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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2000
-----------------
OR
[_] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File No. 333-74797
DOMINO'S, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 38-3025165
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
30 Frank Lloyd Wright Drive
Ann Arbor, Michigan 48106
(Address of principal executive offices)
(734) 930-3030
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: [_]
The aggregate market value of the voting stock held by non-affiliates is zero.
As of March 15, 2001, there were 10 shares of the registrant's common stock
outstanding.
Part I
Item 1. Business.
Domino's, Inc. (referred to as "the Company", "Domino's", or in the
first person notations of "we", "us" and "our"), was incorporated under the laws
of the State of Delaware in 1991. We operate and franchise pizza delivery and
carry-out restaurants under the Domino's Pizza(R) trademark. We operate through
a worldwide network of nearly 7,000 franchise and Company-owned stores located
throughout the United States and 64 international markets and regional
distribution centers located in the United States. We generated system-wide
sales of approximately $3.5 billion for the fiscal year ended December 31, 2000.
System-wide sales by our domestic franchise and Company-owned stores accounted
for approximately 26% of the United States pizza delivery market in 2000.
Domino's is the leading pizza delivery company in the world.
We offer a focused menu of high quality, value priced pizza with three
types of crust (Hand-Tossed, Thin Crust and Deep Dish), along with buffalo
wings, cheesy bread, cinnamon sticks and bread sticks. Our hand-tossed pizza is
made from fresh dough produced in our regional distribution centers. We prepare
every pizza using real cheese, pizza sauce made from fresh tomatoes and a choice
of high quality meat and vegetable toppings in generous portions. Our focused
menu and use of premium ingredients enable us to consistently and efficiently
produce high quality pizza.
Over the 40 years since our founding, we have developed a simple,
cost-efficient model. We offer a limited menu, our stores are designed for
delivery and carry-out and we do not generally offer dine-in service. As a
result, our stores require relatively small, lower rent locations and limited
capital expenditures. Outside the United States, we generally follow the same
operating model with some adaptations to local eating habits and consumer
preferences. Our simple operating model helps to maintain consistent food
quality and minimizes store expenses and capital commitments.
Domino's operates three business segments:
. Domestic Stores, consisting of:
---------------
Corporate operations, which operates our domestic network of
626 Company-owned stores;
Franchise operations, which oversees our domestic network of
4,192 franchise stores; and
. Distribution, which operates our 18 regional distribution centers
------------
and one equipment and supply distribution center that distribute
food, equipment and supplies to our domestic stores and equipment
to our international stores; and
. International, which oversees our network of 2,157 franchise
-------------
stores in 64 international markets, including Alaska, Hawaii,
Puerto Rico, the United States Virgin Islands and Guam, and
operates two Company-owned stores in France; International also
distributes food to stores from distribution centers in Alaska,
Hawaii, Canada and France.
Industry Overview
The United States pizza market had sales of approximately $24.7 billion
in 2000. This market has three segments: dine-in, carry-out and delivery. We
focus on the delivery segment, which accounted for approximately $7.6 billion or
approximately 31% of the total United States pizza market in 2000. Pizza
delivery has been the fastest growing segment of this market, growing at a
compound annual rate of 9.3% between 1997 and 2000, as compared to 5.1% for the
dine-in segment and 4.9% for the carry-out segment over the same period.
Domestic pizza delivery sales have also shown long-term, stable growth.
From 1993 through 2000, pizza delivery sales in the United States grew at a
compound annual rate of 7.8%. Even in the recessionary period during 1990 and
1991, pizza delivery sales in the United States grew at a compound annual rate
of 2.5%.
1
We believe that the growth and stability of the pizza delivery market
will persist as a result of several continuing demographic factors. In
particular, we believe that longer work schedules and the increasing prevalence
of dual career families have led to rapid growth in the demand for delivered
food. We believe that delivered pizza is well positioned to capitalize on these
trends as other food products have difficulty matching the combination of value,
consistency, convenience and timely delivery of pizza.
Competitive Strengths
Leading Market Position. With system-wide sales accounting for
approximately 26% of the United States pizza delivery market in 2000, Domino's
is the leading pizza delivery company in the United States. Outside the United
States, we generally are the market share leaders or are a strong number two in
the key markets where we compete. Our leadership positions in these key markets
and our strong global presence provide significant cost and marketing advantages
relative to our delivery competitors.
Strong Brand Equity. Our brand name is widely recognized by consumers
in the United States as the leader in pizza delivery. Over the past five years,
Domino's and its franchisees have invested an estimated $1.1 billion on
national, market level and local advertising in the United States. We continue
to reinforce the strength of our brand name recognition with extensive
advertising through national, market level and local television, print and
direct mail campaigns. Domino's Pizza is one of Ad Age's "100 Megabrands," a
list which includes other prominent brands such as Coke(R), Campbell's(R),
Kodak(R) and Wrigley(R).
Focused and Cost-efficient Operating System. We have focused on pizza
delivery since our founding in 1960. Over this time, we have developed a simple,
cost-efficient operating system for producing a streamlined menu offering and
delivery system. Our limited menu, efficient food production processes supported
by our distribution system and extensive employee training programs allow us to
produce our pizza in approximately ten minutes. The simplicity and efficiency of
our store operations gives us significant advantages over competitors that also
participate significantly in the carry-out or dine-in segments of the pizza
market and, as a result, have more complex operations. Consequently, we believe
these competitors have a difficult time matching Domino's value, quality and
consistency in the delivery segment.
Minimal Capital Requirements. We have minimal capital expenditure and
working capital requirements. Our capital expenditures are low because we focus
on delivery and because our franchisees fund all capital expenditures for their
stores. Since our stores do not generally offer dine-in service, they do not
require expensive restaurant facilities, are relatively small (1,000-1,300
square feet) and are inexpensive to build and furnish as compared to other quick
service restaurant ("QSR") establishments. A new Domino's store typically
requires $125,000 to $250,000 in initial capital, far less than the typical
establishments of many of our major competitors. Because approximately 87% of
our domestic stores are franchised, our share of system-wide capital
expenditures is small. In addition, Domino's requires minimal working capital as
we collect more than 97% of our royalties from domestic franchisees within three
weeks of when the royalty is generated, collect approximately 95% of
Distribution receivables within 15 days of the related sale and generally
achieve approximately 40-50 inventory turns per year in our regional
distribution centers. We believe these minimal working capital requirements are
advantageous for funding our continued growth.
Strong Franchise Relationships. We believe that our strong
relationships with franchisees are a critical component of our success. We
support our franchisees by providing brand/sales building programs, employee
training, financial incentives and infrastructure support. We employ an
owner-operator model that results in our franchisees owning an average of three
stores, considerably fewer than most franchise models. We also believe that our
franchise owners enjoy some of the most attractive economics within the QSR
industry. Our strong cooperation with our franchisees is demonstrated by an over
97% voluntary participation rate in our domestic distribution system and strong
franchisee participation in cooperative advertising programs. We generally
experience a franchise contract renewal rate of over 99% and 140 new franchisees
entered our system in 2000. We believe our franchise system will continue to be
a growing component of our business.
2
Efficient National Distribution System. We operate a nationwide network
of 18 regional distribution centers. Each distribution center is generally
located within a 300-mile radius of the domestic stores it serves. We take
advantage of volume purchasing of food and supplies, to provide consistency,
efficiencies of scale and low cost distribution. Our distribution system has an
on-time accuracy rate of approximately 99% and allows our store managers to
focus on store operations and customer service.
Business Strategy
Our business strategy has been to grow revenues and profitability by
focusing on our delivery expertise: prompt delivery of high quality food
products, operational excellence and brand recognition through strong
promotional advertising. This strategy has resulted in our leading pizza
delivery market position and strong track record of profitable growth. We intend
to achieve further growth and strengthen our competitive position through the
continued implementation of this strategy and the following initiatives:
Focus on Core Competencies. We believe four core competencies are
crucial to our future growth: Build the Brand, Maintain High Standards, Flawless
Execution and PeopleFirst. We have streamlined our organization and structured
our operations, marketing and support services to achieve these objectives.
Capitalize on Strong Industry Dynamics. We believe that the pizza
delivery market will continue to show strong growth and stability as a result of
several positive demographic trends. These long-term trends include more dual
career families, longer work weeks and increased consumer emphasis on
convenience. In addition, we believe that the low cost and high value of
delivered pizza will support continued industry growth even during an economic
slowdown. Domino's is well positioned to take advantage of these dynamics, given
our market leadership position, strong brand name and cost-efficient operating
model.
Leverage Market Leadership Position and High Brand Awareness. Domino's
is the leading pizza delivery company in the United States. System-wide sales by
our Company-owned and domestic franchise stores accounted for approximately 26%
of the United States pizza delivery market in 2000. Our market leadership
position and strong brand give us significant marketing strength relative to
many of our competitors. We believe strong brand recognition is important in the
pizza delivery industry because consumer decisions are strongly influenced by
brand awareness. We intend to continue investments that promote our brand name
and enhance our recognition as the leader in pizza delivery.
Expand Store Base. We plan to continue expanding our base of
traditional domestic stores, enter new domestic markets with non-traditional
venues (e.g. convenience stores, stadiums, etc.) and increase our network of
international stores.
At the end of fiscal 2000, we had 160 non-traditional stores in
operation compared to 99 stores in operation at the end of fiscal 1999. Many of
these stores provide both delivery and carry-out services from convenience
stores in lightly populated markets. We intend to continue aggressively opening
these non-traditional stores.
Company History
Thomas S. Monaghan founded the Company in 1960. Prior to December 1998,
Domino's was a wholly-owned subsidiary of Domino's Pizza LLC ("Domino's Pizza")
(formerly Domino's Pizza, Inc.). During December 1998, prior to the
recapitalization described below, Domino's Pizza distributed its ownership
interest in Domino's to TISM, Inc. ("TISM"), the current parent corporation of
Domino's. TISM then contributed its ownership interest in Domino's Pizza, which
had been a wholly-owned subsidiary of TISM, to Domino's, effectively converting
Domino's from a subsidiary of Domino's Pizza to the parent of Domino's Pizza.
3
On December 21, 1998, investors, including funds associated with Bain
Capital, Inc. ("Bain Capital"), management and others (collectively, "Investor
Group"), acquired a controlling interest in Domino's through a recapitalization
of TISM that resulted in the reorganization and acquisition of Domino's by the
Investor Group from Thomas S. Monaghan and certain members of his family
(collectively, "Original Stockholders"). Specifically:
. The Investor Group invested $229.2 million to acquire common
stock of TISM, which represented approximately 93% of its
outstanding common stock immediately following the
recapitalization, and $101.1 million to acquire cumulative
preferred stock of TISM, which represented 100% of its
outstanding preferred stock immediately following the
recapitalization.
. The Original Stockholders retained a portion of their voting
common stock in TISM equal to $17.5 million, or approximately
7% of the outstanding common stock of TISM immediately
following the recapitalization. The Original Stockholders
received $903.2 million for their remaining common stock and
TISM contingent notes payable for up to an aggregate of $15
million in certain circumstances upon the sale or transfer to
non-affiliates by the Bain Capital funds of more than 50% of
their initial common stock ownership in TISM.
. Thomas S. Monaghan received $50 million for a covenant not-to-
compete.
The recapitalization and related expenses were financed in part through
the investments of the Investor Group and:
. Borrowings under a new senior credit facility with aggregate
availability of $545 million, consisting of $445 million in
term loans and a revolving credit facility of up to $100
million; and
. The sale of $275 million of 10 3/8% Senior Subordinated Notes
due in 2009.
Operations
General. We believe our operating model is differentiated from other
pizza competitors that are not focused primarily on the delivery business. Our
business model has competitive advantages, including production-oriented store
design, efficient and consistent operational processes, strategic location to
facilitate delivery service, favorable store economics and a focused menu.
Production-Oriented Store Design. Our typical store is small, occupying
approximately 1,000 to 1,300 square feet, and is designed with a focus on
efficient and timely production of consistent, high-quality pizza for delivery.
Our stores are primarily production facilities and, accordingly, do not
generally have a dine-in section.
Efficient and Consistent Operational Processes. Each store executes an
operational process which includes order taking, pizza preparation, cooking (via
automated, conveyor-driven ovens), boxing and delivery. The entire order taking
and pizza production process is designed for completion in approximately ten
minutes to allow sufficient time for safe delivery generally within 25 to 30
minutes of ordering. This simple and focused operational process has been
achieved through years of continuous improvement, resulting in a high level of
efficiency.
