of Class A-1 Common Stock owned by Bain Capital Fund VI, L.P. ("Fund VI"), whose sole general partner is Bain Capital Partners VI, L.P. ("BCP VI "), whose sole general partner is Bain Capital Investors, LLC, a Delaware limited liability company ("BCI"), (ii) 2,104,694 shares of Class A-1 Common Stock owned by Bain Capital VI Coinvestment Fund, L.P. ("Coinvest Fund"), whose sole general partner is BCP VI, whose sole general partner is BCI, (iii) 6,164 shares of Class A-1 Common Stock owned by PEP Investments PTY Ltd. ("PEP"), a New South Wales company limited by shares for which BCI is Attorney-in-Fact, (iv) 161,215 shares of Class A-1 Common Stock owned by BCIP Associates II ("BCIP II"), whose managing partner is BCI, (v) 34,702 shares of Class A-1 Common Stock owned by BCIP Trust Associates II ("BCIP Trust II"), whose managing partner is BCI, (vi) 26,043 shares of Class A-1 Common Stock owned by BCIP Associates II-B ("BCIP II-B"), whose managing partner is BCI, (vii) 10,221 shares of Class A-1 Common Stock owned by BCIP Trust Associates II-B ("BCIP Trust II-B"), whose managing partner is BCI, (viii) 50,349 shares of Class A-1 Common Stock owned by BCIP Associates II-C ("BCIP II-C), whose managing partner is BCI, (ix) 96,419 shares of Class A-1 Common Stock owned by Sankaty High Yield Asset Partners, L.P., whose sole general partner is Sankaty High Yield Asset Investors, LLC, whose sole managing member is Sankaty Investors, LLC, whose sole managing member is Mr. Jonathan S. Lavine, and (x) 385,675 shares of Class A-1 Common Stock owned by Brookside Capital Partners Fund, L.P., whose sole general partner is Brookside Capital Investors, L.P., whose sole general partner is Brookside Capital Management, LLC, whose sole managing member is Mr. Roy Edgar Brakeman, III. (2) Consists of (i) 1,849,036 shares of Class A-1 Common Stock owned by Fund VI, whose sole general partner is BCP VI, whose sole general partner is BCI, of which Mr. Balson is a member, (ii) 2,104,694 shares of Class A-1 Common Stock owned by Coinvest Fund, whose sole general partner is BCP VI, whose sole general partner is BCI, of which Mr. Balson is a member, (iii) 6,164 shares of Class A-1 Common Stock owned by PEP, for which BCI, of which Mr. Balson is a member, is Attorney-in-Fact, (iv) 26,043 shares of Class A-1 Common Stock owned by BCIP II-B, a Delaware general partnership of which Mr. Balson or an entity affiliated with him is a general partner and whose managing partner is BCI, of which Mr. Balson is a member, and (v) 10,221 shares of Class A-1 Common Stock owned by BCIP Trust II-B, a Delaware general partnership of which an entity affiliated with Mr. Balson is a general partner and whose managing partner is BCI, of which Mr. Balson is a member. Mr. Balson disclaims beneficial ownership of any such shares in which he does not have a pecuniary interest. (3) Consists of (i) 1,849,036 shares of Class A-1 Common Stock owned by Fund VI, whose sole general partner is BCP VI, whose sole general partner is BCI, of which Mr. Nunnelly is a member, (ii) 2,104,694 shares of Class A-1 Common Stock owned by Coinvest Fund, whose sole general partner is BCP VI, whose sole general partner is BCI, of which Mr. Nunnelly is a member, (iii) 6,164 shares of Class A-1 Common Stock owned by PEP, for which BCI, of which Mr. Nunnelly is a member, is Attorney-in-Fact, (iv) 161,215 shares of Class A-1 Common Stock owned by BCIP II, a Delaware general partnership of which Mr. Nunnelly or an entity affiliated with him is a general partner and whose managing partner is BCI, of which Mr. Nunnelly is a member, and (v) 34,702 shares of Class A-1 Common Stock owned by BCIP Trust II, a Delaware general partnership of which an entity affiliated with Mr. Nunnelly is a general partner and whose managing partner is BCI, of which Mr. Nunnelly is a member. Mr. Nunnelly disclaims beneficial ownership of any such shares in which he does not have a pecuniary interest. (4) Mr. Ruggiero is an executive officer of the ultimate general partners of J.P. Morgan Partners (BHCA), L.P. (formerly known as Chase Equity Associates, L.P. and hereinafter referred to as "JPMP BHCA"), J.P. Morgan Capital, L.P. (formerly known as J.P. Morgan Capital Corporation and hereinafter referred to as "JPM Capital") and Sixty Wall Street Fund, L.P. (hereinafter referred to as "Sixty WSF"). Mr. Ruggiero is also a partner of J.P. Morgan Partners, LLC, an investment adviser to JPMP BHCA, JPM Capital and Sixty WSF. JPMP BHCA is a member of DP Investors I, LLC which holds 472,452 shares of Class A-1 Common Stock. Each of JPM Capital and Sixty WSF holds 446,834 and 25,618 shares of Class A-1 Common Stock, respectively. Accordingly, Mr. Ruggiero may be deemed the indirect beneficial owner of the voting shares held by JPMP BHCA, JPM Capital and JPM Sixty WSF. Mr. Ruggiero disclaims beneficial ownership of any such shares held by each of JPMP BHCA, JPM Capital and Sixty WSF, except to the extent of his pecuniary interest therein which is not readily determinable because it is subject to several variables including without limitation, the internal rates of returns and vesting of each of JPMP BHCA, JPM Capital and Sixty WSF. 64
The following table sets forth information with respect to ownership of TISM, Inc. non-voting securities as of March 15, 2003 by each Named Executive Officer. Under certain circumstances these securities are convertible into voting Class A-1 Common Stock. Class A-3 Class L Name Common Stock Common Stock Preferred Stock ---- ------------ ------------ --------------- David A. Brandon 400,000 44,444 - Harry J. Silverman 100,000 - 1,425 Michael D. Soignet 100,000 - 1,425 Patrick W. Knotts - - - J. Patrick Doyle 27,276 3,031 594 Item 13. Certain Relationships and Related Transactions. Stockholders Agreement In connection with the Recapitalization, TISM, certain of its subsidiaries, including the Company, and all of the equity holders of TISM (including the Bain Capital funds), entered into a stockholders agreement that, among other things, provides for tag-along rights, drag-along rights, registration rights, restrictions on the transfer of shares held by parties to the stockholders agreement and certain preemptive rights for certain stockholders. Under the terms of the stockholders agreement, the approval of the Bain Capital funds will be required for TISM, its subsidiaries, including the Company, and its stockholders to take various specified actions, including major corporate transactions such as a sale or initial public offering, acquisitions, divestitures, financings, recapitalizations and mergers, as well as other actions such as hiring and firing senior managers, setting management compensation and establishing capital and operating budgets and business plans. Pursuant to the stockholders agreement and TISM's Articles of Incorporation, the Bain Capital funds have the power to elect up to half of the Board of Directors of TISM. The stockholders agreement includes customary indemnification provisions in favor of controlling persons against liabilities under the Securities Act. Management Agreement In connection with the Recapitalization, TISM and certain of its subsidiaries entered into a management agreement with Bain Capital Partners VI, L.P. pursuant to which it provides financial, management and operation consulting services. In exchange for such services, Bain Capital Partners VI, L.P. is entitled to an annual management fee of $2.0 million plus the reasonable out-of-pocket expenses of Bain Capital Partners VI, L.P. and its affiliates. In addition, in exchange for assisting the Company in negotiating the senior financing for any recapitalization, acquisition or other similar transaction, Bain Capital Partners VI, L.P. is entitled to a transaction fee equal to 1% of the gross purchase price, including assumed liabilities, for such transaction, irrespective of whether such senior financing is actually committed or drawn upon. The management agreement will continue in effect as long as Bain Capital Partners VI, L.P. continues to provide such services. The management agreement, however, may be terminated (i) by mutual consent of the parties, (ii) by either party following a material breach of the management agreement by the other party and the failure of such other party to cure the breach within thirty days of written notice of such breach or (iii) by Bain Capital Partners VI, L.P. upon sixty days written notice. The management agreement includes customary indemnification provisions in favor of Bain Capital Partners VI, L.P. and its affiliates. Messrs. Balson and Nunnelly are managing directors of Bain Capital, an affiliate of Bain Capital Partners VI, L.P. Financing Arrangements An affiliate of J.P. Morgan Capital Corporation, a TISM stockholder, provided the following services to the Company on terms which we believe are no less favorable than obtainable from an unrelated third party. During 2002 and in connection with the consummation of our new senior credit facility, this affiliate provided financing services for which they were paid approximately $2.3 million in financing fees. This affiliate also receives commitment and letters of credit fees for their ratable portion of the senior credit facility. A separate affiliate is also counterparty to our $70.0 million interest rate collar agreement which expires in June 2003. Mr. Ruggiero is a partner of J.P. Morgan Partners, LLC, an affiliate of J.P. Morgan Capital Corporation. 65
Shareholder Indemnification of Legal Settlement In 2000, the Company settled a lawsuit in which the Company paid the plaintiffs $5.0 million for a full release of all related claims. Thomas S. Monaghan, a principal stockholder, agreed to indemnify TISM for 80% of all related legal settlements. Mr. Monaghan paid $4.0 million to the Company in 2000 and $521,000 in 2002 in accordance with this indemnification agreement. Mr. Monaghan has no further obligations under this indemnification agreement. Lease Agreement In connection with the Recapitalization in 1998, Domino's Pizza LLC entered into a new lease agreement with Domino's Farms with respect to its World Resource Center and Michigan distribution center. The lease provided for lease payments of $4.3 million in the first year, increasing annually to approximately $4.5 million in the fifth year. Thomas S. Monaghan, a TISM shareholder and former director of TISM and Domino's, is the ultimate general partner of Domino's Farms. In August of 2002, the Company amended the aforementioned lease agreement with Domino's Farms. The new lease provides for no lease payments in the first year, lease payments of approximately $5.0 million in the second year, increasing annually to approximately $6.2 million in the tenth year. We believe that this lease, as amended, is on terms no less favorable than are obtainable from unrelated third parties. Contingent Note Payable TISM is contingently liable to pay Thomas S. Monaghan and his wife an amount not to exceed approximately $15 million under a note payable, plus 8% interest per annum beginning in 2003, in the event the majority stockholders of TISM sell a certain percentage of their TISM common stock to an unaffiliated party. Consulting Agreement with Thomas S. Monaghan In connection with the Recapitalization, Mr. Monaghan entered into a consulting agreement that has a term of ten years, is terminable by either the Company or Mr. Monaghan upon thirty days prior written notice, and may be extended or renewed by written agreement. Under the consulting agreement, Mr. Monaghan may be required to make himself available to Domino's Pizza on a limited basis. Mr. Monaghan received a retainer of $1.0 million for the first twelve months of the agreement and was entitled to receive $500,000 per year for the remainder of the term of the agreement. The agreement provided that upon termination for any reason, the Company would pay Mr. Monaghan a lump sum payment equal to the full amount of the retainer for the remainder of the term. During 2002, we terminated the consulting agreement in exchange for a payment of approximately $2.9 million. As a consultant, Mr. Monaghan was entitled to reimbursement of travel and other expenses incurred in performance of his duties but is not entitled to participate in any of our employee benefit plans or other benefits or conditions of employment available to our employees. Item 14. Controls and Procedures. Within 90 days prior to the date of the filing of this report, the Company's Chief Executive Officer and Chief Financial Officer conducted an evaluation of the effectiveness, design and operation of the Company's disclosure controls and procedures as defined in Exchange Act Rule 13a-14. Based upon that evaluation, such officers concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed is recorded, processed, summarized, and reported in a timely manner. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referred to above. 66
Part IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) 1. Financial Statements: The following financial statements of Domino's, Inc. are included in Item 8, "Financial Statements and Supplementary Data": Report of Independent Accountants Consolidated Balance Sheets as of December 30, 2001 and December 29, 2002 Consolidated Statements of Income for the Years Ended December 31, 2000, December 30, 2001 and December 29, 2002 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2000, December 30, 2001 and December 29, 2002 Consolidated Statements of Stockholder's Deficit for the Years Ended December 31, 2000, December 30, 2001 and December 29, 2002 Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, December 30, 2001 and December 29, 2002 Notes to Consolidated Financial Statements 2. Financial Statement Schedules: The following financial statement schedule is attached to this report. Schedule II - Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable, not required, or the information is included in the financial statements or the notes thereto. 3. Exhibits: Certain of the following Exhibits have been previously filed with the Securities and Exchange Commission pursuant to the requirements of the Securities Act of 1933 and the Securities Exchange Act of 1934. Such exhibits are identified by the parenthetical references following the listing of each such exhibit and are incorporated herein by reference. Exhibit Number Description - ------ ----------- 2.1 Agreement and Plan of Merger dated as of September 25, 1998 (incorporated by reference to Exhibit 2.1 of registrant's registration statement on Form S-4 filed with Securities and Exchange Commission on May 12, 1999 (registration no: 333-74797), (the "S-4")). 2.2 Amendment No. 1 to Agreement and Plan of Merger dated as of November 24, 1998 (S-4, Exhibit 2.2). 2.3 Amendment No. 2 to Agreement and Plan of Merger dated as of November 24, 1998 (S-4, Exhibit 2.3). 2.4 Amendment No. 3 to Agreement and Plan of Merger dated December 18, 1998 (S-4, Exhibit 2.4). 2.5 Certificate of Merger for Domino's Pizza LLC and DP CA Comm Inc. and DP CA Corp Inc. dated December 26, 2001 (incorporated by reference to Exhibit 2.5 of the registrant's annual report on Form 10-K for the fiscal year ended December 30, 2001, (the "2001 10-K")). 3.1 Domino's, Inc. Amended and Restated Certificate of Incorporation (S-4, Exhibit 3.1). 3.2 Domino's, Inc. Amended and Restated By-Laws (S-4, Exhibit 3.2). 67
4.1 Stockholders Agreement dated as of December 21, 1998 by and among TISM, Inc., Domino's, Inc., Bain Capital Fund VI, L.P., Bain Capital VI Coinvestment Fund, L.P., BCIP, PEP Investments PTY Ltd., Sankaty High Yield Asset Partners, L.P., Brookside Capital Partners Fund, L.P., RGIP, LLC, DP Investors I, LLC, DP Investors II, LLC, J.P. Morgan Capital Corporation, Sixty Wall Street Fund, L.P., DP Transitory Corporation, Thomas S. Monaghan, individually and in his capacity as trustee, and Marjorie Monaghan, individually and in her capacity as trustee, Harry J. Silverman, Michael D. Soignet, Stuart K. Mathis, Patrick Kelly, Gary M. McCausland and Cheryl Bachelder (S-4, Exhibit 10.5). 4.2 Indenture dated as of December 21, 1998 by and among Domino's Inc., Domino's Pizza, Inc., Metro Detroit Pizza, Bluefence, Inc., Domino's Pizza International, Inc., Domino's Pizza International Payroll Services, Inc., Domino's Pizza-Government Services Division, Inc. and IBJ Schroder Bank and Trust Company (S-4, Exhibit 4.1). 4.3 Supplemental Indenture dated as of June 7, 2000 (incorporated by reference to Exhibit 10.2 of the registrant's quarterly report on Form 10-Q for the fiscal quarter ended September 10, 2000). 4.4 Registration Rights Agreement dated as of December 21, 1998 by and among Domino's, Inc., Domino's Pizza, Inc., Metro Detroit Pizza, Inc., Bluefence, Inc., Domino's Pizza International, Inc., Domino's Pizza International Payroll Services, Inc., Domino's Pizza-Government Services Division, Inc., J.P. Morgan Securities, Inc. and Goldman, Sachs & Co. (S-4, Exhibit 4.2). 10.1 Amended and Restated Purchase Agreement dated December 21, 1998 by and among Domino's Inc., Domino's Pizza, Inc., Metro Detroit Pizza, Inc., Bluefence, Inc., Domino's Pizza International, Inc., Domino's Pizza International Payroll Services, Inc., Domino's Pizza-Government Services Division, Inc., J.P. Morgan Securities, Inc. and Goldman, Sachs & Co. (S-4, Exhibit 10.1). 10.2 Consulting Agreement dated December 21, 1998 by and between Domino's Pizza, Inc. and Thomas S. Monaghan (S-4, Exhibit 10.2). 10.3 Lease Agreement dated as of December 21, 1998 by and between Domino's Farms Office Park Limited Partnership and Domino's Pizza, Inc. (S-4, Exhibit 10.3). 10.4 Amendment, dated February 7, 2000, to Lease Agreement dated December 21, 1998 by and between Domino's Farms Office Park Limited Partnership and Domino's Pizza, Inc. (incorporated by reference to Exhibit 10.32 of the registrant's annual report on Form 10-K for the year ended December 31, 2000, (the "2000 10-K")). 10.5 First Amendment to a Lease Agreement between Domino's Farms Office Park, L.L.C. and Domino's Pizza, LLC, dated as of August 8, 2002, by and between Domino's Farms Office Park L.L.C. and Domino's Pizza, LLC. 10.6 Management Agreement by and among TISM, Inc., each of its direct and indirect subsidiaries and Bain Capital Partners VI, L.P. (S-4, Exhibit 10.4). 10.7 Senior Executive Deferred Bonus Plan of Domino's, Inc. dated as of December 21, 1998 (S-4, Exhibit 10.6). 10.8 Domino's Pizza, Inc. Deferred Compensation Plan adopted effective January 4, 1999 (S-4, Exhibit 10.7). 10.9 Domino's Pizza, Inc. Amendment to the Deferred Compensation Plan (incorporated by reference to Exhibit 10.8 of the registrant's annual report on Form 10-K for the year ended January 2, 2000, (the "1999 10-K")). 68
10.10 Credit Agreement dated as of December 21, 1998 by and among Domino's, Inc., Bluefence, Inc., J.P. Morgan Securities, Inc., Morgan Guaranty Trust Company of New York, Bank One and Comerica Bank (S-4, Exhibit 10.15). 10.11 First Amendment, dated as of February 10, 1999, to Credit Agreement, dated as of December 21, 1998, as amended. (2000 10-K, Exhibit 10.28). 10.12 Second Amendment, dated as of April 16, 1999, to Credit Agreement, dated as of December 21, 1998, as amended. (2000 10-K, Exhibit 10.29). 10.13 Third Amendment, dated as of July 17, 2000, to Credit Agreement, dated as of December 21, 1998, as amended (incorporated by reference to Exhibit 10.3 of the registrant's quarterly report on Form 10-Q/A for the fiscal quarter ended September 10, 2000). 10.14 Borrower Pledge Agreement dated as of December 21, 1998 by and among Domino's, Inc., Bluefence, Inc. and Morgan Guaranty Trust Company of New York, as Collateral Agent (S-4, Exhibit 10.16). 10.15 Borrower Security Agreement dated as of December 21, 1998 by and among Domino's, Inc., Bluefence, Inc. and Morgan Guaranty Trust Company of New York, as Collateral Agent (S-4, Exhibit 10.18). 10.16 Credit agreement, dated as of July 29, 2002, among Domino's, Inc. and Domino's Franchise Holding Co. (f/k/a Bluefence, Inc.) as borrowers, TISM, Inc., as Guarantor, the lenders listed herein, as lenders, J.P. Morgan Securities Inc., as arranger, JPMorgan Chase Bank, as administrative agent, Bank One, NA, as syndication agent, and Comerica Bank, as documentation agent (incorporated by reference to Exhibit 10.40 of the registrant's current report on Form 8-K dated July 29, 2002). 10.17 Pledge agreement, dated as of July 29, 2002, among Domino's, Inc., Domino's Franchise Holding Co., TISM, Inc., Domino's Pizza LLC, Domino's Pizza International, Inc., Domino's Pizza Government Services Division, Inc., Domino's Pizza International Payroll Services, Inc. Domino's Pizza PMC, Inc., Domino's Pizza California LLC and JPMorgan Chase Bank as Collateral Agent 10.18 Security agreement, dated as of July 29, 2002, among Domino's, Inc., Domino's Franchise Holding Co., TISM, Inc., Domino's Pizza LLC, Domino's Pizza International, Inc., Domino's Pizza Government Services Division, Inc., Domino's Pizza International Payroll Services, Inc. Domino's Pizza PMC, Inc., Domino's Pizza California LLC and JPMorgan Chase Bank as Collateral Agent 10.19 TISM, Inc. Third Amended and Restated Stock Option Plan (1999 10-K, Exhibit 10.23). 10.20 First Amendment to the TISM, Inc. Third Amended and Restated Stock Option Plan (incorporated by reference to Exhibit 10.2 of the registrant's quarterly report on Form 10-Q for the fiscal quarter ended June 18, 2000). 10.21 Settlement Letter, dated March 23, 2000, between TISM, Inc. and Thomas S. Monaghan. (2000 10-K, Exhibit 10.33). 10.22 Employment Agreement dated as of March 31, 1999 between David A. Brandon and TISM, Inc., Domino's Inc. and Domino's Pizza, Inc. (S-4, Exhibit 10.21). 10.23 Employment Agreement dated as of January 1, 2002 between Domino's Pizza LLC and Harry J. Silverman (2001 10-K, Exhibit 10.36). 10.24 Employment Agreement dated as of January 1, 2002 between Domino's Pizza LLC and Patrick W. Knotts (2001 10-K, Exhibit 10.37). 69
10.25 Employment Agreement dated as of January 1, 2002 between Domino's Pizza LLC and Michael D. Soignet (2001 10-K, Exhibit 10.38). 10.26 Employment Agreement dated as of January 1, 2002 between Domino's Pizza LLC and J. Patrick Doyle (2001 10-K, Exhibit 10.39). 10.27 Time sharing agreement, dated as of December 2, 2002, between Domino's Pizza LLC and David A. Brandon. 16.1 Letter from Arthur Andersen LLP to the Securities and Exchange Commission, dated March 22, 2002. (2001 10-K, Exhibit 16.1). 21.1 Domino's, Inc. significant subsidiaries 99.1 Risk Factors 99.2 Certification by David A. Brandon pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.3 Certification by Harry J. Silverman pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. __________ (b) Reports on Form 8-K. The following report on Form 8-K was filed on October 22, 2002 and was the only report on Form 8-K filed during the fiscal quarter ended December 29, 2002: Statement of Chief Executive Officer, dated October 22, 2002, pursuant to Securities and Exchange Commission Order 4-460, dated June 27, 2002, and Statement of Chief Financial Officer, dated October 22, 2002, pursuant to Securities and Exchange Commission Order 4-460, dated June 27, 2002. SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT. No annual report has been sent to security holders covering the registrant's last fiscal year and no proxy materials have been sent to more than 10 of the registrant's security holders during the registrant's last fiscal year. 70
Report of Independent Accountants To Domino's, Inc.: Our audits of the consolidated financial statements referred to in our report dated February 3, 2003 of Domino's, Inc. (which report and consolidated financial statements are included in this Form 10-K) also included an audit of the financial statement schedule listed in Item 15 of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PricewaterhouseCoopers LLP Detroit, Michigan February 3, 2003 71
SCHEDULE II - VALUATION and QUALIFYING ACCOUNTS DOMINO'S, INC. and SUBSIDIARIES (In Thousands) Balance * Additions / Balance Beginning Provision Deductions Translation End of of Year (Benefit) from Reserves Adjustments Year ------- --------- ------------- ----------- ---- Allowance for doubtful accounts receivable 2002 $6,071 $ 650 $(3,036) $ 79 $3,764 2001 3,561 2,955 (345) (100) 6,071 2000 2,444 1,996 (827) (52) 3,561 Allowance for doubtful notes receivable 2002 3,493 (1,091) 1,275 7 3,684 2001 3,141 41 311 - 3,493 2000 3,537 205 (601) - 3,141 ____________ * Consists primarily of write-offs, recoveries of bad debt and certain reclassifications. 72
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized, in the Township of Ann Arbor, State of Michigan on the 25th day of March, 2003. DOMINO'S, INC. /s/ Harry J. Silverman ------------------------- Harry J. Silverman Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 25, 2003. /s/ David A. Brandon - --------------------------- David A. Brandon Chairman, CEO and Director (Principal Executive Officer) /s/ Harry J. Silverman - --------------------------- Harry J. Silverman Chief Financial Officer (Principal Financial and Accounting Officer) /s/ Andrew B. Balson - --------------------------- Andrew B. Balson Director /s/ Dennis F. Hightower - --------------------------- Dennis F. Hightower Director /s/ Mark E. Nunnelly - --------------------------- Mark E. Nunnelly Director /s/ Robert M. Rosenberg - --------------------------- Robert M. Rosenberg Director /s/ Robert Ruggiero, Jr. - --------------------------- Robert Ruggiero, Jr. Director 73
CERTIFICATION OF CHIEF EXECUTIVE OFFICER, DOMINO'S, INC. I, David A. Brandon, Chief Executive Officer, Domino's, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of Domino's, Inc. 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. March 25, 2003 /s/ David A. Brandon - ------------------ -------------------------- Date David A. Brandon Chief Executive Officer 74
CERTIFICATION OF CHIEF FINANCIAL OFFICER, DOMINO'S, INC. I, Harry J. Silverman, Chief Financial Officer, Domino's, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of Domino's, Inc. 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. March 25, 2003 /s/ Harry J. Silverman - ------------------ -------------------------- Date Harry J. Silverman Chief Financial Officer 75
EXHIBIT 10.5 FIRST AMENDMENT TO A LEASE AGREEMENT BETWEEN DOMINOS' FARMS OFFICE PARK, L.L.C. (LANDLORD) AND DOMINO'S PIZZA, LLC (TENANT) THIS FIRST AMENDMENT to a Lease Agreement is made August 8th, 2002 and is effective as of the 21st day of December, 2003, by and between DOMINO'S FARMS OFFICE PARK, L.L.C., a Michigan Limited Liability Company, f/k/a Domino's Farms Office Park Limited Partnership (Landlord) and DOMINO'S PIZZA, LLC (Tenant). WHEREAS, Landlord entered into a Lease Agreement for a portion of the office building known as Domino's Farms Prairie House located at 30 Frank Lloyd Wright Drive, Ann Arbor, Michigan 48105 with Domino's Pizza, Inc., whose successor in interest is Domino's Pizza, LLC (Tenant) for a term of five (5) years commencing as of December 21, 1998; and WHEREAS, Landlord and Tenant desire to extend the term of the Lease, include additional space as part of the Premises, and incorporate additional provisions; NOW, THEREFORE, Landlord and Tenant agree to amend the Lease by replacing the Standard Lease Summary, Rider A, and Rider C with the attached Standard Lease Summary, Rider A, Rider C, and Rider D. IN WITNESS WHEREOF, the parties have hereunto executed this First Amendment to Lease Agreement as of the day and year first above written. LANDLORD: DOMINO'S FARMS OFFICE PARK, L.L.C. (a Michigan limited liability company) /s/ Edwin L. Pear - --------------------------- By: /s/ Paul R. Roney ------------------------------ /s/ Johnie A. Campbell Paul R. Roney - --------------------------- Its: Manager TENANT: DOMINO'S PIZZA, LLC (a Michigan limited liability company) /s/ Cerene A. Boudrie By: /s/ Harry Silverman - --------------------------- ----------------------------- Name: Harry Silverman /s/ Joel F. Graziani Its: Executive VP of Finance - --------------------------- Chief Financial Officer 1
FIRST AMENDED STANDARD LEASE SUMMARY THIS FIRST AMENDED STANDARD LEASE SUMMARY is made August 8th, 2002, and contains amendments to certain basic terms of the Lease dated December 21, 1998, between Domino's Farms Office Park Limited Partnership and Domino's Pizza, Inc. The amendments to the Lease shall be effective as of the 21st day of December, 2003, between the following parties: LANDLORD: TENANT: Domino's Farms Office Park, LL.C. Domino's Pizza, LLC 24 Frank Lloyd Wright Drive 30 Frank Lloyd Wright Drive Ann Arbor, Michigan 48105 P.O. Box 997 (f/k/a as Domino's Farms Office Park Ann Arbor, Michigan 48106-0997 Limited Partnership (successor in interest to Domino's Pizza, Inc.) The following is intended to summarize certain basic terms of this Lease, and is not intended to be exhaustive. In the event anything set forth in this Lease Summary ("Lease Summary") conflicts with the other specific provisions of this Lease contained in the Standard Lease Terms, the latter shall be deemed to control. All terms of the Lease no amended by this First Standard Lease Summary or Riders A, C, and D executed in connection with the First Amended Lease Agreement shall remain in effect. A. BUILDING: The office building commonly known as Domino's Farms Prairie House located at 30 Frank Lloyd Wright Drive, Ann Arbor, Michigan 48105. B. PREMISES: Office Space, Lab Space 188,767 rentable square feet [Tenant and Conference Center shall have the option to terminate the Square Footage: Lease with regard to approximately 4,500 rentable square feet or up to 15,000 rentable square feet from the south end of the third floor of the Premises, subject to adequate ingress and egress requirements, and upon such termination the rent shall be reduced accordingly. Tenant must notify Landlord by December 31, 2002 if it elects to terminate the Lease with regard to this space]. 2
Warehouse Square Approximately 5,000 Footage: Location: All of the highlighted space as shown on the attached Rider A. C. TERM Commencement Date: December 21, 2003 Expiration Date: Midnight December 20, 2013 Option to Renew: See Rider C D. RENT See Rider C E. PERMITTED USES: Office, together with uses ancillary and accessory thereto F. SECURITY DEPOSIT: None G. LANDLORD'S AGENT: Domino's Farms Corporation H. MAILING ADDRESS: P.O. Box 445 Ann Arbor, Michigan 48105-0445 RIDERS ATTACHED: Rider A - Floor Plan Rider B - Rules and Regulations Rider C - Additional Provisions Rider D - Cleaning Specifications 3
RIDER C This Rider C is part of the First Amendment to Lease Agreement dated August 8th, 2002, and replaced the Rider C attached to the Lease Agreement dated December 21, 1998. PARKING LOT Landlord agrees to provide for a separate parking lot for Tenant of at least 450 parking spaces in accordance with the drawing attached. Tenant will be required to use such lot for its employees, invitees, and guests. Landlord will not grant permission to use such lot to any other person or entity. The Landlord, at Landlord's expense, will be responsible for maintaining the parking lot (including replacing, resurfacing repainting, and repairing, as needed, and keeping it free from ice, snow, debris, and the like) and will provide entry and exit gates along with a security guard booth which will be staffed by the Landlord during normal business hours. Tenant may implement a parking sticker or permit procedure to identify vehicles that may be parked on the lot, at Tenant's expense. Any of the proposed changes for the parking lot as set forth in the attached drawing will be subject to approval by the appropriate local authorities. The number of handicap parking spaces will be maintained as required by the township parking code. Tenant may designate certain spaces in the lot as "reserved" spaces provided that the designation complies with township parking codes. Any parking signage desired by Tenant, including reserved parking designations, will be subject to approval by Landlord, and will be at Tenant's expense. TERM The term of this Lease shall be ten (10) years commencing December 21, 2003 and shall end at midnight December 20, 2013 (expiration date). RENT The rent for the Premises shall be as follows: Annual Office, Lab and Annual Base Annual Year Conference Center Rent Storage Space Rent Rental - ---- ---------------------- ------------------- ------------ Year 1** $ 25.95 per sq. ft. $ 12.00 per sq. ft. Year 2 and 3 The base annual rental shall increase each year to reflect the cost of living increase in accordance with any increase in the Consumers Price Index of the Bureau of Labor Statistics all items indexed for Detroit, Michigan or by one and one-half percent, whichever is less, provided however, in no event shall the base rent as adjusted be reduced from the previous year. 4
Year 4 and 5 The base annual rental shall increase each year to reflect the cost of living increase in accordance with any increase in the Consumers Price Index of the Bureau of Labor Statistics all items indexed for Detroit, Michigan or by two and one-half percent, whichever is less, provided however, in no event shall the base rent as adjusted be reduced from the previous year. Year 6, 7 The base annual rental shall increase each year to reflect the 8, 9, and 10 cost of living increase in accordance with any increase in the Consumers Price Index of the Bureau of Labor Statistics all items indexed for Detroit, Michigan or by three percent, whichever is less, provided however, in no event shall the base rent as adjusted be reduced from the previous year. **Tenant will not be required to pay rent for the first year of the Lease. TENANT IMPROVEMENTS Tenant desires to make substantial changes and Tenant improvements to the Premises at Tenant's cost. All changes and Tenant improvements to the Premises will be made in accordance with plans and specifications which will be provided to and approved by Landlord, subject to the Interior Specifications for Tenant Improvement Guidelines. Landlord will not unreasonably withhold consent for Tenant to make architectural changes to the lobby/entrance area so long as consistent and compatible with materials and colors of existing building. Tenant agrees to indemnify and hold Landlord harmless from any claims arising from the remodeling and making of improvements. Tenant agrees to be responsible for obtaining any applicable permits and to insure that all work is paid for in full and that Landlord's interest in the property will be kept free from any liens. Tenant accepts the Premises in "as is" condition and configuration. To the extent the Premises consists of space presently not leased by Tenant, Landlord agrees to deliver the space in a broom clean condition. Tenant shall obtain, at its own expense, an insurance policy to insure the leasehold improvements made to the Premises and any other fixtures or equipment of Tenant which will remain the property of Landlord under Section 19 of this Lease. The policy shall name Landlord as an additional insured for full replacement costs against loss by fire, with standard extended risk coverage, vandalism, malicious mischief, sprinkler leakage and all other risk perils. OPTION TO RENEW Upon expiration of the term, provided that Tenant is not then in default beyond the expiration of any applicable grace and cure period after notice, Tenant may extend the term of this Lease for an additional term of five (5) years (the First Extended Term) and Tenant may extend the term of this Lease for an additional term consisting of five (5) years (the Second Extended Term), upon the expiration of the First Extended Term, provided that Tenant has 5
