SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 24, 2002 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from: ___________ to ___________ Commission file number: 333-74797 Domino's, Inc. (Exact name of registrant as specified in its charter) Delaware 38-3025165 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 30 Frank Lloyd Wright Drive Ann Arbor, Michigan 48106 (Address of principal executive offices) (734) 930-3030 (Registrant's telephone number, including area code) Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] The number of shares outstanding of the registrant's common stock as of April 29, 2002 was 10 shares.
Domino's, Inc. INDEX PART I. FINANCIAL INFORMATION Page No. -------- Item 1. Financial Statements Condensed Consolidated Balance Sheets - March 24, 2002 and December 30, 2001 3 Condensed Consolidated Statements of Income - Fiscal quarter ended March 24, 2002 and March 25, 2001 4 Condensed Consolidated Statements of Cash Flows - Fiscal quarter ended March 24, 2002 and March 25, 2001 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk 11 PART II. OTHER INFORMATION 12 SIGNATURES 12 2
PART I. FINANCIAL INFORMATION Item 1. Financial Statements Domino's, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (In thousands) March 24, 2002 December 30, 2001 Assets (Unaudited) (Note) -------------- ----------------- Current assets: Cash and cash equivalents $ 5,223 $ 34,842 Accounts receivable 52,454 54,225 Notes receivable 4,786 4,024 Inventories 19,583 22,088 Prepaid expenses and other 5,975 4,892 Deferred income taxes 11,302 11,302 --------- --------- Total current assets 99,323 131,373 --------- --------- Property, plant and equipment: Land and buildings 15,873 15,983 Leasehold and other improvements 55,937 50,684 Equipment 132,013 114,904 Construction in progress 5,677 5,837 --------- --------- 209,500 187,408 Accumulated depreciation and amortization 102,880 99,763 --------- --------- Property, plant and equipment, net 106,620 87,645 --------- --------- Other assets: Deferred financing costs 23,243 24,594 Goodwill 27,364 12,673 Capitalized software 33,424 34,408 Deferred income taxes 63,965 66,270 Other 25,983 25,330 --------- --------- Total other assets 173,979 163,275 --------- --------- Total assets $ 379,922 $ 382,293 ========= ========= Liabilities and stockholder's deficit Current liabilities: Current portion of long-term debt $ 38,046 $ 43,157 Accounts payable 39,385 30,125 Accrued income taxes 7,461 2,164 Insurance reserves 8,089 7,365 Other accrued liabilities 62,231 71,323 --------- --------- Total current liabilities 155,212 154,134 --------- --------- Long-term liabilities: Long-term debt, less current portion 602,185 611,532 Insurance reserves 7,396 6,334 Other accrued liabilities 33,762 35,167 --------- --------- Total long-term liabilities 643,343 653,033 --------- --------- Stockholder's deficit: Common stock - - Additional paid-in capital 120,202 120,202 Retained deficit (536,641) (542,540) Accumulated other comprehensive loss (2,194) (2,536) ---------- ---------- Total stockholder's deficit (418,633) (424,874) ---------- ---------- Total liabilities and stockholder's deficit $ 379,922 $ 382,293 ========== ========== - -------- Note: The balance sheet at December 30, 2001 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. See accompanying notes. 3
Domino's, Inc. and Subsidiaries Condensed Consolidated Statements of Income (Unaudited) Fiscal Quarter Ended March 24, March 25, (In thousands) 2002 2001 --------- --------- Revenues: Domestic corporate stores $ 89,906 $ 90,843 Domestic franchise 34,559 30,625 Domestic distribution 165,745 150,603 International 17,846 15,560 -------- -------- Total revenues 308,056 287,631 -------- -------- Operating expenses: Cost of sales 225,338 212,246 General and administrative 44,293 46,543 -------- -------- Total operating expenses 269,631 258,789 -------- -------- Income from operations 38,425 28,842 Interest income 218 595 Interest expense 13,397 16,591 -------- -------- Income before provision for income taxes 25,246 12,846 Provision for income taxes 9,341 5,037 -------- -------- Net income $ 15,905 $ 7,809 ======== ======== - --------- See accompanying notes. 4
Domino's, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) Fiscal Quarter Ended March 24, March 25, 2002 2001 ---------------- -------------- (In thousands) Cash flows from operating activities: Net cash provided by operating activities $ 38,741 $10,262 -------- ------- Cash flows from investing activities: Capital expenditures (17,767) (9,735) Acquisitions of franchise operations (21,850) - Other (4,261) 2,001 -------- ------- Net cash used in investing activities (43,878) (7,734) -------- ------- Cash flows from financing activities: Repayments of debt (14,454) (6,900) Distributions to Parent (10,006) - -------- ------- Net cash used in financing activities (24,460) (6,900) -------- ------- Effect of exchange rate changes on cash and cash equivalents (22) (21) -------- ------- Decrease in cash and cash equivalents (29,619) (4,393) Cash and cash equivalents, at beginning of period 34,842 25,136 -------- ------- Cash and cash equivalents, at end of period $ 5,223 $20,743 ======== ======= - -------- See accompanying notes. 5