Strategic Locations. We locate our stores strategically to facilitate
quality delivery service to our customers. The majority of our stores are
located in populated areas in or adjacent to large or mid-size cities, on or
near college campuses or military bases. The majority of our stores serve
approximately 5,000 to 15,000 addresses. We use geographic information software,
which incorporates variables such as household count, traffic volumes,
competitor locations, household demographics and visibility, to evaluate and
identify potential store locations.
4
Favorable Store Economics. Because our stores do not generally offer
dine-in service or rely heavily on carry-out, the stores typically do not
require expensive real estate, are relatively small, and are inexpensive to
build-out and furnish as compared to other QSR establishments. A new Domino's
store typically requires only $125,000 to $250,000 in initial capital, far less
than many other QSR establishments. Our stores also benefit from lower
maintenance costs as store assets have long lives and updates are not frequently
required.
Focused Menu. We maintain a focused menu that is designed to present an
attractive, high quality offering to customers, while minimizing errors in the
order taking and food preparation process and expediting safe delivery. Our
basic menu has three simple components: pizza size, pizza type and pizza
toppings. Most stores carry two sizes of traditional Hand-Tossed, Thin Crust and
Deep Dish pizza. The typical store also offers bread sticks, cheesy bread,
cinnamon sticks, Coca-Cola(R) soft drink products and buffalo wings. We also
occasionally offer new products on a promotional basis. We believe that our
focused menu creates a strong identity among consumers, improves operating
efficiency and maintains food quality and consistency.
Divisional Overview
General. We operate three business segments: (i) Domestic Stores,
consisting of Corporate operations, which operates our network of 626
Company-owned stores, and Franchise operations, which oversees our domestic
network of 4,192 franchise stores; (ii) Distribution, which operates 18 regional
food distribution centers and one equipment distribution center supplying food,
equipment and supplies to our domestic stores and equipment to our international
stores; and (iii) International, which oversees our network of 2,157
international franchise stores in 64 international markets including Alaska,
Hawaii, Puerto Rico, the United States Virgin Islands and Guam, and operates our
two Company-owned stores in France. International also distributes food to
stores from distribution centers in Alaska, Hawaii, Canada and France.
Domestic Stores. Our network of Company-owned stores plays an important
strategic role in our predominately franchised system. In addition to generating
significant revenues and profits, we utilize our Company-owned stores as a forum
for training new store managers and prospective franchisees, and as a test site
for new products and promotions and store operational improvements. We also
believe that our Company-owned stores add economies of scale for advertising,
marketing and other fixed costs traditionally borne by franchisees. Corporate
operations is divided into two geographic regions and is managed through 13
field offices in the contiguous United States.
Our domestic franchises are operated by highly qualified entrepreneurs
who own and operate an average of three stores. Our principal sources of revenue
from domestic franchise store operations are royalty payments based on store
sales and, to a much lesser extent, fees for store openings and transfers.
Our domestic franchises are currently managed through five regional
offices located in Dallas, Texas, Atlanta, Georgia, Santa Ana, California,
Linthicum, Maryland and Ann Arbor, Michigan. The regional offices provide
training, financial analysis, store development, store operational audits and
marketing services for our franchisees. We maintain a close relationship and
direct link with our franchise stores through regional franchise teams, an array
of computer-based training materials that ensure franchise stores operate in
compliance with specified standards, and franchise advisory groups that
facilitate communications between us and our franchisees.
Distribution. Distribution operates distribution centers that purchase,
receive, store and deliver uniform, high-quality pizza-related food products,
supplies and equipment to domestic stores. Each regional food distribution
center serves an average of 268 stores, generally located within a 300-mile
radius.
Distribution services all of our domestic Company-owned stores and over
97% of our domestic franchise stores. We believe that this participation rate is
particularly impressive and reflective of our world-class distribution centers
given the fact that our domestic franchisees have the option of purchasing food,
supply and equipment from approved independent suppliers. Distribution supplies
products ranging from fresh dough, cheese and basic food items to pizza boxes
and cleaning supplies. Distribution drivers generally unload supplies and stock
store shelves after hours, thereby minimizing disruption of store operations
during peak hours. We believe that franchisees choose to obtain supplies from us
because we provide the most efficient, convenient and cost-effective
alternative.
5
Distribution offers a profit-sharing arrangement to stores that
purchase 100% of their food and supplies from Distribution. All of our domestic
Company-owned stores and substantially all domestic franchise stores buying from
Distribution participate in our profit-sharing program. We believe these
arrangements strengthen our ties with these franchisees, secure a stable source
of revenue and profits for the Company and provide incentives for franchisees to
work closely with us to reduce costs. These profit-sharing arrangements provide
Company-owned stores and participating franchisees with approximately 50% of
their regional distribution center's pre-tax profits. Distribution paid out
approximately $32.0 million to franchisees participating in the profit-sharing
program in 2000.
Distribution's information systems are an integral part of its superior
customer service. Distribution employs routing strategies to maximize on-time
deliveries, utilizing software to determine store routes on a daily basis for
optimal efficiency. Through our strategic distribution center locations and
proven routing systems, we achieved on-time delivery rates of approximately 99%
in 2000.
International. International oversees our network of 2,157 stores in 64
international markets, including Alaska, Hawaii, Puerto Rico, the United States
Virgin Islands and Guam, and operates our two Company-owned stores in France.
We have over 400 franchise stores in Mexico, more than 200 franchise
stores in both Canada and the United Kingdom and over 100 franchise stores in
each of Japan, Australia, South Korea and Taiwan. The principal sources of
revenues from international operations are royalty payments based on sales from
franchisees and, to a lesser extent, food sales to franchisees and fees from
master franchise agreements and store openings.
We generally grant international franchises through master franchise
agreements to entities that have knowledge of the local markets. These master
franchise agreements generally grant the franchisee exclusive rights to develop
or sub-franchise stores and distribution centers in a particular geographic area
and contain growth clauses requiring franchisees to open a minimum number of
stores within a specified period. In a small number of countries, we franchise
directly to individual store operators.
Franchise Program
General. The success of our unique franchise formula, together with the
relatively low initial capital investment required to open a franchise store,
has enabled us to attract a large number of highly motivated entrepreneurs as
franchisees. We consider franchisees to be a vital part of our continued growth
and believe our relationships with franchisees are excellent.
Domestic Franchisees. We maintain the strength of our franchise store
base by seeking franchisees who are willing to commit themselves to operating
franchise stores and by applying rigorous standards to prospective franchisees.
Specifically, we generally require prospective domestic franchisees to manage a
store for at least one year before being granted a franchise. This enables us to
observe the operational and financial performance of domestic franchisees prior
to entering into a long-term contract. We also restrict the ability of domestic
franchisees to become involved in outside business investments, which focuses
the franchisees on operating their stores. We believe these standards are unique
to the franchise industry and result in highly qualified and focused store
operators, while helping to maintain the strength of the Domino's Pizza brand.
We enter into franchise agreements with domestic franchisees under
which the franchisee is granted the right to operate a store for a term of ten
years, with an option to renew for an additional ten years. Under the current
standard franchise agreement, we assign an exclusive area of primary
responsibility to each franchise store. During the term of the franchise
agreement, the franchisee is generally required to pay a 5.5% royalty fee on
sales, subject, in certain instances, to lower rates based on area development
agreements, sales initiatives and new store incentives. We have the contractual
right, subject to state law, to terminate a franchise agreement for a variety of
reasons, including, but not limited to, a franchisee's failure to make payments
when due or failure to adhere to specified company policies and standards.
6
International Franchisees. The majority of franchisees outside of the
contiguous United States are master franchisees with franchise and distribution
rights for entire regions or countries. Prospective candidates are required to
possess or have access to local market knowledge required to establish and
develop Domino's Pizza stores and a distribution system. The local market
knowledge focuses on the ability to identify and access targeted real estate
sites along with expertise in local customs, culture and laws. We also encourage
our candidates to have access to sufficient capital to meet growth and
development plans.
We enter into master franchise agreements with our international
franchisees under which the master franchisee may open and operate franchise
stores or, under specified conditions, enter into sub-franchise agreements for a
term of ten to twenty years, with an option to renew for an additional ten year
term. The master franchisee is generally required to pay an initial, one-time
franchisee fee, as well as an additional franchise fee upon the opening of each
new store. In addition, the master franchisee is required to pay a continuing
royalty fee as a percentage of sales, which also varies.
Franchise Store Development. We furnish each domestic franchisee with
assistance in selecting sites, developing stores and conforming to the physical
specifications for typical stores. Each domestic franchisee is responsible for
selecting the location for a store but must obtain approval for store design and
location based on accessibility and visibility of the site and targeted
demographic factors, including population density and traffic. We provide design
plans, fixtures and equipment for most franchise locations at competitive
prices.
Franchisee Financing Programs. We have an established internal
financing program to assist franchisees in opening stores. We generally provide
financing of up to $100,000 for the purpose of opening new stores to franchisees
who are creditworthy and have adequate working capital. The franchisees may use
the funds to purchase equipment, signage, leasehold improvements or supplies,
with the condition that leasehold improvements cannot exceed $35,000. We have
also historically offered to finance the sale of certain Company-owned stores to
domestic franchisees and finance the implementation of new products and programs
such as the 1998 rollout of our HeatWave(R) hot bag systems. In addition, we
have notes outstanding to various international franchisees. At December 31,
2000, loans outstanding under our franchisee financing programs totaled $19.0
million.
Franchise Training and Support. Training store managers and employees
is a critical component of our success. We require all domestic franchisees to
complete initial and ongoing training programs provided by us. In addition,
under the standard domestic franchise agreement, domestic franchisees are
required to implement training programs for their store employees. We assist our
domestic and international franchisees by providing training services for store
managers and employees, including computer-based training materials,
comprehensive operations manuals and franchise development classes.
Franchise Operations. We maintain strict control over franchise
operations to protect our brand and image. All franchisees are required to
operate their stores in compliance with written policies, standards and
specifications, including matters such as menu items, ingredients, materials,
supplies, services, furnishings, decor and signs. Each franchisee has full
discretion to determine the product prices to be charged to its customers. We
also provide support to our franchisees, including training, marketing
assistance and consultation to franchisees who experience financial or
operational difficulties. We have established several advisory boards through
which franchisees can contribute to corporate level initiatives.
Domino's Image 2000 Campaign
We have implemented a relocation and reimaging campaign called Domino's
Image 2000. The relocation program is aimed at increasing store sales and market
share through improved brand visibility and maximization of carry-out sales. It
involves relocating selected stores, upgrading store interiors, adding new
signage to draw attention to the store and providing contemporary uniforms for
employees. If a store is already in a strong location, the signage and carry-out
areas are updated. We believe that average per Company-owned store capital
expenditures for the reimaging campaign will approximate $30,000. The capital
expenditures for relocating a Company-owned store averages approximately
$170,000 to $190,000 per store.
7
Marketing Operations
We coordinate the domestic advertising and marketing efforts at the
national and cooperative market levels. We require Company-owned and domestic
franchise stores to contribute 3% of their net sales to fund national marketing
and advertising campaigns. The fund is used primarily to purchase television
advertising, but also supports market research, field communications, commercial
production, talent payments and other activities supporting the Domino's Pizza
brand. We can require stores to additionally contribute a minimum of 1% up to a
maximum of 3% of net sales to market level media campaigns. Franchise store
contributions to market level media campaigns currently average approximately
2.3% of net sales in our top 40 markets.
We estimate that Company-owned and domestic franchise stores also spend
an additional 3% to 5% of their net sales on local store marketing, including
targeted database mailings, saturation print mailings to households in a target
area and community involvement through school and civic organizations. We offer
a national print program which provides cost-effective print materials as an
incentive for franchisees to use marketing material prepared by us and which
reinforces our national branding strategy.
By communicating common brand direction at the national, market and
local market levels, we create a consistent marketing message to our customers.
Over the past five years, we estimate that we and our domestic franchisees have
invested approximately $1.1 billion in system-wide advertising at the national,
market and local community levels.
