<PAGE>
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 28, 1999
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 [ ] No [x]
The number of shares outstanding of the registrant's common stock as of May 10,
1999 was 10 shares.
<PAGE>
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 1
March 28, 1999 and January 3, 1999
Condensed Consolidated Statements of Income 3
Three Months Ended March 28, 1999 and
March 22, 1998
Condensed Consolidated Statements of Cash Flows 4
Three Months Ended March 28, 1999 and
March 22, 1998
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults Under Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
<PAGE>
Domino's, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
March 28, 1999 January 3, 1999
(In thousands) (Unaudited) (Note)
--------------- ---------------
<S> <C> <C>
Assets
Current assets:
Cash $ 14,973 $ 115
Accounts receivable 41,840 48,858
Inventories 17,460 20,134
Deferred tax assets 9,811 9,811
Other 16,698 17,927
--------- -------
Total current assets 100,782 96,845
--------- -------
Property, plant and equipment:
Land and buildings 14,246 14,605
Leasehold and other improvements 53,372 52,248
Equipment 109,986 109,517
Construction in progress 3,605 5,486
--------- --------
181,209 181,856
Accumulated depreciation and amortization 116,918 116,890
-------- --------
Total property, plant and equipment 64,291 64,966
-------- --------
Other assets:
Deferred tax assets 73,610 71,776
Deferred financing costs 41,895 43,046
Goodwill 13,708 14,179
Covenants not-to-compete 42,151 50,058
Capitalized software 23,862 22,593
Other 24,839 24,428
-------- -------
Total other assets 220,065 226,080
-------- -------
Total assets $ 385,138 $387,891
========= ========
Liabilities and stockholder's deficit
Current liabilities:
Current portion of long-term debt $ 7,646 $ 7,646
Accounts payable 31,269 44,596
Insurance reserves 9,746 9,633
Other accrued liabilities 66,058 53,194
--------- --------
Total current liabilities 114,719 115,069
--------- --------
Long-term liabilities:
Long-term debt, less current portion 718,780 720,480
Insurance reserves 12,973 15,132
Other accrued liabilities 22,174 20,985
-------- --------
Total long-term liabilities 753,927 756,597
-------- --------
Stockholder's deficit
Common stock - -
Additional paid-in capital 114,737 114,737
Retained deficit (597,980) (598,209)
Accumulated other comprehensive income (265) (303)
--------- ---------
Total stockholder's deficit (483,508) (483,775)
--------- ---------
Total liabilities and stockholder's deficit $ 385,138 $387,891
========= ========
</TABLE>
1
<PAGE>
Note: The balance sheet at January 3, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
2
<PAGE>
Domino's, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended
(In thousands) March 28, 1999 March 22, 1998
-------------- --------------
Revenues:
Corporate stores $ 86,560 $ 92,318
Domestic franchise royalties 26,616 24,288
Domestic distribution 134,727 127,075
International 12,865 12,179
-------- --------
Total revenues 260,768 255,860
-------- --------
Operating expenses:
Cost of sales 185,608 189,125
General and administrative 57,641 52,528
-------- --------
Total operating expenses 243,249 241,653
-------- --------
Income from operations 17,519 14,207
Interest income 113 390
Interest expense 17,251 796
-------- --------
Income before provision for income taxes 381 13,801
Provision for income taxes 152 1,149
-------- --------
Net income $ 229 $ 12,652
======== ========
See accompanying notes.
3
<PAGE>
DOMINO'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
(In thousands) March 28, 1999 March 22, 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net cash provided by operating activities $20,284 $10,456
------- -------
Cash flows from investing activities:
Purchases of plant and equipment (4,989) (8,892)
Other 1,195 (394)
------- -------
Net cash used in investing activities (3,794) (9,286)
------- -------
Cash flows from financing activities:
Proceeds from issuance of long-term debt - 1,200
Repayments of long-term debt (1,700) (546)
------- -------
Net cash provided by (used in) financing activities (1,700) 654
------- -------
Effect of exchange rate changes on cash 68 (26)
------- -------
Increase in cash 14,858 1,798
Cash, at beginning of period 115 105
------ -------
Cash, at end of period $14,973 $ 1,903
======= =======
</TABLE>
See accompanying notes.
