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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 September 8, 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 October
14, 2002 was 10 shares.
Domino's, Inc.
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 8, 2002 and December 30, 2001 3
Condensed Consolidated Statements of Income -
Fiscal quarter and three fiscal quarters ended
September 8, 2002 and September 9, 2001 4
Condensed Consolidated Statements of Cash Flows -
Three fiscal quarters ended September 8, 2002 and
September 9, 2001 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II. OTHER INFORMATION 13
SIGNATURES 14
CERTIFICATIONS 15
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Domino's, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands) September 8, 2002 December 30, 2001
Assets (Unaudited) (Note)
----------------- -----------------
Current assets:
Cash and cash equivalents $ 5,020 $ 34,842
Accounts receivable 53,689 54,225
Notes receivable 4,572 4,024
Inventories 23,874 22,088
Prepaid expenses and other 6,196 4,892
Deferred income taxes 11,302 11,302
----------------- -----------------
Total current assets 104,653 131,373
----------------- -----------------
Property, plant and equipment:
Land and buildings 15,813 15,983
Leasehold and other improvements 55,837 50,684
Equipment 138,740 114,904
Construction in progress 6,391 5,837
----------------- -----------------
216,781 187,408
Accumulated depreciation and amortization 102,874 99,763
----------------- -----------------
Property, plant and equipment, net 113,907 87,645
----------------- -----------------
Other assets:
Deferred financing costs 19,289 24,594
Goodwill 27,315 12,673
Capitalized software 28,029 34,408
Deferred income taxes 61,318 66,270
Other 21,713 25,330
----------------- -----------------
Total other assets 157,664 163,275
----------------- -----------------
Total assets $ 376,224 $ 382,293
================= =================
Liabilities and stockholder's deficit
Current liabilities:
Current portion of long-term debt $ 4,034 $ 43,157
Accounts payable 49,277 30,125
Insurance reserves 8,098 7,365
Other accrued liabilities 65,431 73,487
----------------- -----------------
Total current liabilities 126,840 154,134
----------------- -----------------
Long-term liabilities:
Long-term debt, less current portion 606,790 611,532
Insurance reserves 11,926 6,334
Other accrued liabilities 29,479 35,167
----------------- -----------------
Total long-term liabilities 648,195 653,033
----------------- -----------------
Stockholder's deficit:
Common stock - -
Additional paid-in capital 120,723 120,202
Retained deficit (515,216) (542,540)
Accumulated other comprehensive loss (4,318) (2,536)
----------------- -----------------
Total stockholder's deficit (398,811) (424,874)
----------------- -----------------
Total liabilities and stockholder's deficit $ 376,224 $ 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 Three Fiscal Quarters Ended
September 8, September 9, September 8, September 9,
(In thousands) 2002 2001 2002 2001
----------------------------- ----------------------------
Revenues:
Domestic corporate stores $ 84,436 $ 80,555 $ 262,824 $ 253,324
Domestic franchise 30,623 30,373 97,219 91,042
Domestic distribution 143,614 163,223 464,080 470,055
International 18,387 15,305 55,055 46,418
------------ ------------ ------------ ------------
Total revenues 277,060 289,456 879,178 860,839
------------ ------------ ------------ ------------
Operating expenses:
Cost of sales 203,450 218,823 644,578 643,034
General and administrative 39,412 42,100 131,056 130,621
------------ ------------ ------------ ------------
Total operating expenses 242,862 260,923 775,634 773,655
------------ ------------ ------------ ------------
Income from operations 34,198 28,533 103,544 87,184
Interest income 47 418 315 1,433
Interest expense 17,099 15,947 44,312 48,227
------------ ------------ ------------ ------------
Income before provision for
income taxes 17,146 13,004 59,547 40,390
Provision for income taxes 6,345 5,072 22,032 15,773
------------ ------------ ------------ ------------
Net income $ 10,801 $ 7,932 $ 37,515 $ 24,617
============ ============ ============ ============
________
See accompanying notes.