exercised its option for the First Extended Term and is not then in default beyond the expiration of any applicable grace and cure period after notice. The base annual rent for the First Extended Term shall be the fair market rent for the Premises (the "FMR") on the date which is nine years, thirty days after the Commencement Date (the "Rent Appraisal Date"), and (ii) in addition to the payment of Base Annual rent, Tenant shall during the First Extended Term pay to Landlord for the use of the fitness center a reasonable price or fee which the Landlord may then be charging to Tenant and the other tenants in the Building on a prorata basis (based upon the rentable square feet of the Premises in relation to the rentable square feet of all of Domino's Farms), which amount shall be payable in equal monthly installments on each Rent Day; provided, however that Tenant shall not be obligated to pay such price or fee at such times as Tenant provides Landlord with written notice that it elects not to use such fitness center during the First or Second Extended Term. The Tenant shall exercise the option for the First Extended Term by notifying the Landlord in writing at least 360 days before the initial Term expires. Upon such exercise this Lease shall be deemed to be extended without the execution of any further lease or other instrument, except for any instrument that may be prepared by Landlord to confirm the agreement of the parties, which Tenant agrees to execute and deliver to Landlord promptly on request. Time shall be of the essence with respect to the exercise of such option by Tenant. The FMR shall be determined by the mutual written agreement of Landlord and Tenant. In the event that Landlord and Tenant shall not have reached mutual agreement as to the FMR on or before the sixtieth (60th) day following the Rent Appraisal Date, but Landlord's determination of the FMR is less than five percent (5%) greater than Tenant's determination of the FMR (which respective determinations shall be based on blind written bids submitted at the end of the sixty (60) day period by each of Landlord and Tenant to the other), the FMR will be the average of Landlord's and Tenant's respective determinations. In the event that Landlord and Tenant shall not have reached mutual agreement as to the FMR on or before the sixtieth (60th) day following the Rent Appraisal Date and Landlord's determination of the FMR is more than five percent (5%) greater than Tenant's determination of the FMR, then Landlord and Tenant each shall, no later than the seventy-fifth (75th) day following the Rent Appraisal Date, select a Real Estate Appraiser, as hereinafter defined. If either party shall fail to so appoint a Real Estate Appraiser, the one Real Estate Appraiser so appointed shall proceed to determine the FMR. In the event that the Real Estate Appraisers selected by Landlord and Tenant agrees as to the FMR, said determination shall be binding on Landlord and Tenant. In the event that the Real Estate Appraisers selected by Landlord and Tenant cannot agree as to the FMR, on or before the one hundred fifth (105th) day following the Rent Appraisal Date, then said Real Estate Appraisers shall each designate his or her calculation of FMR and shall jointly select a third Real Estate Appraiser, provided that if they cannot agree on the third Real Estate Appraiser on or before the one hundred twentieth (120th) day following the Rent Appraisal Date, then said third Real Estate Appraiser shall be selected by the President of the American Arbitration Association of Southfield, Michigan (or any successor thereto). The third Real Estate appraiser shall designate his or her calculation of FMR no later than the one hundred fiftieth (150th) day following the Rent Appraiser Date and the average of the three FMR's designated by the three Real Estate Appraisers shall be the FMR as determined hereunder, except that for the purpose of such averaging each and every designated FMR which varies by more than ten percent (10%) from the amount which is the average of the other two (2) designated FMR's shall be ignored (it 6
being understood that if two (2) designated FMR's so vary, the remaining designated FMR shall be the FMR as determined hereunder). The term "Real Estate Appraiser" shall mean a fit and impartial person having not less than five (5) years experience as an appraiser of leasehold estates relating to first class office space in Ann Arbor, Michigan. The appraisal shall be conducted in accordance with the provisions of this Section and, to the extent not inconsistent herewith, in accordance with the prevailing rules of the American Arbitration Association in Michigan or any successor thereto. The final determination of the Real Estate Appraiser(s) shall be in writing and shall be binding and conclusive upon the parties, each of which shall receive counterpart copies thereof. In rendering such decision the Real Estate Appraiser(s) shall not add to, subtract from or otherwise modify the provisions of this Lease. The fees and expenses of the Real Estate Appraisers shall be shared equally by Landlord and Tenant. In rendering the determination of FMR the real estate appraiser(s) shall assume or take into consideration as appropriate all of the following: (1) Landlord and Tenant are typically motivated; (2) the Landlord and prospective Tenant are well informed and well advised and each is acting in what it considers its own best interest; (3) a reasonable time under then-existing market conditions is allowed for exposure of the Premises on the open market; (4) the rent is unaffected by any obligation of Landlord to pay brokerage commissions or tenant-improvement allowances, or by concessions, special financing amounts and/or terms, or unusual services, fees, costs or credits in connection with the leasing transaction; (5) the Premises are fit for immediate occupancy and use "as is" and require no additional work by Landlord and that no work has been carried out therein by the Tenant, its subtenant, or their predecessors in interest during the Term which has diminished the rental value of the Premises; (6) in the event the Premises have been destroyed or damaged by fire or other casualty, they have been fully restored; (7) that the Premises are to be let with vacant possession and subject to the provisions of this Lease; and (8) market rents then being charged for comparable space in other similar office buildings in the same area, provided that arm's-length leases of space in the Building during the preceding year shall be the best evidence of FMR. In rendering such decision and award, the arbitrators shall not modify the provisions of this Lease. The decision and award of the real estate appraisers shall be in writing and shall be final and conclusive on all parties and counterpart copies thereof shall be delivered to each of said parties. Judgment may be had on the decision and award of the arbitrators so rendered in any court of competent jurisdiction. COMMISSARY Tenant agrees that the Commissary it presently operates on the Premises will be moved off the Premises no later April 30, 2003, and at Tenant's option, the Lease shall terminate as to so much of the Premises as Tenant no longer needs as a result of moving the Commissary and the annual rent will be reduced accordingly. WAREHOUSE RELOCATION Landlord agrees to lease to Tenant, as part of the Premises, approximately 5,000 square feet of warehouse space within the existing warehouse. 7
MASSCORP SPACE If Tenant requests non-contiguous space for MassCorp within the building, Tenant agrees the rental rate for such additional space shall be the same as the rate for office space. BUSINESS USE Landlord agrees to maintain the Domino's Farms Prairie House as a building primarily for business, research, and office use and will use reasonable efforts to minimize the use of the Building and surrounding grounds for non-business activities that may detract from a Class A office setting. In any event, Landlord will not intentionally expand the non business use of the Building and surrounding grounds from the presently permitted non business uses, and will not replace or institute a substitute Holiday Light Display, without the consent of Tenant, which will not be unreasonably withheld. Landlord also agrees that any future expansion of building will be for business, research and office use. Tenant shall be permitted to use the existing flag poles for Domino's Pizza related flags. CLEANING SPECIFICATIONS The cleaning specifications for the premises are attached as Exhibit D. PHASE VI In the event Landlord proceeds with the completion of Phase VI of the building, Landlord agrees that it will use its best efforts to move the current fitness center to Phase VI and expand the existing cafeteria area. Landlord agrees, subject to availability, that the cafeteria area may be used for occasional meeting use by the Tenant. 2.01 Amenities: Tenant's employees shall be entitled to use the fitness center on no less favorable terms than those of any other tenant. Landlord does not guarantee the continued operation of a fitness center and does not guarantee that there will never be a charge for use of the fitness center. 2.02 Common Area: Although the term "Common Area" shall continue to include lobbies and restrooms for the purpose of this Lease, Landlord agrees that the lobbies and restrooms that are located within the Premises shall not be made available for use by other tenants. 16.02 Condemnation Award: Landlord agrees that in the event of a condemnation, or conveyance in lieu thereof, of all or part of the Premises, Tenant shall be entitled to 8
receive a pro rata portion of the award based on the value of the Tenant Improvements which are taken as a result of the condemnation. 17.01 Assignment or Subletting: Landlord acknowledges that any restructuring of Tenant, and or the sale of equity in Tenant, or related or successor entity, shall not constitute an assignment requiring consent of Landlord. 24.01 Subordination: Landlord agrees that Tenant may pledge its interest in the Lease to Tenant's lenders and that the Landlord will execute such consents and other documents as may be required by Tenant's lenders to perfect the pledge. Tenant will not be required to subordinate its interest in the Lease if prohibited from doing so by Tenant's lenders. Tenant will, promptly on request of Landlord, sign an appropriate estoppel certificate, acknowledging the material terms of this Lease and whether or not a default exists. 9
EXHIBIT 10.17 EXHIBIT XI PLEDGE AGREEMENT PLEDGE AGREEMENT (as amended, modified or supplemented from time to time, this "Agreement"), dated as of July 29, 2002, made by each of the undersigned pledgors (each a "Pledgor" and, together with any other entity that becomes a pledgor hereunder pursuant to Section 30 hereof, the "Pledgors") to JPMorgan Chase Bank, as Collateral Agent (together with any successor Collateral Agent, the "Pledgee"), for the benefit of the Secured Creditors (as defined below). Except as otherwise defined herein, capitalized terms used herein and defined in the Credit Agreement (as defined below) shall be used herein as therein defined. W I T N E S S E T H : WHEREAS, Domino's, Inc., a Delaware corporation ("Domino's" or "Company"), Domino's Franchise Holding Co. (f/k/a Bluefence, Inc.), a Michigan corporation ("Subsidiary Borrower" and, together with Company, each "Borrower" and, collectively, "Borrowers"), TISM, Inc., a Michigan corporation, the Lenders from time to time party thereto, J.P. Morgan Securities Inc., as Arranger, JPMorgan Chase Bank, as Administrative Agent for Lenders (in such capacity and together with any successor Administrative Agent, "Administrative Agent"), Bank One, NA, as Syndication Agent and Comerica Bank, as Documentation Agent, have entered into a Credit Agreement, dated as of July 29, 2002 (as amended, modified or supplemented from time to time, the "Credit Agreement"), providing for the making of Loans to the Borrowers, and the issuance of Letters of Credit for the joint and several account of the Borrowers, in each case as contemplated therein (the Lenders, the Administrative Agent, the Documentation Agent, the Syndication Agent, the Issuing Lenders and the Pledgee are herein called the "Lender Creditors"); WHEREAS, the Borrowers or any Subsidiary thereof may at any time and from time to time enter into or maintain one or more Interest Rate Agreements and Currency Agreements (collectively, together with the Existing Swap Agreement, the "Secured Hedging Agreements") with one or more Lenders or any affiliate thereof (each such Lender or affiliate, even if the respective Lender subsequently ceases to be a Lender under the Credit Agreement for any reason, together with such Lender's or affiliate's successors and assigns, are herein called the "Other Creditors," and, together with the Lender Creditors, are herein called the "Secured Creditors"); WHEREAS, pursuant to the Subsidiaries Guaranty, each Pledgor that is a party thereto has guaranteed to the Secured Creditors the payment when due of all Obligations as described in such Subsidiaries Guaranty; WHEREAS, pursuant to the Holdings Guaranty, Holdings has unconditionally guaranteed to the Guaranteed Creditors the payment when due of all Guaranteed Obligations as described therein;
WHEREAS, it is a condition precedent to the making of Loans and the issuance of Letters of Credit under the Credit Agreement that each Pledgor shall have executed and delivered to the Pledgee this Agreement; and WHEREAS, each Pledgor will obtain benefits from the incurrence of Loans by, and the issuance of, and participation in, Letters of Credit under the Credit Agreement and the entering into and maintaining of Secured Hedging Agreements and, accordingly, each Pledgor desires to enter into this Agreement in order to satisfy the condition described in the preceding paragraph; NOW, THEREFORE, in consideration of the benefits accruing to each Pledgor, the receipt and sufficiency of which are hereby acknowledged, each Pledgor hereby makes the following representations and warranties to the Pledgee for the benefit of the Secured Creditors and hereby covenants and agrees with the Pledgee for the benefit of the Secured Creditors as follows: 1. SECURITY FOR OBLIGATIONS. This Agreement is made by each Pledgor for the benefit of the Secured Creditors to secure: (i) the full and prompt payment when due (whether at the stated maturity, by acceleration or otherwise) of all obligations, liabilities and indebtedness (including, without limitation, principal, premium, interest (including, without limitation, all interest that accrues after the commencement of any case, proceeding or other action relating to the bankruptcy, insolvency, reorganization or similar proceeding of any Pledgor or any Subsidiary thereof at the rate provided for in the respective documentation, whether or not a claim for post-petition interest is allowed in any such proceeding), reimbursement obligations under Letters of Credit, fees, costs and indemnities) of such Pledgor to the Lender Creditors, whether now existing or hereafter incurred under, arising out of, or in connection with, the Credit Agreement and the other Loan Documents to which such Pledgor is a party (including, in the case of each Pledgor that is a Guarantor, all such obligations, liabilities and indebtedness of such Pledgor under the Subsidiaries Guaranty to which it is a party) and the due performance and compliance by such Pledgor with all of the terms, conditions and agreements contained in the Credit Agreement and in such other Loan Documents (all such obligations, liabilities and indebtedness under this clause (i), except to the extent consisting of obligations, liabilities or indebtedness with respect to Secured Hedging Agreements entitled to the benefits of this Agreement, being herein collectively called the "Loan Document Obligations"); (ii) the full and prompt payment when due (whether at the stated maturity, by acceleration or otherwise) of all obligations, liabilities and indebtedness (including, without limitation, all interest that accrues after the commencement of any case, proceeding or other action relating to the bankruptcy, insolvency, reorganization or similar proceeding of any Pledgor at the rate provided for in the respective documentation, whether or not a claim for post-petition interest is allowed in any such proceeding), owing by such Pledgor to the Other Creditors under, or with respect to (including, in the case of each Pledgor that is a Guarantor, all such obligations, liabilities and indebtedness of such Pledgor under the Subsidiaries Guaranty), any Secured Hedging Agreement entitled to -2-
the benefits of this Agreement, whether such Secured Hedging Agreement is now in existence or hereafter arising, and the due performance and compliance by such Pledgor with all of the terms, conditions and agreements contained therein (all such obligations, liabilities and indebtedness described in this clause (ii) being herein collectively called the "Other Obligations"); (iii) any and all sums advanced by the Pledgee in order to preserve the Collateral (as hereinafter defined) or preserve its security interest in the Collateral; (iv) in the event of any proceeding for the collection or enforcement of any indebtedness, obligations or liabilities of such Pledgor referred to in clauses (i) and (ii) above, after an Event of Default (which term as used herein shall mean any Event of Default under, and as defined in, the Credit Agreement or any payment default upon the expiration of any applicable grace period by the Borrowers under any Secured Hedging Agreements) shall have occurred and be continuing, the reasonable expenses of retaking, holding, preparing for sale or lease, selling or otherwise disposing of or realizing on the Collateral, or of any exercise by the Pledgee of its rights hereunder, together with reasonable attorneys' fees and court costs; (v) all amounts paid by any Indemnitee as to which such Indemnitee has the right to reimbursement under Section 11 of this Agreement; and (vi) all amounts owing to any Agent or any of its affiliates pursuant to any of the Loan Documents in its capacity as such; all such indebtedness, obligations, liabilities, sums and expenses set forth in clauses (i) through (vi) of this Section 1 being herein collectively called the "Obligations," it being acknowledged and agreed that the "Obligations" shall include extensions of credit of the types described above, whether outstanding on the date of this Agreement or extended from time to time after the date of this Agreement. 2. DEFINITIONS. (a) Unless otherwise defined herein, all capitalized terms used herein and defined in the Credit Agreement shall be used herein as therein defined. Reference to singular terms shall include the plural and vice versa. (b) The following capitalized terms used herein shall have the definitions specified below: "Administrative Agent" has the meaning set forth in the Recitals hereto. "Adverse Claim" has the meaning given such term in Section 8-102(a)(1) of the UCC. "Agreement" has the meaning set forth in the first paragraph hereof. "Borrower" shall have the meaning provided in the Recitals hereto. -3-
"Certificated Security" has the meaning given such term in Section 8-102(a)(4) of the UCC. "Class" has the meaning set forth in Section 22 hereof. "Clearing Corporation" has the meaning given such term in Section 8-102(a)(5) of the UCC. "Collateral" has the meaning set forth in Section 3.1 hereof. "Collateral Accounts" means any and all accounts established and maintained by the Pledgee in the name of any Pledgor to which Collateral may be credited. "Credit Agreement" has the meaning set forth in the Recitals hereto. "Domestic Corporation" has the meaning set forth in the definition of "Stock". "Event of Default" has the meaning set forth in Section 1 hereof. "Excluded Foreign Entity" means any corporation, partnership (general or limited), limited liability company or other business entity (x) that is organized under the laws of any country, state or province other than the United States, Canada, Bermuda or any state, province or territory thereof and (y) the book value of the gross assets of which do not exceed $1,000,000. "Financial Asset" has the meaning given such term in Section 8-102(a)(9) of the UCC. "Foreign Corporation" has the meaning set forth in the definition of "Stock". "Indemnitees" has the meaning set forth in Section 11 hereof. "Instrument" has the meaning given such term in Section 9-102(a)(47) of the UCC. "Investment Property" has the meaning given such term in Section 9-102(a)(49) of the UCC. "Lender Creditors" has the meaning set forth in the Recitals hereto. "Lenders" has the meaning set forth in the Recitals hereto. "Limited Liability Company Assets" means all assets, whether tangible or intangible and whether real, personal or mixed (including, without limitation, all limited liability company capital and interest in other limited liability companies), at any time owned or represented by any Limited Liability Company Interest. "Limited Liability Company Interests" means the entire limited liability company membership interest at any time owned by any Pledgor in any limited liability company (other -4-
than an Excluded Foreign Entity); provided that the term "Limited Liability Company Interest" shall not include any limited liability company membership interest in any limited liability company that is not a Subsidiary of any Pledgor to the extent (and only for so long as) the limited liability company agreement or operating agreement for such limited liability company or applicable law prohibits the assignment of, or granting of a security interest in, the limited liability company membership interests of such limited liability company and such prohibitions are not rendered invalid by Section 9-406 or Section 9-408 of the UCC, it being understood and agreed, however, any such excluded limited liability company membership interest shall otherwise be subject to the security interests created by this Agreement (and shall become a "Limited Liability Company Interest" for all purposes of this Agreement) upon the receipt by the respective Pledgor of any necessary approvals or waivers permitting the assignment thereof or the granting of a security interest therein. "Loan Document Obligations" has the meaning set forth in Section 1 hereof. "Location" of any Pledgor has the meaning given such term in Section 9-307 of the UCC. "Non-Voting Stock" means all capital stock of any Foreign Subsidiary which is not Voting Stock. "Notes" means (x) all intercompany notes at any time issued to each Pledgor and (y) all other promissory notes from time to time issued to, or held by, each Pledgor. "Obligations" has the meaning set forth in Section 1 hereof. "Other Creditors" has the meaning set forth in the Recitals hereto. "Other Obligations" has the meaning set forth in Section 1 hereof. "Partnership Assets" means all assets, whether tangible or intangible and whether real, personal or mixed (including, without limitation, all partnership capital and interest in other partnerships), at any time owned or represented by any Partnership Interest. "Partnership Interest" means the entire general partnership interest or limited partnership interest at any time owned by any Pledgor in any general partnership or limited partnership (other than Excluded Foreign Entities); provided that the term "Partnership Interest" shall not include any partnership interest (general or limited) in any partnership that is not a Subsidiary of any Pledgor to the extent (and only for so long as) the partnership agreement for such partnership or applicable law prohibits the assignment of, or granting of a security interest in, the partnership interests of such partnership and such prohibitions are not rendered invalid by Section 9-406 or Section 9-408 of the UCC, it being understood and agreed, however, any such excluded partnership interest shall otherwise be subject to the security interests created by this Agreement (and shall become a "Partnership Interest" for all purposes of this Agreement) upon the receipt by the respective Pledgor of any necessary approvals or waivers permitting the assignment thereof or the granting of a security interest therein. "Pledged Notes" has the meaning set forth in Section 3.5 hereof. -5-
"Pledgee" has the meaning set forth in the first paragraph hereof. "Pledgor" has the meaning set forth in the first paragraph hereof. "Proceeds" has the meaning given such term in Section 9-102(a)(64) of the UCC. "Registered Organization" has the meaning given such term in Section 9-102(a)(70) of the UCC. "Requisite Creditors" has the meaning set forth in Section 22 hereof. "Requisite Lenders" has the meaning given such term in the Credit Agreement. "Secured Creditors" has the meaning set forth in the Recitals hereto. "Secured Debt Agreements" has the meaning set forth in Section 5 hereof. "Secured Hedging Agreement" shall have the meaning provided in the recitals of this Agreement. "Securities Account" has the meaning given such term in Section 8-501(a) of the UCC. "Securities Act" means the Securities Act of 1933, as amended, as in effect from time to time. "Security" and "Securities" has the meaning given such term in Section 8-102(a)(15) of the UCC and shall in any event also include all Stock and all Notes but excludes Securities issued by Excluded Foreign Entities and the Excluded Non-Profit Subsidiary. "Security Entitlement" has the meaning given such term in Section 8-102(a)(17) of the UCC. "Specified Collateral Event" has the meaning provided in the Security Agreement. "Stock" means (x) with respect to corporations incorporated under the laws of the United States or any State or territory thereof or the District of Columbia (other than the Excluded Non-Profit Subsidiary) (each a "Domestic Corporation"), all of the issued and outstanding shares of capital stock of any corporation at any time owned by any Pledgor of any Domestic Corporation and (y) with respect to corporations not Domestic Corporations or Excluded Foreign Entities (each a "Foreign Corporation"), all of the issued and outstanding shares of capital stock at any time owned by any Pledgor of any such Foreign Corporation. "Termination Date" has the meaning set forth in Section 20 hereof. "Transmitting Utility" has the meaning given such term in Section 9-102(a)(80) of the UCC. -6-
"UCC" means the Uniform Commercial Code as in effect in the State of New York from time to time; provided that all references herein to specific sections or subsections of the UCC are references to such sections or subsections, as the case may be, of the Uniform Commercial Code as in effect in the State of New York on the date hereof. "Uncertificated Security" has the meaning given such term in Section 8-102(a)(18) of the UCC. "Voting Stock" means all classes of capital stock of any Foreign Corporation entitled to vote. 3. PLEDGE OF SECURITIES, ETC. 3.1 Pledge. To secure the Obligations now or hereafter owed or to be performed by such Pledgor, each Pledgor does hereby grant, pledge and assign to the Pledgee for the benefit of the Secured Creditors, and does hereby create a continuing security interest (subject to those Liens permitted to exist with respect to the Collateral pursuant to the terms of all Secured Debt Agreements then in effect) in favor of the Pledgee for the benefit of the Secured Creditors in, all of the right, title and interest in and to the following, whether now existing or hereafter from time to time acquired (collectively, the "Collateral"): (a) each of the Collateral Accounts (to the extent a security interest therein is not created pursuant to the Security Agreement), including any and all assets of whatever type or kind deposited by such Pledgor in any such Collateral Account, whether now owned or hereafter acquired, existing or arising, including, without limitation, all Financial Assets, Investment Property, monies, checks, drafts, Instruments, Securities or interests therein of any type or nature deposited or required by the Credit Agreement or any other Secured Debt Agreement to be deposited in such Collateral Account, and all investments and all certificates and other Instruments (including depository receipts, if any) from time to time representing or evidencing the same, and all dividends, interest, distributions, cash and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the foregoing; (b) all Securities of such Pledgor from time to time and all options and warrants owned by such Pledgor from time to time to purchase Securities; (c) all Limited Liability Company Interests of such Pledgor from time to time and all of its right, title and interest in each limited liability company to which each such interest relates, whether now existing or hereafter acquired, including, without limitation: (A) all the capital thereof and its interest in all profits, losses, Limited Liability Company Assets and other distributions to which such Pledgor shall at any time be entitled in respect of such Limited Liability Company Interests; (B) all other payments due or to become due to such Pledgor in respect of Limited Liability Company Interests, whether under any limited liability company agreement or otherwise, whether as contractual obligations, damages, insurance proceeds or otherwise; -7-
(C) all of its claims, rights, powers, privileges, authority, options, security interests, liens and remedies, if any, under any limited liability company agreement or operating agreement, or at law or otherwise in respect of such Limited Liability Company Interests; (D) all present and future claims, if any, of such Pledgor against any such limited liability company for monies loaned or advanced, for services rendered or otherwise; (E) all of such Pledgor's rights under any limited liability company agreement or operating agreement or at law to exercise and enforce every right, power, remedy, authority, option and privilege of such Pledgor relating to such Limited Liability Company Interests, including any power to terminate, cancel or modify any limited liability company agreement or operating agreement, to execute any instruments and to take any and all other action on behalf of and in the name of any of such Pledgor in respect of such Limited Liability Company Interests and any such limited liability company, to make determinations, to exercise any election (including, but not limited to, election of remedies) or option or to give or receive any notice, consent, amendment, waiver or approval, together with full power and authority to demand, receive, enforce, collect or receipt for any of the foregoing or for any Limited Liability Company Asset, to enforce or execute any checks, or other instruments or orders, to file any claims and to take any action in connection with any of the foregoing; and (F) all other property hereafter delivered in substitution for or in addition to any of the foregoing, all certificates and instruments representing or evidencing such other property and all cash, securities, interest, dividends, rights and other property at any time and from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all thereof; (d) all Partnership Interests of such Pledgor from time to time and all of its right, title and interest in each partnership to which each such interest relates, whether now existing or hereafter acquired, including, without limitation: (A) all the capital thereof and its interest in all profits, losses, Partnership Assets and other distributions to which such Pledgor shall at any time be entitled in respect of such Partnership Interests; (B) all other payments due or to become due to such Pledgor in respect of Partnership Interests, whether under any partnership agreement or otherwise, whether as contractual obligations, damages, insurance proceeds or otherwise; (C) all of its claims, rights, powers, privileges, authority, options, security interests, liens and remedies, if any, under any partnership agreement or operating agreement, or at law or otherwise in respect of such Partnership Interests; -8-
(D) all present and future claims, if any, of such Pledgor against any such partnership for monies loaned or advanced, for services rendered or otherwise; (E) all of such Pledgor's rights under any partnership agreement or operating agreement or at law to exercise and enforce every right, power, remedy, authority, option and privilege of such Pledgor relating to such Partnership Interests, including any power to terminate, cancel or modify any partnership agreement or operating agreement, to execute any instruments and to take any and all other action on behalf of and in the name of any Pledgor in respect of such Partnership Interests and any such partnership, to make determinations, to exercise any election (including, but not limited to, election of remedies) or option or to give or receive any notice, consent, amendment, waiver or approval, together with full power and authority to demand, receive, enforce, collect or receipt for any of the foregoing or for any Partnership Asset, to enforce or execute any checks, or other instruments or orders, to file any claims and to take any action in connection with any of the foregoing (with all of the foregoing rights only to be exercisable upon the occurrence and during the continuation of an Event of Default); and (F) all other property hereafter delivered in substitution for or in addition to any of the foregoing, all certificates and instruments representing or evidencing such other property and all cash, securities, interest, dividends, rights and other property at any time and from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all thereof; (e) all Security Entitlements of such Pledgor from time to time in any and all of the foregoing; (f) all Financial Assets and Investment Property of such Pledgor from time to time; and (g) all Proceeds of any and all of the foregoing. Notwithstanding anything to the contrary contained in this Section 3.1 or in Section 3.3 hereof, (x) except as otherwise provided in subsection 6.11 of the Credit Agreement no Pledgor (to the extent that it is a Borrower or a Domestic Subsidiary of Holdings) shall be required at any time to pledge hereunder (and the Collateral of such Pledgor shall not include) more than 65% of the Voting Stock of any Foreign Corporation and (y) so long as it does not cause any materially adverse tax consequences to Holdings or any of its Subsidiaries, each Pledgor shall be required to pledge hereunder 100% of any Non-Voting Stock at any time and from time to time acquired by such Pledgor of any Foreign Corporation. 3.2 Procedures. (a) To the extent that any Pledgor at any time or from time to time owns, acquires or obtains any right, title or interest in any Collateral, such Collateral shall automatically (and without the taking of any action by the respective Pledgor) be pledged pursuant to Section 3.1 of this Agreement and, in addition thereto, such Pledgor shall (to the extent -9-