4
<PAGE>
Domino's, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 28, 1999
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions of Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring accruals, considered necessary for a fair presentation have
been included. Operating results for the fiscal quarter ended March 28, 1999
are not necessarily indicative of the results that may be expected for the year
ended January 2, 2000. For further information, refer to the consolidated
financial statements and footnotes thereto for the year ended January 3, 1999
included in the Domino's, Inc. Form S-4 Registration Statement No. 333-74797.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying condensed consolidated financial statements include the
accounts of Domino's, Inc., formerly known as Domino's Pizza International
Payroll Services, Inc., a Delaware corporation, and its wholly-owned
subsidiaries (collectively, Domino's). All significant intercompany accounts
and transactions have been eliminated. Domino's, Inc. is a wholly-owned
subsidiary of TISM, Inc. (TISM).
TISM's Recapitalization
On December 21, 1998, TISM effected a merger with TM Transitory Merger
Corporation (TMTMC) in a leveraged recapitalization transaction whereby TMTMC
was merged with and into TISM with TISM being the surviving entity. TMTMC had
no operations and was formed solely for the purpose of effecting the
recapitalization. As part of the recapitalization, Domino's incurred
significant debt and distributed significantly all of the proceeds to TISM,
which used those proceeds, along with proceeds from the issuance of two classes
of common stock and one class of preferred stock, to fund the purchase of 93% of
the outstanding common stock of TISM from one of TISM's directors and certain
members of his family.
Prior to December 1998, Domino's, Inc. was an indirectly wholly-owned subsidiary
of Domino's Pizza, Inc. During December 1998 and before the recapitalization,
Domino's Pizza, Inc. distributed its ownership interest in Domino's, Inc. to
TISM. TISM then contributed its ownership interest in Domino's Pizza, Inc.,
which had been a wholly-owned subsidiary of TISM, to Domino's, Inc., effectively
converting Domino's, Inc. from a subsidiary of Domino's Pizza, Inc. into
Domino's Pizza, Inc.'s parent.
The accompanying condensed consolidated financial statements and these Notes to
Condensed Consolidated Financial Statements include the results of operations of
Domino's Pizza, Inc. and its wholly-owned subsidiaries (including Domino's,
Inc.) for the periods prior to the recapitalization.
Fiscal Year and Fiscal Quarters
Domino's fiscal year ends on the Sunday closest to December 31 and generally
consists of fifty-two weeks. The 1998 fiscal year, however, which ended January
3, 1999, consisted of fifty-three weeks.
Domino's first three fiscal quarters of a fiscal year each consist of twelve
weeks and the fourth quarter of a fiscal year consists of either sixteen or
seventeen weeks depending upon whether the fiscal year consists of fifty-two
weeks or fifty-three weeks, respectively. The first fiscal quarters of 1999 and
1998 consisted of the twelve week periods ended March 28, 1999 and March 22,
1998, respectively.
5
<PAGE>
3. Accounting Pronouncements
The American Institute of Certified Public Accountants has issued Statement of
Position (SOP) 98-5, "Reporting on the Costs of Start-up Activities," which
requires entities to expense the costs of start-up activities, including
organizational costs, when incurred. We adopted this SOP in the first quarter
of fiscal year 1999. The adoption of this SOP did not have a material impact on
our financial statements or our operations.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. This statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. We have not determined the reporting
impact, if any, of the adoption of this statement.