Suppliers
We believe that the length and quality of our relationships with
suppliers provides us with priority service at competitive prices. We have
maintained active relationships of over 15 years with more than half of our
major suppliers. As a result, we have typically relied on oral rather than
written contracts with our suppliers. In addition, we believe that two factors
have been critical to maintaining long-lasting relationships and keeping our
purchasing costs low. First, we are one of the largest volume purchasers of
pizza-related products such as flour, cheese, sauce and pizza boxes, which gives
us the ability to maximize leverage with our suppliers. Second, in four of our
five key product categories (meats, dough products, boxes and sauce), we
generally retain active purchasing relationships with at least two separate
suppliers. This purchasing strategy allows us to shift purchases among suppliers
based on quality, price and timeliness of delivery. For the year ended December
31, 2000, our cheese supplier accounted for approximately 33% of our
distribution cost of sales. Prices charged to us by our suppliers are subject to
fluctuation and we have historically been able to pass increased costs onto our
Distribution customers. There can be no assurances that we will be able to
continue this in the future.
Competition
The pizza delivery market is highly fragmented. In this market, we
compete against regional and local companies, as well as three national chains:
Pizza Hut(R), Papa John's(R) and Little Caesar's(R). We generally compete on the
basis of product quality, location, delivery time, service and price. We also
compete on a broader scale with other international, national, regional and
local restaurants and QSR establishments. The overall food service industry and
the QSR segment is intensely competitive with respect to product quality, price,
service, convenience and concept. The industry is often affected by changes in
consumer tastes, national, regional or local economic conditions, currency
fluctuations to the extent international operations are involved, demographic
trends and disposable purchasing power. We compete within the food service
industry and the QSR segment not only for customers, but also for management and
hourly personnel, suitable real estate sites and qualified franchisees.
Government Regulation
We are subject to various federal, state and local laws affecting the
operation of our business, as are our franchisees. Each store is subject to
licensing and regulation by a number of governmental authorities, which include
zoning, health, safety, sanitation, building and fire agencies in the
jurisdiction in which the store is located. Difficulties in obtaining, or the
failure to obtain, required licenses or approvals can delay or prevent the
opening of a new store in a particular area or cause an existing store to cease
operations. Our distribution facilities are licensed and subject to regulation
by federal, state and local health and fire codes.
8
We are subject to the rules and regulations of the Federal Trade
Commission (FTC) and various state laws regulating the offer and sale of
franchises. The FTC and various state laws require that we furnish a franchise
offering circular containing certain information to prospective franchisees. A
number of states regulate the sale of franchises and require registration of the
franchise offering circular with state authorities and the delivery of a
franchise offering circular to prospective franchisees. We are operating under
exemptions from registration in several states based on net worth and
experience. Substantive state laws that regulate the franchisor-franchisee
relationship presently exist in a substantial number of states, and bills have
been introduced in Congress from time to time which would provide for federal
regulation of the franchisor-franchisee relationship. The state laws often
limit, among other things, the duration and scope of non-competition provisions,
the ability of a franchisor to terminate or refuse to renew a franchise and the
ability of a franchisor to designate sources of supply.
Internationally, our franchise stores are subject to national and local
laws and regulations which often are similar to those affecting our domestic
stores, including laws and regulations concerning franchises, labor, health,
sanitation and safety. Our international franchise stores are also often subject
to tariffs and regulations on imported commodities and equipment and laws
regulating foreign investment.
Trademarks
Domino's has several registered trademarks and service marks and
believes that the Domino's Pizza mark has significant value and is materially
important to our business. Our policy is to pursue registration of our important
trademarks whenever possible and to vigorously oppose the infringement of any of
our registered or unregistered trademarks. Domino's licenses the use of its
registered marks to franchisees through their franchise agreements.
Working Capital
Information about the Company's working capital is included in
Management's Discussion and Analysis of Financial Condition and Results of
Operation in Part II, Item 7., page 16.
Customers
The Company's business is not dependent upon a single customer or small
group of customers. No customer accounted for more than 10% of total
consolidated revenues in 2000, 1999 or 1998.
Seasonal Operations
The Company's business is not typically seasonal.
Backlog Orders
Company-owned stores and distribution centers have no backlog orders as
of December 31, 2000.
Government Contracts
No material portion of the Company's business is subject to
renegotiation of profits or termination of contracts or subcontracts at the
election of the United States government.
Research and Development
The Company operates research and product development facilities at its
corporate headquarters in Ann Arbor, Michigan. The Company incurred research and
development expense of approximately $1,009,000, $788,000 and $620,000 in 2000,
1999 and 1998, respectively.
9
Environmental Matters
The Company is not aware of any Federal, state or local environmental
laws or regulations that will materially affect its earnings or competitive
position, or result in material capital expenditures. However, we cannot predict
the effect of possible future environmental legislation or regulations. During
2000, there were no material capital expenditures for environmental control
facilities and no such material expenditures are expected.
Employees
As of December 31, 2000, we had approximately 14,600 employees,
excluding employees of franchise-operated stores. None of our domestic employees
are represented by unions. We consider our relationships with our employees to
be excellent.
Financial Information about Geographic Areas
Financial information about international and United States markets is
incorporated herein by reference from Selected Financial Data, Management's
Discussion and Analysis of Financial Condition and Results of Operation and the
consolidated financial statements and related footnotes in Part II, Item 6.,
pages 11 through 12, Item 7. pages 13 through 16 and Item 8. pages 19 through
46, respectively of this Form 10-K.
Item 2. Properties.
We lease approximately 185,000 square feet for our executive offices,
world headquarters and distribution facility located in Ann Arbor, Michigan
under an operating lease with Domino's Farms Office Park Limited Partnership, a
related party, for a term of five years commencing December 21, 1998, with an
option to renew for an additional five-year term.
We own facilities at fourteen Company-owned stores and five
distribution facilities. We also own and lease seven store facilities to
domestic franchisees. There are no mortgages on any of these facilities other
than mortgages on the distribution facilities granted in connection with our
senior credit facilities. All other Company-owned stores and facilities are
leased by us, typically with five-year leases with one or two five-year renewal
options. All other franchise stores are leased or owned directly by the
franchisees.
Item 3. Legal Proceedings.
The Company is a party to lawsuits, revenue agent reviews by taxing
authorities and legal proceedings, of which the majority involve workers'
compensation, employment practices liability, general liability, automobile and
franchisee claims arising in the ordinary course of business. In the opinion of
the Company's management, these matters, individually and in the aggregate, will
not have a material adverse effect on the financial condition and results of
operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
10
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
As of March 15, 2001, Domino's had 3,000 authorized shares of common
stock, par value $0.01 per share, of which 10 were issued and outstanding and
held by TISM. There is no established public trading market for Domino's common
stock. Domino's ability to pay dividends is limited under the indenture related
to the Senior Subordinated Notes.
Item 6. Selected Financial Data.
The following selected financial data, as of and for the fiscal years
ended December 31, 2000, January 2, 2000, January 3, 1999 (consists of 53
weeks), December 28, 1997 and December 29, 1996, is derived from the audited
consolidated financial statements of Domino's, Inc. and subsidiaries except for
the historical balance sheet data as of December 29, 1996 which was derived from
unaudited consolidated financial statements of Domino's, Inc. and subsidiaries
which, in the opinion of management, include all adjustments necessary for a
fair presentation. The data should be read in conjunction with, and is qualified
by reference to, Management's Discussion and Analysis of Financial Condition and
Results of Operation.
(In thousands) 2000 1999 (a) 1998 1997 1996
---- -------- ---- ---- ----
System-wide Sales (unaudited):
Domestic $2,647,221 $2,563,311 $2,505,991 $2,294,224 $2,110,324
International 896,254 800,989 717,694 633,857 524,496
---------- ---------- ---------- ---------- ----------
$3,543,475 $3,364,300 $3,223,685 $2,928,081 $2,634,820
========== ========== ========== ========== ==========
Operating Data:
Revenues $1,166,080 $1,156,639 $1,176,778 $1,044,790 $969,937
Income from operations 112,354 75,628 70,269 65,004 56,501
Income before provision (benefit)
for income taxes and
extraordinary item 41,098 2,504 63,948 61,471 50,611
Provision (benefit) for income
taxes (b) 16,073 419 (12,928) 366 30,884
Extraordinary gain on debt
extinguishment, net of income
taxes 181 - - - -
Net income 25,206 2,085 76,876 61,105 19,727
Other Financial Data:
EBITDA (c) $147,296 $131,055 $94,962 $83,140 $72,340
Net cash provided by operating
activities 57,602 63,268 64,731 73,408 53,225
Depreciation and other non-cash
items 34,942 51,427 24,693 18,136 15,839
Capital expenditures 37,903 27,882 48,359 31,625 15,472
Balance Sheet Data:
Total assets $ 369,629 $ 381,130 $ 387,891 $ 212,978 $ 155,454
Long-term debt 664,592 696,132 720,480 36,438 46,224
Total debt 686,074 717,570 728,126 44,408 70,067
Stockholder's equity (deficit) (454,807) (478,966) (483,775) 26,118 (34,868)
11
(a) In 1999, the Company recognized $7.6 million in restructuring charges
comprised of staff reduction costs of $6.3 million and exit cost liabilities
of 1.3 million.
(b) On December 30, 1996, the Company elected to be an "S" Corporation for
federal income tax purposes. The Company reverted to "C" Corporation status
effective December 21, 1998. On a pro forma basis, had the Company been a
"C" Corporation throughout this period, income tax expense would have been
higher by the following amounts: fiscal year ended December 28, 1997 --
$25.4 million; fiscal year ended January 3, 1999 -- $36.8 million.
(c) EBITDA represents earnings before interest, taxes, depreciation,
amortization, gain (loss) on sale of assets and, in 1999, the legal
settlement expense indemnified by a TISM stockholder. EBITDA is presented
because we utilize it extensively in internal management reporting to
evaluate our business segments, we believe it is frequently used by security
analysts in the evaluation of companies and is an important financial
measure in our indenture and credit agreements. However, EBITDA should not
be considered as an alternative to cash flow from operating activities as a
measure of liquidity or as an alternative to net income as an indicator of
our operating performance or any other measure of performance in accordance
with generally accepted accounting principles.
The following table sets forth a reconciliation of income from operations to
EBITDA:
-------------------------------------------------------------
Fiscal Year
-------------------------------------------------------------
Dollars in Thousands 2000 1999 1998 1997 1996
-------- -------- --------- -------- --------
Income from operations........................... $112,354 $ 75,628 $70,269 $ 65,004 $ 56,501
Loss (gain) on sale of assets ................... 1,338 (316) 1,570 1,197 353
Legal settlement expense indemnified by a TISM
stockholder.................................. - 4,000 - - -
Depreciation and amortization.................... 33,604 51,743 23,123 16,939 15,486
-------- -------- --------- -------- --------
EBITDA........................................... $147,296 $131,055 $ 94,962 $ 83,140 $ 72,340
======== ======== ========= ======== ========
12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
The following discussion and analysis of financial condition and
results of operation relates, in part, to periods prior to TISM's
recapitalization in December 1998. As a result of the recapitalization, the
Company entered into new financing arrangements under which the Company incurred
significant indebtedness. The Company also has a different capital structure,
and changes in ownership and executive leadership team composition subsequent to
the recapitalization. Accordingly, the results of operations for the year ended
January 3, 1999, which consists of 53 weeks, will not necessarily be comparable
to the years ended January 2, 2000 and December 31, 2000, respectively.
2000 Compared to 1999
Revenues
- --------
General. Revenues primarily 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 0.8% to $1.166 billion in 2000, from $1.157 billion in
1999. This increase in total revenues is due primarily to increased
international and domestic franchise revenues. These results are more fully
described below.
Domestic Stores
- ---------------
Corporate Stores. Revenues from corporate store operations decreased slightly
to $378.0 million in 2000, from $378.1 million in 1999.
This slight decrease is due primarily to a decrease in same store sales offset
in part by an increase in the average number of Company-owned stores open during
2000. Same store sales for Company-owned stores decreased 0.9% in 2000 compared
to 1999. The number of Company-owned stores was 626 as of December 31, 2000, as
compared to 656 as of January 2, 2000. The average number of Company-owned
stores open during 2000 increased by 2 stores compared to 1999.
Domestic Franchise. Revenues from domestic franchise operations increased 3.3%
to $120.6 million in 2000, from $116.7 million in 1999.
This increase is due primarily to an increase in the average number of domestic
franchise stores open during 2000 and an increase in same store sales. Same
store sales for domestic franchise stores increased 0.1% in 2000 compared to
1999. The number of domestic franchise stores was 4,192 as of December 31, 2000,
as compared to 3,973 as of January 2, 2000. The average number of domestic
franchise stores open during 2000 increased by 165 stores compared to 1999.