Domino's, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited; tabular amounts in thousands) March 24, 2002 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring items, considered necessary for a fair presentation have been included. Operating results for the fiscal quarter ended March 24, 2002 are not necessarily indicative of the results that may be expected for the year ended December 29, 2002. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 30, 2001 included in our Form 10-K. 2. Accounting Pronouncements On December 31, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets". Upon adoption of this Statement, the Company ceased amortization of goodwill. Amortization of goodwill was approximately $482,000 and $2.0 million for the first quarter of 2001 and fiscal year 2001, respectively. In accordance with this Statement, the Company will test for impairment of its goodwill within six months of adoption and at least annually thereafter. The Company has not quantified the amount of impairment, if any, that may result from the adoption of this Statement. On May 1, 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". The Company elected to early adopt this Statement effective for the first quarter of 2002. Upon adoption and in accordance with this Statement, the Company will no longer record its gains and losses on debt extinguishment as extraordinary items. The Company will reclassify prior period gains and losses on debt extinguishment, originally recorded as extraordinary items, and certain future debt extinguishments, if any, as gains or losses in determining income from operations. 3. Comprehensive Income Fiscal Quarter Ended --------------------- March 24, March 25, 2002 2001 ---------------------------- Net income $ 15,905 $7,809 Cumulative effect of change in accounting principle, net of tax - 1,692 Unrealized loss on derivative instruments, net of tax (355) (1,676) Reclassification adjustment for (gains) losses included in net income, net of tax 739 (335) Currency translation adjustment (42) (187) --------- --------- Comprehensive income $ 16,247 $7,303 ========= ========= 6
4. Segment Information The following table summarizes revenues and earnings before interest, taxes, depreciation and amortization (EBITDA) for each of the Company's reportable segments. During the first quarter of 2002, the Company purchased 83 stores from our franchisee in Arizona. This acquisition resulted in an approximately $22.4 million increase in Domestic Store assets. Fiscal Quarter Ended March 24, 2002 and March 25, 2001 ------------------------------------------------------ Domestic Domestic Intersegment Stores Distribution International Revenues Other Total ------ ------------ ------------- -------- ----- ----- Revenues - 2002 $124,465 $189,674 $17,846 $(23,929) $ - $308,056 2001 121,468 175,484 15,560 (24,881) - 287,631 EBITDA - 2002 $ 40,087 $ 11,837 $ 4,785 $ - $(10,968) $ 45,741 2001 32,684 9,488 3,893 - (9,314) 36,751 The following table reconciles total EBITDA to consolidated income before provision for income taxes. Fiscal Quarter Ended -------------------- March 24, March 25, 2002 2001 -------- ---------- Total EBITDA $45,741 $36,751 Depreciation and amortization (7,152) (6,965) Interest expense (13,397) (16,591) Interest income 218 595 Loss on debt extinguishment (335) - Gain (loss) on sale of assets 171 (944) ------- ---------- Income before provision for income taxes $25,246 $12,846 ======= ========== 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation The 2002 and 2001 first quarters referenced herein represent the twelve-week periods ended March 24, 2002 and March 25, 2001, respectively. Store Growth Activity - --------------------- The following is a summary of the Company's store growth activity for the first quarter of 2002 and the first quarter of 2001. First Quarter of 2002 -------------------------------------------- Beginning End of of Period Opened Closed Transfers Period --------- ------ ------ --------- ------ Domestic Corporate Stores 519 1 (5) 83 598 Domestic Franchise 4,294 19 (18) (83) 4,212 ----- --- --- --- ----- Domestic Stores 4,813 20 (23) - 4,810 International 2,259 27 (20) - 2,266 ----- --- --- --- ----- Total 7,072 47 (43) - 7,076 ===== === === === ===== First Quarter of 2001 -------------------------------------------- Beginning End of of Period Opened Closed Transfers Period --------- ------ ------ --------- ------ Domestic Corporate Stores 626 3 (13) (11) 605 Domestic Franchise 4,192 30 (15) 11 4,218 ----- --- --- --- ----- Domestic Stores 4,818 33 (28) - 4,823 International 2,159 70 (6) - 2,223 ----- --- --- --- ----- Total 6,977 103 (34) - 7,046 ===== === === === ===== Revenues - -------- General. Revenues include retail sales of food by Company-owned stores, royalties and fees from domestic and international franchise stores, and sales of food, equipment and supplies by our distribution centers to domestic and international franchise stores. Total revenues increased 7.1% to $308.1 million in the first quarter of 2002, from $287.6 million for the comparable period in 2001. This increase in total revenues is due primarily to increases in domestic distribution revenues and, to a lesser extent, an increase in international and domestic franchise revenues. These results are more fully described below. Domestic Stores - --------------- Domestic Corporate Stores. Revenues from domestic corporate store operations