4. Change in Accounting Estimates
During the first quarter of 1999, we initiated a review of the estimated useful
lives we use for depreciating or amortizing our plant and equipment and goodwill
assets. The review included consideration of the estimated life of our stores
as determined through quantitative analysis performed in late 1998 and analysis
of the historical longevity of operating assets used in our operations. We
concluded the review late in the first quarter of 1999.
Based on this review, we modified the useful lives for several asset categories.
For equipment, estimated useful lives were extended for certain assets from
seven years to either ten or twelve years and were shortened for other assets,
primarily computer equipment, from either five or seven years to three years.
For leasehold improvements, estimated useful lives were extended from five years
to ten years, which generally will result in amortization of these assets over
the term of the respective leases plus one renewal option period. For furniture
and fixtures, estimated useful lives were extended for certain assets from seven
years to ten years. For goodwill, which primarily arises from purchases of
stores from franchisees, estimated useful lives were shortened in certain
circumstances to ten years from the beginning of fiscal 1999. In accordance
with generally accepted accounting principles, these changes in useful lives are
being applied on a prospective basis to existing assets and will be applied to
assets acquired in the future.
For the quarter ended March 28, 1999, the overall impact of these changes in
accounting estimates was to increase income from operations and net income by
approximately $400,000 and $240,000, respectively.
This resulted from a reduction to depreciation and amortization expense of
approximately $1.2 million due to the net impact of the changes in useful lives,
partially offset by a one-time increase in depreciation and amortization expense
of approximately $800,000 to eliminate the remaining net book value of assets
which had no remaining useful life based upon the shortening of the useful lives
for such assets.
5. Comprehensive Income
The Financial Accounting Standards Board has issued SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting comprehensive
income and its components in a full set of financial statements. Comprehensive
income is defined as the total of net income and all other non-owner changes in
equity. We adopted this Statement in 1997.
Our quarterly total comprehensive income was as follows (in thousands):
<TABLE>
<CAPTION>
For the three months ended,
March 28, 1999 March 22, 1998
-------------- --------------
<S> <C> <C>
Net income $ 229 $ 12,652
Currency translation adjustment 43 13
Unrealized gain (loss) on investments, net of tax (5) 147
-------------- --------------
Total comprehensive income $ 267 $ 12,812
============== ==============
</TABLE>
6
<PAGE>
6. Segment Data
The Financial Accounting Standards Board has issued SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information," which supercedes SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise," replacing
the "industry segment" approach of reporting segment information with the
"management" approach. The "management" approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the reportable segments. We adopted this
Statement in 1998. Adoption of this Statement only affects the presentation of
the notes to the financial statements.
We have three reportable segments as determined by management using the
"management" approach as defined in SFAS No. 131: (1) Domestic Stores, (2)
Domestic Distribution and (3) International. Our operations are organized by
management on the combined bases of line of business and geography. The
Domestic Stores segment includes operations with respect to all franchised and
corporate-owned stores throughout the contiguous United States. The Domestic
Distribution segment includes the distribution of food, equipment and supplies
to franchised and corporate-owned stores throughout the contiguous United
States. The International segment includes operations related to our
franchising business in foreign and non-contiguous United States markets and our
food distribution business in Canada, Alaska, Hawaii and, in 1998, Puerto Rico.
In December 1998, we sold our Puerto Rico food distribution business to our
master franchisee in that market.
The accounting policies of the reportable segments are the same as those we use
on a consolidated basis. We evaluate the performance of our segments and
allocate resources to them based on EBITDA.
The tables below summarize the financial information concerning our reportable
segments for the fiscal quarters ended March 28, 1999 and March 22, 1998.
Intersegment revenues are comprised of sales of food, equipment and supplies
from the Domestic Distribution segment to the Domestic Stores segment.
Intersegment sales prices are market based. In 1998, the "Other" column as it
relates to EBITDA information below includes charitable contributions, salary of
a TISM Director and former majority TISM stockholder and other corporate
headquarters costs that we do not allocate to any of the reportable segments.