Domestic Distribution
- ---------------------
Revenues from domestic distribution operations increased 0.1% to $604.1 million
in 2000, from $603.4 million in 1999.
This increase is due primarily to an increase in food volumes related to
increased domestic franchise same store sales and increased domestic franchise
store counts, offset in part by a market decrease in cheese prices and an
increased demand for lower-priced fresh dough.
International
- -------------
Revenues from international operations increased 8.6% to $63.4 million in 2000,
from $58.4 million in 1999.
This increase is due primarily to an increase in the average number of
international franchise stores open during 2000 and an increase in same store
sales. On a constant dollar basis, same store sales increased 3.7% in 2000
compared to 1999. The number of international stores was 2,159 as of December
31, 2000, as compared to 1,930 as of January 2, 2000. The average number of
international stores open during 2000 increased by 243 stores compared to 1999.
13
Operating Expenses
- ------------------
Cost of sales increased 0.9% to $862.2 million in 2000, from $854.2 million in
1999. Gross profit increased 0.5% to $303.9 million in 2000, from $302.5 million
in 1999.
This increase in gross profit is due primarily to an increase in total revenues
and lower food costs in part due to an increased demand for higher-margin fresh
dough. This increase was offset in part by increases in Company-owned store
labor and delivery expenses.
General and administrative expenses decreased 12.6% to $191.6 million in 2000,
from $219.3 million in 1999. As a percentage of total revenues, general and
administrative expenses decreased 2.6% to 16.4% in 2000, from 19.0% in 1999.
These decreases are due primarily to a decrease in covenant not-to-compete
amortization expense and, to a lesser extent, savings realized from our
corporate restructuring in late 1999 and a decrease in professional fees.
Covenant not-to-compete amortization expense, primarily related to the covenant
obtained as part of the recapitalization, decreased $21.9 million to $11.2
million in 2000, from $33.1 million in 1999. This decrease is due to the use of
an accelerated amortization method over the covenant's three-year term.
Provision (Benefit) for Income Taxes
- ------------------------------------
Provision (benefit) for income taxes increased $15.7 million to $16.1 million in
2000, from $0.4 million in 1999. This increase is due primarily to a significant
increase in pre-tax income in 2000 compared to 1999.
1999 Compared to 1998
Revenues
- --------
General. Total revenues decreased 1.7% to $1.157 billion in 1999, from $1.177
billion in 1998. This decrease in total revenues is due primarily to the 1998
store rationalization program and the one additional week in fiscal 1998 as
compared to fiscal 1999, offset in part by increased domestic franchise and
domestic distribution revenues.
Domestic Stores
- ---------------
Corporate Stores. Revenues from corporate store operations decreased 7.7% to
$378.1 million in 1999, from $409.4 million in 1998.
This decrease is due primarily to a reduction in the average number of
Company-owned stores open during 1999, due primarily to the 1998 store
rationalization program, offset in part by an increase in same store sales. The
Company closed or sold to franchisees 142 under-performing Company owned-stores
during the fourth quarter of 1998 under the 1998 store rationalization program.
Same store sales for Company-owned stores increased 1.7% in 1999 compared to
1998. The number of Company-owned stores was 656 as of January 2, 2000, as
compared to 642 as of January 3, 1999. The average number of Company-owned
stores open during 1999 decreased by 91 stores compared to 1998.
Domestic Franchise. Revenues from domestic franchise operations increased 4.0%
to $116.7 million in 1999, from $112.2 million in 1998.
This increase is due primarily to an increase in the average number of domestic
franchise stores open during 1999, in part resulting from the 1998 store
rationalization program, and an increase in same store sales. Same store sales
for domestic franchise stores increased 2.9% in 1999 compared to 1998. The
number of domestic franchise stores was 3,973 as of January 2, 2000, as compared
to 3,847 as of January 3, 1999. The average number of domestic franchise stores
open during 1999 increased by 151 stores compared to 1998.
Domestic Distribution
- ---------------------
Revenues from domestic distribution operations increased 0.7% to $603.4 million
in 1999, from $599.1 million in 1998.
14
This increase is due primarily to an increase in food volumes related to
increased domestic franchise same store sales and increased domestic franchise
store counts, offset in part by a $7.0 million decrease in equipment sales
during 1999 and an increased demand for lower-priced fresh dough. During the
first half of 1998, equipment and supply sales to franchisees were at high
levels due primarily to the roll-out of the Domino's HeatWave hot bag systems.
International
- -------------
Revenues from international operations increased 4.2% to $58.4 million in 1999,
from $56.0 million in 1998.
This increase is due primarily to an increase in the average number of
international franchise stores open during 1999, the addition of three
Company-owned stores in France and an increase in same store sales. On a
constant dollar basis, same store sales increased 3.6% in 1999 compared to 1998.
The number of international stores was 1,930 as of January 2, 2000, as compared
to 1,730 at January 3, 1999. The average number of international stores open
during 1999 increased by 182 stores compared to 1998.
Operating Expenses
- ------------------
Cost of sales decreased 4.1% to $854.2 million in 1999, from $890.8 million in
1998. Gross profit increased 5.8% to $302.5 in 1999, from $286.0 in 1998.
This increase in gross profit is due primarily to reductions in Company-owned
store food, labor and insurance costs that resulted mainly from the elimination
of under-performing stores through the 1998 store rationalization program as
well as improved shift scheduling, minimized overtime, reduced insurance
premiums and favorable product mix and pricing. In addition, the cost of sales
component of depreciation and amortization expense decreased due to the
modification of estimated useful lives for several fixed asset categories
effective in the first quarter of 1999.
General and administrative expenses increased 1.6% to $219.3 million in 1999,
from $215.7 million in 1998. As a percentage of total revenues, general and
administrative expenses increased 0.7% to 19.0% in 1999, from 18.3% in 1998.
These increases are due primarily to a $5.0 million litigation settlement
expense incurred in 1999 and increased covenant not-to-compete amortization
expense of $32.5 million resulting from a covenant not-to-compete obtained as
part of the recapitalization. These increases were substantially offset by
decreases in related party expenses of $21.0 million, comprised primarily of
lease payments and charitable contributions, the elimination of a field office
as part of our 1998 store rationalization program and costs associated with the
additional week included in fiscal 1998.
Restructuring
- -------------
In 1999, the Company recognized approximately $7.6 million in restructuring
charges comprised of staff reduction costs of $6.3 million and exit cost
liabilities of $1.3 million. The staff reduction costs were incurred in
connection with the reduction of 90 corporate and administrative employees. The
exit costs were recorded in connection with the planned closure and relocation
of certain Company-owned stores.
Interest Expense
- ----------------
Interest expense increased approximately $67.0 million to $74.1 million in 1999,
from $7.1 million in 1998. This increase is due primarily to increased interest
costs due to significantly increased indebtedness incurred as part of the
recapitalization and amortization of related deferred financing costs.
Provision (Benefit) for Income Taxes
- ------------------------------------
Provision (benefit) for income taxes increased $13.3 million to a provision of
$0.4 million in 1999, from a benefit of $12.9 million in 1998. As part of the
recapitalization, TISM and its qualifying subsidiaries (including Domino's)
converted from "S" Corporation status to "C" Corporation status for federal
income tax reporting purposes in December 1998 and established a $27.9 million
deferred tax asset, which was partially offset by the establishment of tax
reserves. The Company did not provide for Federal income taxes on income earned
during the 1998 "S" Corporation period. Additionally, in May 1999, a state court
upheld a favorable lower court tax ruling with respect to an issue that, if
decided unfavorably, could have resulted in significant additional tax cost to
the Company. As a result, during the second fiscal quarter of 1999, the Company
reversed related state tax reserves and deferred federal tax benefits that were
associated with this issue.
15
Liquidity and Capital Resources
- -------------------------------
We had negative working capital of $12.7 million and cash of $25.1 million at
December 31, 2000. Historically, we have operated with minimal positive working
capital or negative working capital primarily because our receivable collection
periods and inventory turn rates are faster than the normal payment terms on our
current liabilities. In addition, our sales are not typically seasonal, which
further limits our working capital requirements. Our primary sources of
liquidity are cash flows from operations and availability of borrowings under
our revolving credit facility. We expect to fund planned capital expenditures
and debt commitments from these sources.
As of December 31, 2000, we had $686.1 million of long-term debt, of which $21.5
million was classified as a current liability. There were no borrowings under
our $100 million revolving credit facility and letters of credit issued under
the revolving credit facility were $14.2 million. The borrowings under the
revolving credit facility are available to fund our working capital
requirements, capital expenditures and other general corporate purposes.
Cash provided by operating activities was $57.6 million and $63.3 million for
2000 and 1999, respectively. The $5.7 million decrease is due primarily to a
$18.0 million net change in operating assets and liabilities and a $18.1 million
decrease in depreciation and amortization. These decreases in cash provided by
operating activities were partially offset by an increase in net income of $23.1
million and a $4.9 million decrease in deferred income taxes.
Cash used in investing activities was $34.8 million and $26.4 million for 2000
and 1999, respectively. The $8.4 million increase is due primarily to a $10.0
million increase in purchases of property, plant and equipment. The main
components of this increase are as follows: (i) a $6.1 million increase related
to Company-owned store relocations, re-imagings and other upgrades; (ii) a $2.4
million increase related to distribution center activity; and (iii) a $1.1
million net increase in information systems spending including a $3.1 million
increase in spending on our next generation store systems project. The Company
also experienced a $3.0 million decrease in cash provided by notes receivable
repayments. These increases in cash used in investing activities were partially
offset by a $3.3 million increase in cash provided by proceeds from sales of
property, plant and equipment, including $3.1 million relating to the sale of 8
Company-owned stores to a franchisee.
Cash used in financing activities was $28.0 million and $6.9 million for 2000
and 1999, respectively. The $21.1 million increase is due primarily to an $18.0
million increase in payments made under our senior credit facility and a $10.0
million extinguishment of senior subordinated notes during 2000. These increases
in cash used in financing activities were partially offset by a $2.5 million
increase in capital contributions and a $2.6 million decrease in distributions
to TISM during 2000.
Based upon the current level of operations and anticipated growth, we believe
that the cash generated from operations and amounts available under the
revolving credit facility will be adequate to meet our anticipated debt service
requirements, capital expenditures and working capital needs for the next
several years. There can be no assurance, however, that our business will
generate sufficient cash flow from operations or that future borrowings will be
available under the senior credit facilities or otherwise to enable us to
service our indebtedness, including the senior credit facilities and the Senior
Subordinated Notes, to redeem or refinance TISM's, our Parent company,
Cumulative Preferred Stock when required or to make anticipated capital
expenditures. Our future operating performance and our ability to service or
refinance the Senior Subordinated Notes and to service, extend or refinance the
senior credit facilities will be subject to future economic conditions and to
financial, business and other factors, many of which are beyond our control.
Impact of Inflation
We believe that our results of operation are not materially impacted
upon moderate changes in the inflation rate. Inflation and changing prices did
not have a material impact on our operations in 2000, 1999 or 1998. Severe
increases in inflation, however, could affect the global and United States
economy and could have an adverse impact on our business, financial condition
and results of operation.
16
FORWARD LOOKING STATEMENTS
--------------------------
This Form 10-K contains forward looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 (the "Act"), including
information within Management's Discussion and Analysis of Financial Condition
and Results of Operation. The following cautionary statements are being made
pursuant to the provisions of the Act and with the intention of obtaining the
benefits of the "safe harbor" provisions of the Act. Although we believe that
our expectations are based on reasonable assumptions, actual results may differ
materially from those in the forward looking statements as a result of various
factors, including but not limited to, the following:
. Our ability to grow and implement cost-saving strategies
. Increases in our operating costs, including cheese, fuel and other
commodity costs and the minimum wage
. Our ability to compete domestically and internationally in our intensely
competitive industry
. Our ability to retain or replace our executive officers and other key
members of management and our ability to adequately staff our stores and
distribution centers with qualified personnel
. Our ability to pay principal and interest on our substantial debt
. Our ability to borrow in the future
. Our ability to find and/or retain suitable real estate for our stores and
distribution centers
. Adverse legislation or regulation
. Changes in consumer taste, demographic trends and traffic patterns
. Our ability to sustain or increase historical revenues and profit margins
. Continuation of certain trends and general economic conditions in the
industry
. Adequacy of insurance coverage
We do not undertake to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market Risk
- -----------
The Company is exposed to market risks primarily from interest rate changes on
our variable rate debt and foreign currency fluctuations relating to
international revenues. Management actively monitors these exposures. As a
policy, the Company does not engage in speculative transactions nor does it hold
or issue financial instruments for trading purposes.