4
Domino's, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Fiscal Quarters Ended
September 8, September 9,
2002 2001
------------ ------------
(In thousands)
Cash flows from operating activities:
Net cash provided by operating activities $ 86,337 $ 54,465
------------ ------------
Cash flows from investing activities:
Capital expenditures (38,361) (26,863)
Acquisitions of franchise operations (21,850) (263)
Other 1,123 5,978
------------ ------------
Net cash used in investing activities (59,088) (21,148)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 365,000 -
Repayments of long-term debt (408,911) (21,617)
Cash paid for financing costs (3,609) -
Capital contribution 521 -
Distributions to Parent (10,191) -
------------- ------------
Net cash used in financing activities (57,190) (21,617)
------------- -------------
Effect of exchange rate changes on cash
and cash equivalents 119 (47)
------------ -------------
Increase (decrease) in cash and cash equivalents (29,822) 11,653
Cash and cash equivalents, at beginning of period 34,842 25,136
------------ ------------
Cash and cash equivalents, at end of period $ 5,020 $ 36,789
============ ============
________
See accompanying notes.
5
Domino's, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited; tabular amounts in thousands)
September 8, 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 and three fiscal quarters ended September 8, 2002 are not
necessarily indicative of the results that may be expected for the year ending
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. Comprehensive Income
Fiscal Quarter Ended Three Fiscal Quarters Ended
-------------------- ---------------------------
September 8, September 9, September 8, September 9,
2002 2001 2002 2001
-------------- ------------- ------------- --------------
Net income $ 10,801 $ 7,932 $ 37,515 $ 24,617
Cumulative effect of change in
accounting principle, net of tax - - - 1,692
Unrealized loss on derivative
instruments, net of tax (1,821) (2,494) (4,719) (4,584)
Reclassification adjustment for
losses included in net income,
net of tax 779 435 2,244 132
Currency translation adjustment 213 78 693 (151)
-------------- -------------- -------------- ---------------
Comprehensive income $ 9,972 $ 5,951 $ 35,733 $ 21,706
============== ============== ============== ===============
3. 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
a former franchisee in Arizona. This acquisition resulted in an approximately
$22.4 million increase in Domestic Store assets.
Fiscal Quarter Ended September 8, 2002 and September 9, 2001
------------------------------------------------------------
Domestic Domestic Intersegment
Stores Distribution International Revenues Other Total
------ ------------ ------------- -------- ----- -----
Revenues -
2002 $ 115,059 $ 166,924 $ 18,387 $(23,310) $ - $ 277,060
2001 110,928 187,978 15,305 (24,755) - 289,456
EBITDA -
2002 $ 33,482 $ 10,631 $ 5,068 $ - $ (9,385) $ 39,796
2001 30,489 9,816 4,272 - (8,539) 36,038
Three Fiscal Quarters Ended September 8, 2002 and September 9, 2001
-------------------------------------------------------------------
Domestic Domestic Intersegment
Stores Distribution International Revenues Other Total
------ ------------ ------------- -------- ----- -----
Revenues -
2002 $ 360,043 $ 535,989 $ 55,055 $(71,909) $ - $ 879,178
2001 344,366 543,128 46,418 (73,073) - 860,839
EBITDA -
2002 $ 108,166 $ 33,860 $ 15,054 $ - $ (29,896) $ 127,184
2001 94,425 29,390 12,176 - (26,623) 109,368
6
The following table reconciles total EBITDA to consolidated income before
provision for income taxes.
Fiscal Quarter Ended Three Fiscal Quarters Ended
-------------------- ---------------------------
September 8, September 9, September 8, September 9,
2002 2001 2002 2001
--------------- --------------- --------------- --------------
Total EBITDA $ 39,796 $ 36,038 $ 127,184 $ 109,368
Depreciation and amortization (5,737) (7,166) (19,560) (21,160)
Interest expense (17,099) (15,947) (44,312) (48,227)
Interest income 47 418 315 1,433
Loss on debt extinguishment (301) (146) (1,217) (146)
Gain (loss) on sale/disposal of assets 440 (193) (2,863) (878)
--------------- --------------- --------------- -------------
Income before provision for income taxes $ 17,146 $ 13,004 $ 59,547 $ 40,390
=============== =============== =============== =============
4. Financing Arrangements
The Company retired approximately $3.3 million and $13.6 million of outstanding
senior subordinated notes during the third quarter and first three quarters of
2002, respectively. The Company recognized losses of approximately $301,000 and
$1.2 million for the third quarter and first three quarters of 2002,
respectively, reflecting the differences between the carrying value of the notes
and the open market purchase price.
In connection with the consummation of the 2002 Senior Credit Facility in the
third quarter of 2002, the Company expensed financing costs of approximately
$4.5 million.