In 1999, such column includes only corporate headquarters costs that we do not
allocate to any of the reportable segments. All amounts presented below are in
thousands.
<TABLE>
<CAPTION>
Domestic Domestic Intersegment
Stores Distribution International Revenues Other Total
-------- ------------- --------------- -------------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
1999............ $ 113,176 $156,917 $ 12,865 $(22,190) $ - $260,768
1998............ 116,606 154,189 12,179 (27,114) - 255,860
EBITDA
1999............ 30,502 5,389 2,101 - (7,767) 30,225
1998............ 25,081 4,014 1,914 - (12,152) 18,857
</TABLE>
<TABLE>
<CAPTION>
The following table reconciles Total EBITDA above to consolidated income before provision for income taxes:
For the three months ended,
March 28, 1999 March 22, 1998
-------------- --------------
<S> <C> <C>
Total EBITDA.........................................................$ 30,225 $ 18,857
Depreciation and amortization........................................ (12,810) (4,630)
Interest expense...................................................... (17,251) (796)
Interest income...................................................... 113 390
Gain (loss) on sale of plant and equipment............................ 104 (20)
---------------- ---------
Income before provision for income taxes..............................$ 381 $ 13,801
================ =========
</TABLE>
No customer accounted for more than 10% of total consolidated revenues in the
fiscal quarters ended March 28, 1999 and March 22, 1998.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The 1999 and 1998 fiscal quarters referenced herein represent the twelve-week
periods ended March 28, 1999 and March 22, 1998, respectively.
Revenues
General. Revenues include sales by corporate-owned stores, royalty fees from
domestic and international franchises and sales by our distribution commissaries
to domestic and international franchises. Total revenues increased $4.9
million, or 1.9%, to $260.8 million for the quarter ended March 28, 1999 from
$255.9 million for the quarter ended March 22, 1998. This increase is
attributable to higher revenues from Domestic Franchise, Domestic Distribution
and International operations, partially offset by lower revenues from Corporate
Stores.
Corporate Stores. Revenues from Corporate Store operations decreased $5.7
million, or 6.2%, to $86.6 million for the quarter ended March 28, 1999 from
$92.3 million for the quarter ended March 22, 1998. This decrease was due to
$15.1 million relating to a decrease in the average number of corporate stores
resulting from Domino's store rationalization program, under which we closed or
sold to franchisees 142 stores in the second half of 1998. This decrease was
partially offset by $9.4 million relating to a 12.1% increase in average store
sales for the quarter ended March 28, 1999 from the quarter ended March 22,
1998. Same store sales for the quarter ended March 28, 1999 increased 6.2% from
the quarter ended March 22, 1998. Ending corporate stores decreased by 125 to
641 as of March 28, 1999 from 766 as of March 22, 1998, due mainly to the store
rationalization program completed in December 1998.
Franchise. Revenues from Domestic Franchise operations are derived primarily
from royalty income. Revenues from franchise operations increased by $2.3
million, or 9.5%, to $26.6 million for the quarter ended March 28, 1999 from
$24.3 million for the quarter ended March 22, 1998. This increase is
attributable primarily to a 4.4% increase in average store sales for the quarter
ended March 28, 1999 as compared to the quarter ended March 22, 1998 and an
increase in the average number of franchise stores. Same store sales for the
quarter ended March 28, 1999 increased by 6.5% from the quarter ended March 22,
1998. Ending franchise stores increased by 177 to 3,861 as of March 28, 1999
from 3,684 as of March 22, 1998.
Distribution. Revenues from Domestic Distribution operations are derived
primarily from the sale of food, equipment and supplies to domestic franchise
stores and, to a lesser extent, the sale of equipment to international stores,
and exclude sales to corporate-owned stores. Revenues from Distribution
operations increased $7.6 million, or 6.0%, to $134.7 million for the quarter
ended March 28, 1999 from $127.1 million for the quarter ended March 22, 1998.