provided below) take the following actions as set forth below (as promptly as practicable and, in any event, within 30 days after it obtains such Collateral) for the benefit of the Pledgee and the other Secured Creditors: (i) with respect to a Certificated Security (other than a Certificated Security credited on the books of a Clearing Corporation), the respective Pledgor shall physically deliver such Certificated Security to the Pledgee, endorsed to the Pledgee or endorsed in blank; (ii) with respect to an Uncertificated Security (other than an Uncertificated Security credited on the books of a Clearing Corporation), upon the occurrence and continuation of a Specified Collateral Event or an Event of Default and if requested by the Collateral Agent, the respective Pledgor shall cause the issuer of such Uncertificated Security (or, in the case of an issuer that is not a Subsidiary of such Pledgor, will use its best efforts to cause such issuer) to duly authorize, execute and deliver to the Pledgee an agreement for the benefit of the Pledgee and the other Secured Parties substantially in the form of Exhibit A hereto (appropriately completed to the satisfaction of the Pledgee and with such modifications, if any, as shall be satisfactory to the Pledgee) pursuant to which such issuer agrees to comply with any and all instructions originated by the Pledgee without further consent by the registered owner and not to comply with instructions regarding such Uncertificated Security (and any Partnership Interests and Limited Liability Company Interests issued by such issuer) originated by any other Person other than a court of competent jurisdiction; provided that Pledgee hereby agrees that it will not provide any instructions to any such issuer unless and until an Event of Default has occurred and is continuing; (iii) with respect to a Certificated Security, Uncertificated Security, Partnership Interest or Limited Liability Company Interest credited on the books of a Clearing Corporation (including a Federal Reserve Bank, Participants Trust Company or The Depository Trust Company), the respective Pledgor shall notify the Pledgee thereof and shall take all actions required (i) to comply with the applicable rules of such Clearing Corporation and (ii) upon the occurrence and continuation of a Specified Collateral Event or an Event of Default and if requested by the Collateral Agent, to perfect the security interest of the Pledgee under applicable law (including, in any event, under Sections 9-314(a), (b) and (c), 9-106 and 8-106(d) of the UCC). Each such Pledgor further agrees to take such actions as the Pledgee deems reasonably necessary or desirable to effect the foregoing; (iv) with respect to a Partnership Interest or a Limited Liability Company Interest (other than a Partnership Interest or Limited Liability Company Interest credited on the books of a Clearing Corporation), (1) if such Partnership Interest or Limited Liability Company Interest is represented by a certificate and is a Security for purposes of the UCC, the procedure set forth in Section 3.2(a)(i) hereof, and (2) if such Partnership Interest or Limited Liability Company Interest is not represented by a certificate or is not a Security for purposes of the UCC, the procedure set forth in Section 3.2(a)(ii) hereof; -10-
(v) with respect to any Note (other than, to the extent no Event of Default has occurred and is continuing, a Note that constitutes Chattel Paper or any Note evidencing an aggregate amount of outstanding Indebtedness less than $750,000 at any time), physical delivery of such Note to the Pledgee, endorsed to the Pledgee or endorsed in blank; and (vi) after an Event of Default has occurred and is continuing, with respect to cash, to the extent not otherwise provided in the Security Agreement, (i) establishment by the Pledgee of a cash account in the name of such Pledgor over which the Pledgee shall have exclusive and absolute control and dominion (and no withdrawals or transfers may be made therefrom by any Person except with the prior written consent of the Pledgee) and (ii) deposit of such cash in such cash account. (b) In addition to the actions required to be taken pursuant to preceding Section 3.2(a) hereof, each Pledgor shall take the following additional actions with respect to the Securities and Collateral: (i) with respect to all Collateral of such Pledgor of which the Pledgee may obtain "control" within the meaning of Section 8-106 of the UCC (or under any provision of the UCC as same may be amended or supplemented from time to time, or under the laws of any relevant State other than the State of New York), upon the occurrence and continuation of a Specified Collateral Event or an Event of Default, the respective Pledgor shall take all actions as may be requested from time to time by the Pledgee so that "control" of such Collateral is obtained and at all times held by the Pledgee; and (ii) each Pledgor shall from time to time cause appropriate financing statements (on appropriate forms) under the Uniform Commercial Code as in effect in the various relevant States, in form satisfactory to the Pledgee and covering all Collateral hereunder, to be filed in the relevant filing offices so that at all times the Pledgee has a security interest in all Investment Property and other Collateral which is perfected by the filing of such financing statements (in each case to the maximum extent perfection by filing may be obtained under the laws of the relevant States, including, without limitation, Section 9-312(a) of the UCC). 3.3 Subsequently Acquired Collateral. If any Pledgor shall acquire (by purchase, stock dividend or otherwise) any additional Collateral at any time or from time to time after the date hereof, such Collateral shall automatically (and without any further action being required to be taken) be subject to the pledge and security interests created pursuant to Section 3.1 hereof and, furthermore, the Pledgor will thereafter take (or cause to be taken) all action (as promptly as practicable and, in any event, within 30 days after it obtains such Collateral) with respect to such Collateral in accordance with the procedures set forth in Section 3.2 hereof, and will promptly thereafter deliver to the Pledgee (i) a certificate executed by a senior financial officer of such Pledgor describing such Collateral and certifying that the same has been duly pledged in favor of the Pledgee (for the benefit of the Secured Creditors) hereunder and (ii) supplements to Annexes B through G hereto as are necessary to cause such annexes to be complete and accurate at such time. -11-
3.4 Transfer Taxes. Each pledge of Collateral under Section 3.1 or Section 3.3 hereof shall be accompanied by any transfer tax stamps required in connection with the pledge of such Collateral. 3.5 Definition of Pledged Notes. All Notes at any time pledged or required to be pledged hereunder are hereinafter called the "Pledged Notes." 3.6 Certain Representations and Warranties Regarding the Collateral. Each Pledgor represents and warrants that on the date hereof: (i) each Subsidiary of such Pledgor, and the direct ownership thereof, is listed on Annex B hereto; (ii) the Stock held by such Pledgor consists of the number and type of shares of the stock of the corporations as described in Annex C hereto; (iii) such Stock referenced in clause (ii) of this paragraph constitutes that percentage of the issued and outstanding capital stock of the issuing corporation as is set forth in Annex C hereto; (iv) the Notes held by such Pledgor consist of the promissory notes described in Annex D hereto where such Pledgor is listed as the lender; (v) the Limited Liability Company Interests held by such Pledgor consist of the number and type of interests of the Persons described in Annex E hereto; (vi) each such Limited Liability Company Interest referenced in clause (v) of this paragraph constitutes that percentage of the issued and outstanding equity interest of the issuing Person as set forth in Annex E hereto; (vii) the Partnership Interests held by such Pledgor consist of the number and type of interests of the Persons described in Annex F hereto; (viii) each such Partnership Interest referenced in clause (vii) of this paragraph constitutes that percentage or portion of the entire partnership interest of the Partnership as set forth in Annex F hereto; (ix) the exact address of each chief executive office of such Pledgor is listed on Annex G hereto; (x) the Pledgor has complied with the respective procedure set forth in Section 3.2(a) hereof with respect to each item of Collateral described in Annexes C through F hereto; and (xi) such Pledgor owns no other Securities, Limited Liability Company Interests or Partnership Interests; provided, that in respect to the representations and warranties set forth in clauses (iii), (vi) and (viii) above, to the extent that such Stock, Limited Liability Company Interest or Partnership Interest, as applicable, is an ownership interest in a Person other than a Subsidiary or Affiliate of Holdings or any of its Subsidiaries, the applicable Pledgor shall make the aforementioned representations and warranties on the basis of its knowledge after using commercially reasonable efforts to obtain the necessary information from such Person or its officers, employees or agents. 4. APPOINTMENT OF SUB-AGENTS; ENDORSEMENTS, ETC. If and to the extent necessary to enable the Pledgee to perfect its security interest in any of the Collateral or to exercise any of its remedies hereunder, the Pledgee shall have the right to appoint one or more sub-agents for the purpose of retaining physical possession of the Collateral, which may be held (in the discretion of the Pledgee) in the name of the relevant Pledgor, endorsed or assigned in blank or in favor of the Pledgee or any nominee or nominees of the Pledgee or a sub-agent appointed by the Pledgee. 5. VOTING, ETC., WHILE NO EVENT OF DEFAULT. Unless and until there shall have occurred and be continuing an Event of Default, each Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Collateral owned by it, and to give consents, waivers or ratifications in respect thereof; provided, that, in each case, no vote shall be cast or any consent, waiver or ratification given or any action taken or omitted to be -12-
taken which would violate, result in breach of any covenant contained in, or be inconsistent with any of the terms of this Agreement, the Credit Agreement, any other Loan Document, any Secured Hedging Agreements entitled to the benefits of this Agreement (collectively, the "Secured Debt Agreements"), or which would have the effect of materially impairing the value of the Collateral or any part thereof or the position or interests of the Pledgee or any other Secured Creditor in the Collateral. All such rights of each Pledgor to vote and to give consents, waivers and ratifications shall cease in case an Event of Default has occurred and is continuing, and Section 7 hereof shall become applicable. 6. DIVIDENDS AND OTHER DISTRIBUTIONS. Unless and until there shall have occurred and be continuing an Event of Default, all cash dividends, cash distributions, cash Proceeds and other cash amounts payable in respect of the Collateral shall be paid to the respective Pledgor. The Pledgee shall be entitled to receive directly, and to retain as part of the Collateral: (i) all other or additional stock, notes, limited liability company interests, partnership interests, instruments or other securities or property (including, but not limited to, cash dividends other than as set forth above) paid or distributed by way of dividend or otherwise in respect of the Collateral; (ii) all other or additional stock, notes, limited liability company interests, partnership interests, instruments or other securities or property (including, but not limited to, cash) paid or distributed in respect of the Collateral by way of stock-split, spin-off, split-up, reclassification, combination of shares or similar rearrangement; and (iii) all other or additional stock, notes, limited liability company interests, partnership interests, instruments or other securities or property (including, but not limited to, cash) which may be paid in respect of the Collateral by reason of any consolidation, merger, exchange of stock, conveyance of assets, liquidation or similar corporate reorganization. Nothing contained in this Section 6 shall limit or restrict in any way the Pledgee's right to receive proceeds of the Collateral in any form in accordance with Section 3 of this Agreement. All dividends, distributions or other payments which are received by any Pledgor contrary to the provisions of this Section 6 and Section 7 hereof shall be held for the benefit of the Pledgee, shall be segregated from other property or funds of such Pledgor and shall be forthwith paid over to the Pledgee as Collateral in the same form as so received (with any necessary endorsement). 7. REMEDIES IN CASE OF EVENT OF DEFAULT. Each Pledgor agrees that if any Event of Default shall have occurred and be continuing, then and in every such case, the Pledgee in addition to any rights now or hereafter existing under applicable law, the other provisions of this Agreement or any other Loan Document shall be entitled to exercise all of the rights, powers and remedies (whether vested in it by this Agreement, any other Secured Debt Agreement or by law) for the protection and enforcement of its rights in respect of the Collateral, and the Pledgee shall be entitled to exercise all the rights and remedies of a secured party under the Uniform Commercial Code as in effect in any relevant jurisdiction and also shall be entitled, -13-
without limitation, to exercise the following rights, which each Pledgor hereby agrees to be commercially reasonable: (i) to receive all amounts payable in respect of the Collateral otherwise payable under Section 6 hereof to the respective Pledgor; (ii) to transfer all or any part of the Collateral into the Pledgee's name or the name of its nominee or nominees; (iii) to accelerate any Pledged Note which may be accelerated in accordance with its terms, and take any other lawful action to collect upon any Pledged Note (including, without limitation, to make any demand for payment thereon); (iv) to vote all or any part of the Collateral (whether or not transferred into the name of the Pledgee) and give all consents, waivers and ratifications in respect of the Collateral and, subject to provisions of all applicable law, otherwise act with respect thereto as though it were the outright owner thereof (each Pledgor hereby irrevocably constituting and appointing the Pledgee the proxy and attorney-in-fact of such Pledgor, with full power of substitution to do so); (v) at any time and from time to time to sell, assign and deliver, or grant options to purchase, all or any part of the Collateral, or any interest therein, at any public or private sale, without demand of performance, advertisement or notice of intention to sell or of the time or place of sale or adjournment thereof or to redeem or otherwise purchase or dispose (all of which are hereby waived by each Pledgor), for cash, on credit or for other property, for immediate or future delivery without any assumption of credit risk, and for such price or prices and on such terms as the Pledgee in its absolute discretion may determine, provided that at least 10 days' written notice of the time and place of any such sale shall be given to the respective Pledgor. The Pledgee shall not be obligated to make any such sale of Collateral regardless of whether any such notice of sale has theretofore been given. Each purchaser at any such sale shall hold the property so sold absolutely free from any claim or right on the part of each Pledgor, and each Pledgor hereby waives and releases to the fullest extent permitted by law any right or equity of redemption with respect to the Collateral, whether before or after sale hereunder, and all rights, if any, of marshalling the Collateral and any other security for the Obligations or otherwise and all rights, if any, of stay and/or appraisal which it now has or may at any time in the future have under rule of law or statute now existing or hereafter enacted. At any such sale, unless prohibited by applicable law, the Pledgee on behalf of the Secured Parties may bid for and purchase all or any part of the Collateral so sold free, to the extent permitted by applicable law, from any such right or equity of redemption. Neither the Pledgee nor any other Secured Party shall be liable for failure to collect or realize upon any or all of the Collateral or for any delay in so doing nor shall any of them be under any obligation to take any action whatsoever with regard thereto; and (vi) to set-off any and all Collateral against any and all Obligations, and to withdraw any and all cash or other Collateral from any and all Collateral Accounts and to apply such cash and other Collateral to the payment of any and all Obligations; -14-
provided that, it being understood that each Pledgor's obligation to so deliver the Collateral is of the essence of this Agreement and that, accordingly, upon application to a court of equity having jurisdiction, the Pledgee shall be entitled to a decree requiring specific performance by such Pledgor of said obligation. By accepting the benefits of this Agreement and each other Collateral Document, the Secured Creditors expressly acknowledge and agree that this Agreement and each other Collateral Document may be enforced only by the action of the Administrative Agent or the Pledgee acting upon the instructions of the Required Secured Creditors and that no other Secured Creditor shall have any right individually to seek to enforce this Agreement or any other Collateral Document or to realize upon the security to be granted hereby or thereby, it being understood and agreed that such rights and remedies may be exercised by the Pledgee for the benefit of the Secured Creditors upon the terms of this Agreement and the other Collateral Documents. 8. REMEDIES, CUMULATIVE, ETC. Each and every right, power and remedy of the Pledgee or any other Secured Creditor provided for in this Agreement or in any other Secured Debt Agreement, or now or hereafter existing at law or in equity or by statute shall be cumulative and concurrent and shall be in addition to every other such right, power or remedy. The exercise or beginning of the exercise by the Pledgee or any other Secured Creditor of any one or more of the rights, powers or remedies provided for in this Agreement or any other Secured Debt Agreement or now or hereafter existing at law or in equity or by statute or otherwise shall not preclude the simultaneous or later exercise by the Pledgee or any other Secured Creditor of all such other rights, powers or remedies, and no failure or delay on the part of the Pledgee or any other Secured Creditor to exercise any such right, power or remedy shall operate as a waiver thereof. No notice to or demand on any Pledgor in any case shall entitle it to any other or further notice or demand in similar or other circumstances or constitute a waiver of any of the rights of the Pledgee or any other Secured Creditor to any other or further action in any circumstances without notice or demand. The Secured Creditors agree that this Agreement may be enforced only by the action of the Pledgee, acting upon the instructions of the Requisite Lenders (or, after the date on which all Credit Agreement Obligations have been paid in full, the holders of at least a majority of the Other Obligations) and that no other Secured Creditor shall have any right individually to seek to enforce or to enforce this Agreement or to realize upon the security to be granted hereby, it being understood and agreed that such rights and remedies may be exercised by the Pledgee or the holders of at least a majority of the Other Obligations, as the case may be, for the benefit of the Secured Creditors upon the terms of this Agreement and the other Loan Documents. 9. APPLICATION OF PROCEEDS. (a) All monies collected by the Pledgee upon any sale or other disposition of the Collateral pursuant to the terms of this Agreement, together with all other monies received by the Pledgee hereunder, shall be applied in the manner provided in Section 7.4 of the Security Agreement. (b) It is understood and agreed that the Pledgors shall remain jointly and severally liable to the extent of any deficiency between the amount of the proceeds of the Collateral hereunder and the aggregate amount of the Obligations. 10. PURCHASERS OF COLLATERAL. Upon any sale of the Collateral by the Pledgee hereunder (whether by virtue of the power of sale herein granted, pursuant to judicial -15-
process or otherwise), the receipt of the Pledgee or the officer making the sale shall be a sufficient discharge to the purchaser or purchasers of the Collateral so sold, and such purchaser or purchasers shall not be obligated to see to the application of any part of the purchase money paid over to the Pledgee or such officer or be answerable in any way for the misapplication or nonapplication thereof. 11. INDEMNITY. Each Pledgor jointly and severally agrees (i) to indemnify, reimburse and hold harmless the Pledgee, each other Secured Creditor and their respective successors, assigns, employees, agents, affiliates and servants (individually an "Indemnitee," and collectively the "Indemnitees") from and against any and all liabilities, obligations, damages, injuries, penalties, claims, demands, actions, suits, judgments and losses of whatsoever kind or nature, and (ii) to reimburse each Indemnitee for any and all reasonable costs, expenses and disbursements, including reasonable attorneys' fees and expenses, in each case growing out of or resulting from this Agreement or the exercise by any Indemnitee of any right or remedy granted to it hereunder or under any other Secured Debt Agreement (but excluding any liabilities, obligations, damages, injuries, penalties, claims, demands, actions, suits, judgments and losses or expenses to the extent incurred by reason of gross negligence, bad faith or willful misconduct of such Indemnitee. In no event shall the Pledgee be liable, in the absence of gross negligence, bad faith or willful misconduct on its part, for any matter or thing in connection with this Agreement other than to account for monies actually received by it in accordance with the terms hereof. If and to the extent that the obligations of any Pledgor under this Section 11 are unenforceable for any reason, such Pledgor hereby agrees to make the maximum contribution to the payment and satisfaction of such obligations which is permissible under applicable law. The indemnity obligations of each Pledgor contained in this Section 11 shall continue in full force and effect notwithstanding the full payment of all Notes issued under the Credit Agreement, the termination of all Secured Hedging Agreements and Letters of Credit, and the payment of all Obligations and notwithstanding the discharge thereof. 12. PLEDGEE NOT A PARTNER OR LIMITED LIABILITY COMPANY MEMBER. (a) Nothing herein shall be construed to make the Pledgee or any other Secured Creditor liable as a member of any limited liability company or as a partner of any partnership and neither the Pledgee nor any other Secured Creditor by virtue of this Agreement or otherwise (except as referred to in the following sentence) shall have any of the duties, obligations or liabilities of a member of any limited liability company or as a partner in any partnership. The parties hereto expressly agree that, unless the Pledgee shall become the absolute owner of Collateral consisting of a Limited Liability Company Interest or Partnership Interest pursuant hereto, this Agreement shall not be construed as creating a partnership or joint venture among the Pledgee, any other Secured Creditor, any Pledgor and/or any other Person. (b) Except as provided in the last sentence of paragraph (a) of this Section 12, the Pledgee, by accepting this Agreement, did not intend to become a member of any limited liability company or a partner of any partnership or otherwise be deemed to be a co-venturer with respect to any Pledgor, or any limited liability company or partnership either before or after an Event of Default shall have occurred. The Pledgee shall have only those powers set forth herein and the Secured Parties shall assume none of the duties, obligations or liabilities of a member of any limited liability company or as a partner of any partnership or any Pledgor except as provided in the last sentence of paragraph (a) of this Section 12. -16-
(c) The Pledgee and the other Secured Parties shall not be obligated to perform or discharge any obligation of any Pledgor as a result of the pledge hereby effected. (d) The acceptance by the Pledgee of this Agreement, with all the rights, powers, privileges and authority so created, shall not at any time or in any event obligate the Pledgee or any other Secured Party to appear in or defend any action or proceeding relating to the Collateral to which it is not a party, or to take any action hereunder or thereunder, or to expend any money or incur any expenses or perform or discharge any obligation, duty or liability under the Collateral. 13. FURTHER ASSURANCES; POWER-OF-ATTORNEY. (a) Each Pledgor agrees to execute and deliver to the Pledgee such financing statements, in form reasonably acceptable to the Pledgee, as the Pledgee may from time to time reasonably request or as are reasonably necessary or desirable in the opinion of the Pledgee to establish and maintain a valid, enforceable, perfected security interest in the Collateral as provided herein. Each Pledgor will pay any applicable filing fees, recordation taxes and related expenses relating to the perfection of Pledgee's security interest in its Collateral. Each Pledgor hereby authorizes the Pledgee to file any such financing statements without the signature of such Pledgor where permitted by law. (b) Each Pledgor hereby constitutes and appoints the Pledgee its true and lawful attorney, irrevocably, with full power after the occurrence of and during the continuance of an Event of Default (in the name of such Pledgor or otherwise) to act, require, demand, receive and give acquittance for any and all monies and claims for monies due or to become due to such Pledgor under or arising out of the Collateral, to endorse any checks or other instruments or orders in connection therewith and to file any claims or take any action or institute any proceedings which the Pledgee may deem to be necessary or advisable to protect the interests of the Secured Parties, which appointment as attorney is coupled with an interest. 14. THE PLEDGEE AS COLLATERAL AGENT. The Pledgee will hold in accordance with this Agreement all items of the Collateral at any time received under this Agreement. It is expressly understood and agreed by each Secured Creditor that by accepting the benefits of this Agreement each such Secured Creditor acknowledges and agrees that the obligations of the Pledgee as holder of the Collateral and interests therein and with respect to the disposition thereof, and otherwise under this Agreement, are only those expressly set forth in this Agreement and in Section 9 of the Credit Agreement. The Pledgee shall act hereunder on the terms and conditions set forth herein and in Section 9 of the Credit Agreement. 15. TRANSFER BY THE PLEDGORS. No Pledgor will sell or otherwise dispose of, grant any option with respect to, or mortgage, pledge or otherwise encumber any of the Collateral or any interest therein (except as may be permitted in accordance with the terms of the Credit Agreement). 16. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PLEDGORS. (a) Each Pledgor represents, warrants and covenants that: (i) it is the legal, beneficial and record owner of, and has good and marketable title to, all Collateral and that it has sufficient interest in all Collateral in which a -17-
security interest is purported to be created hereunder for such security interest to attach (subject, in each case, to no pledge, lien, mortgage, hypothecation, security interest, charge, option, Adverse Claim or other encumbrance whatsoever, except the liens and security interests created by this Agreement or permitted under the Secured Debt Agreements); (ii) it has full power, authority and legal right to pledge all the Collateral pledged by it pursuant to this Agreement; (iii) this Agreement has been duly authorized, executed and delivered by such Pledgor and constitutes a legal, valid and binding obligation of such Pledgor enforceable against such Pledgor in accordance with its terms, except to the extent that the enforceability hereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws generally affecting creditors' rights and by equitable principles (regardless of whether enforcement is sought in equity or at law); (iv) except to the extent already obtained or made, no consent of any other party (including, without limitation, any stockholder, partner, member or creditor of such Pledgor or any of its Subsidiaries) and no consent, license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required to be obtained by such Pledgor in connection with (a) the execution, delivery or performance of this Agreement, (b) the validity or enforceability of this Agreement (except as set forth in clause (iii) above), (c) the perfection or enforceability of the Pledgee's security interest in the Collateral or (d) except for compliance with or as may be required by applicable securities laws, the exercise by the Pledgee of any of its rights or remedies provided herein; (v) the execution, delivery and performance of this Agreement will not violate any provision of any applicable law or regulation or of any order, judgment, writ, award or decree of any court, arbitrator or governmental authority, domestic or foreign, applicable to such Pledgor, or of the certificate of incorporation, operating agreement, limited liability company agreement, partnership agreement or by-laws of such Pledgor or of any securities issued by such Pledgor or any of its Subsidiaries, or of any mortgage, deed of trust, indenture, lease, loan agreement, credit agreement or other material contract, agreement or instrument or undertaking to which such Pledgor or any of its Subsidiaries is a party or which purports to be binding upon such Pledgor or any of its Subsidiaries or upon any of their respective assets and will not result in the creation or imposition of (or the obligation to create or impose) any lien or encumbrance on any of the assets of such Pledgor or any of its Subsidiaries except as contemplated by this Agreement (other than the Liens created by the Collateral Documents); (vi) all of the Collateral (consisting of Securities, Limited Liability Company Interests or Partnership Interests) has been duly and validly acquired, is fully paid and non-assessable and is subject to no options to purchase or similar rights; (vii) each of the Pledged Notes, in respect to which any Subsidiary or Affiliate of Holdings is the obligor thereof,constitutes, or when executed by the obligor thereof -18-
will constitute, the legal, valid and binding obligation of such obligor, enforceable in accordance with its terms, except to the extent that the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws generally affecting creditors' rights and by equitable principles (regardless of whether enforcement is sought in equity or at law); (viii) the pledge, collateral assignment and delivery to the Pledgee of the Collateral consisting of Certificated Securities pursuant to this Agreement creates a valid and perfected first priority security interest in such Certificated Securities, and the proceeds thereof, subject to no prior Lien or encumbrance or to any agreement purporting to grant to any third party a Lien or encumbrance on the property or assets of such Pledgor which would include the Securities (other than those Liens permitted to exist with respect to the Collateral pursuant to the terms of the Secured Debt Agreements then in effect) and the Pledgee is entitled to all the rights, priorities and benefits afforded by the UCC or other relevant law as enacted in any relevant jurisdiction to perfect security interests in respect of such Collateral; and (ix) "control" (as defined in Section 8-106 of the UCC) has been obtained by the Pledgee over all Collateral consisting of Securities with respect to which such "control" may be obtained pursuant to Section 8-106 of the UCC, except to the extent that the obligation of the applicable Pledgor to provide the Pledgee with "control" of such Collateral has not yet arisen under this Agreement; provided that in the case of the Pledgee obtaining "control" over Collateral consisting of a Security Entitlement, such Pledgor shall have taken all steps in its control so that the Pledgee obtains "control" over such Security Entitlement. (b) Each Pledgor covenants and agrees that it will defend the Pledgee's right, title and security interest in and to the Securities and the proceeds thereof against the claims and demands of all persons whomsoever; and each Pledgor covenants and agrees that it will have like title to and right to pledge any other property at any time hereafter pledged to the Pledgee as Collateral hereunder and will likewise defend the right thereto and security interest therein of the Pledgee and the other Secured Parties. (c) Each Pledgor covenants and agrees that it will take no action which would violate any of the terms of any Loan Document. 17. LEGAL NAMES; TYPE OF ORGANIZATION (AND WHETHER A REGISTERED ORGANIZATION AND/OR A TRANSMITTING UTILITY); JURISDICTION OF ORGANIZATION; LOCATION; ORGANIZATIONAL IDENTIFICATION NUMBERS; CHANGES THERETO; ETC. The exact legal name of each Pledgor, the type of organization of such Pledgor, whether or not such Pledgor is a Registered Organization, the jurisdiction of organization of such Pledgor, such Pledgor's Location, the organizational identification number (if any) of each Pledgor, and whether or not such Pledgor is a Transmitting Utility, is listed on Annex A hereto for such Pledgor. No Pledgor shall change its legal name, its type of organization, its status as a Registered Organization (in the case of a Registered Organization), its status as a Transmitting Utility or as a Person which is not a Transmitting Utility, as the case may be, its jurisdiction of organization, its Location, or its organizational identification number -19-
(if any), except that any such changes shall be permitted (so long as not in violation of the applicable requirements of the Secured Debt Agreements and so long as same do not involve (x) a Registered Organization ceasing to constitute same or (y) any Pledgor changing its jurisdiction of organization or Location from the United States or a State thereof to a jurisdiction of organization or Location, as the case may be, outside the United States or a State thereof) if (i) it shall have given to the Collateral Agent not less than 15 days' prior written notice of each change to the information listed on Annex A (as adjusted for any subsequent changes thereto previously made in accordance with this sentence), together with a supplement to Annex A which shall correct all information contained therein for the respective Pledgor, and (ii) in connection with the respective such change or changes, it shall have taken all action reasonably requested by the Collateral Agent to maintain the security interests of the Collateral Agent in the Collateral intended to be granted hereby at all times fully perfected and in full force and effect. In addition, to the extent that any Pledgor does not have an organizational identification number on the date hereof and later obtains one, such Pledgor shall promptly thereafter deliver a notification of the Collateral Agent of such organizational identification number and shall take all actions reasonably satisfactory to the Collateral Agent to the extent necessary to maintain the security interest of the Collateral Agent in the Collateral intended to be granted hereby fully perfected and in full force and effect. 18. PLEDGORS' OBLIGATIONS ABSOLUTE, ETC. The obligations of each Pledgor under this Agreement shall be absolute and unconditional and shall remain in full force and effect without regard to, and shall not be released, suspended, discharged, terminated or otherwise affected by, any circumstance or occurrence whatsoever (other than termination of this Agreement pursuant to Section 20 hereof), including, without limitation: (i) any renewal, extension, amendment or modification of or addition or supplement to or deletion from any Secured Debt Agreement (other than this Agreement in accordance with its terms) or any other instrument or agreement referred to therein, or any assignment or transfer of any thereof; (ii) any waiver, consent, extension, indulgence or other action or inaction under or in respect of any such agreement or instrument including, without limitation, this Agreement (other than a waiver, consent or extension with respect to this Agreement in accordance with its terms); (iii) any furnishing of any additional security to the Pledgee or its assignee or any acceptance thereof or any release of any security by the Pledgee or its assignee; (iv) any limitation on any party's liability or obligations under any such instrument or agreement or any invalidity or unenforceability, in whole or in part, of any such instrument or agreement or any term thereof; or (v) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceeding relating to any Pledgor or any Subsidiary of any Pledgor, or any action taken with respect to this Agreement by any trustee or receiver, or by any court, in any such proceeding, whether or not such Pledgor shall have notice or knowledge of any of the foregoing. 19. REGISTRATION, ETC. If at any time when the Pledgee shall determine to exercise its right to sell all or any part of the Collateral consisting of Securities, Limited Liability Company Interests or Partnership Interests pursuant to Section 7 hereof, and the Collateral or the part thereof to be sold shall not, for any reason whatsoever, be effectively registered under the Securities Act, as then in effect, the Pledgee may, in its sole and absolute discretion, sell such Collateral, as the case may be, or part thereof by private sale in such manner and under such circumstances as the Pledgee may deem necessary or advisable in order that such sale may legally be effected without such registration. Without limiting the generality of the -20-