5. Advertising
The Company's advertising fund subsidiary received national advertising
contributions from franchisees of approximately $53 million and $50 million
during the first three quarters of 2002 and 2001, respectively. These
contributions and offsetting expenses are presented net in the statements of
income.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The 2002 and 2001 third quarters referenced herein represent the twelve-week
periods ended September 8, 2002 and September 9, 2001, respectively. The 2002
and 2001 first three quarters referenced herein represent the thirty-six week
periods ended September 8, 2002 and September 9, 2001, respectively.
Store Growth Activity
The following is a summary of the Company's store growth activity for the third
quarter and first three quarters of 2002.
Third Quarter of 2002
--------------------------------------------------------
Beginning End of
Of Period Opened Closed Transfers Period
--------- ------ ------ --------- ------
Domestic Corporate Stores 583 1 - - 584
Domestic Franchise 4,223 25 (21) - 4,227
----- ------ ------- -------- -----
Domestic Stores 4,806 26 (21) - 4,811
International 2,290 50 (13) - 2,327
----- ------ ------- -------- -----
Total 7,096 76 (34) - 7,138
===== ====== ======= ======== =====
First Three Quarters of 2002
--------------------------------------------------------
Beginning End of
Of Period Opened Closed Transfers Period
--------- ------ ------ --------- ------
Domestic Corporate Stores 519 3 (8) 70 584
Domestic Franchise 4,294 63 (60) (70) 4,227
----- ------ ------- ------- -------
Domestic Stores 4,813 66 (68) - 4,811
International 2,259 126 (58) - 2,327
----- ------ ------- ------- -------
Total 7,072 192 (126) - 7,138
===== ====== ======= ======= =======
Revenues
General. 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 and international
franchise stores.
Total revenues decreased 4.3% to $277.1 million in the third quarter of 2002,
from $289.5 million for the comparable period in 2001, and increased 2.1% to
$879.2 million for the first three quarters of 2002, from $860.8 million for the
comparable period in 2001. These changes in total revenues were primarily driven
by increases in domestic store and international revenues, offset in part by
decreases in domestic distribution revenues. These results are more fully
described below.
Domestic Stores
Domestic Corporate Stores. Revenues from domestic corporate store operations
increased 4.8% to $84.4 million in the third quarter of 2002, from $80.6 million
for the comparable period in 2001, and increased 3.8% to $262.8 million for the
first three quarters of 2002, from $253.3 million for the comparable period in
2001.
This increase in revenues in the third quarter of 2002 is due primarily to an
increase in the average number of domestic Company-owned stores open during
2002, due in part to the Arizona acquisition completed during the first quarter
of 2002, offset in part by a decrease in same store sales. Same store sales for
domestic Company-owned stores decreased 1.4% in the third quarter of 2002,
compared to the same period in 2001.
This increase in revenues for the first three quarters of 2002 is due primarily
to an increase in same store sales. Same store sales for domestic Company-owned
stores increased 1.8% for the first three quarters of 2002, compared to the same
period in 2001.
Domestic Franchise. Revenues from domestic franchise operations increased 0.8%
to $30.6 million in the third quarter of 2002, from $30.4 million for the
comparable period in 2001, and increased 6.8% to $97.2 million for the first
three quarters of 2002, from $91.0 million for the comparable period in 2001.
8
This increase in revenues for the first three quarters of 2002 is 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, due in part to the Arizona
acquisition. Same store sales for domestic franchise stores increased 4.1% for
the first three quarters of 2002, compared to the same period in 2001. Same
store sales for domestic franchise stores decreased 0.4% in the third quarter of
2002, compared to the same period in 2001.
Domestic Distribution
Revenues from domestic distribution operations decreased 12.0% to $143.6 million
in the third quarter of 2002, from $163.2 million for the comparable period in
2001, and decreased 1.3% to $464.1 million for the first three quarters of 2002,
from $470.1 million for the comparable period in 2001.
These decreases in revenues are due primarily to a market decrease in overall
food basket prices, including lower cheese prices, in the third quarter and
first three quarters of 2002. The decrease in revenues for the first three
quarters of 2002 was offset in part by an increase in volumes resulting from
increases in domestic franchise same store sales. The average cheese block price
decreased to approximately $1.12 per pound and $1.20 per pound in the third
quarter and first three quarters of 2002, respectively, from approximately $1.67
per pound and $1.42 per pound for the comparable periods in 2001.