The increase was mainly due to an $11.0 million increase in food sales to
franchisees, primarily relating to the increases in Domestic Franchise average
store sales and average number of stores discussed above, partially offset by a
$2.7 million decrease in equipment sales for the quarter ended March 28, 1999 as
compared to the quarter ended March 22, 1998 due to a high level of equipment
sales in 1998 that resulted from the roll-out of our HeatWave hot bag systems.
International. International revenues, which are derived mainly from food sales
to international franchisees, master franchise agreement royalties and, to a
lesser extent, franchise and development fees, increased by $0.7 million, or
5.7%, to $12.9 million for the quarter ended March 28, 1999 from $12.2 million
for the quarter ended March 22, 1998. International franchise royalty revenues
increased by $0.5 million, or 11.9%, to $4.7 million for the quarter ended March
28, 1999 from $4.2 million for the quarter ended March 22, 1998, due principally
to a 13.5% increase in the average number of International franchise stores,
partially offset by a 1.4% decrease in average unit sales. On a constant dollar
basis, same store sales for the quarter ended March 28, 1999 increased by 5.2%
from the quarter ended March 22, 1998. Ending international franchise stores
increased to 1,766 as of March 28, 1999 from 1,584 as of March 22, 1998.
International commissary product sales to franchisees increased slightly, to
$7.6 million for the quarter ended March 28, 1999 from $7.5 million for the
quarter ended March 22, 1998, due to commencement of commissary operations in
France in early 1999 and increased sales in Canadian commissary operations,
significantly offset by the impact of the sale of Puerto Rico commissary
operations to the master franchisee in that market in late 1998. International
8
<PAGE>
franchise and development fees and other income also increased slightly, to $0.6
million for the quarter ended March 28, 1999 from $0.5 for the quarter ended
March 22, 1998.
Gross Profit. Gross profit increased $8.5 million, or 12.7%, to $75.2 million
for the quarter ended March 28, 1999 from $66.7 million for the quarter ended
March 22, 1998. As a percentage of revenues, gross profit increased 2.7%, to
28.8% for the quarter ended March 28, 1999 from 26.1% for the quarter ended
March 22, 1998. These increases were driven primarily by reductions in
corporate stores food, labor and insurance costs that resulted from elimination
of underperforming stores through the store rationalization program as well as
improved shift scheduling, minimized overtime, reduced insurance premiums and a
decrease in the price of cheese. Also, Distribution food cost as a percentage
of sales decreased slightly, due mainly to a shift in product mix from par-baked
deep dish and thin crust shells to higher margin fresh dough. In addition, the
cost of sales component of depreciation and amortization expense decreased
slightly, due mainly to the impact of the store rationalization program
completed in December 1998 and the modification of estimated useful lives for
several fixed asset categories effective in the quarter ended March 28, 1999.
General and Administrative. General and Administrative expenses consist
primarily of regional support offices, corporate administrative functions,
corporate store and distribution facility management costs and advertising and
promotional expenses. General and administrative expenses increased $5.1
million, or 9.7%, to $57.6 million for the quarter ended March 28, 1999 from
$52.5 million for the quarter ended March 22, 1998. As a percentage of revenues,
general and administrative expenses increased 1.6%, to 22.1% for the quarter
ended March 28, 1999 from 20.5% for the quarter ended March 22, 1998. These
increases are due primarily to $7.7 million in amortization expense in 1999 with
respect to a covenant not-to-compete we entered into with our former principal
stockholder at the time of the recapitalization in December 1998, increased
information systems costs, primarily for amortization of our recently developed
financial and supply chain systems, and general office labor cost increases,
partially offset by the impact of eliminating a corporate stores field office as
part of the store rationalization program and elimination of $5.1 million of
related party transaction expenses, which were primarily comprised of lease
payments in excess of current levels to entities controlled by TISM's former
principal stockholder and charitable contributions to a foundation managed by
TISM's former principal stockholder.