foregoing, in any such event the Pledgee, in its sole and absolute discretion (i) may proceed to make such private sale notwithstanding that a registration statement for the purpose of registering such Collateral or part thereof shall have been filed under such Securities Act, (ii) may approach and negotiate with a single possible purchaser to effect such sale, and (iii) may restrict such sale to a purchaser who will represent and agree that such purchaser is purchasing for its own account, for investment, and not with a view to the distribution or sale of such Collateral or part thereof. In the event of any such sale, the Pledgee shall incur no responsibility or liability for selling all or any part of the Collateral at a price which the Pledgee, in its sole and absolute discretion, in good faith deems reasonable under the circumstances, notwithstanding the possibility that a substantially higher price might be realized if the sale were deferred until after registration as aforesaid. 20. TERMINATION; RELEASE. (a) On the Termination Date, this Agreement shall terminate (provided that all indemnities set forth herein including, without limitation, in Section 11 hereof shall survive such termination) and the Pledgee, at the request and expense of the respective Pledgor, will promptly execute and deliver to such Pledgor a proper instrument or instruments (including Uniform Commercial Code termination statements) acknowledging the satisfaction and termination of this Agreement, and will duly assign, transfer and deliver to such Pledgor (without recourse and without any representation or warranty) such of the Collateral as may be in the possession of the Pledgee and as has not theretofore been sold or otherwise applied or released pursuant to this Agreement, together with any moneys at the time held by the Pledgee or any of its sub-agents hereunder and, with respect to any Collateral consisting of an Uncertificated Security (other than an Uncertificated Security credited on the books of a Clearing Corporation), a Partnership Interest or a Limited Liability Company Interest, a termination of the agreement relating thereto executed and delivered by the issuer of such Uncertificated Security pursuant to Section 3.2(a)(ii) or by the respective partnership or limited liability company pursuant to Section 3.2(a)(iv). As used in this Agreement, "Termination Date" shall mean the date upon which the Commitments under the Credit Agreement have been terminated and all Secured Hedging Agreements entitled to the benefits of this Agreement have been terminated, no Note, Loan or Letter of Credit is outstanding and all other Obligations (other than indemnities described in Section 11 hereof and described in Section 10.3 of the Credit Agreement, and any other indemnities set forth in any other Collateral Documents, in each case which are not then due and payable) then due and payable have been paid in full in cash. (b) In the event that any part of the Collateral is sold or otherwise disposed of (x) at any time prior to the time at which all Loan Document Obligations have been paid in full and all Commitments and Letters of Credit under the Credit Agreement have been terminated, in connection with a sale or disposition permitted by subsection 7.7 of the Credit Agreement or is otherwise released at the direction of the Required Lenders (or all the Lenders if required by subsection 10.6 of the Credit Agreement) or (y) at any time thereafter, to the extent permitted by the other Secured Debt Agreements, and in the case of clauses (x) and (y), the proceeds of such sale or disposition (or from such release) are applied in accordance with the terms of the Credit Agreement or such other Secured Debt Agreement, as the case may be, to the extent required to be so applied, the Pledgee, at the request and expense of such Pledgor, will duly release from the security interest created hereby (and will execute and deliver such documentation, including termination or partial release statements and the like in connection therewith) and assign, transfer and deliver to such Pledgor (without recourse and without any representation or warranty) such -21-
of the Collateral as is then being (or has been) so sold or released and as may be in the possession of the Pledgee and has not theretofore been released pursuant to this Agreement. (c) At any time that the respective Pledgor desires that Collateral be released as provided in the foregoing Section 20(a) or (b), it shall deliver to the Pledgee a certificate signed by an authorized officer of such Pledgor stating that the release of the respective Collateral is permitted pursuant to Section 20(a) or (b) hereof. If reasonably requested by the Pledgee (although the Pledgee shall have no obligation to make any such request), the relevant Pledgor shall furnish appropriate legal opinions (from counsel reasonably acceptable to the Pledgee) to the effect set forth in the immediately preceding sentence. The Pledgee shall have no liability whatsoever to any Secured Party as the result of any release of Collateral by it as permitted by this Section 20. (d) The Pledgee shall have no liability whatsoever to any other Secured Party as the result of any release of Collateral by it in accordance with (or which the Collateral Agent in the absence of gross negligence and willful misconduct believes to be in accordance with) this Section 20. 21. NOTICES, ETC. Except as otherwise specified herein, all notices, requests, demands or other communications to or upon the respective parties hereto shall be sent or delivered by mail, telegraph, telex, telecopy, cable or courier service and all such notices and communications shall, when mailed, telegraphed, telexed, telecopied or cabled or sent by courier, be effective when deposited in the mails, delivered to the telegraph company, cable company or overnight courier, as the case may be, or sent by telex or telecopier, except that notices and communications to the Pledgee or any Pledgor shall not be effective until received by the Collateral Agent or such Pledgor, as the case may be. All notices and other communications shall be in writing addressed as follows: (a) if to any Pledgor, at its address set forth opposite its signature below; (b) if to the Pledgee, at: JPMorgan Chase Bank 270 Park Avenue New York, New York 10017 Attention: Ms Teri Streusand, Vice-President Telephone No.: (212) 270-9803 Telecopier No.: (212) 270-5646; (c) if to any Lender Creditor, either (x) to the Administrative Agent, at the address of the Administrative Agent specified in the Credit Agreement, or (y) at such address as such Lender Creditor shall have specified in the Credit Agreement; (d) if to any Other Creditor, at such address as such Other Creditor shall have specified in writing to the Pledgors and the Pledgee; or at such other address as shall have been furnished in writing by any Person described above to the party required to give notice hereunder. -22-
22. WAIVER; AMENDMENT. Except as contemplated in Section 31 hereof, none of the terms and conditions of this Agreement may be changed, waived, modified or varied in any manner whatsoever unless in writing duly signed by each Pledgor directly affected thereby and the Pledgee (with the written consent of either (x) the Requisite Lenders (or all of the Lenders to the extent required by subsection 10.6 of the Credit Agreement) at all times prior to the time on which all Loan Document Obligations have been paid in full or (y) the holders of at least a majority of the outstanding Other Obligations at all times after the time on which all Loan Document Obligations have been paid in full); provided, that any change, waiver, modification or variance affecting the rights and benefits of a single Class (as defined below) of Secured Creditors (and not all Secured Creditors in a like or similar manner) shall also require the written consent of the Requisite Creditors (as defined below) of such affected Class. For the purpose of this Agreement, the term "Class" shall mean each class of Secured Creditors, i.e., whether (i) the Lender Creditors as holders of the Loan Document Obligations or (ii) the Other Creditors as the holders of the Other Obligations. For the purpose of this Agreement, the term "Requisite Creditors" of any Class shall mean each of (i) with respect to the Loan Document Obligations, the Requisite Lenders and (ii) with respect to the Other Obligations, the holders of at least a majority of all obligations outstanding from time to time under the Secured Hedging Agreements. 23. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon each Pledgor and its successors and assigns (although no Pledgor may assign its rights and obligations hereunder except in accordance with the provisions of the Secured Debt Agreements) and shall inure to the benefit of the Pledgee and the other Secured Creditors and their respective successors and assigns. All agreements, statements, representations and warranties made by each Pledgor herein or in any certificate or other instrument delivered by such Pledgor or on its behalf under this Agreement shall be considered to have been relied upon by the Secured Creditors and shall survive the execution and delivery of this Agreement and the other Secured Debt Agreements regardless of any investigation made by the Secured Creditors or on their behalf. 24. HEADINGS DESCRIPTIVE. The headings of the several sections of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. 25. GOVERNING LAW; SUBMISSION TO JURISDICTION; VENUE; WAIVER OF JURY TRIAL. (a) THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK, IN EACH CASE WHICH ARE LOCATED IN THE COUNTY OF NEW YORK, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH PLEDGOR HEREBY IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS. EACH PLEDGOR HEREBY FURTHER IRREVOCABLY WAIVES ANY CLAIM THAT ANY SUCH COURTS LACK -23-
PERSONAL JURISDICTION OVER SUCH PLEDGOR, AND AGREES NOT TO PLEAD OR CLAIM IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT BROUGHT IN ANY OF THE AFORESAID COURTS THAT ANY SUCH COURT LACKS PERSONAL JURISDICTION OVER SUCH PLEDGOR. EACH PLEDGOR FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO ANY SUCH PLEDGOR AT ITS ADDRESS FOR NOTICES AS PROVIDED IN SECTION 21 ABOVE, SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER SUCH MAILING. EACH PLEDGOR HEREBY IRREVOCABLY WAIVES ANY OBJECTION TO SUCH SERVICE OF PROCESS AND FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY ACTION OR PROCEEDING COMMENCED HEREUNDER OR UNDER ANY OTHER CREDIT DOCUMENT THAT SUCH SERVICE OF PROCESS WAS IN ANY WAY INVALID OR INEFFECTIVE. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE PLEDGEE UNDER THIS AGREEMENT, OR ANY SECURED CREDITOR, TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST ANY PLEDGOR IN ANY OTHER JURISDICTION. (b) EACH PLEDGOR HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY OF THE AFORESAID ACTIONS OR PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT BROUGHT IN THE COURTS REFERRED TO IN CLAUSE (a) ABOVE AND HEREBY FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. (c) EACH OF THE PARTIES TO THIS AGREEMENT HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE OTHER CREDIT DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. 26. PLEDGOR'S DUTIES. It is expressly agreed, anything herein contained to the contrary notwithstanding, that each Pledgor shall remain liable to perform all of the obligations, if any, assumed by it with respect to the Collateral and the Pledgee shall not have any obligations or liabilities with respect to any Collateral by reason of or arising out of this Agreement, except for the safekeeping of Collateral actually in Pledgor's possession, nor shall the Pledgee be required or obligated in any manner to perform or fulfill any of the obligations of any Pledgor under or with respect to any Collateral. 27. COUNTERPARTS. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the -24-
same instrument. A set of counterparts executed by all the parties hereto shall be lodged with each Pledgor and the Pledgee. 28. SEVERABILITY. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 29. RECOURSE. This Agreement is made with full recourse to each Pledgor and pursuant to and upon all the warranties, representations, covenants and agreements on the part of such Pledgor contained herein and in the other Secured Debt Agreements and otherwise in writing in connection herewith or therewith. 30. ADDITIONAL PLEDGORS. It is understood and agreed that any Subsidiary of Holdings that is required to execute a counterpart of this Agreement after the date hereof pursuant to the requirements of the Credit Agreement or any other Loan Document, shall automatically become a Pledgor hereunder by executing a counterpart hereof and delivering the same to the Pledgee. Each of Holdings and the Borrowers hereby agree that they shall and shall cause any of their respective Subsidiaries that become a Pledgor hereunder to (i) deliver supplements to Annexes A through G, inclusive, hereto, as are necessary to cause such Annexes to be complete and accurate with respect to such additional Pledgor on such date and (ii) take all actions as specified in this Agreement as would have been taken by such Pledgor had it been an original party to this Agreement, in each case with all documents required above to be delivered to the Pledgee and with all documents and actions required above to be taken to the reasonable satisfaction of the Pledgee. 31. RELEASE OF PLEDGORS. If at any time all of the Equity Interests of any Pledgor owned by Borrowers and their respective Subsidiaries are sold (to a Person other than either Borrower or any Subsidiary Guarantor) in a transaction permitted pursuant to the Credit Agreement (and which does not violate the terms of any other Secured Debt Agreement then in effect), then, such Pledgor shall be released as a Pledgor pursuant to this Agreement without any further action hereunder (it being understood that the sale of all of the Equity Interests in any Person that owns, directly or indirectly, all of the Equity Interests in any Pledgor shall be deemed to be a sale of all of the Equity Interests in such Pledgor for purposes of this Section), and Pledgee is authorized and directed to execute and deliver such instruments of release as are reasonably satisfactory to it. At any time that Holdings desires that a Pledgor be released from this Agreement as provided in this Section 31, Holdings shall deliver to Pledgee a certificate signed by a principal executive officer of Holdings stating that the release of the respective Pledgor is permitted pursuant to this Section 31. If requested by Pledgee (although the Pledgee shall have no obligation to make any such request), Holdings shall furnish legal opinions (from counsel acceptable to the Pledgee) to the effect set forth in the immediately preceding sentence. Pledgee shall have no liability whatsoever to any other Secured Creditor as a result of the release of any Pledgor by it in accordance with, or which it believes to be in accordance with, this Section 31. -25-
IN WITNESS WHEREOF, each Pledgor and the Pledgee have caused this Agreement to be executed by their duly elected officers duly authorized as of the date first above written. Addresses: 30 Frank Lloyd Wright Drive DOMINO'S, INC., as a Pledgor Ann Arbor, MI 48106 Telephone: 734-930-3030 By: /s/ Harry J. Silverman --------------------------------- Telecopy: 734-747-6210 Title: Vice President Attention: Chief Financial Officer 30 Frank Lloyd Wright Drive DOMINO'S FRANCHISE HOLDING CO., as Ann Arbor, MI 48106 a Pledgor Telephone: 734-930-3030 Telecopy: 734-747-6210 By: /s/ Harry J. Silverman --------------------------------- Attention: Chief Financial Officer Title: Vice President 30 Frank Lloyd Wright Drive TISM, INC., as a Pledgor Ann Arbor, MI 48106 Telephone: 734-930-3030 By: /s/ Harry J. Silverman --------------------------------- Telecopy: 734-747-6210 Title: Vice President Attention: Chief Financial Officer 30 Frank Lloyd Wright Drive DOMINO'S PIZZA LLC, as a Pledgor Ann Arbor, MI 48106 Telephone: 734-930-3030 By: /s/ Harry J. Silverman --------------------------------- Telecopy: 734-747-6210 Title: Vice President Attention: Chief Financial Officer 30 Frank Lloyd Wright Drive DOMINO'S PIZZA INTERNATIONAL, INC., Ann Arbor, MI 48106 as a Pledgor Telephone: 734-930-3030 Telecopy: 734-747-6210 By: /s/ Harry J. Silverman --------------------------------- Attention: Chief Financial Officer Title: Vice President 30 Frank Lloyd Wright Drive DOMINO'S PIZZA GOVERNMENT SERVICES Ann Arbor, MI 48106 DIVISION, INC., as a Pledgor Telephone: 734-930-3030 Telecopy: 734-747-6210 By: /s/ Harry J. Silverman --------------------------------- Attention: Chief Financial Officer Title: Vice President
30 Frank Lloyd Wright Drive DOMINO'S PIZZA INTERNATIONAL PAYROLL Ann Arbor, MI 48106 SERVICES, INC., as a Pledgor Telephone: 734-930-3030 Telecopy: 734-747-6210 By: /s/ Harry J. Silverman --------------------------------- Attention: Chief Financial Officer Title: Vice President 30 Frank Lloyd Wright Drive DOMINO'S PIZZA PMC, INC., as a Ann Arbor, MI 48106 Pledgor Telephone: 734-930-3030 By: /s/ Harry J. Silverman --------------------------------- Telecopy: 734-747-6210 Title: Vice President Attention: Chief Financial Officer 30 Frank Lloyd Wright Drive DOMINO'S PIZZA CALIFORNIA LLC, as a Ann Arbor, MI 48106 Pledgor Telephone: 734-930-3030 Telecopy: 734-747-6210 By: /s/ Harry J. Silverman -------------------------------- Attention: Chief Financial Officer Title: Vice President Accepted and Agreed to: JPMORGAN CHASE BANK, as Collateral Agent and Pledgee By: /s/ Teri Streusand --------------------------------- Title: Vice President
EXHIBIT 10.18 EXHIBIT XII [CONFORMED AS EXECUTED] ================================================================================ SECURITY AGREEMENT among DOMINO'S, INC., DOMINO'S FRANCHISE HOLDING CO. (f/k/a BLUEFENCE, INC.), TISM, INC. AND CERTAIN OF THEIR RESPECTIVE SUBSIDIARIES and JPMORGAN CHASE BANK, as COLLATERAL AGENT ---------- Dated as of July 29, 2002 ---------- ================================================================================
SECURITY AGREEMENT SECURITY AGREEMENT, dated as of July 29, 2002, made by each of the undersigned assignors (each an "Assignor" and, together with any other entity that becomes an assignor hereunder pursuant to Section 10.13 hereof, the "Assignors") in favor of JPMorgan Chase Bank, as Collateral Agent (together with any successor Collateral Agent, the "Collateral Agent"), for the benefit of the Secured Creditors (as defined below). Certain capitalized terms as used herein are defined in Article IX hereof. Except as otherwise defined herein, all capitalized terms used herein and defined in the Credit Agreement (as defined below) shall be used herein as therein defined. W I T N E S S E T H: WHEREAS, Domino's, Inc., a Delaware corporation ("Domino's" or the "Company"), Domino's Franchise Holding Co. (f/k/a Bluefence, Inc.), a Michigan corporation ("Subsidiary Borrower" and, together with Company, each a "Borrower" and, collectively, "Borrowers"), TISM, Inc., a Michigan corporation, the financial institutions from time to time party thereto (the "Lenders"), J.P. Morgan Securities Inc., as Lead Arranger and Book Managers, JPMorgan Chase Bank, as Administrative Agent for Lenders (in such capacity and together with any successor Administrative Agent, "Administrative Agent"), Bank One, NA, as Syndication Agent and Comerica Bank, as Documentation Agent, have entered into a Credit Agreement, dated as of July 29, 2002 (as amended, modified or supplemented from time to time, the "Credit Agreement"), providing for the making of Loans to, and the issuance of Letters of Credit for the joint and several account of, the Borrowers as contemplated therein (the Lenders, each Issuing Lender, the Administrative Agent, the Collateral Agent and each other Agent are herein called the "Lender Creditors"); WHEREAS, the Borrowers may at any time and from time to time enter into or maintain one or more Interest Rate Agreements and Currency Agreements (collectively, together with the Existing Swap Agreement, "Secured Hedging Agreements") with one or more Lenders or any affiliate thereof (each such Lender or affiliate, even if the respective Lender subsequently ceases to be a Lender under the Credit Agreement for any reason, together with such Lender's or affiliate's successors and assigns, if any, collectively, the "Other Creditors" and, together with the Lender Creditors, the "Secured Creditors"); WHEREAS, pursuant to the Subsidiaries Guaranty, each Subsidiary Guarantor has jointly and severally guaranteed to the Secured Creditors the payment when due of all Guaranteed Obligations as described therein; WHEREAS, pursuant to the Holdings Guaranty, Holdings has unconditionally guaranteed to the Guaranteed Creditors the payment when due of all Guaranteed Obligations as described therein; WHEREAS, it is a condition precedent to the making of Loans to, and the issuance of Letters of Credit for the joint and several account of, the Borrowers under the Credit Agreement that each Assignor shall have executed and delivered to the Collateral Agent this
Agreement; and WHEREAS, each Assignor will obtain benefits from the incurrence of Loans by, and the issuance of Letters of Credit for the joint and several account of, the Borrowers under the Credit Agreement and the entering into and maintaining by either or both of the Borrowers of Secured Hedging Agreements and, accordingly, each Assignor desires to enter into this Agreement in order to satisfy the condition described in the preceding paragraph; NOW, THEREFORE, in consideration of the benefits accruing to each Assignor, the receipt and sufficiency of which are hereby acknowledged, each Assignor hereby makes the following representations and warranties to the Collateral Agent for the benefit of the Secured Creditors and hereby covenants and agrees with the Collateral Agent for the benefit of the Secured Creditors as follows: ARTICLE I SECURITY INTERESTS 1.1 Grant of Security Interests. (a) As security for the prompt and complete payment and performance when due of all of its Obligations, each Assignor does hereby assign and transfer unto the Collateral Agent, and does hereby pledge and grant to the Collateral Agent, for the benefit of the Secured Creditors, a continuing security interest in all of the right, title and interest of such Assignor in, to and under all of the following personal property and fixtures (and all rights therein) of such Assignor, or in which or to which such Assignor has any rights, in each case whether now existing or hereafter from time to time acquired: (i) each and every Account; (ii) all cash; (iii) the Cash Collateral Account and all monies, securities, Instruments and other investments deposited or required to be deposited in the Cash Collateral Account; (iv) all Chattel Paper (including without limitation all Tangible Chattel Paper and all Electronic Chattel Paper); (v) all Commercial Tort Claims; (vi) all computer programs of such Assignor and all intellectual property rights therein and all other proprietary information of such Assignor, including but not limited to Domain Names and Trade Secret Rights; (vii) all Contracts, together with all Contract Rights arising thereunder; (viii) all Copyrights; (ix) all Equipment; -2-
(x) all Deposit Accounts and all other demand, deposit, time, savings, cash management, passbook and similar accounts maintained by such Assignor with any Person and all monies, securities, Instruments and other investments deposited or required to be deposited in any of the foregoing; (xi) all Documents; (xii) all General Intangibles; (xiii) all Goods; (xiv) all Instruments; (xv) all Inventory; (xvi) all Investment Property; (xvii) all Letter-of-Credit Rights (whether or not the respective letter of credit is evidenced by a writing); (xviii) all Marks, together with the registrations and right to all renewals thereof, and the goodwill of the business of such Assignor symbolized by the Marks; (xix) all Patents; (xx) all Permits; (xxi) all Software and all Software licensing rights, all writings, plans, specifications and schematics, all engineering drawings, customer lists, goodwill and licenses, and all recorded data of any kind or nature, regardless of the medium of recording; (xxii) all Supporting Obligations; and (xxiii) all Proceeds and products of any and all of the foregoing (all of the above, the "Collateral"). (b) The security interest of the Collateral Agent under this Agreement extends to all Collateral which any Assignor may acquire, or with respect to which any Assignor may obtain rights, at any time during the term of this Agreement. (c) Notwithstanding clauses (a) and (b) of this Section 1.1, the payment and performance of the Obligations shall not be secured by: (i) any contract, license, permit or franchise that validly prohibits, restricts or requires the consent of a third party for the creation by such Assignor of a security interest in such contract, license, permit or franchise (or in any rights or property obtained by such Assignor under such contract, license, permit or franchise) except to the extent provided by Sections 9-406, 9- -3-
407, 9-408 and 9-409 of the UCC; (ii) any rights or property to the extent that any valid and enforceable law, statute or regulation applicable to such rights or property prohibits, restricts or requires the consent of a third party for the creation of a security interest therein except to the extent provided by Sections 9-406, 9-407, 9-408 and 9-409 of the UCC, provided, that, notwithstanding the foregoing in this subsection 1.1(c), any such contract, license, permit, franchise, rights and property described above shall be excluded from the Collateral only to the extent and for so long as such prohibition, restriction or third party consent requirement continues validly to prohibit, restrict or require the consent of a third party for the creation of such security interest, and upon the expiration, termination or other lifting of such prohibition, restriction or third party consent requirement, the contracts, licenses, permits, franchises, rights and properties and the rights therein shall automatically be included in the Collateral, without further action on the part of any Assignor, the Collateral Agent or any other Secured Creditor. 1.2 Power of Attorney. Each Assignor hereby constitutes and appoints the Collateral Agent its true and lawful attorney, irrevocably, with full power after the occurrence of and during the continuance of an Event of Default (in the name of such Assignor or otherwise) to act, require, demand, receive, compound and give aquittance for any and all moneys and claims for moneys due or to become due to such Assignor under or arising out of the Collateral, to endorse any checks or other instruments or orders in connection therewith and to file any claims or take any action or institute any proceedings which the Collateral Agent may deem to be necessary or advisable to protect the interests of the Secured Creditors, which appointment as attorney is coupled with an interest. ARTICLE II GENERAL REPRESENTATIONS, WARRANTIES AND COVENANTS Each Assignor represents, warrants and covenants, which representations, warranties and covenants shall survive execution and delivery of this Agreement, as follows: 2.1 Necessary Filings. Except with respect to Collateral (i) having a fair market value, in the aggregate, equal to or less than $5,000,000 and (ii) in which the security interest granted to the Collateral Agent is not at that time required to be perfected by the Collateral Documents and except by reason of the failure of Collateral Agent, Administrative Agent or any Lender to take any action within its exclusive control as contemplated by the Collateral Documents, all filings, registrations, recordings and other actions necessary or appropriate to create, preserve and perfect the security interest granted by such Assignor to the Collateral Agent hereby in respect of the Collateral have been accomplished and the security interest granted to the Collateral Agent pursuant to this Agreement in and to the Collateral creates (or, in the case of (u) Patents, Copyrights, Marks and Domain Names, upon the filing in the appropriate filing office of the instruments to be delivered by the applicable Assignor pursuant to Section 4.6 and 5.6 hereof (v) Instruments and money not on deposit at a banking institution, upon the delivery of such Instruments or money to the Collateral Agent, (w) deposit accounts (and monies therein), -4-
upon the completion of the actions described in Section 3.9 hereof, (x) Commercial Tort Claims, upon the completion of the actions described in Section 3.11 hereof, (y) letter-of-credit rights that do not constitute Supporting Obligations, upon the completion of the actions described in Section 3.10 hereof and (z) Electronic Chattel Paper, upon the Collateral Agent obtaining "control" thereof as described in Section 3.12 hereof) a valid and, together with all such filings, registrations, recordings and other actions, a perfected security interest therein prior to the rights of all other Persons therein and subject to no other Liens (other than those Liens permitted to exist with respect to the Collateral pursuant to the terms of all Secured Debt Agreements then in effect) and is entitled to all the rights, priorities and benefits afforded by the Uniform Commercial Code or other relevant law as enacted in any relevant jurisdiction to perfected security interests, in each case to the extent that the Collateral consists of the type of property in which a security interest may be perfected by possession or control (within the meaning of the UCC as in effect on the date hereof in the State of New York), (x) by filing a financing statement under the Uniform Commercial Code as enacted in any relevant jurisdiction or (y) by a filing of a Grant of Security Interest in the respective form attached hereto in the United States Patent and Trademark Office or in the United States Copyright Office. 2.2 No Liens. Such Assignor is, and as to all Collateral acquired by it from time to time after the date hereof such Assignor will be, the owner of all Collateral free from any Lien, security interest, encumbrance or other right, title or interest of any Person (other than those Liens permitted to exist with respect to the Collateral pursuant to the terms of all Secured Debt Agreements then in effect), and such Assignor shall defend the Collateral against all claims and demands of all Persons at any time claiming the same or any interest therein adverse to the Collateral Agent. 2.3 Other Financing Statements. As of the date hereof, there is no financing statement (or similar statement or instrument of registration under the law of any jurisdiction) covering or purporting to cover any interest of any kind in the Collateral (other than financing statements filed in respect of (x) those Liens permitted to exist with respect to the Collateral pursuant to the terms of all Secured Debt Agreements then in effect and (y) those Liens to be terminated as of the date hereof which were created pursuant to the Existing Credit Agreement and the Collateral Documents (as defined in the Existing Credit Agreement)), and so long as the Termination Date has not occurred, such Assignor will not execute or authorize to be filed in any public office any financing statement (or similar statement or instrument of registration under the law of any jurisdiction) or statements relating to the Collateral, except financing statements filed or to be filed in respect of and covering the security interests granted hereby by such Assignor or in connection with those Liens permitted to exist with respect to the Collateral pursuant to the terms of all Secured Debt Agreements then in effect. 2.4 Chief Executive Office, Record Locations. The chief executive office of such Assignor is, on the date of this Agreement, located at the address indicated on Annex A hereto for such Assignor. During the period of the four calendar months preceding the date of this Agreement, the chief executive office of such Assignor has not been located at any address other than that indicated on Annex A in accordance with the immediately preceding sentence, in each case unless each such other address is also indicated on Annex A hereto for such Assignor. 2.5 Legal Names; Type of Organization (and Whether a Registered Organization -5-