Interest Rate Swaps
- -------------------
The Company may enter into interest rate swaps or similar instruments with the
objective of reducing our volatility in borrowing costs. In 1999, we entered
into two interest rate swap agreements (the 1999 Swap Agreements) to effectively
convert the Eurodollar interest rate component on a portion of our variable rate
debt to a fixed rate of 5.12% through December 2001. As of December 31, 2000,
the total notional amount of the 1999 Swap Agreements was $173.0 million.
Interest Rate Risk
- ------------------
The Company's variable interest expense is sensitive to changes in the general
level of interest rates. As of December 31, 2000, a portion of the Company's
debt is borrowed at Eurodollar rates plus a blended margin rate of approximately
3.2%. At December 31, 2000, the weighted average interest rate on our $247.9
million of variable interest debt was approximately 9.8%. The fair value of the
Company's debt approximates its carrying value.
The Company had total interest expense of approximately $75.2 million for the
year ended December 31, 2000. The estimated increase in interest expense from a
hypothetical 200 basis point adverse change in applicable variable interest
rates would be approximately $5.1 million.
Foreign Currency Forward Contracts
- ----------------------------------
The Company may enter into forward exchange contracts or similar instruments
with the objective of reducing fluctuations in cash flows associated with
changes in the related foreign currency rates. As of December 31, 2000, we had
no outstanding forward exchange contracts. No significant gains or losses
relating to forward exchange contracts have been recognized during fiscal 2000.
Accounting for Derivative Instruments and Hedging Activities
- ------------------------------------------------------------
The Financial Accounting Standards Board has issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities", and two related Statements
which require that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The Company adopted these Statements on January 1, 2001. Adoption of these
Statements resulted in the recognition of an approximately $2.7 million
derivative asset relating to the fair value of the Company's 1999 Swap
Agreements which the Company has designated as cash flow hedges.
18
Item 8. Financial Statements and Supplementary Data.
Report of Independent Public Accountants
To Domino's, Inc.:
We have audited the accompanying consolidated balance sheets of Domino's, Inc.
(a Delaware corporation) and subsidiaries as of December 31, 2000 and January 2,
2000, and the related consolidated statements of income, comprehensive income,
stockholder's equity (deficit) and cash flows for each of the three years in the
period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Domino's, Inc. and subsidiaries
as of December 31, 2000 and January 2, 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000 in conformity with accounting principles generally accepted in the
United States.
Detroit, Michigan, /s/ ARTHUR ANDERSEN LLP
January 30, 2001.
19
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands, except share and per share amounts)
December 31, January 2,
ASSETS 2000 2000
------ ------------ ----------
CURRENT ASSETS:
Cash $ 25,136 $ 30,278
Accounts receivable, net of reserves of $3,561 in 2000 and $2,444 in 1999 48,682 40,902
Notes receivable, net of reserves of $783 in 2000 and $288 in 1999 3,833 5,172
Inventories 19,086 18,624
Prepaid expenses and other 6,580 14,890
Deferred income taxes 9,290 10,498
-------- --------
Total current assets 112,607 120,364
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings 14,917 14,246
Leasehold and other improvements 55,100 54,538
Equipment 114,456 117,018
Construction in progress 7,366 3,548
-------- --------
191,839 189,350
Accumulated depreciation and amortization 106,526 116,287
-------- --------
Property, plant and equipment, net 85,313 73,063
-------- --------
OTHER ASSETS:
Investments in marketable securities, restricted 3,962 3,187
Notes receivable, less current portion, net of
reserves of $2,358 in 2000 and $3,249 in 1999 12,066 10,380
Deferred income taxes 71,253 73,038
Deferred financing costs, net of accumulated
amortization of $12,326 in 2000 and $6,327 in 1999 30,626 37,208
Goodwill, net of accumulated amortization of
$10,107 in 2000 and $9,217 in 1999 14,944 16,034
Covenants not-to-compete, net of accumulated
amortization of $54,223 in 2000 and $43,152 in 1999 5,851 16,970
Capitalized software, net of accumulated amortization
of $20,102 in 2000 and $14,332 in 1999 27,388 26,113
Other assets, net of accumulated amortization and
reserves of $6,245 in 2000 and $6,555 in 1999 5,619 4,773
-------- --------
Total other assets 171,709 187,703
-------- --------
Total assets $369,629 $381,130
======== ========
The accompanying notes are an integral part of these
consolidated balance sheets.
20
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Continued)
(In thousands, except share and per share amounts)
December 31, January 2,
LIABILITIES AND STOCKHOLDER'S DEFICIT 2000 2000
------------------------------------- ------------ ----------
CURRENT LIABILITIES:
Current portion of long-term debt $ 21,482 $ 21,438
Accounts payable 38,335 35,108
Accrued interest 12,922 13,643
Insurance reserves 6,793 7,152
Accrued compensation 17,977 18,068
Accrued income taxes 2,778 804
Accrued restructuring 744 3,020
Other accrued liabilities 24,281 26,875
--------- ---------
Total current liabilities 125,312 126,108
--------- ---------
LONG-TERM LIABILITIES:
Long-term debt, less current portion 664,592 696,132
Insurance reserves 9,633 15,485
Other accrued liabilities 24,899 22,371
--------- ---------
Total long-term liabilities 699,124 733,988
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S DEFICIT:
Common stock, par value $0.01 per share; 3,000
shares authorized; 10 shares issued and outstanding - -
Additional paid-in capital 120,202 120,202
Retained deficit (574,657) (599,292)
Accumulated other comprehensive income (352) 124
--------- ---------
Total stockholder's deficit (454,807) (478,966)
--------- ---------
Total liabilities and stockholder's deficit $ 369,629 $ 381,130
========= =========
The accompanying notes are an integral part of these
consolidated balance sheets.
21
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(In thousands)
For the Years Ended
-------------------------------------------------
December 31, January 2, January 3,
2000 2000 1999
------------ ---------- ----------
REVENUES:
Corporate stores $ 377,971 $ 378,081 $ 409,413
Domestic franchise royalties 120,608 116,715 112,222
Domestic distribution 604,096 603,441 599,121
International 63,405 58,402 56,022
---------- ---------- ----------
Total revenues 1,166,080 1,156,639 1,176,778
---------- ---------- ----------
OPERATING EXPENSES:
Cost of sales 862,161 854,151 890,784
General and administrative 191,565 219,277 215,725
Restructuring - 7,583 -
---------- ---------- ----------
Total operating expenses 1,053,726 1,081,011 1,106,509
---------- ---------- ----------
INCOME FROM OPERATIONS 112,354 75,628 70,269
INTEREST INCOME 3,961 992 730
INTEREST EXPENSE (75,217) (74,116) (7,051)
---------- ---------- ----------
INCOME BEFORE PROVISION (BENEFIT) FOR
INCOME TAXES AND EXTRAORDINARY ITEM 41,098 2,504 63,948
PROVISION (BENEFIT) FOR INCOME TAXES 16,073 419 (12,928)
---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 25,025 2,085 76,876
GAIN ON DEBT EXTINGUISHMENT, NET OF TAX
PROVISION OF $111 181 - -
---------- ---------- ----------
NET INCOME $ 25,206 $ 2,085 $ 76,876
========== ========== ==========
The accompanying notes are an integral part of these consolidated statements.
22
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
(In thousands)
For the Years Ended
---------------------------------------------
December 31, January 2, January 3,
2000 2000 1999
------------ ---------- ----------
NET INCOME $25,206 $2,085 $76,876
------- ------ -------
OTHER COMPREHENSIVE INCOME, BEFORE TAX:
Currency translation adjustment (147) 98 (44)
Unrealized gain on investments in marketable securities - 518 -
Reclassification adjustment for gains
included in net income (548) - (497)
------- ------ -------
(695) 616 (541)
TAX ATTRIBUTES OF ITEMS IN OTHER
COMPREHENSIVE INCOME 219 (189) 30
------- ------ -------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX (476) 427 (511)
------- ------ -------
COMPREHENSIVE INCOME $24,730 $2,512 $76,365
======= ====== =======
The accompanying notes are an integral part of these consolidated statements.
23
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
---------------------------------------------------------
(In thousands)
Accumulated Other
Comprehensive Income
------------------------------
Unrealized
Gain on
Additional Retained Currency Investments
Common Paid-in Earnings Translation in Marketable
Stock Capital (Deficit) Adjustment Securities
------ ---------- --------- ----------- -------------
BALANCE AT DECEMBER 28, 1997 $ - $ - $ 25,910 $(259) $ 467
Net income - - 76,876 - -
Capital contributions from Parent - 50,430 - - -
Distributions to Parent - - (690,688) - -
Currency translation adjustment - - - (44) -
Reclassification adjustment for
gains included in net income - - - - (467)
Recognition of deferred income taxes
as part of Recapitalization - - 54,000 - -
Reclassification of S Corporation
undistributed earnings upon
conversion to C Corporation - 64,307 (64,307) - -
------ -------- --------- ----- -----
BALANCE AT JANUARY 3, 1999 - 114,737 (598,209) (303) -
Net income - - 2,085 - -
Capital contributions from Parent - 5,465 - - -
Distribution to Parent - - (3,168) - -
Currency translation adjustment - - - 98 -
Unrealized gain on investments
in marketable securities - - - - 329
------ -------- --------- ----- -----
BALANCE AT JANUARY 2, 2000 - 120,202 (599,292) (205) 329
Net income - - 25,206 - -
Distributions to Parent - - (571) - -
Currency translation adjustment - - - (147) -
Reclassification adjustment for
gains included in net income - - - - (329)
------ -------- --------- ----- -----
BALANCE AT DECEMBER 31, 2000 $ - $120,202 $(574,657) $(352) $ -
====== ======== ========= ===== =====
The accompanying notes are an integral part of these consolidated statements.
24
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
For the Years Ended
------------------------------------
December 31, January 2, January 3,
2000 2000 1999
------------ ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 25,206 $ 2,085 $ 76,876
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation and amortization 33,604 51,743 23,123
Provision (benefit) for losses on accounts and notes receivable 2,201 1,971 (3,212)
(Gain) loss on sale of property, plant and equipment 1,338 (316) 1,570
Provision (benefit) for deferred income taxes 2,993 (1,949) (27,587)
Amortization of deferred financing costs 6,582 6,093 388
Changes in operating assets and liabilities-
Decrease (increase) in accounts receivable (10,095) 6,123 (6,254)
Decrease in inventories and prepaid expenses and other 3,846 957 4,531
Increase (decrease) in accounts payable and accrued liabilities (1,862) 1,006 7,989
Decrease in insurance reserves (6,211) (4,445) (12,693)
-------- -------- ---------
Net cash provided by operating activities 57,602 63,268 64,731
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (37,903) (27,882) (48,359)
Proceeds from sale of property, plant and equipment 5,034 1,769 5,587
Purchases of franchise operations (5,072) (4,565) (1,534)
Repayments of notes receivable 5,334 8,307 414
(Purchases) sales of investments in marketable securities (1,104) (2,858) 5,130
Other (1,040) (1,127) (386)
-------- -------- ---------
Net cash used in investing activities (34,751) (26,356) (39,148)
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt - - 722,056
Capital contributions from Parent 4,000 1,465 -
Repayments of long-term debt (31,475) (5,188) (38,338)
Cash paid for financing costs - - (43,280)
Distributions to Parent (571) (3,168) (666,020)
-------- -------- ---------
Net cash used in financing activities (28,046) (6,891) (25,582)
-------- -------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 53 142 9
-------- -------- ---------
INCREASE (DECREASE) IN CASH (5,142) 30,163 10
CASH, AT BEGINNING OF PERIOD 30,278 115 105
-------- -------- ---------
CASH, AT END OF PERIOD $ 25,136 $ 30,278 $ 115
======== ======== =========
The accompanying notes are an integral part of these consolidated statements.