decreased 1.0% to $89.9 million in the first quarter of 2002, from $90.8 million for the comparable period in 2001. This decrease is due primarily to a decrease in the average number of domestic Company-owned stores open during 2002, offset in part by an increase in same store sales. The average number of domestic Company-owned stores in operation decreased by 72 to 545 stores in the first quarter of 2002, compared to the same period in 2001. This decrease in revenues was offset in part by an increase in same store sales for domestic Company-owned stores of 5.2% in the first quarter of 2002, compared to the same period in 2001. Domestic Franchise. Revenues from domestic franchise operations increased 12.8% to $34.6 million in the first quarter of 2002, from $30.6 million for the comparable period in 2001. This increase is due primarily to an increase in same store sales and an increase in the average number of domestic franchise stores open during 2002. Same store sales for domestic franchise stores increased 8.0% in the first quarter of 2002, compared to the same period in 2001. The average number of domestic franchise stores in operation increased by 98 to 4,235 stores in the first quarter of 2002, compared to the same period in 2001. 8
Domestic Distribution - --------------------- Revenues from domestic distribution operations increased 10.1% to $165.7 million in the first quarter of 2002, from $150.6 million for the comparable period in 2001. This increase is due primarily to increased volumes relating to an increase in domestic franchise same store sales and average store counts in the first quarter of 2002, as well as a market increase in overall food prices, including cheese prices. International - ------------- Revenues from international operations increased 14.7% to $17.8 million in the first quarter of 2002, from $15.6 million for the comparable period in 2001. This increase is due primarily to an increase in same store sales and an increase in the average number of international stores open during 2002. On a constant dollar basis, same store sales for international stores increased 3.3% in the first quarter of 2002, compared to the same period in 2001. On a historical dollar basis, same store sales for international stores increased 0.5% in the first quarter of 2002, compared to the same period in 2001, reflecting a strong U.S. dollar. The average number of international stores in operation increased by 56 to 2,235 stores in the first quarter of 2002, compared to the same period in 2001. Operating Expenses - ------------------ Cost of sales increased 6.2% to $225.3 million in the first quarter of 2002, from $212.2 million for the comparable period in 2001. Gross profit increased 9.7% to $82.7 million in the first quarter of 2002, from $75.4 million for the comparable period in 2001. This increase in gross profit is due primarily to an increase in domestic store revenues, improved unit economics at our Company-owned stores and an increase in distribution volumes. This increase in gross profit was offset in part by an increase in food costs, including higher cheese costs. The average cheese block price increased 9.6% to approximately $1.26 per pound in the first quarter of 2002, from approximately $1.15 per pound for the comparable period in 2001. As a percentage of total revenues, gross profit increased 0.7% to 26.9% in the first quarter of 2002, from 26.2% for the comparable period in 2001. This increase is due primarily to an increase in revenues resulting from strong domestic sales growth, and improved unit economics at our Company-owned stores. General and administrative expenses decreased 4.8% to $44.3 million in the first quarter of 2002, from $46.5 million for the comparable period in 2001. As a percentage of total revenues, general and administrative expenses decreased 1.8% to 14.4% in the first quarter of 2002, from 16.2% for the comparable period in 2001. This decrease in general and administrative expenses in the first quarter of 2002 is due primarily to a decrease in variable general and administrative costs in our domestic Company-owned stores, as well as losses from the sale of assets in 2001. Interest Expense - ---------------- Interest expense decreased 19.3% to $13.4 million in the first quarter of 2002, from $16.6 million for the comparable period in 2001. This decrease is due primarily to a decrease in related variable interest rates on our senior credit facility and reduced debt levels. Provision for Income Taxes - -------------------------- Provision for income taxes increased $4.3 million to $9.3 million in the first quarter of 2002, from $5.0 million for the comparable period in 2001. This increase is due primarily to an increase in pre-tax income. Liquidity and Capital Resources - ------------------------------- We had negative working capital of $55.9 million and cash and cash equivalents of $5.2 million at March 24, 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 commitments from these sources. 9