and/or a Transmitting Utility); Jurisdiction of Organization; Location; Organizational Identification Numbers; Changes Thereto; Etc. The exact legal name of each Assignor, the type of organization of such Assignor, whether or not such Assignor is a Registered Organization, the jurisdiction of organization of such Assignor, such Assignor's Location, the organizational identification number (if any) of each Assignor, and whether or not such Assignor is a Transmitting Utility, is listed on Annex C hereto for such Assignor. No Assignor shall change its legal name, its type of organization, its status as a Registered Organization (in the case of a Registered Organization), its status as a Transmitting Utility or as a Person which is not a Transmitting Utility, as the case may be, its jurisdiction of organization, its Location, or its organizational identification number (if any) from that used on Annex C hereto, except that any such changes shall be permitted (so long as not in violation of the applicable requirements of the Secured Debt Agreements and so long as same do not involve (x) a Registered Organization ceasing to constitute same or (y) any Assignor changing its jurisdiction of organization or Location from the United States or a State thereof to a jurisdiction of organization or Location, as the case may be, outside the United States or a State thereof) if (i) it shall have given to the Collateral Agent not less than 15 days' prior written notice of each change to the information listed on Annex C (as adjusted for any subsequent changes thereto previously made in accordance with this sentence), together with a supplement to Annex C which shall correct all information contained therein for the respective Assignor, and (ii) in connection with the respective such change or changes, it shall have taken all action reasonably requested by the Collateral Agent to maintain the security interests of the Collateral Agent in the Collateral intended to be granted hereby at all times fully perfected and in full force and effect. In addition, to the extent that any Assignor does not have an organizational identification number on the date hereof and later obtains one, such Assignor shall promptly thereafter notify the Collateral Agent of such organizational identification number and shall take all actions reasonably satisfactory to the Collateral Agent to the extent necessary to maintain the security interest of the Collateral Agent in the Collateral intended to be granted hereby fully perfected and in full force and effect. 2.6 Trade Names; Etc. No Assignor has or operates in any jurisdiction under, or in the preceding five years has had or has operated in any jurisdiction under, any trade names, fictitious names or other names except its legal name as specified in Annex C and such other trade or fictitious names as are listed on Annex D hereto for such Assignor. 2.7 Certain Significant Transactions. During the one year period preceding the date of this Agreement, no Person shall have merged or consolidated with or into any Assignor, and no Person shall have liquidated into, or transferred all or substantially all of its assets to, any Assignor, in each case except as described in Annex E hereto. With respect to any transactions so described in Annex E hereto, the respective Assignor shall have furnished such information with respect to the Person (and the assets of the Person and locations thereof) which merged with or into or consolidated with such Assignor, or was liquidated into or transferred all or substantially all of its assets to such Assignor, and shall have furnished to the Collateral Agent such UCC lien searches as may have been requested with respect to such Person and its assets, to establish that no security interest (excluding those Liens permitted to exist with respect to the Collateral pursuant to the terms of all Secured Debt Agreements then in effect) continues perfected on the date hereof with respect to any Person described above (or the assets transferred to the respective Assignor by such Person), including without limitation pursuant to Section 9-316(a)(3) of the UCC. -6-
2.8 Collateral in the Possession of a Bailee. Upon the occurrence and continuation of a Specified Collateral Event or an Event of Default, if any Inventory or other Goods are at any time in the possession of a bailee, the respective Assignor shall promptly notify the Collateral Agent thereof and, if requested by the Collateral Agent, shall use its reasonable best efforts to promptly obtain an acknowledgment from such bailee, in form and substance reasonably satisfactory to the Collateral Agent, that the bailee holds such Collateral for the benefit of the Collateral Agent and shall act upon the instructions of the Collateral Agent, without the further consent of the respective Assignor. The Collateral Agent agrees with the Assignors that the Collateral Agent shall not give any such instructions unless an Event of Default has occurred and is continuing or would occur after taking into account any action by the respective Assignor with respect to any such bailee. 2.9 Recourse. This Agreement is made with full recourse to each Assignor and pursuant to and upon all the warranties, representations, covenants and agreements on the part of such Assignor contained herein, in the Secured Debt Agreements and otherwise in writing in connection herewith or therewith. ARTICLE III SPECIAL PROVISIONS CONCERNING ACCOUNTS; CONTRACT RIGHTS; INSTRUMENTS; CHATTEL PAPER AND CERTAIN OTHER COLLATERAL 3.1 Additional Representations and Warranties. As of the time when each of its Accounts arises, each Assignor shall be deemed to have represented and warranted that each such Account, and all records, papers and documents relating thereto (if any) are genuine and what they purport to be, and that all papers and documents (if any) relating thereto (i) will, to the knowledge of such Assignor, represent the genuine, legal, valid and binding obligation of the account debtor evidencing indebtedness unpaid and owed by the respective account debtor arising out of the performance of labor or services or the sale or lease and delivery of the merchandise listed therein, or both, (ii) will be the only original writings evidencing and embodying such obligation of the account debtor named therein (other than copies created for general accounting purposes), (iii) will, to the knowledge of such Assignor, evidence true and valid obligations, enforceable in accordance with their respective terms, and (iv) will be in compliance and will conform in all material respects with all applicable federal, state and local laws and applicable laws of any relevant foreign jurisdiction. 3.2 Maintenance of Records. Each Assignor will keep and maintain at its own cost and expense accurate records of its Accounts and Contracts, including, but not limited to, originals of all documentation (including each Contract) with respect thereto, records of all payments received, all credits granted thereon, all merchandise returned and all other dealings therewith, and such Assignor will make the same available on such Assignor's premises to the Collateral Agent for inspection, at such Assignor's own cost and expense, at any and all reasonable times upon reasonable prior notice to such Assignor and otherwise in accordance with the Credit Agreement. Upon the occurrence and during the continuance of an Event of Default and at the request of the Collateral Agent, such Assignor shall, at its own cost and expense, deliver all tangible evidence of its Accounts and Contract Rights (including, without limitation, all documents evidencing the Accounts and all Contracts) and such books and records to the -7-
Collateral Agent or to its representatives (copies of which evidence and books and records may be retained by such Assignor). Upon the occurrence and during the continuance of an Event of Default and if the Collateral Agent so directs, such Assignor shall legend, in form and manner satisfactory to the Collateral Agent, the Accounts and the Contracts, as well as books, records and documents (if any) of such Assignor evidencing or pertaining to such Accounts and Contracts with an appropriate reference to the fact that such Accounts and Contracts have been assigned to the Collateral Agent and that the Collateral Agent has a security interest therein. 3.3 Direction to Account Debtors; Contracting Parties; Etc. Upon the occurrence and during the continuance of an Event of Default, if the Collateral Agent so directs any Assignor, such Assignor agrees (x) to cause all payments on account of the Accounts and Contracts to be made directly to the Cash Collateral Account, (y) that the Collateral Agent may, at its option, directly notify the obligors with respect to any Accounts and/or under any Contracts to make payments with respect thereto as provided in the preceding clause (x), and (z) that the Collateral Agent may enforce collection of any such Accounts and Contracts and may adjust, settle or compromise the amount of payment thereof, in the same manner and to the same extent as such Assignor. Without notice to or assent by any Assignor, the Collateral Agent may, upon the occurrence and during the continuance of an Event of Default, apply any or all amounts then in, or thereafter deposited in, the Cash Collateral Account toward the payment of the Obligations in the manner provided in Section 7.4 of this Agreement. The reasonable costs and expenses of collection (including reasonable attorneys' fees), whether incurred by an Assignor or the Collateral Agent, shall be borne by the relevant Assignor. The Collateral Agent shall deliver a copy of each notice referred to in the preceding clause (y) to the relevant Assignor, provided that (x) the failure by the Collateral Agent to so notify such Assignor shall not affect the effectiveness of such notice or the other rights of the Collateral Agent created by this subsection 3.3 and (y) no such notice shall be required if an Event of Default of the type described in subsections 8.6 and 8.7 of the Credit Agreement has occurred and is continuing. 3.4 Modification of Terms; Etc. Except in accordance with such Assignor's ordinary course of business and consistent with reasonable business judgment, no Assignor shall rescind or cancel any indebtedness evidenced by any Account or under any Contract, or modify any material term thereof or make any material adjustment with respect thereto, or extend or renew the same, or compromise or settle any material dispute, claim, suit or legal proceeding relating thereto, or sell any Account or Contract, or interest therein, without the prior written consent of the Collateral Agent. No Assignor will do anything to adversely affect the right, title and interest of the Collateral Agent in the Accounts or Contracts, except as permitted this Section 3.4 and Section 3.5. 3.5 Collection. Each Assignor shall endeavor in accordance with reasonable business practices to cause to be collected from the account debtor named in each of its Accounts or obligor under any Contract, as and when due (including, without limitation, amounts which are delinquent, such amounts to be collected in accordance with generally accepted lawful collection procedures) any and all amounts owing under or on account of such Account or Contract, and apply forthwith upon receipt thereof all such amounts as are so collected to the outstanding balance of such Account or under such Contract. Except as otherwise directed by the Collateral Agent after the occurrence and during the continuation of an Event of Default, any Assignor may allow in the ordinary course of business as adjustments to amounts owing under -8-
its Accounts and Contracts (i) an extension or renewal of the time or times of payment, or settlement for less than the total unpaid balance, which such Assignor finds appropriate in accordance with reasonable business judgment and (ii) a refund or credit due as a result of returned or damaged merchandise or improperly performed services or for other reasons which such Assignor finds appropriate in accordance with reasonable business judgment. The reasonable costs and expenses (including, without limitation, reasonable attorneys' fees) of collection, whether incurred by an Assignor or the Collateral Agent, shall be borne by the relevant Assignor. 3.6 Instruments. If any Assignor owns or acquires any Instrument in excess of $750,000 constituting Collateral (other than checks and other payment instruments received and collected in the ordinary course of business), such Assignor will within 30 Business Days notify the Collateral Agent thereof, and upon request by the Collateral Agent will promptly deliver such Instrument to the Collateral Agent appropriately endorsed to the order of the Collateral Agent. 3.7 Assignors Remain Liable Under Accounts. Anything herein to the contrary notwithstanding, the Assignors shall remain liable under each of the Accounts to observe and perform all of the conditions and obligations to be observed and performed by it thereunder, all in accordance with the terms of any agreement giving rise to such Accounts. Neither the Collateral Agent nor any other Secured Creditor shall have any obligation or liability under any Account (or any agreement giving rise thereto) by reason of or arising out of this Agreement or the receipt by the Collateral Agent or any other Secured Creditor of any payment relating to such Account pursuant hereto, nor shall the Collateral Agent or any other Secured Creditor be obligated in any manner to perform any of the obligations of any Assignor under or pursuant to any Account (or any agreement giving rise thereto), to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by them or as to the sufficiency of any performance by any party under any Account (or any agreement giving rise thereto), to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to them or to which they may be entitled at any time or times. 3.8 Assignors Remain Liable Under Contracts. Anything herein to the contrary notwithstanding, the Assignors shall remain liable under each of the Contracts to observe and perform all of the conditions and obligations to be observed and performed by them thereunder, all in accordance with and pursuant to the terms and provisions of each Contract. Neither the Collateral Agent nor any other Secured Creditor shall have any obligation or liability under any Contract by reason of or arising out of this Agreement or the receipt by the Collateral Agent or any other Secured Creditor of any payment relating to such Contract pursuant hereto, nor shall the Collateral Agent or any other Secured Creditor be obligated in any manner to perform any of the obligations of any Assignor under or pursuant to any Contract, to make any payment, to make any inquiry as to the nature or the sufficiency of any performance by any party under any Contract, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to them or to which they may be entitled at any time or times. 3.9 Deposit Accounts; Etc. (a) No Assignor maintains, or at any time after the date of this Agreement shall establish or maintain, any demand, time, savings, passbook or -9-
similar account, except for such accounts maintained with a bank (as defined in Section 9-102 of the UCC) whose jurisdiction (determined in accordance with Section 9-304 of the UCC) is within a State of the United States. Annex F hereto accurately sets forth, as of the date of this Agreement, for each Assignor, each Deposit Account maintained by such Assignor (including a description thereof and the respective account number), the name of the respective bank with which such Deposit Account is maintained, and the jurisdiction of the respective bank with respect to such Deposit Account. Upon the occurrence and continuation of a Specified Collateral Event or an Event of Default, if requested by the Collateral Agent, for each Deposit Account (other than the Cash Collateral Account or any other Deposit Account maintained with the Collateral Agent), the respective Assignor shall cause the bank with which the Deposit Account is maintained to execute and deliver to the Collateral Agent, within 30 days after the date of the occurrence of such Specified Collateral Event or Event of Default, a "control agreement" in the form of Annex G hereto (appropriately completed), with such changes thereto as may be acceptable to the Collateral Agent. If any bank with which a Deposit Account is maintained refuses to, or does not, enter into such a "control agreement", then the respective Assignor shall promptly (and in any event within 30 days after the occurrence of the Specified Collateral Event or the Event of Default, as the case may be) close the respective Deposit Account and transfer all balances therein to the Cash Collateral Account or another Deposit Account meeting the requirements of this Section 3.9. If any bank with which a Deposit Account is maintained refuses to subordinate all its claims with respect to such Deposit Account to the Collateral Agent's security interest therein on terms satisfactory to the Collateral Agent, then the Collateral Agent, at its option, may (x) require that such Deposit Account be terminated in accordance with the immediately preceding sentence or (y) agree to a "control agreement" without such subordination, provided that in such event the Collateral Agent may at any time, at its option, subsequently require that such Deposit Account be terminated (within 30 days after notice from the Collateral Agent) in accordance with the requirements of the immediately preceding sentence. (b) After the date of this Agreement, no Assignor shall establish any new demand, time, savings, passbook or similar account, except for Deposit Accounts established and maintained with banks and meeting the requirements of preceding clause (a). At the time any such Deposit Account is established, the appropriate "control agreement" shall be entered into in accordance with the requirements of preceding clause (a) and the respective Assignor shall furnish to the Collateral Agent a supplement to Annex E hereto containing the relevant information with respect to the respective Deposit Account and the bank with which same is established. 3.10 Letter-of-Credit Rights. If any Assignor is at any time a beneficiary under a letter of credit with a stated amount of $1,000,000 or more, such Assignor shall promptly notify the Collateral Agent thereof and, at the request of the Collateral Agent, such Assignor shall, pursuant to an agreement in form and substance reasonably satisfactory to the Collateral Agent, use its reasonable best efforts to (i) arrange for the issuer and any confirmer of such letter of credit to consent to an assignment to the Collateral Agent of the proceeds of any drawing under such letter of credit or (ii) arrange for the Collateral Agent to become the transferee beneficiary of such letter of credit, with the Collateral Agent agreeing, in each case, that the proceeds of any drawing under the letter of credit are to be applied as provided in this Agreement after the occurrence and during the continuance of an Event of Default, provided, that any Letters of Credit constituting Supporting Obligations shall be excluded from the requirements of this -10-
Section 3.10. 3.11 Commercial Tort Claims. All Commercial Tort Claims of each Assignor in existence on the date of this Agreement are described in Annex H hereto. If any Assignor shall at any time after the date of this Agreement acquire a Commercial Tort Claim in an amount (taking the greater of the aggregate claimed damages thereunder or the reasonably estimated value thereof) of $1,000,000 or more, such Assignor shall within 30 days thereof notify the Collateral Agent thereof in a writing signed by such Assignor and describing the details thereof and shall grant to the Collateral Agent in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance reasonably satisfactory to the Collateral Agent. 3.12 Chattel Paper. Upon the request of the Collateral Agent made at any time or from time to time, each Assignor shall within 30 days furnish to the Collateral Agent a list of all Electronic Chattel Paper held or owned by such Assignor. Furthermore, if requested by the Collateral Agent, upon the occurrence and continuation of a Specified Collateral Event or an Event of Default, each Assignor shall promptly take all actions which are reasonably practicable so that the Collateral Agent has "control" of all Electronic Chattel Paper in accordance with the requirements of Section 9-105 of the UCC. Each Assignor will promptly (and in any event within 30 days) following any request by the Collateral Agent made in accordance with the foregoing sentence, deliver all of its Tangible Chattel Paper to the Collateral Agent. 3.13 Further Actions. Each Assignor will, at its own expense, make, execute, endorse, acknowledge, file and/or deliver to the Collateral Agent from time to time such vouchers, invoices, schedules, confirmatory assignments, conveyances, financing statements, transfer endorsements, certificates, reports and other assurances or instruments and take such further steps, including any and all actions as may be necessary or required under the Federal Assignment of Claims Act, relating to its Accounts, Contracts, Instruments and other property or rights covered by the security interest hereby granted, as the Collateral Agent may reasonably require. ARTICLE IV SPECIAL PROVISIONS CONCERNING TRADEMARKS AND DOMAIN NAMES 4.1 Additional Representations and Warranties. Each Assignor represents and warrants that it is the true and lawful owner of or otherwise has the right to use the registered Marks and Domain Names listed in Annex I hereto for such Assignor and that said listed Marks and Domain Names include all United States marks and applications for United States marks registered in the United States Patent and Trademark Office and all Domain Names that such Assignor owns or uses in connection with its business as of the date hereof. Each Assignor represents and warrants that it owns, is licensed to use or otherwise has the right to use, all material Marks and Domain Names that it uses. Each Assignor further warrants that it has no knowledge of any third party claim received by it that any aspect of such Assignor's present or contemplated business operations infringes or will infringe any trademark, service mark or trade name of any other Person other than as could not, either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Each Assignor represents and -11-
warrants that it is the true and lawful owner of or otherwise has the right to use all material U.S. trademark registrations and applications and Domain Name registrations listed in Annex I hereto and that said registrations are valid, subsisting, have not been canceled and that such Assignor is not aware of any third-party claim that any of said registrations is invalid or unenforceable, and is not aware that there is any reason that any of said registrations is invalid or unenforceable. Each Assignor hereby grants to the Collateral Agent an absolute power of attorney to sign, upon the occurrence and during the continuance of an Event of Default, any document which may be required by the United States Patent and Trademark Office or similar registrar in order to effect an absolute assignment of all right, title and interest in each Mark and/or Domain Name, and record the same. 4.2 Licenses and Assignments. Except as otherwise permitted by the Secured Debt Agreements, each Assignor hereby agrees not to divest itself of any right under any Mark or Domain Name absent prior written approval of the Collateral Agent. 4.3 Infringements. Each Assignor agrees, promptly upon learning thereof, to notify the Collateral Agent in writing of the name and address of, and to furnish such pertinent information that may be available with respect to, any party who such Assignor believes is, or may be, infringing or diluting or otherwise violating any of such Assignor's rights in and to any Mark or Domain Name in any manner that could reasonably be expected to have a Material Adverse Effect, or with respect to any party claiming that such Assignor's use of any Mark or Domain Name material to such Assignor's business violates in any material respect any property right of that party. Each Assignor further agrees to prosecute in accordance with reasonable business practices any Person infringing any Mark or Domain Name in any manner that could reasonably be expected to have a Material Adverse Effect. 4.4 Preservation of Marks and Domain Names. Each Assignor agrees to use its Marks and Domain Names which are material to such Assignor's business in interstate commerce during the time in which this Agreement is in effect and to take all such other actions as are reasonably necessary to preserve such Marks as trademarks or service marks under the laws of the United States (other than any such Marks which are no longer used or useful in its business or operations). 4.5 Maintenance of Registration. Each Assignor shall, at its own expense, diligently process all documents reasonably required to maintain all Mark and/or Domain Name registrations, including but not limited to affidavits of use and applications for renewals of registration in the United States Patent and Trademark Office for all of its material registered Marks, and shall pay all fees and disbursements in connection therewith and shall not abandon any such filing of affidavit of use or any such application of renewal prior to the exhaustion of all administrative and judicial remedies without prior written consent of the Collateral Agent (other than with respect to registrations and applications deemed by such Assignor in its reasonable business judgment to be no longer prudent to pursue). 4.6 Future Registered Marks and Domain Names. If any Mark or Domain Name registration that is material to its business is issued hereafter to any Assignor as a result of any application now or hereafter pending before the United States Patent and Trademark Office or any Domain Name is registered by Assignor, within 30 days of receipt of such certificate or -12-
similar indicia of ownership, such Assignor shall deliver to the Collateral Agent a copy of such certificate or similar indicia of ownership, and a grant of a security interest in such Mark and/or Domain Name, to the Collateral Agent and at the expense of such Assignor, confirming grant of a security interest in such Mark and/or Domain Name to the Collateral Agent hereunder, the form of such security to be substantially in the form of Annex L hereto or in such other form as may be reasonably satisfactory to the Collateral Agent. 4.7 Remedies. If an Event of Default shall occur and be continuing, the Collateral Agent may, by written notice to the relevant Assignor, take any or all of the following actions, subject to the limitations of the Uniform Commercial Code in the applicable jurisdictions: (i) declare the entire right, title and interest of such Assignor in and to each of the Marks and Domain Names, together with all trademark rights and rights of protection to the same, vested in the Collateral Agent for the benefit of the Secured Creditors, in which event such rights, title and interest shall immediately vest, in the Collateral Agent for the benefit of the Secured Creditors, and the Collateral Agent shall be entitled to exercise the power of attorney referred to in Section 4.1 hereof to execute, cause to be acknowledged and notarized and record said absolute assignment with the applicable agency; (ii) take and use or sell the Marks or Domain Names and the goodwill of such Assignor's business symbolized by the Marks or Domain Names and the right to carry on the business and use the assets of such Assignor in connection with which the Marks or Domain Names have been used; and (iii) direct such Assignor to refrain, in which event such Assignor shall refrain, from using the Marks or Domain Names in any manner whatsoever, directly or indirectly, and such Assignor shall execute such further documents that the Collateral Agent may reasonably request to further confirm this and to transfer ownership of the Marks or Domain Names and registrations and any pending trademark application in the United States Patent and Trademark Office or applicable Domain Name registrar to the Collateral Agent. ARTICLE V SPECIAL PROVISIONS CONCERNING PATENTS, COPYRIGHTS AND TRADE SECRETS 5.1 Additional Representations and Warranties. Each Assignor represents and warrants that it is the true and lawful owner of all rights in (i) all material United States trade secrets and proprietary information necessary to operate the business of the Assignor (the "Trade Secret Rights"), (ii) the Patents listed in Annex J hereto for such Assignor and that said Patents include all the United States patents and applications for United States patents that such Assignor owns as of the date hereof and (iii) the Copyrights listed in Annex K hereto for such Assignor and that said Copyrights constitute all the United States copyrights registered with the United States Copyright Office and applications for United States copyrights that such Assignor owns as of the date hereof. Each Assignor further warrants that it has no knowledge of any third party claim that any aspect of such Assignor's present or contemplated business operations infringes or will infringe any patent of any other Person or such Assignor has misappropriated any trade secret or proprietary information which, either individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. Each Assignor hereby grants to the Collateral Agent an absolute power of attorney to sign, upon the occurrence and during the continuance of any Event of Default, any document which may be required by the United States Patent and Trademark Office in order to effect an absolute assignment of all right, title and interest in each -13-
Patent, and to record the same. 5.2 Licenses and Assignments. Except as otherwise permitted by the Secured Debt Agreements, each Assignor hereby agrees not to divest itself of any right under any Patent or Copyright absent prior written approval of the Collateral Agent. 5.3 Infringements. Each Assignor agrees, promptly upon learning thereof, to furnish the Collateral Agent in writing with all pertinent information available to such Assignor with respect to any infringement, contributing infringement or active inducement to infringe in any Patent or Copyright or to any claim that the practice of any Patent or use of any Copyright violates any property right of a third party, or with respect to any misappropriation of any Trade Secret Right or any claim that practice of any Trade Secret Right violates any property right of a third party, in each case, in any manner which, either individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. Each Assignor further agrees, absent direction of the Collateral Agent to the contrary, to diligently prosecute, in accordance with its reasonable business judgment, any Person infringing any Patent or Copyright or any Person misappropriating any Trade Secret Right, in each case to the extent that such infringement or misappropriation, either individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. 5.4 Maintenance of Patents or Copyrights. At its own expense, each Assignor shall make timely payment of all post-issuance fees required pursuant to 35 U.S.C. Section 41 to maintain in force its rights under each Patent or Copyright, absent prior written consent of the Collateral Agent (other than any such Patents or Copyrights which are no longer used or are deemed by such Assignor in its reasonable business judgment to no longer be useful in its business or operations). 5.5 Prosecution of Patent or Copyright Applications. At its own expense, each Assignor shall diligently prosecute all material applications for (i) United States Patents listed in Annex J hereto and (ii) Copyrights listed on Annex K hereto, in each case for such Assignor and shall not abandon any such application prior to exhaustion of all administrative and judicial remedies (other than applications that are deemed by such Assignor in its reasonable business judgment to no longer be prudent to pursue), absent written consent of the Collateral Agent. 5.6 Other Patents and Copyrights. Within 30 days of the acquisition or issuance of a United States Patent, registration of a Copyright, or acquisition of a registered Copyright, or of filing of an application for a United States Patent or Copyright, the relevant Assignor shall deliver to the Collateral Agent a copy of said Copyright or Patent, or certificate or registration of, or application therefor, as the case may be, with a grant of a security interest as to such Patent or Copyright, as the case may be, to the Collateral Agent and at the expense of such Assignor, confirming the grant of a security interest, the form of such grant of a security interest to be substantially in the form of Annex M or N hereto, as appropriate, or in such other form as may be reasonably satisfactory to the Collateral Agent. 5.7 Remedies. If an Event of Default shall occur and be continuing, the Collateral Agent may, by written notice to the relevant Assignor, take any or all of the following actions, subject to the limitations of the Uniform Commercial Code in the applicable -14-
jurisdictions: (i) declare the entire right, title, and interest of such Assignor in each of the Patents and Copyrights vested in the Collateral Agent for the benefit of the Secured Creditors, in which event such right, title, and interest shall immediately vest in the Collateral Agent for the benefit of the Secured Creditors, in which case the Collateral Agent shall be entitled to exercise the power of attorney referred to in Section 5.1 hereof to execute, cause to be acknowledged and notarized and to record said absolute assignment with the applicable agency; (ii) take and practice or sell the Patents and Copyrights; and (iii) direct such Assignor to refrain, in which event such Assignor shall refrain, from practicing the Patents and using the Copyrights directly or indirectly, and such Assignor shall execute such further documents as the Collateral Agent may reasonably request further to confirm this and to transfer ownership of the Patents and Copyrights to the Collateral Agent for the benefit of the Secured Creditors. ARTICLE VI PROVISIONS CONCERNING ALL COLLATERAL 6.1 Protection of Collateral Agent's Security. Except as otherwise permitted by the Secured Debt Agreements, each Assignor will do nothing to adversely affect the right, title and interest of the Collateral Agent in the Collateral. Each Assignor will at all times maintain insurance, at such Assignor's own expense to the extent and in the manner provided in the Secured Debt Agreements. Except to the extent otherwise permitted to be retained by such Assignor or applied by such Assignor pursuant to the terms of the Secured Debt Agreements, the Collateral Agent shall, at the time any proceeds of such insurance are distributed to the Secured Creditors, apply such proceeds in accordance with Section 7.4 hereof. Each Assignor assumes all liability and responsibility in connection with the Collateral acquired by it and the liability of such Assignor to pay the Obligations shall in no way be affected or diminished by reason of the fact that such Collateral may be lost, destroyed, stolen, damaged or for any reason whatsoever unavailable to such Assignor. 6.2 Warehouse Receipts Non-negotiable. To the extent practicable, each Assignor agrees that if any warehouse receipt or receipt in the nature of a warehouse receipt is issued with respect to any of its Inventory such Assignor shall notify the Collateral Agent of the existence of such receipt within 30 days of the issuance thereof and upon the occurrence and continuation of a Specified Collateral Event or an Event of Default, upon the request of the Collateral Agent, such Assignor shall request that such warehouse receipt or receipt in the nature thereof shall not be "negotiable" (as such term is used in Section 7-104 of the Uniform Commercial Code as in effect in any relevant jurisdiction or under other relevant law). 6.3 Additional Information. Each Assignor will, at its own expense, from time to time upon the reasonable request of the Collateral Agent, promptly (and in any event within 10 days after its receipt of the respective request) furnish to the Collateral Agent such information with respect to the Collateral (including the identity of the Collateral or such components thereof as may have been requested by the Collateral Agent, the value and location of such Collateral, etc.) as may be requested by the Collateral Agent. Without limiting the forgoing, each Assignor agrees that it shall promptly (and in any event within 10 business days after its receipt of the respective request) furnish to the Collateral Agent such updated Annexes hereto as may from time to time be reasonably requested by the Collateral Agent. -15-