Interest Expense. Interest expense increased $16.5 million, to $17.3 million
for the quarter ended March 28, 1999 from $0.8 million for the quarter ended
March 22, 1998, due mainly to the interest costs, including deferred financing
cost amortization, resulting from Domino's December 1998 borrowings of $722.1
million, which were incurred to fund its recapitalization.
Provision for Income Taxes. The provision for income taxes decreased $0.9
million, to $0.2 million for the quarter ended March 28, 1999 from $1.1 million
for the quarter ended March 22, 1998. As a percentage of income before
provision for income taxes, the provision for income taxes increased 31.6%, to
39.9% for the quarter ended March 28, 1999 from 8.3% for the quarter ended March
22, 1998. As part of our recapitalization, Domino's converted from "S"
Corporation status to "C" Corporation status for federal income tax reporting
purposes in December 1998. As a result, the provision for income taxes for the
quarter ended March 28, 1999 includes U.S. federal and state income taxes and
foreign income taxes whereas the provision for income taxes for the quarter
ended March 22, 1998 includes only foreign income taxes and income taxes of a
few states for which Domino's had been taxed at the corporate level.
Net Income. Net income decreased $12.5 million, or 98.4%, to $0.2 million for
the quarter ended March 28, 1999 from $12.7 million for the quarter ended March
22, 1998. This decrease was due primarily to the factors described above.
9
<PAGE>
Liquidity and Capital Resources
We had a negative working capital amount of $13.9 million at March 28, 1999 and
a negative working capital amount of $18.2 million at January 3, 1999. We have
generally had negative working capital 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 flow from operations and borrowings under our new revolving credit
facility.
Net cash provided by operating activities was $20.3 million and $10.5 million
for the quarters ended March 28, 1999 and March 22, 1998, respectively. The
increase in cash flows from operations for the quarter ended March 28, 1999 was
primarily due to an increase in same store sales and several cost reduction
initiatives, including the store rationalization program, implemented in late
1998.
Net cash used in investing activities consists primarily of capital expenditures
and investments in marketable securities, partially offset by proceeds from
asset sales and collections on notes receivable from franchisees. Net cash used
in investing activities was $3.8 million and $9.3 million for the quarters ended
March 28, 1999 and March 22, 1998, respectively. The decrease in cash used in
investing activities for the quarter ended March 28, 1999 resulted primarily
from a $3.9 million decrease in capital expenditures.
Capital expenditures were $5.0 million and $8.9 million for the quarters ended
March 28, 1999 and March 22, 1998, respectively. The higher capital
expenditures for the quarter ended March 22, 1998 were primarily attributable to
development costs associated with our financial and supply chain computer
systems and the implementation of HeatWave hot bag systems in corporate-owned
stores.
We incurred substantial indebtedness in connection with the recapitalization.
As of March 28, 1999, we had $726.4 million of indebtedness outstanding as
compared to $46.3 million of indebtedness outstanding immediately prior to the
recapitalization. In addition, we have a stockholder's deficit of $483.5
million as of March 28, 1999, as compared to stockholder's equity of $41.8
million immediately prior to the recapitalization.
Net cash used in financing activities was $1.7 million for the quarter ended
March 28, 1999 compared to net cash provided by financing activities of $0.7
million for the quarter ended March 22, 1998. In connection with the
recapitalization, we borrowed $445 million under the term loan facilities and
approximately $2.1 million under a revolving credit facility. Cash flows from
financing activities for the quarters ended March 28, 1999 and March 22, 1998
were entirely comprised of repayments and net borrowings of long-term debt,
respectively.