International
Revenues from international operations increased 20.1% to $18.4 million in the
third quarter of 2002, from $15.3 million for the comparable period in 2001, and
increased 18.6% to $55.1 million in the first three quarters of 2002, from $46.4
million for the comparable period in 2001.
These increases in revenues are due primarily to increases resulting from the
acquisition of the Netherlands franchise operations in the fourth quarter of
2001, as well as increases in same store sales and in the average number of
international stores open during 2002. On a constant dollar basis, same store
sales increased 4.0% and 4.1% for the third quarter and first three quarters of
2002, respectively, compared to the same periods in 2001. On a historical dollar
basis, same store sales increased 4.3% and 2.8% for the third quarter and first
three quarters of 2002, respectively, compared to the same periods in 2001. The
third quarter figures indicate that the U.S. Dollar was generally weaker against
the currencies of those countries in which we compete.
Operating Expenses
Cost of sales decreased 7.0% to $203.5 million in the third quarter of 2002,
from $218.8 million for the comparable period in 2001, and increased 0.2% to
$644.6 million for the first three quarters of 2002, from $643.0 million for the
comparable period in 2001. Gross profit increased 4.2% to $73.6 million in the
third quarter of 2002, from $70.6 million for the comparable period in 2001, and
increased 7.7% to $234.6 million for the first three quarters of 2002, from
$217.8 million for the comparable period in 2001. As a percentage of total
revenues, gross profit increased 2.2% to 26.6% in the third quarter of 2002,
from 24.4% for the comparable period in 2001, and increased 1.4% to 26.7% for
the first three quarters of 2002, from 25.3% for the comparable period in 2001.
The increase in gross profit for the third quarter of 2002 is due primarily to a
decrease in food basket costs, including lower cheese costs, at our
Company-owned stores. The increase in gross profit was offset in part by a
Company-wide increase in insurance costs and same store sales declines at our
domestic stores.
The increase in gross profit for the first three quarters of 2002 is due
primarily to increases in domestic store revenues, primarily due to increases in
domestic Company-owned and franchise same store sales, and related increases in
distribution volumes. Additionally, the gross profit improvement was positively
impacted by a decrease in food basket costs, including lower cheese costs. The
increase in gross profit was offset in part by a Company-wide increase in
insurance and labor costs.
General and administrative expenses decreased 6.4% to $39.4 million in the third
quarter of 2002, from $42.1 million for the comparable period in 2001, and
increased 0.3% to $131.1 million for the first three quarters of 2002, from
$130.6 million for the comparable period in 2001. As a percentage of total
revenues, general and administrative expenses decreased 0.3% to 14.2% in the
third quarter of 2002, from 14.5% for the comparable period in 2001, and
decreased 0.3% to 14.9% for the first three quarters of 2002, from 15.2% for the
comparable period in 2001.
9
The decrease in total general and administrative expenses in the third quarter
of 2002 is due in part to the favorable impact of no longer amortizing goodwill
and the absence of certain covenant not-to-compete amortization expenses related
to an asset that was fully amortized by the end of 2001. Goodwill amortization
expense in the third quarter of 2001 was approximately $464,000 and the
aforementioned covenant not-to-compete amortization expense was approximately
$1.3 million in the third quarter of 2001.
The increase in total general and administrative expenses for the first three
quarters of 2002 is due primarily to the write-off of approximately $5.3 million
of certain capitalized software costs during the second quarter of 2002 offset
in part by the favorable impacts related to the aforementioned goodwill and
covenant not-to-compete amortization expenses. Goodwill amortization expense for
the first three quarters of 2001 was approximately $1.4 million and the
aforementioned covenant not-to-compete amortization expense was approximately
$3.8 million for the first three quarters of 2001.
Total revenues continued to outpace the growth of total general and
administrative expenses for the first three quarters of 2002, reflecting
management's commitment to continuous process improvements throughout the
Company.
Interest Expense
Interest expense increased 7.2% to $17.1 million in the third quarter of 2002,
from $15.9 million for the comparable period in 2001, and decreased 8.1% to
$44.3 million for the first three quarters of 2002, from $48.2 million for the
comparable period in 2001. The increase in interest expense in the third quarter
of 2002 is due primarily to a $4.5 million write-off of financing fees through
interest expense related to the Company's refinancing of its senior credit
facility. The decrease in interest expense in the first three quarters of 2002
is due primarily to decreases in related variable interest rates on our senior
credit facility and reduced debt levels, offset in part by the aforementioned
financing fee write-off.