6.4 Further Actions. Each Assignor will, at its own expense and upon the reasonable request of the Collateral Agent, make, execute, endorse, acknowledge, file and/or deliver to the Collateral Agent from time to time such lists, descriptions and designations of its Collateral, warehouse receipts, receipts in the nature of warehouse receipts, bills of lading, documents of title, vouchers, invoices, schedules, confirmatory assignments, conveyances, financing statements, transfer endorsements, certificates, reports and other assurances or instruments and take such further steps relating to the Collateral and other property or rights covered by the security interest hereby granted, which the Collateral Agent deems reasonably appropriate or advisable to perfect, preserve or protect its security interest in the Collateral. 6.5 Financing Statements. Each Assignor agrees to execute and deliver to the Collateral Agent such financing statements, in form reasonably acceptable to the Collateral Agent, as the Collateral Agent may from time to time reasonably request or as are reasonably necessary or desirable in the opinion of the Collateral Agent to establish and maintain a valid, enforceable, perfected security interest in the Collateral as provided herein and the other rights and security contemplated hereby. Each Assignor will pay any applicable filing fees, recordation taxes and related expenses relating to its Collateral. Each Assignor hereby authorizes the Collateral Agent to file any such financing statements and amendments thereto without the signature of such Assignor where permitted by law (and such authorization includes describing the Collateral as "all assets" of such Assignor). ARTICLE VII REMEDIES UPON OCCURRENCE OF AN EVENT OF DEFAULT 7.1 Remedies; Obtaining the Collateral Upon Default. Each Assignor agrees that, if any Event of Default shall have occurred and be continuing, then and in every such case, the Collateral Agent, in addition to any rights now or hereafter existing under applicable law and under the other provisions of this Agreement, shall have all rights as a secured creditor under any UCC, and such additional rights and remedies to which a secured creditor is entitled under the laws in effect in all relevant jurisdictions and may to the fullest extent permitted by applicable law: (i) personally, or by agents or attorneys, immediately take possession of the Collateral or any part thereof, from such Assignor or any other Person who then has possession of any part thereof with or without notice or process of law, and for that purpose may enter upon such Assignor's premises where any of the Collateral is located and remove the same and use in connection with such removal any and all services, supplies, aids and other facilities of such Assignor; (ii) instruct the obligor or obligors on any agreement, instrument or other obligation (including, without limitation, the Accounts and the Contracts) constituting the Collateral to make any payment required by the terms of such agreement, instrument or other obligation directly to the Collateral Agent and may exercise any and all remedies of such Assignor in respect of such Collateral; -16-
(iii) instruct all banks which have entered into a control agreement with the Collateral Agent to transfer all monies, securities and instruments held by such depositary bank to the Cash Collateral Account; (iv) sell, assign or otherwise liquidate any or all of the Collateral or any part thereof in accordance with Section 7.2 hereof, or direct the relevant Assignor to sell, assign or otherwise liquidate any or all of the Collateral or any part thereof, and, in each case, take possession of the proceeds of any such sale or liquidation; (v) take possession of the Collateral or any part thereof, by directing the relevant Assignor in writing to deliver the same to the Collateral Agent at any reasonable place or places designated by the Collateral Agent, in which event such Assignor shall at its own expense: (x) forthwith cause the same to be moved to the place or places so designated by the Collateral Agent and there delivered to the Collateral Agent; (y) store and keep any Collateral so delivered to the Collateral Agent at such place or places pending further action by the Collateral Agent as provided in Section 7.2 hereof; and (z) while the Collateral shall be so stored and kept, provide such security and maintenance services as shall be reasonably necessary to protect the same and to preserve and maintain it in good condition; (vi) license or sublicense, whether on an exclusive or nonexclusive basis, any Marks, Domain Names, Patents or Copyrights included in the Collateral for such term and on such conditions and in such manner as the Collateral Agent shall in its sole judgment determine; (vii) apply any monies constituting Collateral or proceeds thereof in accordance with the provisions of Section 7.4; and (viii) take any other action as specified in clauses (1) through (5), inclusive, of Section 9-607 of the UCC; it being understood that each Assignor's obligation so to deliver the Collateral is of the essence of this Agreement and that, accordingly, upon application to a court of equity having jurisdiction, the Collateral Agent shall be entitled to a decree requiring specific performance by such Assignor of said obligation. By accepting the benefits of this Agreement and each other Collateral Document, the Secured Creditors expressly acknowledge and agree that this Agreement and each other Collateral Document may be enforced only by the action of the Collateral Agent acting upon the instructions of the Required Secured Creditors and that no other Secured Creditor shall have any right individually to seek to enforce this Agreement or any other Collateral Document or to realize upon the security to be granted hereby or thereby, it being understood and agreed that such rights and remedies may be exercised by the Collateral Agent for the benefit of the Secured Creditors upon the terms of this Agreement and the other Collateral Documents. -17-
7.2 Remedies; Disposition of the Collateral. If any Event of Default shall have occurred and be continuing, then any Collateral repossessed by the Collateral Agent under or pursuant to Section 7.1 hereof and any other Collateral whether or not so repossessed by the Collateral Agent, may be sold, assigned, leased or otherwise disposed of under one or more contracts or as an entirety, and without the necessity of gathering at the place of sale the property to be sold, and in general in such manner, at such time or times, at such place or places and on such terms as the Collateral Agent may, in compliance with any mandatory requirements of applicable law, determine to be commercially reasonable. Any of the Collateral may be sold, leased or otherwise disposed of, in the condition in which the same existed when taken by the Collateral Agent or after any overhaul or repair at the expense of the relevant Assignor which the Collateral Agent shall determine to be commercially reasonable. Any such sale, lease or other disposition may be effected by means of a public disposition or private disposition, effected in accordance with the applicable requirements (in each case if and to the extent applicable) of Sections 9-610 through 9-613 of the UCC and/or such other mandatory requirements of applicable law as may apply to the respective disposition. The Collateral Agent may, without notice or publication, adjourn any public or private disposition or cause the same to be adjourned from time to time by announcement at the time and place fixed for the disposition, and such disposition may be made at any time or place to which the disposition may be so adjourned. To the extent permitted by any such requirement of law, the Collateral Agent may bid for and become the purchaser (and may pay all or any portion of the purchase price by crediting Obligations against the purchase price) of the Collateral or any item thereof, offered for disposition in accordance with this Section 7.2 without accountability to the relevant Assignor. If, under applicable law, the Collateral Agent shall be permitted to make disposition of the Collateral within a period of time which does not permit the giving of notice to the relevant Assignor as hereinabove specified, the Collateral Agent need give such Assignor only such notice of disposition as shall be required by such applicable law. Each Assignor agrees to do or cause to be done all such other acts and things as may be reasonably necessary to make such disposition or dispositions of all or any portion of the Collateral valid and binding and in compliance with any and all applicable laws, regulations, orders, writs, injunctions, decrees or awards of any and all courts, arbitrators or governmental instrumentalities, domestic or foreign, having jurisdiction over any such sale or sales, all at such Assignor's expense. 7.3 Waiver of Claims. Except as otherwise provided in this Agreement, EACH ASSIGNOR HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, NOTICE AND JUDICIAL HEARING IN CONNECTION WITH THE COLLATERAL AGENT'S TAKING POSSESSION OR THE COLLATERAL AGENT'S DISPOSITION OF ANY OF THE COLLATERAL, INCLUDING, WITHOUT LIMITATION, ANY AND ALL PRIOR NOTICE AND HEARING FOR ANY PREJUDGMENT REMEDY OR REMEDIES, and each Assignor hereby further waives, to the extent permitted by law: (i) all damages occasioned by such taking of possession or any such disposition except any damages which are the direct result of the Collateral Agent's gross negligence, bad faith or willful misconduct; (ii) all other requirements as to the time, place and terms of sale or other requirements with respect to the enforcement of the Collateral Agent's rights hereunder; and -18-
(iii) all rights of redemption, appraisement, valuation, stay, extension or moratorium now or hereafter in force under any applicable law in order to prevent or delay the enforcement of this Agreement or the absolute sale of the Collateral or any portion thereof, and each Assignor, for itself and all who may claim under it, insofar as it or they now or hereafter lawfully may, hereby waives the benefit of all such laws. Any sale of, or the grant of options to purchase, or any other realization upon, any Collateral shall operate to divest all right, title, interest, claim and demand, either at law or in equity, of the relevant Assignor therein and thereto, and shall be a perpetual bar both at law and in equity against such Assignor and against any and all Persons claiming or attempting to claim the Collateral so sold, optioned or realized upon, or any part thereof, from, through and under such Assignor. 7.4 Application of Proceeds. (a) All moneys collected by the Collateral Agent (or, to the extent the Pledge Agreement or any other Collateral Document requires proceeds of collateral under such other Collateral Document to be applied in accordance with the provisions of this Agreement, the Pledgee or Collateral Agent under such other Collateral Document) upon any sale or other disposition of the Collateral, together with all other moneys received by the Collateral Agent hereunder, shall be applied as follows: (i) first, to the payment of all amounts owing the Collateral Agent of the type described in clauses (iii), (iv) and (v) of the definition of "Obligations"; (ii) second, to the extent proceeds remain after the application pursuant to the preceding clause (i), to the payment of all amounts owing to any Agent of the type described in clauses (v) and (vi) of the definition of "Obligations"; (iii) third, to the extent proceeds remain after the application pursuant to the preceding clauses (i) and (ii), an amount equal to the outstanding Primary Obligations shall be paid to the Secured Creditors as provided in Section 7.4(e) hereof, with each Secured Creditor receiving an amount equal to its outstanding Primary Obligations or, if the proceeds are insufficient to pay in full all such Primary Obligations, its Pro Rata Share of the amount remaining to be distributed; (iv) fourth, to the extent proceeds remain after the application pursuant to the preceding clauses (i) through (iii), inclusive, an amount equal to the outstanding Secondary Obligations shall be paid to the Secured Creditors as provided in Section 7.4(e) hereof, with each Secured Creditor receiving an amount equal to its outstanding Secondary Obligations or, if the proceeds are insufficient to pay in full all such Secondary Obligations, its Pro Rata Share of the amount remaining to be distributed; and (v) fifth, to the extent proceeds remain after the application pursuant to the preceding clauses (i) through (iv), inclusive, and following the termination of this Agreement pursuant to Section 10.8(a) hereof, to the relevant Assignor or to whomever may be lawfully entitled to receive such surplus. (b) For purposes of this Agreement, (x) "Pro Rata Share" shall mean, when calculating a Secured Creditor's portion of any distribution or amount, that amount (expressed as -19-
a percentage) equal to a fraction the numerator of which is the then unpaid amount of such Secured Creditor's Primary Obligations or Secondary Obligations, as the case may be, and the denominator of which is the then outstanding amount of all Primary Obligations or Secondary Obligations, as the case may be, (y) "Primary Obligations" shall mean (i) in the case of the Loan Document Obligations, all principal of, premium, fees and interest on, all Loans, all amounts of unreimbursed drawings under Letters of Credit, the stated amount of all outstanding Letters of Credit and all fees with respect to Letters of Credit and (ii) in the case of the Other Obligations, all amounts due under such Secured Hedging Agreements (other than indemnities, fees (including, without limitation, attorneys' fees) and similar obligations and liabilities) and (z) "Secondary Obligations" shall mean all Obligations other than Primary Obligations. (c) When payments to Secured Creditors are based upon their respective Pro Rata Shares, the amounts received by such Secured Creditors hereunder shall be applied (for purposes of making determinations under this Section 7.4 only) (i) first, to their Primary Obligations and (ii) second, to their Secondary Obligations. If any payment to any Secured Creditor of its Pro Rata Share of any distribution would result in overpayment to such Secured Creditor, such excess amount shall instead be distributed in respect of the unpaid Primary Obligations or Secondary Obligations, as the case may be, of the other Secured Creditors, with each Secured Creditor whose Primary Obligations or Secondary Obligations, as the case may be, have not been paid in full to receive an amount equal to such excess amount multiplied by a fraction the numerator of which is the unpaid Primary Obligations or Secondary Obligations, as the case may be, of such Secured Creditor and the denominator of which is the unpaid Primary Obligations or Secondary Obligations, as the case may be, of all Secured Creditors entitled to such distribution. (d) Each of the Secured Creditors, by their acceptance of the benefits hereof and of the other Collateral Documents, agrees and acknowledges that if the Lender Creditors receive a distribution on account of undrawn amounts with respect to Letters of Credit issued under the Credit Agreement (which shall only occur after all outstanding Revolving Loans under the Credit Agreement and unreimbursed drawings under Letters of Credit have been paid in full), such amounts shall be paid to the Administrative Agent under the Credit Agreement and held by it, for the equal and ratable benefit of the Lender Creditors, as cash security for the repayment of Obligations owing to the Lender Creditors as such. If any amounts are held as cash security pursuant to the immediately preceding sentence, then upon the termination of all outstanding Letters of Credit under the Credit Agreement, and after the application of all such cash security to the repayment of all Obligations owing to the Lender Creditors after giving effect to the termination of all such Letters of Credit, if there remains any excess cash, such excess cash shall be returned by the Administrative Agent to the Collateral Agent for distribution in accordance with Section 7.4(a) hereof. (e) All payments required to be made hereunder shall be made (x) if to the Lender Creditors, to the Administrative Agent for the account of the Lender Creditors and (y) if to the Other Creditors, to the trustee, paying agent or other similar representative (each a "Representative") for the Other Creditors or, in the absence of such a Representative, directly to the Other Creditors. (f) For purposes of applying payments received in accordance with this Section 7.4, the Collateral Agent shall be entitled to rely upon (i) the Administrative Agent and -20-
(ii) the Representative or, in the absence of such a Representative, upon the Other Creditors for a determination (which the Administrative Agent, each Representative and the Other Creditors agree (or shall agree) to provide upon request of the Collateral Agent) of the outstanding Primary Obligations and Secondary Obligations owed to the Lender Creditors or the Other Creditors, as the case may be. Unless it has received written notice from a Lender Creditor or an Other Creditor to the contrary, the Administrative Agent and each Representative, in furnishing information pursuant to the preceding sentence, and the Collateral Agent, in acting hereunder, shall be entitled to assume that no Secondary Obligations are outstanding. Unless it has written notice from an Other Creditor to the contrary, the Collateral Agent, in acting hereunder, shall be entitled to assume that no Secured Hedging Agreements are in existence. (g) This Agreement is made with full recourse to each Assignor (including, without limitation, with full recourse to all assets of such Assignor) and pursuant to and upon all the warranties, representations, covenants and agreements on the part of such Assignor contained herein, in the other Secured Debt Agreements and otherwise in writing in connection herewith or therewith. It is understood that the Assignors shall remain jointly and severally liable to the extent of any deficiency between the amount of the proceeds of the Collateral and the aggregate amount of the Obligations. 7.5 Remedies Cumulative. Each and every right, power and remedy hereby specifically given to the Collateral Agent shall be in addition to every other right, power and remedy specifically given to the Collateral Agent under this Agreement, the other Secured Debt Agreements or now or hereafter existing at law, in equity or by statute and each and every right, power and remedy whether specifically herein given or otherwise existing may be exercised from time to time or simultaneously and as often and in such order as may be deemed expedient by the Collateral Agent. All such rights, powers and remedies shall be cumulative and the exercise or the beginning of the exercise of one shall not be deemed a waiver of the right to exercise any other or others. No delay or omission of the Collateral Agent in the exercise of any such right, power or remedy and no renewal or extension of any of the Obligations shall impair any such right, power or remedy or shall be construed to be a waiver of any Potential Event of Default or Event of Default or an acquiescence thereof. No notice to or demand on any Assignor in any case shall entitle it to any other or further notice or demand in similar or other circumstances or constitute a waiver of any of the rights of the Collateral Agent to any other or further action in any circumstances without notice or demand. In the event that the Collateral Agent shall bring any suit to enforce any of its rights hereunder and shall be entitled to judgment, then in such suit the Collateral Agent may recover reasonable expenses, including reasonable attorneys' fees, and the amounts thereof shall be included in such judgment. 7.6 Discontinuance of Proceedings. In case the Collateral Agent shall have instituted any proceeding to enforce any right, power or remedy under this Agreement by foreclosure, sale, entry or otherwise, and such proceeding shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Collateral Agent, then and in every such case the relevant Assignor, except to the extent otherwise prohibited by such determination, the Collateral Agent and each holder of any of the Obligations shall be restored to their former positions and rights hereunder with respect to the Collateral subject to the security interest created under this Agreement, and all rights, remedies and powers of the Collateral Agent shall continue as if no such proceeding had been instituted. -21-
ARTICLE VIII INDEMNITY 8.1 Indemnity. (a) Each Assignor jointly and severally agrees to indemnify, reimburse and hold the Collateral Agent, each other Secured Creditor and their respective successors, assigns, employees, affiliates and agents (hereinafter in this Section 8.1 referred to individually as "Indemnitee," and collectively as "Indemnitees") harmless from any and all liabilities, obligations, damages, injuries, penalties, claims, demands, actions, suits, judgments and any and all costs, expenses or disbursements (including reasonable attorneys' fees and expenses) (for the purposes of this Section 8.1 the foregoing are collectively called "expenses") of whatsoever kind and nature imposed on, asserted against or incurred by any of the Indemnitees in any way relating to or arising out of this Agreement, any other Secured Debt Agreement or any other document executed in connection herewith or therewith or in any other way connected with the administration of the transactions contemplated hereby or thereby or the enforcement of any of the terms of, or the preservation of any rights under any thereof, or in any way relating to or arising out of the manufacture, ownership, ordering, purchase, delivery, control, acceptance, lease, financing, possession, operation, condition, sale, return or other disposition, or use of the Collateral (including, without limitation, latent or other defects, whether or not discoverable), the violation of the laws of any country, state or other governmental body or unit, any tort (including, without limitation, claims arising or imposed under the doctrine of strict liability, or for or on account of injury to or the death of any Person (including any Indemnitee), or property damage), or contract claim; provided that no Indemnitee shall be indemnified pursuant to this Section 8.1(a) for losses, damages or liabilities to the extent caused by the gross negligence, bad faith or willful misconduct of such Indemnitee. Each Assignor agrees that upon written notice by any Indemnitee of the assertion of such a liability, obligation, damage, injury, penalty, claim, demand, action, suit or judgment, the relevant Assignor shall assume full responsibility for the defense thereof. Each Indemnitee agrees to use its best efforts to promptly notify the relevant Assignor of any such assertion of which such Indemnitee has knowledge. (b) Without limiting the application of Section 8.1(a) hereof, each Assignor agrees, jointly and severally, to pay or reimburse the Collateral Agent for any and all reasonable fees, costs and expenses of whatever kind or nature incurred in connection with the creation, preservation or protection of the Collateral Agent's Liens on, and security interest in, the Collateral, including, without limitation, all fees and taxes in connection with the recording or filing of instruments and documents in public offices, payment or discharge of any taxes or Liens upon or in respect of the Collateral, premiums for insurance with respect to the Collateral and all other fees, costs and expenses in connection with protecting, maintaining or preserving the Collateral and the Collateral Agent's interest therein, whether through judicial proceedings or otherwise, or in defending or prosecuting any actions, suits or proceedings arising out of or relating to the Collateral. (c) Without limiting the application of Section 8.1(a) or (b) hereof, each Assignor agrees, jointly and severally, to pay, indemnify and hold each Indemnitee harmless from and against any loss, costs, damages and expenses which such Indemnitee may suffer, expend or incur in consequence of or growing out of any misrepresentation by any Assignor in -22-
this Agreement, any other Secured Debt Agreement or in any writing contemplated by or made or delivered pursuant to or in connection with this Agreement or any other Secured Debt Agreement. (d) If and to the extent that the obligations of any Assignor under this Section 8.1 are unenforceable for any reason, such Assignor hereby agrees to make the maximum contribution to the payment and satisfaction of such obligations which is permissible under applicable law. 8.2 Indemnity Obligations Secured by Collateral; Survival. Any amounts paid by any Indemnitee as to which such Indemnitee has the right to reimbursement shall constitute Obligations secured by the Collateral. The indemnity obligations of each Assignor contained in this Article VIII shall continue in full force and effect notwithstanding the full payment of all of the other Obligations and notwithstanding the full payment of all the Notes issued, and Loans made, under the Credit Agreement, the termination of all Letters of Credit issued under the Credit Agreement, the termination of all Secured Hedging Agreements entered into with the Other Creditors and the payment of all other Obligations and notwithstanding the discharge thereof and the occurrence of the Termination Date. ARTICLE IX DEFINITIONS The following terms shall have the meanings herein specified. Such definitions shall be equally applicable to the singular and plural forms of the terms defined. "Account" shall mean any "account" as such term is defined in the Uniform Commercial Code as in effect on the date hereof in the State of New York, and in any event shall include but shall not be limited to, all rights to payment of any monetary obligation, whether or not earned by performance, (i) for property that has been or is to be sold, leased, licensed, assigned or otherwise disposed of, (ii) for services rendered or to be rendered, (iii) for a policy of insurance issued or to be issued, (iv) for a secondary obligation incurred or to be incurred, (v) for energy provided or to be provided, (vi) for the use or hire of a vessel under a charter or other contract, (vii) arising out of the use of a credit or charge card or information contained on or for use with the card, or (viii) as winnings in a lottery or other game of chance operated or sponsored by a State, governmental unit of a State, or person licensed or authorized to operate the game by a State or governmental unit of a State. Without limiting the foregoing, the term "account" shall include all Health-Care-Insurance Receivables. "Administrative Agent" shall have the meaning provided in the recitals of this Agreement. "Agreement" shall mean this Security Agreement as the same may be modified, supplemented or amended from time to time in accordance with its terms. -23-
"As-Extracted Collateral" shall mean "as-extracted collateral" as such term is defined in the Uniform Commercial Code as in effect on the date hereof in the State of New York. "Assignor" shall have the meaning provided in the first paragraph of this Agreement. "Borrower" shall have the meaning provided in the recitals of this Agreement. "Cash Collateral Account" shall mean a cash collateral account maintained with, and in the sole dominion and control of, the Collateral Agent for the benefit of the Secured Creditors. "Chattel Paper" shall mean "chattel paper" as such term is defined in the Uniform Commercial Code as in effect on the date hereof in the State of New York. Without limiting the foregoing, the term "Chattel Paper" shall in any event include all Tangible Chattel Paper and all Electronic Chattel Paper. "Class" shall have the meaning provided in Section 10.2 of this Agreement. "Collateral" shall have the meaning provided in Section 1.1(a) of this Agreement. "Collateral Agent" shall have the meaning provided in the first paragraph of this Agreement. "Commercial Tort Claims" shall mean "commercial tort claims" as such term is defined in the Uniform Commercial Code as in effect on the date hereof in the State of New York. "Contract Rights" shall mean all rights of any Assignor under each Contract, including, without limitation, (i) any and all rights to receive and demand payments under any or all Contracts, (ii) any and all rights to receive and compel performance under any or all Contracts and (iii) any and all other rights, interests and claims now existing or in the future arising in connection with any or all Contracts. "Contracts" shall mean all contracts between any Assignor and one or more additional parties (including, without limitation, any Secured Hedging Agreements, licensing agreements and any partnership agreements, joint venture agreements and limited liability company agreements). "Copyrights" shall mean any United States copyright owned by any Assignor, including any registrations of any copyrights, in the United States Copyright Office or any foreign equivalent office, as well as any application for a copyright registration now or hereafter made with the United States Copyright Office or any foreign equivalent office by any Assignor. "Credit Agreement" shall have the meaning provided in the recitals of this Agreement. -24-
"Default" shall mean any event which with notice or lapse of time, or both, would constitute an Event of Default. "Deposit Accounts" shall mean all "deposit accounts" as such term is defined in the Uniform Commercial Code as in effect on the date hereof in the State of New York. "Documents" shall mean "documents" as such term is defined in the Uniform Commercial Code as in effect on the date hereof in the State of New York. "Domain Names" shall mean all Internet domain names and associated URL addresses in or to which any Assignor now or hereafter has any right, title or interest. "Electronic Chattel Paper" shall mean "electronic chattel paper" as such term is defined in the Uniform Commercial Code as in effect on the date hereof in the State of New York. "Equipment" shall mean any "equipment" as such term is defined in the Uniform Commercial Code as in effect on the date hereof in the State of New York, and in any event, shall include, but shall not be limited to, all machinery, equipment, furnishings, fixtures and vehicles now or hereafter owned by any Assignor and any and all additions, substitutions and replacements of any of the foregoing and all accessions thereto, wherever located, together with all attachments, components, parts, equipment and accessories installed thereon or affixed thereto. "Event of Default" shall mean any Event of Default under, and as defined in, the Credit Agreement and shall in any event include, without limitation, any payment default on any of the Obligations after the expiration of any applicable grace period. "General Intangibles" shall mean "general intangibles" as such term is defined in the Uniform Commercial Code as in effect on the date hereof in the State of New York. "Goods" shall mean "goods" as such term is defined in the Uniform Commercial Code as in effect on the date hereof in the State of New York. "Health-Care-Insurance Receivable" shall mean any "health-care-insurance receivable" as such term is defined in the Uniform Commercial Code as in effect on the date hereof in the State of New York. "Indemnitee" shall have the meaning provided in Section 8.1(a) of this Agreement. "Instrument" shall mean "instruments" as such term is defined in the Uniform Commercial Code as in effect on the date hereof in the State of New York. "Inventory" shall mean merchandise, inventory and goods, and all additions, substitutions and replacements thereof and all accessions thereto, wherever located, together with all goods, supplies, incidentals, packaging materials, labels, materials and any other items used or usable in manufacturing, processing, packaging or shipping same, in all stages of production -25-
from raw materials through work in process to finished goods, and all products and proceeds of whatever sort and wherever located any portion thereof which may be returned, rejected, reclaimed or repossessed by the Collateral Agent from any Assignor's customers, and shall specifically include all "inventory" as such term is defined in the Uniform Commercial Code as in effect on the date hereof in the State of New York. "Investment Property" shall mean "investment property" as such term is defined in the Uniform Commercial Code as in effect on the date hereof in the State of New York. "Lender Creditors" shall have the meaning provided in the recitals of this Agreement. "Lenders" shall have the meaning provided in the recitals of this Agreement. "Letter-of-Credit Rights" shall mean "letter-of-credit rights" as such term is defined in the Uniform Commercial Code as in effect on the date hereof in the State of New York. "Liens" shall mean any security interest, mortgage, pledge, lien, claim, charge, encumbrance, title retention agreement, lessor's interest in a financing lease or analogous instrument, in, of, or on any Assignor's property. "Loan Document Obligations" shall have the meaning provided in the definition of "Obligations" in this Article IX. "Location" of any Assignor, shall mean such Assignor's "location" as determined pursuant to Section 9-307 of the UCC. "Marks" shall mean all right, title and interest in and to any trademarks, service marks and trade names now held or hereafter acquired by any Assignor, including any registration or application for registration of any trademarks and service marks now held or hereafter acquired by any Assignor, which are registered or filed in the United States Patent and Trademark Office or the equivalent thereof in any state of the United States or any equivalent foreign office or agency, as well as any unregistered trademarks and service marks used by an Assignor and any trade dress including logos, designs, fictitious business names and other business identifiers used by any Assignor. "Material Adverse Effect" shall mean a material adverse effect on the business, property, assets, liabilities (actual or contingent), operations or condition (financial or otherwise) of the Borrower and its Subsidiaries taken as a whole. "Obligations" shall mean and include all of the following: (i) the full and prompt payment when due (whether at the stated maturity, by acceleration or otherwise) of all obligations, liabilities and indebtedness (including, without limitation, principal, premium, interest (including, without limitation, all interest that accrues after the commencement of any case, proceeding or other action relating to the bankruptcy, insolvency, reorganization or similar proceeding of any Assignor at the rate -26-