Effective February 1, 1999, we terminated the Distribution profit capitation
program. Under this program, our Distribution division had rebated to
participating franchisees all Distribution pre-tax profits in excess of 2% of
gross revenues from sales to corporate-owned and domestic franchise stores. In
addition, at the beginning of fiscal year 1999 corporate-owned stores began
participating in the profit sharing program of our Distribution division. This
profit sharing plan was recently amended to increase rebates to participating
stores from approximately 45% to approximately 50% of their regional
distribution center's pre-tax profits. Although corporate-owned stores had the
right to participate in the program, historically only domestic franchise stores
participated. We agreed that the aggregate funds available for rebate to
participating franchisees in 1999 under the profit sharing plan would be at
least $1 million more than the aggregate payments made to franchisees under the
profit sharing and profit capitation programs in fiscal year 1998. We agreed to
pay any deficiency to participating franchisees on a pro rata basis.
Based upon the current level of operations and anticipated growth, we believe
that cash generated from operations and amounts available under the revolving
credit facility will be adequate to meet our anticipated debt services
requirements, capital expenditures and working capital needs for the next
several years. There can be no assurance, however, that our business will
generate sufficient cash flow from operations or that future borrowings will be
available under the senior credit facilities or otherwise to enable us to
service our indebtedness, including the senior credit facilities and the senior
subordinated notes, or to make anticipated capital expenditures. Our future
10
<PAGE>
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.
Impact of Inflation
We believe that our results of operations are not dependent upon moderate
changes in the inflation rate. Inflation and changing prices did not have a
material impact on our operations for the quarters ended March 28, 1999 and
March 22, 1998. Severe increases in inflation, however, could affect the global
and United States economy and could have an impact on our business, financial
condition and results of operations.
Year 2000 Readiness Disclosure
We have recently either replaced or upgraded a majority of our core information
systems, including the franchise royalties system, franchise legal system,
information warehouse system and ULTRA store system, which is the point-of-sale
and operating system for corporate-owned stores. In addition, we are in the
process of implementing a full suite of financial and distribution supply chain
computer systems. We anticipate the financial systems implementation will be
complete no later than October 31, 1999. The implementation of our new
distribution supply chain systems is currently underway. We are also in the
process of a remediation effort on our legacy supply chain systems to render
them Year 2000 compliant. We anticipate the effort to bring legacy supply chain
systems into compliance with Year 2000 will be completed no later than October
31, 1999. We believe the completion of this remediation effort will mitigate
the risk associated with not completing the new distribution supply chain
implementation prior to December 31, 1999. Upon completion of this project
and/or relevant Year 2000 remediation efforts, we believe that all of our
critical internal information systems will operate correctly with regard to the
import, export, and processing of date information, including correct handling
of leap years, in connection with the change in the calendar year from 1999 to
2000. Each of these upgrades were part of our budgeted expenses for upgrading
our computer infrastructure and were not primarily undertaken or accelerated
because of the Year 2000 issue. We have, however, complemented our system
upgrades with an internal compliance team responsible for testing all of our
information systems for Year 2000 compliance.
We are also planning to inventory and address other less critical equipment and
machinery, such as facility equipment, that may contain embedded technology with
Year 2000 compliance problems. We expect to complete this effort no later than
September 30, 1999. We also have material relationships with franchisees,
suppliers and vendors and other significant entities, such as public utilities,
that may not have adequately addressed the Year 2000 issue with respect to their
equipment or information systems. Although we are attempting to assess the
extent of their compliance efforts, we have received written assurances from
only a portion of this group and, accordingly, cannot determine the risk to our
business.
For the fiscal year ended January 3, 1999, we spent approximately $256,000
addressing the Year 2000 issue. For the year ended January 2, 2000, we estimate
we will spend approximately $700,000 addressing the Year 2000 issue, of which we
spent approximately $174,000 during the quarter ended March 28, 1999. These
amounts do not reflect the cost of our internal compliance team or the cost of
planned replacement systems, such as the financial and distribution supply chain
system software, which may have a positive impact on resolving the Year 2000
issue. We do not expect that additional costs required to address the Year 2000
issue will have a significant impact on our business or operating results. In
the event, however, that we are unable to complete planned upgrades, implement
replacement systems or otherwise resolve Year 2000 compliance problems prior to
December 31, 1999, or in the event our franchisees or a significant number of
our suppliers and vendors do not adequately address the Year 2000 issue before
such date, we may experience significant disruption or delays in our operations,
which in turn could have a material adverse effect on our business.