Provision for Income Taxes
Provision for income taxes increased $1.2 to $6.3 million in the third quarter
of 2002, from $5.1 million for the comparable period in 2001, and increased $6.2
million to $22.0 million for the first three quarters of 2002, from $15.8
million for the comparable period in 2001. These increases are due primarily to
increases in pre-tax income.
Liquidity and Capital Resources
We had negative working capital of $22.2 million and cash and cash equivalents
of $5.0 million at September 8, 2002. Working capital was positively impacted
during the third quarter of 2002 as a result of a change in the Company's senior
credit facility amortization payment schedule. 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 September 8, 2002, we had $610.8 million of long-term debt, of which $4.0
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 were $15.9 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 $86.3 million and $54.5 million in the
first three quarters of 2002 and 2001, respectively. The $31.8 million increase
is due primarily to a $12.9 million increase in net income, a $4.7 million
increase in amortization of deferred financing costs, due primarily to a $4.5
million write-off of financing fees related to the Company's refinancing of its
senior credit facility, and a $12.2 million net change in operating assets and
liabilities.
Cash used in investing activities was $59.1 million and $21.1 million in the
first three quarters of 2002 and 2001, respectively. The $38.0 million increase
is due primarily to a $21.6 million increase in acquisitions of franchise
operations and an $11.5 million increase in capital expenditures. 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.
10
Cash used in financing activities was $57.2 million and $21.6 million in the
first three quarters of 2002 and 2001, respectively. The $35.6 million increase
is due primarily to a $387.3 million increase in repayments of long-term debt,
including repayment of $364.3 million in connection with the Company's
refinancing of its senior credit facility, a $10.2 million increase in
distributions to parent, and a $3.6 million increase in cash paid for financing
fees. These increases were offset in part by a $365.0 million increase in
proceeds from issuance of long-term debt in connection with the Company's
refinancing of its senior credit facility.
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 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.
11
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 to various fixed
rates over various terms. These agreements are summarized below.
During the third quarter of 2002, we entered into an interest rate swap
agreement to effectively convert the variable Eurodollar component of the
effective interest rate on a portion of the Company's debt to a fixed rate over
specified terms. This agreement is summarized below.
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 $37.5 million September 2001 - September 2003 3.645%
Interest Rate Swap $37.5 million September 2001 - September 2004 3.69%
Interest Rate Swap $75.0 million August 2002 - June 2005 3.25%
Interest Rate Risk
The Company's variable interest expense is sensitive to changes in the general
level of interest rates. As of September 8, 2002, a portion of the Company's
debt is borrowed at Eurodollar rates plus a blended margin rate of 2.5%. At
September 8, 2002, the weighted average interest rate on our $75.0 million of
variable interest debt was approximately 4.4%.
The Company had total interest expense of approximately $44.3 million in the
first three quarters of 2002. The estimated increase in interest expense from a
hypothetical 200 basis point adverse change in applicable variable interest
rates would be approximately $1.8 million.
12
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
Thomas S. Monaghan voluntarily submitted his resignation from the board of
directors on July 29, 2002. Mr. Monaghan's resignation was not due to a
disagreement with the Company.
The Chief Executive Officer and Chief Financial Officer reviewed the Company's
system of internal controls and concluded that they are effective. There have
been no significant changes in internal controls.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit
Number Description
------ -----------
99.1 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.
99.2 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. Current Reports on Form 8-K
The Company filed a Current Report on Form 8-K on August 2, 2002 which
included the Company's new senior credit agreement, dated as of July 29,
2002.
The Company filed a Current Report on Form 8-K on October 22, 2002 which
included sworn statements from the Company's Chief Executive Officer and
Chief Financial Officer as required by the Securities and Exchange
Commission (Order No. 4-460, dated June 27, 2002).
13
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: October 23, 2002 /s/ Harry J. Silverman
-----------------------------------
Chief Financial Officer
14
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 quarterly report on Form 10-Q of Domino's, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 we 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 quarterly
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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 function):
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
quarterly 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.
October 23, 2002 /s/ David A. Brandon
- ------------------ -------------------------
Date David A. Brandon
Chief Executive Officer
15
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 quarterly report on Form 10-Q of Domino's, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 we 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 quarterly
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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 function):
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
quarterly 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.
October 23, 2002 /s/ Harry J. Silverman
- ------------------ -------------------------
Date Harry J. Silverman
Chief Financial Officer
16