25
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts
of Domino's, Inc. (Domino's), a Delaware corporation, and its wholly-
owned subsidiaries (collectively, the Company). All significant
intercompany accounts and transactions have been eliminated. Domino's
is a wholly-owned subsidiary of TISM, Inc. (the Parent).
Description of Business
-----------------------
The Company is primarily engaged in the following business activities:
(1) retail sales of food through Company-owned stores in the
contiguous U.S., (2) sale of food and equipment to Company-owned and
franchised stores through Company-owned distribution centers, and (3)
receipt of royalties and fees relating to support of domestic and
international franchised stores.
Parent's Recapitalization
-------------------------
On December 21, 1998, the Parent effected a merger with TM Transitory
Merger Corporation (TMTMC) in a leveraged recapitalization
transaction whereby TMTMC was merged with and into the Parent with
the Parent being the surviving entity (the Recapitalization). TMTMC
had no operations and was formed solely for the purpose of effecting
the Recapitalization. As part of the Recapitalization, the Company
incurred significant debt and distributed significantly all of the
proceeds to the Parent, which used those proceeds, along with
proceeds from the Parent's 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 the Parent from a Company and Parent
Director and certain members of his family.
During 1999, the Company distributed an additional $3.2 million to the
Parent, which used the proceeds to satisfy a Recapitalization-related
obligation to a Company and Parent Director and certain members of
his family.
As part of the Recapitalization, the Company entered into a $5.5
million, ten year consulting agreement with a Company and Parent
Director and former majority Parent stockholder. The Company paid
$500,000 and $1.0 million in 2000 and 1999, respectively, under this
agreement and will pay the remaining $4.0 million ratably over eight
years beginning in 2001. The $5.5 million was recorded as a charge to
retained earnings (deficit) as a component of purchase price for the
common stock.
Prior to December 1998, Domino's was an indirectly wholly-owned
subsidiary of Domino's Pizza LLC (formerly known as Domino's Pizza,
Inc.) (DPLLC). During December 1998 and before the Recapitalization,
DPLLC distributed its ownership interest in Domino's to the Parent.
The Parent then contributed its ownership interest in DPLLC, which
had been a wholly-owned subsidiary of the Parent, to Domino's,
effectively converting Domino's from a subsidiary of DPLLC into
DPLLC's parent.
26
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
The accompanying consolidated financial statements and these Notes to
Consolidated Financial Statements include the results of operations
of DPLLC and its wholly-owned subsidiaries (including Domino's) for
the periods prior to the Recapitalization.
Domino's amended its charter in December 1998 to increase the total
number of authorized shares of common stock from 1,000 to 3,000 and
decreased the par value of these shares from $1.00 per share to $0.01
per share.
Fiscal Year
-----------
The Company's fiscal year ends on the Sunday closest to December 31.
The 2000 fiscal year ended December 31, 2000; the 1999 fiscal year
ended January 2, 2000; and the 1998 fiscal year ended January 3,
1999. Each of the fiscal years consists of fifty-two weeks except for
fiscal year 1998 which consists of fifty-three weeks.
Inventories
-----------
Inventories are valued at the lower of cost (on a first-in, first-out
basis) or market.
Inventories at December 31, 2000 and January 2, 2000 are comprised of
the following (in thousands):
2000 1999
------- -------
Equipment and supplies $ 4,551 $ 5,659
Food 15,781 14,641
------- -------
20,332 20,300
Less- Reserves 1,246 1,676
------- -------
Inventories $19,086 $18,624
======= =======
Notes Receivable
----------------
During the normal course of business, the Company may provide financing
to franchisees (i) to stimulate franchise store growth, (ii) to
finance the sale of Company-owned stores to franchisees, or (iii) to
facilitate new equipment rollouts. Substantially all of the related
notes receivable require monthly payments of principal and interest,
or monthly payments of interest only, generally ranging from 10% to
12%, with balloon payments of the remaining principal due one to ten
years from the original issuance date. Such notes are generally
secured by the assets sold. In financing these transactions, the
Company derives benefits other than interest income. Given the nature
of these borrower/lender relationships, the Company, in essence,
makes its own market in these notes. The carrying amounts of these
notes approximate fair value.
27
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
During 1998, the Company modified certain criteria used to determine
the allowance for bad debts for notes receivable. As a result of this
change, the Company recognized a non-recurring benefit of
approximately $3.7 million during 1998. This benefit is included in
general and administrative expense.
Property, Plant and Equipment
-----------------------------
Additions to property, plant and equipment are recorded at cost.
Depreciation for financial reporting purposes is provided using the
straight-line method over the estimated useful lives of the related
assets. During 1998, asset lives were generally three to seven years
for equipment, twenty years for buildings and improvements and five
years or the term of the lease including renewal options, whichever
is shorter, for leasehold and other improvements.
The Company initiated a review of the estimated useful lives for
depreciating or amortizing property, plant and equipment and
goodwill, respectively. The review included consideration of the
estimated lives of stores as determined primarily through
quantitative analysis and analysis of the historical longevity of
operating assets used in operations. The Company concluded the review
in the first quarter of 1999.
Based on this review, the Company 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. For goodwill, which primarily arises from purchases of
stores from franchisees, estimated useful lives were shortened in
certain circumstances to ten years.
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. These changes in accounting estimates have been effected as
of the beginning of 1999, resulting in increases in income from
operations and net income as follows (in thousands):
2000 1999
------- -------
Net impact of changes in useful lives $ 4,466 $ 5,616
Non-recurring charge to eliminate assets which
had no remaining useful lives - (1,025)
------- -------
Increase in income from operations 4,466 4,591
Income tax effect (1,786) (1,676)
------- -------
Increase in net income $ 2,680 $ 2,915
======= =======
Depreciation expense was approximately $14.1 million, $11.9 million and
$16.6 million in 2000, 1999 and 1998, respectively.
28
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
Investments in Marketable Securities
------------------------------------
Investments in marketable securities include investments in mutual
funds made by eligible individuals under our deferred compensation
plan, which began in 1999 (Note 5). These investments are stated at
aggregate fair value, are restricted and have been placed in a "rabbi
trust" whereby the amounts are irrevocably set aside to fund the
Company's obligations under our deferred compensation plan.
Prior to 2000, the Company classified marketable securities as
available-for-sale. Unrealized gains as of January 2, 2000 were
$329,000, net of tax. Realized gains and losses are determined using
the specific identification method. Beginning in 2000, the Company
reclassified all investments in marketable securities as trading and
recognized the related unrealized gains during 2000.
Deferred Financing Costs
------------------------
Deferred financing costs include debt issuance costs primarily incurred
by the Company as part of the Recapitalization. Amortization is
provided using the effective interest rate method over the terms of
the respective debt instruments to which the costs relate and is
included in interest expense. Amortization of deferred financing
costs was approximately $6.0 million, $6.1 million and $388,000 in
2000, 1999 and 1998, respectively.
As part of the Recapitalization, the Company paid financing costs to
affiliates of the Parent stockholders of approximately $21.1 million.
Approximately $14.4 million of these expenditures were treated by the
Company as capitalizable deferred financing costs while approximately
$6.7 million of these expenditures were made on behalf of the Parent
and were treated as distributions to the Parent.
Goodwill and Covenants Not-to-Compete
-------------------------------------
Goodwill arising primarily from franchise acquisitions has been
recorded at cost and is being amortized using the straight-line
method over periods not exceeding ten years. Amortization of goodwill
was approximately $2.3 million, $2.1 million and $2.0 million in
2000, 1999 and 1998, respectively.
Covenants not-to-compete, primarily obtained as a part of the
Recapitalization, have been recorded at cost and are being amortized
using an accelerated method over a three year period for the covenant
not-to-compete with a Company and Parent Director and former majority
Parent stockholder. Other covenants not-to-compete are being
amortized using the straight-line method over periods not exceeding
ten years. Amortization of covenants not-to-compete was approximately
$11.2 million, $33.1 million and $2.2 million in 2000, 1999 and 1998,
respectively.
29
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
Capitalized Software
--------------------
Capitalized software is recorded at cost and includes purchased,
internally developed and externally developed software used in the
Company's operations. Amortization for financial reporting purposes
is provided using the straight-line method over the estimated useful
lives of the software, which range from two to seven years.
Amortization expense was approximately $5.9 million, $4.4 million and
$2.0 million in 2000, 1999 and 1998, respectively.
Other Assets
------------
Other assets primarily include equity investments in international
franchisees, deposits and other intangibles primarily arising from
franchise acquisitions. Amortization of other intangibles is provided
using the straight-line method over the estimated useful lives of the
amortizable assets. Amortization expense was approximately $94,000,
$241,000 and $376,000 in 2000, 1999 and 1998, respectively.
Other Accrued Liabilities
-------------------------
Current and long-term other accrued liabilities primarily include
accruals for sales, income and other taxes, legal matters, marketing
and advertising expenses, equipment warranty expenses, store
operating expenses, deferred revenues, deferred compensation and a
consulting fee payable to a Company and Parent Director and former
majority Parent stockholder.
Revenue Recognition
-------------------
Corporate store revenues are comprised of retail sales of food through
Company-owned stores located in the contiguous U.S. and are
recognized when the food is delivered to or carried out by customers.
Domestic franchise royalties are primarily comprised of royalties and
fees from franchisees with operations in the contiguous U.S. and are
recognized as revenue when earned.
Domestic distribution revenues are comprised of sales of food,
equipment and supplies to franchised stores located in the contiguous
U.S. and are recognized as revenue upon shipment of the related
products to franchisees.
International revenues are primarily comprised of sales of food and
royalties and fees from foreign, Alaskan and Hawaiian franchisees and
are recognized consistently with the policies applied for revenues
generated in the contiguous U.S.
30
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
Advertising Costs
-----------------
Advertising costs are expensed as incurred. Advertising expense, which
relates primarily to Company-owned stores, was approximately $38.1
million, $37.8 million and $41.2 million during 2000, 1999 and 1998,
respectively.
Insurance Programs
------------------
The Company is partially self-insured for property and health insurance
risks and, for periods up to December 20, 1998, was partially self-
insured for workers' compensation, general liability and owned and
non-owned automobile programs.
The Company's health insurance program provides coverage for life,
medical, dental and accidental death and dismemberment (AD&D) claims.
Self-insurance limitations for medical and dental per a covered
individual's lifetime were $2.0 million in 2000, 1999 and 1998. The
AD&D and life insurance components of the health insurance program
are fully insured by the Company through third-party insurance
carriers.
Effective July 1, 1996 through December 19, 1998, the self-insurance
limitations per occurrence for the workers' compensation, general
liability and owned and non-owned automobile programs were $500,000,
plus a one-time otherwise recoverable amount of $500,000 in excess of
$500,000 on the combined general liability, owned and non-owned
automobile programs for each policy year, except for the period from
July 1, 1998 through December 19, 1998 for which there was no
otherwise recoverable amount.
Total excess insurance limits for all partially self-insured periods
were $105.0 million per occurrence for the general liability and
owned and non-owned automobile programs and up to the applicable
statutory limits for workers' compensation.
Self-insurance reserves are determined using actuarial estimates. These
estimates are based on historical information along with certain
assumptions about future events. Changes in assumptions for such
factors as medical costs and legal actions, as well as changes in
actual experience, could cause these estimates to change in the near
term. In management's opinion, the accrued insurance reserves at
December 31, 2000 are sufficient to cover potential aggregate losses.
During December 1998, the Company entered into a guaranteed cost,
combined casualty insurance program that is effective for the period
December 20, 1998 to December 20, 2001. The new program covers
insurance claims on a first dollar basis for workers' compensation,
general liability and owned and non-owned automobile liability. Total
insurance limits under this program are $106.0 million per occurrence
for general liability and owned and non-owned automobile liability
and up to the applicable statutory limits for workers' compensation.
31
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
Foreign Currency Translation
----------------------------
The Company's foreign entities use their local currency or the U.S.
dollar as the functional currency, in accordance with the provisions
of Statement of Financial Accounting Standards (SFAS) No. 52,
"Foreign Currency Translation." Where the functional currency is the
local currency, the Company translates net assets into U.S. dollars
at yearend exchange rates, while income and expense accounts are
translated at average exchange rates. Translation adjustments are
included in accumulated other comprehensive income and other foreign
currency transaction gains and losses are included in determining net
income.