As of March 24, 2002, we had $640.2 million of long-term debt, of which $38.0 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 increased $5.5 million to $17.4 million in the first quarter of 2002, from $11.9 million at December 30, 2001. This increase is a result of additional letters of credit issued under our casualty insurance program. 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 $38.7 million and $10.3 million in the first quarter of 2002 and 2001, respectively. The $28.4 million increase is due primarily to an $8.1 million increase in net income, a $2.2 million change in the deferred tax provision and a $19.5 million net change in operating assets and liabilities. These increases in cash provided by operating activities were offset in part by a $1.1 million change in (gain) loss on the sale of assets. Cash used in investing activities was $43.9 million and $7.7 million in the first quarter of 2002 and 2001, respectively. The $36.2 million increase is due primarily to a $21.9 million increase in acquisitions of franchise operations, an $8.0 million increase in capital expenditures and a $6.3 million net change in other assets, including a $5.7 million net change in notes receivable. The increase in acquisitions of franchise operations is 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 $24.5 million and $6.9 million in the first quarter of 2002 and 2001, respectively. The $17.6 million increase is due primarily to a $10.0 million increase in distributions to parent and a $7.6 million increase in repayments of long-term debt. This increase in repayments of long-term debt is due primarily to the retirement of $2.5 million of outstanding senior subordinated notes and an increase in senior credit facility cash sweep payments made in the first quarter of 2002 compared to the first quarter of 2001. 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 facilities or otherwise to enable us to service our indebtedness, including the senior credit facilities and the Senior Subordinated Notes, to redeem or refinance TISM's, our Parent company, Cumulative Preferred Stock when required or to make anticipated capital expenditures. Our future operating performance and our ability to service or refinance the Senior Subordinated Notes and to service, extend or refinance the senior credit facilities will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. Forward-Looking Statements - -------------------------- Certain statements contained in this filing relating to capital spending levels and the adequacy of our capital resources are forward-looking. Also, statements that contain words such as "believes," "expects," "anticipates," "intends," "estimates" or similar expressions are forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Among these risks and uncertainties are competitive factors, increases in our operating costs, ability to retain our key personnel, our substantial leverage, ability to implement our growth and cost-saving strategies, industry trends and general economic conditions, adequacy of insurance coverage and other factors, all of which are described in the Form 10-K for the year ended December 30, 2001 and our other filings with the Securities and Exchange Commission. We do not undertake to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk Market Risk - ----------- The Company is exposed to market risks primarily from interest rate changes on our variable rate debt. Management actively monitors this exposure. The Company does not engage in speculative transactions nor does it hold or issue financial instruments for trading purposes. Interest Rate Derivatives - ------------------------- The Company may enter into interest rate swaps, collars or similar instruments with the objective of reducing volatility relating to our borrowing costs. During 2001, we entered into an interest rate collar and three interest rate swap agreements to effectively convert the variable Eurodollar component of the effective interest rate on a portion of the Company's debt under Term Loans A, B and C to various fixed rates over various terms. These agreements are summarized as follows: Total Notional Derivative Amount Term Rate ---------- ------ ---- ---- Interest Rate Collar $75.0 million June 2001 - June 2003 3.86% - Floor 6.00% - Ceiling Interest Rate Swap $75.0 million June 2001 - June 2004 4.90% Interest Rate Swap $37.5 million September 2001 - September 2003 3.645% Interest Rate Swap $37.5 million September 2001 - September 2004 3.69% Interest Rate Risk - ------------------ The Company's variable interest expense is sensitive to changes in the general level of interest rates. As of March 24, 2002, a portion of the Company's debt is borrowed at Eurodollar rates plus a blended margin rate of approximately 3.1%. At March 24, 2002, the weighted average interest rate on our $157.9 million of variable interest debt was approximately 5.0%. The Company had total interest expense of approximately $13.4 million in the first quarter of 2002. The estimated increase in interest expense from a hypothetical 200 basis point adverse change in applicable variable interest rates would be approximately $758,000. 11
PART II. OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Changes in Securities and Use of Proceeds None. Item 3. Defaults Under Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K a. Exhibits None. b. Current Reports on Form 8-K There were no reports filed on Form 8-K during the quarter ended March 24, 2002. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DOMINO'S, INC. (Registrant) Date: May 7, 2002 /s/ Harry J. Silverman -------------------------- Chief Financial Officer 12