At this time, we are still assessing the likely worst case scenario that may
result from any significant disruptions or delays in our operations due to Year
2000 compliance issues associated with (1) our critical information systems, (2)
other less critical facility equipment or machinery, or (3) a significant number
of our franchisees, suppliers and vendors. We expect to complete this analysis
within the next several months. Further, except as mentioned above, we have no
contingency plans in place to address Year 2000 problems.
11
<PAGE>
We plan to evaluate the status of our Year 2000 compliance efforts at the end of
June 1999 to determine whether such contingency plans are necessary.
Forward-Looking Statements
This filing includes various forward-looking statements about us that are
subject to risks and uncertainties. Forward-looking statements include
information concerning future results of operations, cost savings 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,
among other things:
. Our ability to grow and implement cost-saving strategies;
. Increases in our operating costs, including commodity costs and the minimum
wage;
. Our ability to compete domestically and internationally;
. Our ability to retain or replace our executive officers and other key members
of management;
. Our ability to pay principal and interest on our substantial debt;
. Our ability to borrow in the future;
. Our ability and the ability of our franchisees, suppliers and vendors to
implement an effective Year 2000 readiness program;
. Adverse legislation or regulation;
. Our ability to sustain or increase historical revenues and profit margins;
and
. Continuation of certain trends and general economic conditions in our
industry.
Accordingly, actual results may differ materially from those expressed or
implied by such forward-looking statements contained in this filing. Also, our
Registration Statement contains a description of risk factors that you should
carefully consider. 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 filing might not occur.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable
12
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use Of Proceeds
None.
Item 3. Defaults Under Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit
Number Description
------- -----------
10.1 Employment Agreement dated as of March 31, 1999 by and among David
A. Brandon and TISM, Inc., Domino's, Inc. and Domino's Pizza, Inc.
(Incorporated by reference to the Exhibit 10.21 to Domino's
Registration Statement on Form S-4, Registration No. 333-74797.)
27 Financial Data Schedule which is submitted electronically to the
Securities and Exchange Commission for information only and not
deemed to be filed with the Commission.
b. Current Reports on Form 8-K
There were no reports filed on Form 8-K during the quarterly period ended
March 28, 1999.
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 19, 1999 /s/ Harry J. Silverman
_________________________________
Harry J. Silverman,
Chief Financial Officer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> JAN-02-2000 JAN-3-1999
<PERIOD-START> JAN-04-1999 DEC-29-1997
<PERIOD-END> MAR-28-1999 MAR-22-1998
<CASH> 14,973 1,903
<SECURITIES> 0 0
<RECEIVABLES> 53,101 47,186
<ALLOWANCES> 3,180 3,394
<INVENTORY> 17,460 29,975
<CURRENT-ASSETS> 100,782 84,665
<PP&E> 181,209 190,246
<DEPRECIATION> 116,918 133,705
<TOTAL-ASSETS> 385,138 216,376
<CURRENT-LIABILITIES> 114,719 100,186
<BONDS> 275,000 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> (483,508) 38,930
<TOTAL-LIABILITY-AND-EQUITY> 385,138 216,376
<SALES> 228,891 226,894
<TOTAL-REVENUES> 260,768 255,860
<CGS> 131,192 129,163
<TOTAL-COSTS> 185,608 189,125
<OTHER-EXPENSES> 57,641 52,528
<LOSS-PROVISION> 447 261
<INTEREST-EXPENSE> 17,138 406
<INCOME-PRETAX> 381 13,801
<INCOME-TAX> 152 1,149
<INCOME-CONTINUING> 229 12,652
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 229 12,652
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