provided for in the respective documentation, whether or not a claim for post-petition interest is allowed in any such proceeding), reimbursement obligations under Letters of Credit, fees, costs and indemnities) of each Assignor to the Lender Creditors, whether now existing or hereafter incurred under, arising out of, or in connection with, the Credit Agreement and the other Loan Documents to which such Assignor is a party (including, in the case of each Assignor that is a Guarantor, all such obligations, liabilities and indebtedness of such Assignor under the Subsidiaries Guaranty) and the due performance and compliance by such Assignor with all of the terms, conditions and agreements contained in the Credit Agreement and in such other Loan Documents (all such obligations, liabilities and indebtedness under this clause (i), except to the extent consisting of obligations or indebtedness with respect to Secured Hedging Agreements, being herein collectively called the "Loan Document Obligations"); (ii) the full and prompt payment when due (whether at the stated maturity, by acceleration or otherwise) of all obligations, liabilities and indebtedness (including, without limitation, all interest that accrues after the commencement of any case, proceeding or other action relating to the bankruptcy, insolvency, reorganization or similar proceeding of any Assignor at the rate provided for in the respective documentation, whether or not a claim for post-petition interest is allowed in any such proceeding) owing by such Assignor to the Other Creditors under, or with respect to (including, in the case of each Assignor that is a Guarantor, all such obligations, liabilities and indebtedness of such Assignor under the Subsidiaries Guaranty), each Secured Hedging Agreement, whether such Secured Hedging Agreement is now in existence or hereafter arising, and the due performance and compliance by such Assignor with all of the terms, conditions and agreements contained therein (all such obligations, liabilities and indebtedness described in this clause (ii) being herein collectively called the "Other Obligations"); (iii) any and all sums advanced by the Collateral Agent in order to preserve the Collateral or preserve its security interest in the Collateral; (iv) in the event of any proceeding for the collection or enforcement of any indebtedness, obligations, or liabilities of such Assignor referred to in clauses (i) and (ii) above, after an Event of Default shall have occurred and be continuing, the reasonable expenses of retaking, holding, preparing for sale or lease, selling or otherwise disposing of or realizing on the Collateral, or of any exercise by the Collateral Agent of its rights hereunder, together with reasonable attorneys' fees and court costs; (v) all amounts paid by any Indemnitee as to which such Indemnitee has the right to reimbursement under Section 8.1 of this Agreement; and (vi) all amounts owing to any Agent pursuant to any of the Loan Documents in its capacity as such; it being acknowledged and agreed that the "Obligations" shall include extensions of credit of the types described above, whether outstanding on the date of this Agreement or extended from time to time after the date of this Agreement. -27-
"Other Creditors" shall have the meaning provided in the recitals of this Agreement. "Other Obligations" shall have the meaning provided in the definition of "Obligations" in this Article IX. "Patents" shall mean any patent to which any Assignor now or hereafter has any right, title or interest therein, and any divisions, continuations (including, but not limited to, continuations-in-parts) and improvements thereof, as well as any application for a patent now or hereafter made by any Assignor. "Permits" shall mean, to the extent permitted to be assigned by the terms thereof or by applicable law, all licenses, permits, rights, orders, variances, franchises or authorizations of or from any governmental authority or agency. "Primary Obligations" shall have the meaning provided in Section 7.4(b) of this Agreement. "Pro Rata Share" shall have the meaning provided in Section 7.4(b) of this Agreement. "Proceeds" shall mean all "proceeds" as such term is defined in the Uniform Commercial Code as in effect in the State of New York on the date hereof and, in any event, shall also include, but not be limited to, (i) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to the Collateral Agent or any Assignor from time to time with respect to any of the Collateral, (ii) any and all payments (in any form whatsoever) made or due and payable to any Assignor from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral by any governmental authority (or any person acting under color of governmental authority) and (iii) any and all other amounts from time to time paid or payable under or in connection with any of the Collateral. "Registered Organization" shall have the meaning provided in the Uniform Commercial Code as in effect in the State of New York. "Representative" shall have the meaning provided in Section 7.4(e) of this Agreement. "Required Secured Creditors" shall mean (i) at any time when any Loan Document Obligations are outstanding or any Commitments under the Credit Agreement exist, the Requisite Lenders (or, to the extent provided in Section 10.6 of the Credit Agreement, each of the Lenders) and (ii) at any time after all of the Loan Document Obligations have been paid in full and all Commitments under the Credit Agreement have been terminated and no further Commitments may be provided thereunder, the holders of a majority of the Other Obligations. "Requisite Creditors" shall have the meaning provided in Section 10.2 of this Agreement. -28-
"Secondary Obligations" shall have the meaning provided in Section 7.4(b) of this Agreement. "Secured Creditors" shall have the meaning provided in the recitals of this Agreement. "Secured Debt Agreements" shall mean and include this Agreement, the other Loan Documents and the Secured Hedging Agreements entered into with any Other Creditor. "Secured Hedging Agreements" shall have the meaning provided in the recitals of this Agreement. "Software" shall mean "software" as such term is defined in the Uniform Commercial Code as in effect on the date hereof in the State of New York. "Specified Collateral Event" shall mean the failure of the Company and its Subsidiaries to maintain a rating of at least "BB-" from Standard & Poor's Ratings Group or at least "Ba3" from Moody's Investors Service, Inc.. "Supporting Obligations" shall mean any "supporting obligation" as such term is defined in the Uniform Commercial Code as in effect on the date hereof in the State of New York, now or hereafter owned by any Assignor, or in which any Assignor has any rights, and, in any event, shall include, but shall not be limited to all of such Assignor's rights in any Letter-of-Credit Right or secondary obligation that supports the payment or performance of, and all security for, any Account, Chattel Paper, Document, General Intangible, Instrument or Investment Property."Tangible Chattel Paper" shall mean "tangible chattel paper" as such term is defined in the Uniform Commercial Code as in effect on the date hereof in the State of New York. "Termination Date" shall have the meaning provided in Section 10.8(a) of this Agreement. "Timber-to-be-Cut" shall mean "timber-to-be-cut" as such term is used in the Uniform Commercial Code as in effect on the date hereof in the State of New York. "Trade Secrets" shall mean any secretly held existing engineering or other data, information, production procedures and other know-how relating to the design, manufacture, assembly, installation, use, operation, marketing, sale and/or servicing of any products or business of an Assignor worldwide, whether written or not. "Trade Secret Rights" shall have the meaning provided in Section 5.1 of this Agreement. "Transmitting Utility" shall have the meaning given such term in Section 9-102(a)(80) of the UCC. -29-
"UCC" shall mean the Uniform Commercial Code as in effect from time to time in the relevant jurisdiction. ARTICLE X MISCELLANEOUS 10.1 Notices. Except as otherwise specified herein, all notices, requests, demands or other communications to or upon the respective parties hereto shall be sent or delivered by mail, telegraph, telex, telecopy, cable or courier service and all such notices and communications shall, when mailed, telegraphed, telexed, telecopied, or cabled or sent by courier, be effective when deposited in the mails, delivered to the telegraph company, cable company or overnight courier, as the case may be, or sent by telex or telecopier, except that notices and communications to the Collateral Agent or any Assignor shall not be effective until received by the Collateral Agent or such Assignor, as the case may be. All notices and other communications shall be in writing and addressed as follows: (a) if to any Assignor, c/o: Domino's, Inc. 30 Frank Lloyd Wright Drive Ann Arbor, MI 48106 Attention of Joe Donovan, Vice President and Treasurer Telephone No.: (734) 930-3111 Telecopier No.: (800) 472-2062 (b) if to the Collateral Agent, at: JPMorgan Chase Bank 270 Park Avenue New York, NY 10017 Attention: Ms. Teri Streusand, Vice-President Telephone No.: (212) 270-9803 Telecopier No.: (212) 270-5646 (c) if to any Lender Creditor other than the Collateral Agent, at such address as such Lender Creditor shall have specified in the Credit Agreement; (d) if to any Other Creditor, at such address as such Other Creditor shall have specified in writing to each Assignor and the Collateral Agent; or at such other address or addressed to such other individual as shall have been furnished in writing by any Person described above to the party required to give notice hereunder. 10.2 Waiver; Amendment. Except as provided in Sections 10.8 and 10.13, none of the terms and conditions of this Agreement may be changed, waived, modified or varied in any manner whatsoever unless in writing duly signed by each Assignor directly affected thereby and the Collateral Agent; provided, however, that any change, waiver, modification or variance -30-
(with the written consent of either (x) the Requisite Lenders (or all of the Lenders to the extent required by Section 10.6 of the Credit Agreement) at all times prior to the time on which all Loan Document Obligations have been paid in full or (y) the holders of at least a majority of the outstanding Other Obligations at all times after the time on which all Loan Document Obligations have been paid in full) affecting the rights and benefits of a single Class of Secured Creditors (and not all Secured Creditors in a like or similar manner) also shall require the written consent of the Requisite Creditors of such affected Class. For the purpose of this Agreement, the term "Class" shall mean each class of Secured Creditors, i.e., whether (x) the Lender Creditors as holders of the Loan Document Obligations or (y) the Other Creditors as the holders of the Other Obligations. For the purpose of this Agreement, the term "Requisite Creditors" of any Class shall mean each of (x) with respect to the Loan Document Obligations, the Requisite Lenders (or, to the extent provided in subsection 10.6 of the Credit Agreement, each of the Lenders), and (y) with respect to the Other Obligations, the holders of at least a majority of all Other Obligations outstanding from time to time. 10.3 Obligations Absolute. The obligations of each Assignor hereunder shall remain in full force and effect without regard to, and shall not be impaired by, (a) any bankruptcy, insolvency, reorganization, arrangement, readjustment, composition, liquidation or the like of such Assignor; (b) any exercise or non-exercise, or any waiver of, any right, remedy, power or privilege under or in respect of this Agreement or any other Secured Debt Agreement; or (c) any amendment to or modification of any Secured Debt Agreement or any security for any of the Obligations; whether or not such Assignor shall have notice or knowledge of any of the foregoing. 10.4 Successors and Assigns. This Agreement shall be binding upon each Assignor and its successors and assigns (although no Assignor may assign its rights and obligations hereunder except in accordance with the provisions of the Secured Debt Agreements) and shall inure to the benefit of the Collateral Agent and the other Secured Creditors and their respective successors and assigns. All agreements, statements, representations and warranties made by each Assignor herein or in any certificate or other instrument delivered by such Assignor or on its behalf under this Agreement shall be considered to have been relied upon by the Secured Creditors and shall survive the execution and delivery of this Agreement and the other Secured Debt Agreements regardless of any investigation made by the Secured Creditors or on their behalf. 10.5 Headings Descriptive. The headings of the several sections of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. 10.6 GOVERNING LAW; SUBMISSION TO JURISDICTION; VENUE; WAIVER OF JURY TRIAL. (a) THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK, AND, BY EXECUTION AND DELIVERY OF -31-
THIS AGREEMENT, EACH ASSIGNOR HEREBY IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS. EACH ASSIGNOR HEREBY FURTHER IRREVOCABLY WAIVES ANY CLAIM THAT ANY SUCH COURTS LACK JURISDICTION OVER SUCH ASSIGNOR, AND AGREES NOT TO PLEAD OR CLAIM IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT BROUGHT IN ANY OF THE AFORESAID COURTS THAT ANY SUCH COURT LACKS JURISDICTION OVER SUCH ASSIGNOR. EACH ASSIGNOR FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO ANY SUCH ASSIGNOR AT ITS ADDRESS FOR NOTICES AS PROVIDED IN SECTION 10.1 ABOVE, SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER SUCH MAILING. EACH ASSIGNOR HEREBY IRREVOCABLY WAIVES ANY OBJECTION TO SUCH SERVICE OF PROCESS AND FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY ACTION OR PROCEEDING COMMENCED HEREUNDER OR UNDER ANY OTHER LOAN DOCUMENT THAT SUCH SERVICE OF PROCESS WAS IN ANY WAY INVALID OR INEFFECTIVE. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE COLLATERAL AGENT UNDER THIS AGREEMENT, OR ANY SECURED CREDITOR, TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST ANY ASSIGNOR IN ANY OTHER JURISDICTION. (b) EACH ASSIGNOR HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY OF THE AFORESAID ACTIONS OR PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT BROUGHT IN THE COURTS REFERRED TO IN CLAUSE (a) ABOVE AND HEREBY FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. (c) EACH OF THE PARTIES TO THIS AGREEMENT HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. -32-
10.7 Assignor's Duties. It is expressly agreed, anything herein contained to the contrary notwithstanding, that each Assignor shall remain liable to perform all of the obligations, if any, assumed by it with respect to the Collateral and the Collateral Agent shall not have any obligations or liabilities with respect to any Collateral by reason of or arising out of this Agreement provided, that the Collateral Agent shall be liable for the safekeeping of the Collateral already in its possession, nor shall the Collateral Agent be required or obligated in any manner to perform or fulfill any of the obligations of any Assignor under or with respect to any Collateral. 10.8 Termination; Release. (a) On the Termination Date, this Agreement shall terminate (provided that all indemnities set forth herein including, without limitation in Section 8.1 hereof, shall survive such termination) and the Collateral Agent, at the request and expense of the respective Assignor, will promptly execute and deliver to such Assignor a proper instrument or instruments (including Uniform Commercial Code termination statements) acknowledging the satisfaction and termination of this Agreement, and will duly assign, transfer and deliver to such Assignor (without recourse and without any representation or warranty) such of the Collateral as may be in the possession of the Collateral Agent and as has not theretofore been sold or otherwise applied or released pursuant to this Agreement. As used in this Agreement, "Termination Date" shall mean the date upon which the Commitments under the Credit Agreement have been terminated and all Secured Hedging Agreements entered into with any Other Creditor have been terminated, no Note, Loan or Letter of Credit is outstanding and all other Obligations (other than indemnities described in Section 11 hereof and described in Section 10.3 of the Credit Agreement, and any other indemnities set forth in any other Collateral Documents, in each case which are not then due and payable) then due and payable have been paid in full. (b) In the event that any part of the Collateral is sold, transferred or otherwise disposed of (x) at any time prior to the time at which all Loan Document Obligations have been paid in full and all Commitments and Letters of Credit under the Credit Agreement have been terminated, in connection with a sale or disposition permitted by subsection 7.7 of the Credit Agreement or is otherwise released at the direction of the Required Lenders (or all the Lenders if required by subsection 10.6 of the Credit Agreement) or (y) at any time thereafter, to the extent permitted by the other Secured Debt Agreements, and in the case of clauses (x) and (y), the proceeds of such sale or disposition (or from such release) are applied in accordance with the terms of the Credit Agreement or such other Secured Debt Agreement, as the case may be, to the extent required to be so applied, such Collateral will be sold, transferred or otherwise disposed of free and clear of the Liens created by this Agreement and the Collateral Agent, at the request and expense of the relevant Assignor, will duly and promptly assign, transfer and deliver to such Assignor (without recourse and without any representation or warranty) such of the Collateral as is then being (or has been) so sold, transferred or otherwise disposed of, or released, and as may be in the possession of the Collateral Agent and has not theretofore been released pursuant to this Agreement. Furthermore, upon the release of any Guarantor from the Subsidiaries Guaranty in accordance with the provisions thereof, such Assignor (and the Collateral at such time assigned by the respective Assignor pursuant hereto) shall be released from this Agreement. (c) At any time that an Assignor desires that the Collateral Agent take any action to acknowledge or give effect to any release of Collateral pursuant to the foregoing -33-
Section 10.8(a) or (b), such Assignor shall deliver to the Collateral Agent a certificate signed by a senior officer of such Assignor stating that the release of the respective Collateral is permitted pursuant to such Section 10.8(a) or (b). At any time that Company or the respective Assignor desires that a Subsidiary of Company which has been released from the Subsidiaries Guaranty be released hereunder as provided in the last sentence of Section 10.8(b), it shall deliver to the Collateral Agent a certificate signed by a principal executive officer of Company and the respective Assignor stating that the release of the respective Assignor (and its Collateral) is permitted pursuant to such Section 10.8(b). (d) The Collateral Agent shall have no liability whatsoever to any other Secured Party as the result of any release of Collateral by it in accordance with this Section 10.8. -34-
10.9 Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A set of counterparts executed by all the parties hereto shall be lodged with each Assignor and the Collateral Agent. 10.10 Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 10.11 The Collateral Agent and the other Secured Creditors. The Collateral Agent will hold in accordance with this Agreement all items of the Collateral at any time received under this Agreement. It is expressly understood and agreed that the obligations of the Collateral Agent as holder of the Collateral and interests therein and with respect to the disposition thereof, and otherwise under this Agreement, are only those expressly set forth in this Agreement and in Section 9 of the Credit Agreement. The Collateral Agent shall act hereunder on the terms and conditions set forth herein and in Section 9 of the Credit Agreement. 10.12 Benefit of Agreement. This Agreement shall be binding upon the parties hereto and their respective successors and assigns and shall inure to the benefit of and be enforceable by each of the parties hereto and its successors and assigns. 10.13 Additional Assignors. It is understood and agreed that any Subsidiary of Holdings that desires to become an Assignor hereunder, or is required to execute a counterpart of this Agreement after the date hereof pursuant to the requirements of the Credit Agreement or any other Loan Document, shall become an Assignor hereunder by executing a counterpart hereof and delivering same to the Collateral Agent, (y) delivering supplements to Annexes A through F, inclusive, and H through K, inclusive, hereto as are necessary to cause such Annexes to be complete and accurate with respect to such additional Assignor on such date and (z) taking all actions as specified in this Agreement as would have been taken by such Assignor had it been an original party to this Agreement, in each case with all documents required above to be delivered to the Collateral Agent and with all documents and actions required above to be taken to the reasonable satisfaction of the Collateral Agent. [Remainder of this page intentionally left blank; signature page follows] -35-
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. DOMINO'S, INC., as an Assignor By: /s/ Harry J. Silverman ------------------------------- Title: Vice President DOMINO'S FRANCHISE HOLDING CO., as an Assignor By: /s/ Harry J. Silverman ------------------------------- Title: Vice President TISM, INC., as an Assignor, By: /s/ Harry J. Silverman ------------------------------- Title: Vice President DOMINO'S PIZZA LLC, as an Assignor, By: /s/ Harry J. Silverman ------------------------------- Title: Vice President DOMINO'S PIZZA INTERNATIONAL, INC., as an Assignor, By: /s/ Harry J. Silverman ------------------------------- Title: Vice President DOMINO'S PIZZA GOVERNMENT SERVICES DIVISION, INC., as an Assignor, By: /s/ Joseph P. Donovan ------------------------------- Title: Treasurer
DOMINO'S PIZZA INTERNATIONAL PAYROLL SERVICES, INC., as an Assignor, By: /s/ Joseph P. Donovan ------------------------------- Title: Treasurer DOMINO'S PIZZA PMC, INC., as an Assignor, By: /s/ Joseph P. Donovan ------------------------------- Title: Treasurer DOMINO'S PIZZA CALIFORNIA LLC, as an Assignor, By: /s/ Joseph P. Donovan ------------------------------- Title: Treasurer Accepted and Agreed to: JPMORGAN CHASE BANK, as Collateral Agent By: /s/ Teri Streusand --------------------------- Title: Vice President -2-
TABLE OF CONTENTS PAGE ---- ARTICLE I SECURITY INTERESTS.....................................................................................2 1.1 Grant of Security Interests.........................................................................2 1.2 Power of Attorney...................................................................................4 ARTICLE II GENERAL REPRESENTATIONS, WARRANTIES AND COVENANTS.....................................................4 2.1 Necessary Filings...................................................................................4 2.2 No Liens............................................................................................5 2.3 Other Financing Statements..........................................................................5 2.4 Chief Executive Office, Record Locations............................................................5 2.5 Legal Names; Type of Organization (and Whether a Registered Organization and/or a Transmitting Utility); Jurisdiction of Organization; Location; Organizational Identification Numbers; Changes Thereto; Etc........................................................5 2.6 Trade Names; Etc....................................................................................6 2.7 Certain Significant Transactions....................................................................6 2.8 Collateral in the Possession of a Bailee............................................................7 2.9 Recourse............................................................................................7 ARTICLE III SPECIAL PROVISIONS CONCERNING ACCOUNTS; CONTRACT RIGHTS; INSTRUMENTS; CHATTEL PAPER AND CERTAIN OTHER COLLATERAL.................................................................................7 3.1 Additional Representations and Warranties...........................................................7 3.2 Maintenance of Records..............................................................................7 3.3 Direction to Account Debtors; Contracting Parties; Etc..............................................8 3.4 Modification of Terms; Etc..........................................................................8 3.5 Collection..........................................................................................8 3.6 Instruments.........................................................................................9 3.7 Assignors Remain Liable Under Accounts..............................................................9 3.8 Assignors Remain Liable Under Contracts.............................................................9 3.9 Deposit Accounts; Etc...............................................................................9 3.10 Letter-of-Credit Rights............................................................................10 3.11 Commercial Tort Claims.............................................................................11 3.12 Chattel Paper......................................................................................11 3.13 Further Actions....................................................................................11 ARTICLE IV SPECIAL PROVISIONS CONCERNING TRADEMARKS AND DOMAIN NAMES............................................11 4.1 Additional Representations and Warranties..........................................................11 4.2 Licenses and Assignments...........................................................................12 4.3 Infringements......................................................................................12 4.4 Preservation of Marks and Domain Names.............................................................12 (i)
TABLE OF CONTENTS (continued) PAGE ---- 4.5 Maintenance of Registration........................................................................12 4.6 Future Registered Marks and Domain Names...........................................................12 4.7 Remedies...........................................................................................13 ARTICLE V SPECIAL PROVISIONS CONCERNING PATENTS, COPYRIGHTS AND TRADE SECRETS...................................13 5.1 Additional Representations and Warranties..........................................................13 5.2 Licenses and Assignments...........................................................................14 5.3 Infringements......................................................................................14 5.4 Maintenance of Patents or Copyrights...............................................................14 5.5 Prosecution of Patent or Copyright Applications....................................................14 5.6 Other Patents and Copyrights.......................................................................14 5.7 Remedies...........................................................................................14 ARTICLE VI PROVISIONS CONCERNING ALL COLLATERAL.................................................................15 6.1 Protection of Collateral Agent's Security..........................................................15 6.2 Warehouse Receipts Non-negotiable..................................................................15 6.3 Additional Information.............................................................................15 6.4 Further Actions....................................................................................16 6.5 Financing Statements...............................................................................16 ARTICLE VII REMEDIES UPON OCCURRENCE OF AN EVENT OF DEFAULT.....................................................16 7.1 Remedies; Obtaining the Collateral Upon Default....................................................16 7.2 Remedies; Disposition of the Collateral............................................................18 7.3 Waiver of Claims...................................................................................18 7.4 Application of Proceeds............................................................................19 7.5 Remedies Cumulative................................................................................21 7.6 Discontinuance of Proceedings......................................................................21 ARTICLE VIII INDEMNITY..........................................................................................22 8.1 Indemnity..........................................................................................22 8.2 Indemnity Obligations Secured by Collateral; Survival..............................................23 ARTICLE IX DEFINITIONS..........................................................................................23 ARTICLE X MISCELLANEOUS.........................................................................................30 10.1 Notices............................................................................................30 10.2 Waiver; Amendment..................................................................................30 10.3 Obligations Absolute...............................................................................31 10.4 Successors and Assigns.............................................................................31 10.5 Headings Descriptive...............................................................................31 (ii)
TABLE OF CONTENTS (continued) PAGE ---- 10.6 GOVERNING LAW; SUBMISSION TO JURISDICTION; VENUE; WAIVER OF JURY TRIAL............................31 10.7 Assignor's Duties.................................................................................33 10.8 Termination; Release..............................................................................33 10.9 Counterparts......................................................................................35 10.10 Severability......................................................................................35 10.11 The Collateral Agent and the other Secured Creditors..............................................35 10.12 Benefit of Agreement..............................................................................35 10.13 Additional Assignors..............................................................................35 ANNEX A Schedule of Chief Executive Offices ANNEX B [RESERVED] ANNEX C Schedule of Legal Names, Type of Organization (and Whether a Registered Organization and/or a Transmitting Utility), Jurisdiction of Organization, Location and Organizational Identification Numbers ANNEX D Schedule of Trade and Fictitious Names ANNEX E Description of Certain Significant Transactions Occurring Within One Year Prior to the Date of the Security Agreement ANNEX F Schedule of Deposit Accounts ANNEX G Form of Control Agreement Regarding Deposit Accounts ANNEX H Schedule of Commercial Tort Claims ANNEX I Schedule of Marks and Internet Domain Name Registrations ANNEX J Schedule of Patents ANNEX K Schedule of Copyrights ANNEX L Grant of Security Interest in United States Trademarks ANNEX M Grant of Security Interest in United States Patents ANNEX N Grant of Security Interest in United States Copyrights (iii)
EXHIBIT 10.27 TIME SHARING AGREEMENT The Agreement, made and entered into this 2nd day of December, 2002 by and between Domino's Pizza LLC, a limited liability company organized and existing under the laws of the State of Michigan ("Domino's") and David A. Brandon. WITNESSETH: WHEREAS, Domino's is the owner of one (1) Dassault-Breguet Falcon 50 aircraft bearing FAA Registration Number N300A and Manufacturer's Serial Number 64 (the "Aircraft"); and WHEREAS User desires use of the Aircraft on a limited basis; and WHEREAS, Domino's desires to make the Aircraft available to User on a timesharing basis in accordance with Section 91.501 of the Federal Aviation Regulations ("FARs"). NOW THEREFORE, in consideration of the mutual covenants set forth herein, the parties agree as follows: 1. Provision of Aircraft. Domino's agrees to provide the Aircraft to User on a time sharing basis in accordance with the provisions of 91.501(b)(6), 91.501(c)(1) and 91.501(d) of the FARs for a term of one year. The term shall be automatically extended for additional one-year terms on the same conditions as set forth herein unless earlier terminated pursuant to Paragraph 15 below. 2. Reimbursement of Expenses. For each flight conducted under this Agreement, User shall pay Domino's the lesser of (i) Fifteen Hundred Dollars ($1,500) per flight hour for the Aircraft, or (ii) the sum of the expenses of operating such flight to the extent prescribed by FAR 91.501(d), i.e. the sum of the expenses set forth in subparagraphs (a) - (j) below: (a) Fuel, oil, lubricants, and other additives; (b) Travel expenses of the crew, including food, lodging, and ground transportation; (c) Hangar and tie-down costs away from the Aircraft's base of operation; (d) Insurance obtained for the specific flight; (e) Landing fees, airport taxes, and similar assessments; (f) Customs, foreign permit, and similar fees directly related to the flight; (g) In-flight food and beverages; (h) Passenger ground transportation; (i) Flight planning and weather contract services; and (j) An additional charge equal to one hundred percent (100 %) of the expenses listed in subparagraph (a) above. 1
3. Invoicing and Payment. All payments to be made to Domino's by User hereunder shall be paid in the manner set forth in this Paragraph 3. Domino's will pay to suppliers, employees, contractors and governmental entities all expenses related to the operation of the Aircraft hereunder in the ordinary course. As to each flight operated hereunder, Domino's shall provide to User an invoice for the charges specified in Paragraph 2 of this Agreement (plus domestic or international air transportation excise taxes, as applicable, imposed by the Internal Revenue Code or other governmental charges which are collected by Domino's as operator and remitted to the appropriate authority), such invoice to be issued by the thirtieth (30th) day of each calendar month for flights performed the preceding calendar month. User shall pay Domino's the full amount of such invoice within ten (10) days of the date of the invoice. In the event Domino's has not received supplier invoices for reimbursable charges listed in section 2 above relating to such flight prior to such invoicing, Domino's shall issue supplemental invoice(s) for such charge(s) to User, and User shall pay such charge(s) within ten (10) days of the date of each supplemental invoice. 4. Flight Requests. User will provide Domino's with flight requests and proposed flight schedules as far in advance as possible and in any case at least twenty-four (24) hours in advance of User's desired departure. Flight requests shall be in a form, whether oral or written, mutually convenient to and agreed upon by the parties. In addition to proposed schedules and departure times, User shall provide at least the following information for each proposed flight reasonably in advance of the desired departure time as required by Domino's or its flight crew: (a) departure point; (b) destination; (c) date and time of flight; (d) number and identity of anticipated passengers; (e) nature and extent of luggage and/or cargo to be carried; (f) date and time of return flight, if any; and (g) any other information concerning the proposed flight that may be pertinent to or required by Domino's or its flight crew. 5. Aircraft Scheduling. Domino's shall have final authority over all scheduling of the Aircraft, provided however that Domino's will use reasonable efforts to accommodate User's requests. 6. Aircraft Maintenance. As between the parties hereto, Domino's shall be solely responsible for securing scheduled and unscheduled maintenance, preventive maintenance and required or otherwise necessary inspections of the Aircraft, and shall take such requirements into account in scheduling the Aircraft. Performance of maintenance, preventive maintenance or inspection shall not be delayed or postponed for the purpose of scheduling the Aircraft unless such maintenance or inspection can safely be conducted at a later time in compliance with applicable laws, regulations and requirements, and such delay or postponement is consistent with the sound discretion of the pilot-in-command. 7. Flight Crew. Domino's shall provide, at its sole expense, qualified flight crew for all flight operations under this Agreement. 2