Financial Derivatives
---------------------
During 1999, the Company entered into two interest rate swap agreements
(the 1999 Swap Agreements) to effectively convert the Eurodollar
component of the effective interest rate on a portion of the
Company's debt under Term Loans A, B and C (Note 2) to a fixed rate
of 5.12% beginning in January 1999 and continuing through December
2001, in an effort to reduce the impact of interest rate changes on
income. The total notional amount under the 1999 Swap Agreements is
initially $179.0 million and decreases over time to a total notional
amount of $167.0 million in December 2001. As of December 31, 2000,
management estimates the fair value of the 1999 Swap Agreements to be
an asset of approximately $2.7 million.
As a result of generating royalty revenues from franchised operations
in Japan, the Company is exposed to the effect of exchange rate
fluctuations between the Japanese yen and U.S. dollar. Using foreign
currency forward contracts enables management to minimize the effect
of a fluctuating Japanese yen on reported income. During 1999 and
1998, the Company entered into contracts to sell 30 million Japanese
yen every four weeks during the respective following fiscal year.
During 1997, the Company entered into contracts to sell 35 million
Japanese yen every four weeks during 1998.
Gains and losses with respect to these contracts are recognized in
income at each balance sheet date based on the exchange rate in
effect at that time. No significant gains or losses were recognized
under these contracts during 2000, 1999 and 1998. The carrying value
of the foreign currency forward contracts outstanding as of January
2, 2000 approximates fair value. As of December 31, 2000, the Company
had no foreign currency forward contract commitments and had no
foreign currency forward contracts outstanding.
Accounting for Derivative Instruments and Hedging Activities
------------------------------------------------------------
The Financial Accounting Standards Board has issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", and
two related Statements which require that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and
measure those instruments at fair value. The Company adopted these
Statements on January 1, 2001. Adoption of these Statements resulted
in the recognition of an approximately $2.7 million derivative asset
relating to the fair value of the Company's 1999 Swap Agreements
which the Company has designated as cash flow hedges.
32
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
Supplemental Disclosures of Cash Flow Information
-------------------------------------------------
The Company paid interest of approximately $69.9 million, $56.7 million
and $4.6 million during 2000, 1999 and 1998, respectively.
Additionally, cash paid for Federal income taxes was approximately
$4.7 million, $5.1 million and $2.7 million in 2000, 1999 and 1998,
respectively.
During 1998, the Company made non-cash distributions to the Parent of
approximately $16.6 million representing the Company's investment in
a related party limited partnership and approximately $2.6 million
representing various leaseholds and other assets. The Company also
assumed a $5.5 million consulting agreement liability from the Parent
during 1998.
During 2000, the Company financed the sale of certain Company-owned
stores to franchisees with approximately $5.6 million of notes,
including $4.4 million of notes to a former minority Parent
stockholder.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Reclassifications
-----------------
Certain amounts from fiscal 1999 and 1998 have been reclassified to
conform to the fiscal 2000 presentation.
33
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
(2) FINANCING ARRANGEMENTS
At December 31, 2000 and January 2, 2000, long-term debt consisted of
the following (in thousands):
2000 1999
-------- --------
Term Loan A (see below) $159,961 $174,424
Term Loan B (see below) 130,349 133,878
Term Loan C (see below) 130,622 134,017
Notes to franchisees, interest ranging from 5.8%
to 6.1%, maturing through 2004 142 251
Senior subordinated notes, 10 3/8% (see below) 265,000 275,000
-------- --------
686,074 717,570
Less- current portion 21,482 21,438
-------- --------
$664,592 $696,132
======== ========
On December 21, 1998, Domino's and a subsidiary entered into a new
credit agreement (the 1998 Agreement) with a consortium of banks
primarily to finance a portion of the Recapitalization, to repay
existing indebtedness under a previous credit agreement and to
provide available borrowings for use in the normal course of
business.
The 1998 Agreement provides the following credit facilities: three term
loans (Term Loan A, Term Loan B and Term Loan C) and a revolving
credit facility (the Revolver). The aggregate borrowings available
under the 1998 Agreement are $545 million.
The 1998 Agreement provides for borrowings of $175 million under Term
Loan A, $135 million under Term Loan B and $135 million under Term
Loan C. Under the terms of the 1998 Agreement, the borrowings under
Term Loans A, B and C bear interest, payable at least quarterly, at
either (i) the higher of (a) the specified bank's prime rate (9.5% at
December 31, 2000) and (b) 0.5% above the Federal Reserve reported
overnight funds rate, each plus an applicable margin of between 0.50%
to 2.75% or (ii) the Eurodollar rate (6.56% at December 31, 2000)
plus an applicable margin of between 1.50% to 3.75%, with margins
determined based upon the Company's ratio of indebtedness to earnings
before interest, taxes, depreciation and amortization (EBITDA), as
defined. At December 31, 2000, the Company's effective borrowing
rates were 9.06%, 10.06% and 10.31% for Term Loans A, B and C,
respectively. As of December 31, 2000, all borrowings under Term
Loans A, B and C were under Eurodollar contracts with interest
periods of 60 days. Principal payments are required under Term Loans
A, B and C, commencing at varied dates and continuing quarterly
thereafter until maturity. The final scheduled principal payments on
the outstanding borrowings under Term Loans A, B and C are due in
December 2004, December 2006 and December 2007, respectively.
34
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
The 1998 Agreement also provides for borrowings of up to $100 million
under the Revolver, of which up to $35.0 million is available for
letter of credit advances and $10.0 million is available for swing-
line loans. Borrowings under the Revolver (excluding the letters of
credit and swing-line loans) bear interest, payable at least
quarterly, at either (i) the higher of (a) the specified bank's prime
rate and (b) 0.5% above the Federal Reserve reported overnight funds
rate, each plus an applicable margin of between 0.50% to 2.00% or
(ii) the Eurodollar rate plus an applicable margin of between 1.50%
to 3.00%, with margins determined based upon the Company's ratio of
indebtedness to EBITDA, as defined. Borrowings under the swing-line
portion of the Revolver bear interest, payable at least quarterly, at
the higher of (a) the specified bank's prime rate or (b) 0.5% above
the Federal Reserve reported overnight funds rate, each plus an
applicable margin of between 0.50% to 2.00% based upon the Company's
ratio of indebtedness to EBITDA, as defined. The Company also pays a
commitment fee on the unused portion of the Revolver ranging from
0.25% to 0.50%, determined based upon the Company's ratio of
indebtedness to EBITDA, as defined. At December 31, 2000 the
commitment fee for such unused borrowings is 0.50%. The fee for
letter of credit amounts outstanding at December 31, 2000 is 2.75%.
As of December 31, 2000, there is $85.8 million in available
borrowings under the Revolver, with $14.2 million of letters of
credit outstanding. There are no borrowings outstanding under the
swing-line portion of the Revolver. The Revolver expires in December
2004.
The credit facilities included in the 1998 Agreement are (i) guaranteed
by the Parent, (ii) jointly and severally guaranteed by each of
Domino's domestic subsidiaries, and (iii) secured by a first priority
lien on substantially all of the assets of the Company.
The 1998 Agreement contains certain financial and non-financial
covenants that, among other restrictions, require the maintenance of
minimum interest coverage ratios and consolidated adjusted EBITDA and
maximum leverage ratios, all as defined in the 1998 Agreement, and
restrict the Company's ability to pay dividends on or redeem or
repurchase the Company's capital stock, incur additional
indebtedness, issue preferred stock, make investments, use assets as
security in other transactions and sell certain assets or merge with
or into other companies.
On December 21, 1998, Domino's issued $275 million of 10 3/8% Senior
Subordinated Notes due 2009 (the Notes) requiring semi-annual
interest payments, which began July 15, 1999. Prior to January 15,
2002, the Company may redeem, at a fixed price, up to 35% of the
Notes with the proceeds of equity offerings, if any, by the Parent or
the Company. Before January 15, 2004, Domino's may redeem all, but
not part, of the Notes if a change in control occurs, as defined in
the Notes. Beginning January 15, 2004, Domino's may redeem some or
all of the Notes at fixed redemption prices, ranging from 105.19% of
par in 2004 to 100% of par in 2007 through maturity. In the event of
a change in control, as defined, the Company will be obligated to
repurchase Notes tendered by the holders at a fixed price. The Notes
are guaranteed by each of Domino's domestic subsidiaries (non-
domestic subsidiaries do not represent a material amount of revenues
and assets) and are subordinated in right of payment to all existing
and future senior debt of the Company.
35
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
In 2000, the Company amended the 1998 Agreement whereby a basket of
funds not to exceed $30.0 million was designated for the early
retirement of Notes at the Company's option. The Company subsequently
retired $10.0 million of the Notes during 2000 through open market
transactions using funds generated from operations. These retirements
resulted in an after-tax extraordinary gain of approximately
$181,000, which is net of approximately $207,000 in 1998 Agreement
amendment fees and $583,000 in deferred financing cost amortization
expense.
The indenture related to the Notes restricts Domino's and its
restricted subsidiaries from, among other restrictions, paying
dividends or redeeming equity interests (including those of the
Parent), with certain specified exceptions, unless a minimum fixed
charge coverage ratio is met and, in any event, such payments are
limited to 50% of cumulative net income of the Company from January
4, 1999 to the payment date plus the net proceeds from any capital
contributions or the sale of equity interests.
In 1998, the Company received $20 million under Term Loans B and C from
a stockholder of the Parent. The Company also issued $20 million of
the Notes to this stockholder. During 1999, the stockholder reduced
its holdings in Term Loans B and C to $17.9 million. Interest expense
to this stockholder related to the Term Loans B and C and the Notes
was $3.4 million in 1999. During 2000, the stockholder reduced its
holdings in Term Loans B and C to $6.4 million and increased its
holdings in the Notes to $22.0 million. Interest expense to this
stockholder related to Term Loans B and C and the Notes was $3.4
million in 2000.
As of December 31, 2000, management estimates the fair value of the
Notes to be approximately $222.6 million. The carrying amounts of the
Company's other debt approximate fair value.
As of December 31, 2000, maturities of long-term debt are as follows
(in thousands):
2001 $ 21,482
2002 33,596
2003 48,035
2004 65,844
2005 63,321
Thereafter 453,796
--------
$686,074
========
36
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
(3) COMMITMENTS AND CONTINGENCIES
Lease Commitments
-----------------
The Company leases equipment, vehicles, store and commissary locations
and its corporate headquarters under operating leases with expiration
dates through 2016. Rent expenses totaled approximately $23.1
million, $23.5 million and $27.4 million during 2000, 1999 and 1998,
respectively. As of December 31, 2000, the future minimum rental
commitments for all noncancellable leases, which include
approximately $13.6 million in commitments to related parties and is
net of approximately $3.9 million in future minimum rental
commitments which have been assigned to certain franchisees, are as
follows (in thousands):
2001 $ 26,792
2002 22,129
2003 19,395
2004 11,344
2005 8,207
Thereafter 22,046
--------
$109,913
========
Legal Proceedings and Related Matters
-------------------------------------
The Company is a party to lawsuits, revenue agent reviews by taxing
authorities and legal proceedings, of which the majority involve
workers' compensation, employment practices liability, general
liability, and automobile and franchisee claims arising in the
ordinary course of business. In the opinion of the Company's
management, these matters, individually and in the aggregate, will
not have a material adverse effect on the financial condition and
results of operations of the Company, and the established reserves
adequately provide for the estimated resolution of such claims.
(4) INCOME TAXES
As a result of the Recapitalization, the Parent, Domino's and its
qualifying subsidiaries reverted to C Corporation status effective
December 21, 1998 and filed a consolidated Federal income tax return.
The Company records its Federal income tax provision, related income
tax liability and deferred income taxes as if it files its own
consolidated Federal income tax return in accordance with a December
1998 tax-sharing agreement.
Prior to the Recapitalization, certain Domino's subsidiaries sold
certain tangible and intangible assets to another Domino's
subsidiary, which had revoked its S Corporation election. The gain on
this transaction, while not reflected for financial reporting
purposes, resulted in a deferred tax asset to the Company of $54
million due to the difference in book and tax bases. This amount was
initially credited directly to retained earnings (deficit).