8. Operational Authority and Control. Domino's shall be responsible for the physical and technical operation of the Aircraft and the safe performance of all flights, and shall retain full authority and control including exclusive operational control and possession of the Aircraft at all times during the term of this Agreement. In accordance with applicable FARs, the qualified flight crew provided by Domino's will exercise all required duties and responsibilities in regard to the safety of each flight conducted hereunder. The pilot-in-command shall have absolute discretion in all matters concerning the preparation of the Aircraft for flight and the flight itself, the load carried and its distribution, the decision whether or not a flight shall be undertaken, the route to be flown, the place where landings shall be made, and all other matters relating to operation of the Aircraft. User specifically agrees that the flight crew shall have final and complete authority to delay or cancel any flight for any reason or condition which in the sole judgment of the pilot-in-command could compromise the safety of the flight, and to take any other action which in the sole judgment of the pilot-in-command is necessitated by considerations of safety. No such action of the pilot-in-command shall create or support any liability to User or any other person for loss, injury, damage or delay. The parties further agree that Domino's shall not be liable for delay or failure to furnish the Aircraft and crew pursuant to this Agreement when such failure is caused by government regulation or authority, mechanical difficulty or breakdown, war, terrorism, civil commotion, strikes or labor disputes, weather conditions, acts of God, or other circumstances beyond Domino's reasonable control. 9. Insurance and Limitation of Liability. (a) Insurance. Domino's will maintain or cause to be maintained in full force and effect throughout the term of this Agreement aircraft liability insurance in respect of the Aircraft in an amount at least equal to $100 million combined single limit for bodily injury to or death of persons (including passengers) and property damage liability. Domino's shall use best efforts to procure such additional insurance coverage as User may request naming User as an additional insured; provided, that the cost of such additional insurance shall be borne by User pursuant to Paragraph 2(d) hereof. (b) Limitation of Liability. User agrees that the insurance specified in paragraph 9(a) shall provide its sole recourse for all claims, losses, liabilities, obligations, demands, suits, judgments or causes of action, penalties, fines, costs and expenses of any nature whatsoever, including attorneys' fees and expenses for or on account of or arising out of, or in any way connected with the use of the Aircraft by User or its guests, including injury to or death of any persons, including User and its guests which may result from or arise out of the use or operation of the Aircraft during the term of this Agreement ("Claims"). This Section 9 shall survive termination of this Agreement. 10. Warranties. User warrants that: (a) It will use the Aircraft under this Agreement for and only for its own account, including the carriage of its guests, and will not use the Aircraft for the purpose of providing transportation of passengers or cargo for compensation or hire; (b) It will not permit any lien, security interest or other charge or encumbrance to attach against the Aircraft as a result of its action or inaction, and shall not convey, mortgage, assign, lease or in any way alienate the Aircraft or Domino's rights hereunder; and (c) During the term of this Agreement, it will abide by and conform to and will cause all passengers to abide by and conform to all such laws, governmental and airport orders, rules, and regulations as shall from time to time be in effect relating in any way to the operation or use of the Aircraft under Part 91 of the FARs. 3
11. Base of Operations. For purposes of this Agreement, the base of operation of the Aircraft is Willow Run, Ypsilanti, Michigan; provided, that such base may be changed upon notice from Domino's to User. 12. Notices and Communications. All notices and other communications under this Agreement shall be in writing (except as permitted in Paragraph 4) and shall be given (and shall be deemed to have been duly given upon receipt or refusal to accept receipt) by personal delivery, the next business day if given by facsimile (with a simultaneous confirmation copy sent by first class mail properly addressed and postage prepaid) or by a reputable overnight courier service, addressed as follows: If to Domino's: Domino's Pizza LLC 30 Frank Lloyd Wright Drive Ann Arbor, Michigan 48106-099 Attn: Elisa Garcia Phone: (734) 930-3678 Fax: (734) 327-8877 If to User: David A. Brandon 30 Frank Lloyd Wright Ann Arbor, MI 48106-0997 Phone: 734-930-3006 or to such other person or address as either party shall from time to time designate by writing to the other party. 13. Further Acts. Domino's and User shall from time to time perform such other and further acts and execute such other and further instruments as may be required by law or may be reasonably necessary (i) to carry out the intent and purpose of this Agreement, and (ii) to establish, maintain and protect the respective rights and remedies of the other party. 14. Successors and Assigns. Neither this Agreement nor any party's interest herein shall be assignable to any other party. This Agreement shall inure to the benefit of and be binding upon the parties hereto, their representatives, successors and assigns. 15. Termination. Either party may terminate this Agreement for any reason upon written notice to the other, such termination to become effective ten (10) days from the date of the notice; provided, that this Agreement may be terminated as a result of a breach by either party of its obligations under this Agreement on ten (10) days written notice by the non-breaching party to the breaching party; and provided further, that this Agreement may be terminated on such shorter notice as may be required to comply with applicable laws, regulations, the requirements of any financial institution with a security or other interest in the Aircraft, insurance requirements or in the event the insurance required hereunder is not in full force and effect. 16. Governing Law. This Agreement shall be construed under and the legal relations between the parties shall be governed by the laws of the State of Michigan. 17. Severability. If any provision of this Agreement is held to be illegal, invalid or unenforceable, the legality, validity and enforceability of the remaining provisions shall not be affected or impaired. 4
18. Amendment or Modification. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and is not intended to confer upon any person or entity any rights or remedies hereunder which are not expressly granted herein. This Agreement may be amended or modified only in writing duly executed by the parties hereto. 19. TRUTH IN LEASING STATEMENT UNDER SECTION 91.23 OF THE FEDERAL AVIATION REGULATIONS. a. DOMINO'S HEREBY CERTIFIES THAT THE AIRCRAFT HAS BEEN INSPECTED AND MAINTAINED WITHIN THE TWELVE (12) MONTH PERIOD PRECEDING THE DATE OF THIS AGREEMENT, OR SUCH SHORTER PERIOD AS DOMINO'S SHALL HAVE HAD POSSESSION OF THE AIRCRAFT, IN ACCORDANCE WITH THE PROVISIONS OF FAR PART 91 AND THAT ALL APPLICABLE REQUIREMENTS FOR THE MAINTENANCE AND INSPECTION THEREUNDER HAVE BEEN MET. b. DOMINO'S AGREES, CERTIFIES, AND KNOWINGLY ACKNOWLEDGES THAT WHEN THE AIRCRAFT IS USED UNDER THIS AGREEMENT, DOMINO'S SHALL BE KNOWN AS, CONSIDERED, AND SHALL IN FACT BE THE OPERATOR OF THE AIRCRAFT. Domino's Pizza LLC 30 Frank Lloyd Wright Drive Ann Arbor, Michigan 48106-099 c. THE PARTIES UNDERSTAND THAT AN EXPLANATION OF FACTORS AND PERTINENT FEDERAL AVIATION REGULATIONS BEARING ON OPERATIONAL CONTROL CAN BE OBTAINED FROM THE NEAREST FAA FLIGHT STANDARDS DISTRICT OFFICE, GADO, OR ACDO. DOMINO'S AGREES TO SEND AN EXECUTED COPY OF THIS AGREEMENT FOR AND ON BEHALF OF BOTH PARTIES TO: FLIGHT STANDARDS TECHNICAL DIVISION, P.O. BOX 25724, OKLAHOMA CITY, OKLAHOMA 73125, WITHIN TWENTY-FOUR (24) HOURS OF ITS EXECUTION, AS PROVIDED BY FAR 91-23(c)(1). IN WITNESS WHEREOF, the parties hereto have caused the signature of their authorized representatives to be affixed below on the day and year first above written. The persons signing below warrant their authority to sign. 5
DOMINO'S PIZZA LLC: USER: By: /s/ Harry J. Silverman By: /s/ David A. Brandon -------------------------- ------------------------ Name: Harry J. Silverman Name: David A. Brandon -------------------------- ------------------------ Title: EVP and CFO -------------------------- 6
Exhibit 21.1 SIGNIFICANT SUBSIDIARIES OF DOMINO'S, INC. Domino's Pizza LLC Michigan Domino's Franchise Holding Co. Michigan Domino's Pizza PMC, Inc. Michigan Domino's Pizza California LLC California Domino's Pizza International, Inc. Delaware Domino's Pizza International Payroll Services, Inc. Florida Domino's Pizza NS Co. Canada Domino's Pizza of Canada Canada Domino's Pizza of France S.A.S. France Dutch Pizza Beheer B.V. Netherlands
EXHIBIT 99.1 RISK FACTORS This Annual Report on Form 10-K includes various forward-looking statements about Domino's that are subject to risks and uncertainties. Forward-looking statements include information concerning future results of operations, and business strategy. Also, statements that contain words such as "believes," "expects," "anticipates," "intends," "estimated" or similar expressions are forward-looking statements. We have based these forward looking statements on our current expectations and projections about future events. While we believe these expectations and projections are reasonable, such forward-looking statements are inherently subject to risks, uncertainties and assumptions about us, including the following factors. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Annual Report on Form 10-K might not occur. RISKS RELATING TO OUR BUSINESS AND INDUSTRY The pizza delivery channel is highly competitive, and increased competition could adversely affect our operating results. We compete in the United States against two national chains, as well as many regional and local businesses. We could experience increased competition from existing or new companies in the pizza delivery channel, which could create increasing pressures to grow our business in order to maintain our channel share. If we are unable to maintain our competitive position, we could experience downward pressure on prices, lower demand for our products, reduced margins, the inability to take advantage of new business opportunities and the loss of channel share, which would have an adverse effect on our operating results. We also compete on a broader scale with quick service and other international, national, regional and local restaurants. The overall food service market and the quick service restaurant sector are intensely competitive with respect to food quality, price, service, convenience and concept, and are often affected by changes in: . consumer tastes; . national, regional or local economic conditions; . currency fluctuations to the extent international operations are involved; . demographic trends; and . disposable purchasing power. We compete within the food service market and the quick service restaurant sector not only for customers, but also for management and hourly employees, suitable real estate sites and qualified franchisees. Our domestic distribution segment is also subject to competition from outside suppliers. If other suppliers were to offer lower prices or better service to our franchisees for their ingredients and supplies and, as a result, our franchisees chose not to purchase from our domestic distribution centers, our results of operations and financial condition would be adversely affected.
If we fail to successfully implement our growth strategy, which includes opening new domestic and international stores, our ability to increase our revenues and operating profits could be adversely affected. A significant component of our growth strategy is opening new domestic and international franchise stores. We and our franchisees face many challenges in opening new stores, including, among others: . selection and availability of suitable store locations; . negotiation of acceptable lease or financing terms; . securing required domestic or foreign governmental permits and approvals; and . employment and training of qualified personnel. The opening of additional franchise stores also depends, in part, upon the availability of prospective franchisees who meet our criteria. Our failure to add a significant number of new stores would adversely affect our ability to increase revenues and operating income. We are currently planning to expand our international operations in markets where we currently operate and in selected new markets. This may require considerable management time as well as start-up expenses for market development before any significant revenues and earnings are generated. Operations in new foreign markets may achieve low margins or may be unprofitable and expansion in existing markets may by affected by local economic and market conditions. Therefore, as we expand internationally, we may not experience the operating margins we expect and our revenues and earnings may be negatively impacted and our common stock price may decline. We may also pursue strategic acquisitions as part of our business. If we are able to identify acquisition candidates, such acquisitions may be financed, to the extent permitted under our debt agreements, with substantial debt or with potentially dilutive issuances of equity securities. The food service market is affected by consumer preferences and perceptions. Changes in these preferences and perceptions may lessen the demand for our products, which would reduce sales and harm our business. Food service businesses are affected by changes in consumer tastes, national, regional and local economic conditions, and demographic trends. Our sales could also be affected by changing consumer tastes. For instance, if prevailing health or dietary preferences cause consumers to avoid pizza in favor of foods that are perceived as more healthy, our business and operating results would be harmed. Moreover, because we are primarily dependent on a single product, if consumer demand for pizza should decrease, our business would suffer more than if we had a more diversified menu, as many other food service businesses do. Increases in food, labor and other costs could adversely affect our profitability and operating results. An increase in our operating costs could adversely affect our profitability. Factors such as inflation, increased food costs, increased labor and employee benefit costs and increased energy costs may adversely affect our operating costs. Most of the factors affecting costs are beyond our control and, in many cases, we may not be able to pass along these increased costs to our customers or franchisees. Most ingredients used in our pizza, particularly cheese, are subject to significant price fluctuations as a result of seasonality, weather, demand and other factors. Labor costs are primarily a function of the minimum wage and availability of labor. Cheese and labor represent a significant percentage of a typical store's costs.
Our substantial indebtedness could adversely affect our financial health and limit our ability to plan for or respond to changes in our business. In addition, we are permitted to incur more debt in the future, which could aggravate the risks described below. To finance our 1998 recapitalization, we incurred a significant amount of indebtedness and we are currently highly leveraged. As of December 29, 2002, our total debt was $602.0million. The terms of the indenture relating to our senior subordinated notes permit us to incur substantial indebtedness in the future, including up to an additional $100 million under our revolving credit facility. As of December 29, 2002, we had approximately $82 million available under the revolving credit facility for future borrowings, subject to covenant compliance, and we had approximately $18 million outstanding under letters of credit. Our ability to make payments on and to refinance our indebtedness will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other factors that are, to some extent, beyond our control. In addition, because some of our debt obligations are subject to variable interest rates, we are sensitive to fluctuations in interest rates and any significant increase in interest rates could negatively affect our results of operations and financial condition. Our business may not generate sufficient cash flow from operations, and future borrowings may not be available to us under our revolving credit facility in amounts sufficient, to enable us to pay our indebtedness or to fund our other liquidity needs. If we cannot generate sufficient cash flow from operations to pay our indebtedness when due, we may need to refinance all or a portion of our indebtedness on or before maturity, sell assets, delay capital expenditures, or seek additional equity. We may not be able to refinance any of our indebtedness on commercially reasonable terms or at all. Our substantial indebtedness could have other important consequences. For example, it could: . limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate, thereby potentially placing us at a competitive disadvantage compared to our competitors, many of whom currently operate on a less leveraged basis and have significantly greater operating and financing flexibility than we do; and . have a material adverse effect on us if we fail to comply with the covenants in the agreements governing our indebtedness because such failure could result in an event of default which, if not cured or waived, could result in a substantial amount of our indebtedness becoming immediately due and payable.. Our leverage, and the restrictions on our operations described above, may materially and adversely affect our ability to finance our future operations or capital needs or to engage in other business activities. We face risks of litigation from customers, employees and others in the ordinary course of business, which diverts our financial and management resources. Any adverse litigation or publicity may negatively impact our financial condition and results of operations. Claims of illness or injury relating to food quality or food handling are common in the food service industry. In addition, class action lawsuits have been filed, and may continue to be filed, against various QSRs alleging, among other things, that QSRs have failed to disclose the health risks associated with high-fat food products and that QSR marketing practices have encouraged obesity. In addition to decreasing our sales and profitability and diverting our management resources, adverse publicity or a substantial judgment against us could negatively impact our financial condition, results of operations and brand reputation, hindering our ability to attract and retain franchisees and grow our business. Further, we may be subject to employee and other claims in the future based on, among other things, discrimination, harassment, and wrongful termination and wage issues, including relating to overtime compensation. We have been subject to these types of claims in the past and if one or more of these claims were to be successful or if there is a significant increase in the number of these claims, our business, financial condition, operating results and cash flows could be harmed.
We do not have long-term contracts with most of our suppliers, and as a result they could seek to significantly increase prices or fail to deliver. We typically do not rely on written contracts or long-term arrangements with our suppliers. Although we have not experienced significant problems with our suppliers, our suppliers may implement significant price increases or may not meet our requirements in a timely fashion, if at all. The occurrence of any of the foregoing could have a material adverse effect on our operating results. We are dependent on sole suppliers for some of our food products. We are dependent on sole suppliers for our cheese, chicken and meat toppings and for our Crunchy Thin Crust dough products. Alternate sources for these ingredients may not be available and we may not be able to enter into new arrangements on a timely basis for the supply of these ingredients or on terms as favorable to us as under our current arrangements. Shortages or interruptions in the supply or delivery of fresh food products could adversely affect our operating results. We and our franchisees are dependent on frequent deliveries of fresh food products that meet our specifications. Shortages or interruptions in the supply of fresh food products caused by unanticipated demand, problems in production or distribution, inclement weather or other conditions could adversely affect the availability, quality and cost of ingredients, which would adversely affect our operating results. Any prolonged disruption in the operations of any of our dough manufacturing and distribution centers could harm our business. We operate 18 dough manufacturing and distribution centers in the contiguous United States and dough manufacturing and distribution centers in Alaska, Hawaii, Canada, the Netherlands and France. Our domestic dough manufacturing and distribution centers service all of our company-owned stores and approximately 98% of our domestic franchise stores. As a result, any prolonged disruption in the operations of any of these facilities, whether due to technical or labor difficulties, destruction or damage to the facility, real estate issues or other reasons, could result in increased costs and reduced revenues and our profitability and prospects could be harmed. Loss of key personnel or our inability to attract and retain new qualified personnel could hurt our business and inhibit our ability to operate and grow successfully. Our success in the highly competitive pizza delivery channel will continue to depend to a significant extent on our leadership team and other key management personnel. We do not have any long-term employment agreements with any of our executive officers. As a result, we may not be able to retain our executive officers and key personnel or attract additional qualified management. Our success also will continue to depend on our ability to attract and retain qualified personnel to operate our stores, dough manufacturing and distribution centers and international operations. The loss of these employees or our inability to recruit and retain qualified personnel could have a material adverse effect on our operating results.
Our international operations subject us to additional risks, which risks and costs may differ in each country in which we do business, and may cause our profitability to decline due to increased costs. We conduct a portion of our business outside the United States. Our financial condition and results of operations may be adversely affected if global markets in which our company-owned and franchise stores compete are affected by changes in political, economic or other factors. These factors, over which neither we nor our franchisees have control, may include: . recessionary or expansive trends in international markets; . changing labor conditions and difficulties in staffing and managing our foreign operations; . increases in the taxes we pay and other changes in applicable tax laws; . legal and regulatory changes and the burdens and costs of our compliance with a variety of foreign laws; . changes in inflation rates; . changes in exchange rates and the imposition of restrictions on currency conversion or the transfer of funds; . greater difficulty in collecting our royalties and longer payment cycles; . expropriation of private enterprises; . political and economic instability; and . other external factors. Fluctuations in the value of the U.S. dollar in relation to other currencies may lead to lower revenues and earnings. Exchange rate fluctuations could have an adverse effect on our results of operations. Approximately 6.4% of our revenues in 2002 were denominated in foreign currencies. Sales made by our stores outside the United States are denominated in the currency of the country in which the store is located, and this currency could become less valuable prior to conversion to U.S. dollars as a result of exchange rate fluctuations. Unfavorable currency fluctuations could lead to increased prices to customers outside the United States or lower profitability to our franchisees outside the United States, or could result in lower revenues for us, on a U.S. dollar basis, from such customers and franchisees. We may not be able to adequately protect our intellectual property, which could harm the value of our brand and branded products and adversely affect our business. We depend in large part on our brand and branded products and believe that they are very important to our business. We rely on a combination of trademarks, copyrights, service marks, trade secrets and similar intellectual property rights to protect our brand and branded products. The success of our business depends on our continued ability to use our existing trademarks and service marks in order to increase brand awareness and further develop our branded products in both domestic and international markets. We have registered certain trademarks and have other trademark registrations pending in the United States and foreign jurisdictions. All of the trademarks that we currently use have not been registered in all of the countries in which we do business and may never be registered in all of these countries. We may not be able to adequately protect our trademarks and our use of these trademarks may result in liability for trademark infringement, trademark dilution or unfair competition. All of the steps we have taken to protect our intellectual property in the United States and in foreign countries may not be adequate. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Further, through acquisitions of third parties, we may acquire brands and related trademarks that are subject to the same risks as the brands and trademarks we currently own. We may from time to time be required to institute litigation to enforce our trademarks or other intellectual property rights, or to protect our trade secrets. Such litigation could result in substantial costs and diversion of resources and could negatively affect our sales, profitability and prospects regardless of whether we are able to successfully enforce our rights.
Our business growth strategy depends on the success of our franchisees and we may be harmed by actions taken by our franchisees that are outside of our control. A significant portion of our revenues comes from royalties generated by our franchise stores. Franchisees are independent operators and their employees are not our employees. We provide limited training and support to franchisees, but the quality of franchise store operations may be diminished by any number of factors beyond our control. Consequently, franchisees may not successfully operate stores in a manner consistent with our standards and requirements, or may not hire and train qualified managers and other store personnel. If they do not, our image and reputation may suffer, and system-wide sales could decline. While we try to ensure that our franchisees maintain the quality of our brand and branded products, our franchisees may take actions that adversely affect the value of our intellectual property or reputation. At December 29, 2002, we had over 1,330 domestic franchisees operating over 4,200 domestic stores. Three of these franchisees each operate over 50 domestic stores. In addition, our international master franchisees are generally responsible for the development of significantly more stores than our domestic franchisees. As a result, our international operations are more closely tied to the success of a smaller number of franchisees than our domestic operations. Our domestic and international franchisees may not operate their franchises successfully. If one or more of our key franchisees were to become insolvent or otherwise were unable or unwilling to pay us our royalties, our results of operations could be adversely affected. We are subject to extensive government regulation, and our failure to comply with existing or increased regulations could adversely affect our business and operating results. We are subject to numerous federal, state, local and foreign laws and regulations, including those relating to: . the preparation and sale of food; . building and zoning requirements; . environmental protection; . minimum wage, overtime and other labor requirements; . compliance with the Americans with Disabilities Act; and . working and safety conditions. We may become subject to legislation seeking to tax and/or regulate high-fat foods. If we fail to comply with existing or future regulations, we may be subject to governmental or judicial fines or sanctions. In addition, our capital expenses could increase due to remediation measures that may be required if we are found to be noncompliant with any of these laws or regulations. We are also subject to a Federal Trade Commission rule and to various state and foreign laws that govern the offer and sale of franchises. Additionally, these laws regulate various aspects of the franchise relationship, including terminations and the refusal to renew franchises. The failure to comply with these laws and regulations in any jurisdiction or to obtain required government approvals could result in a ban or temporary suspension on future franchise sales, fines or other penalties or require us to make offers of rescission or restitution, any of which could adversely affect our business and operating results. The terms of the Domino's, Inc. senior subordinated notes and the senior credit facility have restrictive terms and our failure to comply with any of these terms could put us in default, which would have an adverse effect on our business and prospects. The indenture relating to the Domino's Inc. senior subordinated notes and the senior credit facility contain restrictive covenants, including financial condition tests and restrictions on our ability to operate our business. The senior credit facility requires us to maintain specified financial ratios and satisfy financial condition tests at the end of each fiscal quarter. Our ability to meet these financial ratios and tests can be affected by events beyond our control, and we may not meet those tests. A breach of any of these covenants could result in a default under the senior credit facility and/or the indenture relating to the senior subordinated notes. If our banks accelerate all amounts owing under the senior credit facility because of a default under the senior credit facility and we are unable to pay such amounts, the banks have the right to foreclose on substantially all of our assets.
Upon the occurrence of specific kinds of change of control events, our subsidiary, Domino's, Inc., must offer to repurchase all of its outstanding senior subordinated notes. It is possible, however, that we will not have sufficient funds at the time of the change of control to make the required repurchase of the senior subordinated notes or that restrictions in the senior credit facility will not allow such repurchase. The occurrence of some of the events that would constitute a change of control under the indenture would also constitute a default under the senior credit facility. Moreover, the exercise by the holders of the senior subordinated notes of their right to require Domino's, Inc. to repurchase the senior subordinated notes could cause a default under such senior indebtedness, even if the change of control itself does not, due to the financial effect on us of such repurchase. A default under the indenture or the senior credit facility may have a material adverse effect on our business, financial condition and results of operations. Our current insurance coverage may not be adequate, and insurance premiums for such coverage may increase and we may not be able to obtain insurance at acceptable rates, or at all. Under our current insurance policies covering workers' compensation, general liability and owned and non-owned automobile liabilities, we are generally responsible for between $500,000 and $3 million per occurrence and our total insurance limits are $108 million per occurrence for general liability and owned and non-owned automobile liabilities and up to the applicable statutory limits for workers' compensation. These insurance policies may not be adequate to protect us from liabilities that we incur in our business. In addition, in the future our insurance premiums may increase and we may not be able to obtain similar levels of insurance on reasonable terms or at all. Any such inadequacy of or inability to obtain insurance coverage could have a material adverse effect on our business, financial condition and results of operations. Our annual and quarterly operating results are subject to fluctuations and if we fail to meet the expectations of securities analysts or investors, our share price may decrease significantly. Our sales and operating results can vary significantly from quarter to quarter and year to year depending on various factors, many of which are beyond our control. These factors include: . variations in the timing and volume of our sales and our franchisees' sales; . the timing of expenditures in anticipation of future sales; . sales promotions by us and our competitors; . changes in competitive and economic conditions generally; . changes in the cost or availability of our ingredients or labor; and . foreign currency exposure. As a result, our results of operations may decline quickly and significantly in response to changes in order patterns or rapid decreases in demand for our food products. We anticipate that fluctuations in operating results will continue in the future.
EXHIBIT 99.2 CERTIFICATION PURSUANT TO SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as Chief Executive Officer of Domino's, Inc. (the "Company"), does hereby certify that to the undersigned's knowledge: 1) the Company's annual report on Form 10-K for the year ending December 29, 2002 (the "Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) the information contained in the Company's Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ David A. Brandon ------------------------------- David A. Brandon Chief Executive Officer Dated: March 25, 2003
EXHIBIT 99.3 CERTIFICATION PURSUANT TO SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as Chief Financial Officer of Domino's, Inc. (the "Company"), does hereby certify that to the undersigned's knowledge: 1) the Company's annual report on Form 10-K for the year ending December 29, 2002 (the "Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) the information contained in the Company's Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Harry J. Silverman ------------------------------- Harry J. Silverman Chief Financial Officer Dated: March 25, 2003