37
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
The differences between the United States Federal statutory income tax
provision (using the statutory rate of 35%) and the Company's
consolidated income tax provision (benefit) for 2000, 1999 and 1998
(only two weeks of which was a C Corporation period) are summarized
as follows (in thousands):
2000 1999 1998
-------- ------- --------
Federal income tax provision based on the
statutory rate $ 14,384 $ 876 $ 22,382
State and local taxes, net of related Federal
income taxes 1,668 909 1,594
Non-resident withholding and foreign income
taxes 3,382 2,792 2,530
Non-deductible expenses 351 374 578
Foreign tax and other tax credits (3,709) (3,064) (2,885)
Losses attributable to foreign subsidiaries 389 505 -
Tax reserves, net of related Federal income taxes in 1999 700 (2,925) 10,000
Tax effect of conversion to C Corporation - 1,001 (27,905)
Exclusion of income earned during
S Corporation period in 1998 - - (18,900)
Other (1,092) (49) (322)
-------- ------- --------
$ 16,073 $ 419 $(12,928)
======== ======= ========
The components of the 2000, 1999 and 1998 provision (benefit) for
income taxes are as follows (in thousands):
2000 1999 1998
-------- ------- --------
Provision (benefit) for Federal income taxes-
Current provision $ 4,084 $ 2,630 $ 8,996
Deferred provision (benefit) 7,222 (1,901) (26,907)
-------- ------- --------
Total provision (benefit) for Federal income taxes 11,306 729 (17,911)
Provision (benefit) for state and local income taxes-
Current provision (benefit) 5,725 (3,054) 3,133
Deferred benefit (4,340) (48) (680)
Provision for non-resident withholding and
foreign income taxes 3,382 2,792 2,530
-------- ------- --------
$ 16,073 $ 419 $(12,928)
======== ======= ========
38
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
Realization of the Company's deferred tax assets is dependent upon many
factors, including, but not limited to, the ability of the Company to
generate sufficient taxable income. Although realization of the
Company's deferred tax assets is not assured, management believes it
is more likely than not that the deferred tax assets will be
realized. On an ongoing basis, management will assess whether it
remains more likely than not that the deferred tax assets will be
realized.
Significant components of net deferred income taxes are as follows (in
thousands):
2000 1999
------- -------
Deferred Federal income tax assets-
Step-up of basis on subsidiaries sale of certain assets $42,109 $45,390
Covenants not-to-compete 13,253 10,605
Self-insurance reserves 5,270 7,067
Accruals and other reserves 7,062 8,559
Bad debt reserves 2,289 2,080
Depreciation, amortization and asset basis differences 3,645 6,654
Deferred revenues 2,655 1,517
Other 2,295 2,897
------- -------
78,578 84,769
------- -------
Deferred Federal income tax liabilities-
Capitalized development costs 4,560 2,922
Other 8 504
------- -------
4,568 3,426
------- -------
Net deferred Federal income tax asset 74,010 81,343
Net deferred state income tax asset 6,533 2,193
------- -------
Net deferred income taxes $80,543 $83,536
======= =======
As of December 31, 2000, the classification of net deferred income
taxes is summarized as follows (in thousands):
Current Long-term Total
----------- ------------- ----------
Deferred tax assets $ 9,290 $ 76,017 $ 85,307
Deferred tax liabilities - (4,764) (4,764)
----------- ------------- ----------
Net deferred income taxes $ 9,290 $ 71,253 $ 80,543
=========== ============= ==========
39
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
As of January 2, 2000, the classification of net deferred income taxes
is summarized as follows (in thousands):
Current Long-term Total
----------- ------------- -----------
Deferred tax assets $ 10,990 $ 75,972 $ 86,962
Deferred tax liabilities (492) (2,934) (3,426)
----------- ------------- -----------
Net deferred income taxes $ 10,498 $ 73,038 $ 83,536
=========== ============= ===========
(5) EMPLOYEE BENEFITS
The Company has a deferred salary reduction plan which qualifies under
Internal Revenue Code Section 401(k). All employees of the Company
who have completed 1,000 hours of service and are at least 21 years
of age are eligible to participate in the plan. The plan requires the
Company to match 50% of the first 6% of employee contributions per
participant. These matching contributions vest immediately. The
charges to operations for Company contributions to the plan were $2.2
million, $2.5 million and $2.4 million for 2000, 1999 and 1998,
respectively.
Effective January 4, 1999, the Company established a nonqualified
deferred compensation plan available for the members of the Company's
executive team and certain other key employees. Under this plan, the
participants may defer up to 40% of their annual compensation. The
plan requires the Company to match 30% with respect to the first 25%,
20% or 15% of participant salary deferrals, depending on the
employee. The plan requires the Company to credit the participants'
accounts following each pay period. The Company may be required to
make supplemental contributions to participants' accounts depending
on the earnings of the Company as defined in the plan. The
participants direct the investment of their deferred compensation
within several mutual funds. The Company contributions to this plan
were $905,000 in 1999 and are included in general and administrative
expense. In 1999, the Company amended the plan to eliminate the
Company match and supplemental contributions beginning in 2000.
(6) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is party to stand-by letters of credit with off-balance
sheet risk. The Company's exposure to credit loss for stand-by
letters of credit and financial guarantees is represented by the
contractual amount of these instruments. The Company uses the same
credit policies in making conditional obligations as it does for on-
balance sheet instruments. Total conditional commitments under
letters of credit as of December 31, 2000 are $14.2 million.
40
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
(7) RELATED PARTY TRANSACTIONS
Leases
------
The Company leases its corporate headquarters under a long-term
operating lease agreement with a partnership owned by a Company and
Parent Director and former majority Parent stockholder. The current
lease, dated December 21, 1998, replaced a previous lease agreement
with the same partnership. The Company also leased two commissary
locations from partnerships owned by this Company and Parent Director
and former majority Parent stockholder and his family during 1997 and
until August 1998 when the Company purchased the commissaries and
terminated the respective leases. Total lease expense for the
aforementioned leases was $4.4 million, $4.4 million and $13.6
million for 2000, 1999 and 1998, respectively, the majority of which
is included in general and administrative expense.
Aggregate future commitments under these leases are as follows (in
thousands):
2001 $ 4,486
2002 4,606
2003 4,544
Thereafter -
-------
$13,636
=======
Charitable Contributions
------------------------
In 1998, the Company made contributions of approximately $7.7 million
to a charitable foundation founded and operated by a Company and
Parent Director and former majority Parent stockholder. There were no
Company contributions made to this foundation in 2000 or 1999.
Covenant Not-to-Compete
-----------------------
As part of the Recapitalization, the Parent entered into a covenant
not-to-compete with a Company and Parent Director and former Parent
majority stockholder. The Parent contributed this asset to the
Company during 1998. The Company has capitalized the $50.0 million
paid in consideration for the covenant not-to-compete and is
amortizing this amount over the three-year term of the covenant using
an accelerated amortization method. Amortization expense was
approximately $10.9 million, $32.5 million and $1.3 million in 2000,
1999 and 1998, respectively.
41
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
Management Agreement and Consulting Services
--------------------------------------------
As part of the Recapitalization, the Parent and its subsidiaries
(collectively, the Group) entered into a management agreement with an
affiliate of a stockholder of the Parent to provide the Group with
certain management services. The Company is committed to pay an
amount not to exceed $2.0 million per year on an ongoing basis for
management services as defined in the management agreement. In
addition to the management services, the Company engaged another
affiliate to provide consulting services during 2000 and 1999. In
2000, the Company incurred $2.0 million for management services and
$688,000 for consulting services. In 1999, the Company incurred $2.0
million for management services and $2.2 million for consulting
services. Furthermore, the Group must allow the affiliate to
participate in the negotiation and consummation of future senior
financing and pay the affiliate a fee, as defined in the management
agreement.
Shareholder Indemnification of Legal Settlement
-----------------------------------------------
In 2000, the Company settled a lawsuit that was outstanding at January
2, 2000 in which the Company agreed to pay the plaintiffs $5.0
million for a full release of all related claims. This amount was
recorded in general and administrative expense in 1999. The Company
also recorded a related $1.8 million benefit for income taxes.
Additionally, a Company and Parent Director and former majority
Parent stockholder agreed to indemnify the Parent and paid the Parent
$4.0 million in 2000. The Parent then contributed the $4.0 million to
the Company. The Company recorded the $4.0 million as a capital
contribution as of January 2, 2000.
(8) RESTRUCTURING
In 1999, the Company recognized approximately $7.6 million in
restructuring charges comprised of staff reduction costs of $6.3
million and exit cost liabilities of $1.3 million. The staff
reduction costs were incurred during the second, third and fourth
quarters, in connection with the reduction of 90 corporate and
administrative employees. As of December 31, 2000, the Company had
paid substantially all of the staff reduction costs.
The exit costs were recorded in the fourth quarter of 1999 in
connection with the planned closure and relocation of 50 specifically
identified Company-owned stores. The exit cost liability is comprised
of the operating lease obligations after the expected closure dates
and related leased premises restoration costs. As of December 31,
2000, approximately $600,000 of the exit cost liabilities had been
paid. Management expects that additional exit cost liabilities of
approximately $744,000 will be paid as relocation obligations become
due.
42
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
(9) SEGMENT INFORMATION
The Company has three reportable segments as determined by management
using the "management approach" as defined in SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related
Information": (1) Domestic Stores, (2) Domestic Distribution and (3)
International. The Company's operations are organized by management
on the combined bases of line of business and geography. The Domestic
Stores segment includes Company operations with respect to all
franchised and Company-owned stores throughout the contiguous United
States. The Domestic Distribution segment includes the distribution
of food, equipment and supplies to franchised and Company-owned
stores throughout the contiguous United States. The International
segment primarily includes Company operations related to its
franchising business in foreign and non-contiguous United States
markets and its food distribution business in Canada, France, Alaska
and Hawaii.
The accounting policies of the reportable segments are the same as
those described in Note 1. The Company evaluates the performance of
its segments and allocates resources to them based on EBITDA.
The tables below summarize the financial information concerning the
Company's reportable segments for 2000, 1999 and 1998. Intersegment
Revenues are comprised of sales of food, equipment and supplies from
the Domestic Distribution segment to the Company-owned stores in the
Domestic Stores segment. Intersegment sales prices are market based.
The "Other" column as it relates to EBITDA information below
primarily includes corporate headquarter costs that management does
not allocate to any of the reportable segments and in 1998 included a
Company and Parent Director and former majority Parent stockholder's
salary and charitable contributions. The "Other" column as it relates
to capital expenditures primarily includes capitalized software and
leasehold improvements that management does not allocate to any of
the reportable segments. All amounts presented below are in
thousands.
Domestic Domestic Intersegment
Stores Distribution International Revenues Other Total
-------- ------------ ------------- ------------- --------- ----------
Revenues-
2000 $498,579 $707,224 $63,405 $(103,128) $ - $1,166,080
1999 494,796 704,970 58,402 (101,529) - 1,156,639
1998 521,635 716,802 56,022 (117,681) - 1,176,778
EBITDA-
2000 132,859 35,681 15,190 - (36,434) 147,296
1999 138,101 29,302 11,513 - (47,861) 131,055
1998 123,467 17,972 9,656 - (56,133) 94,962
Capital
Expenditures-
2000 17,439 7,720 1,393 - 11,351 37,903
1999 11,333 5,319 985 - 10,245 27,882
1998 20,564 6,439 249 - 21,107 48,359
43
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
The following table reconciles total EBITDA to consolidated income
before provision (benefit) for income taxes and extraordinary item:
2000 1999 1998
-------- -------- --------
Total EBITDA $147,296 $131,055 $ 94,962
Depreciation and amortization (33,604) (51,743) (23,123)
Interest expense (75,217) (74,116) (7,051)
Interest income 3,961 992 730
Legal settlement expense indemnified by a
Parent stockholder - (4,000) -
Gain (loss) on sale of plant and equipment (1,338) 316 (1,570)
-------- -------- --------
Income before provision (benefit)
for income taxes and extraordinary item $ 41,098 $ 2,504 $ 63,948
======== ======== ========
The following table presents the Company's identifiable asset
information for 2000 and 1999 and a reconciliation to total
consolidated assets:
2000 1999
-------- --------
Domestic Stores $146,553 $139,119
Domestic Distribution 57,673 58,949
-------- --------
Contiguous United States 204,226 198,068
International 17,542 15,966
Unallocated Assets 147,861 167,096
-------- --------
Total Consolidated Assets $369,629 $381,130
======== ========
Unallocated assets include assets that management does not attribute to
the reportable segments above and primarily includes investments in
marketable securities, deferred financing costs, deferred income
taxes, the covenant not-to-compete obtained as part of the
Recapitalization and capitalized software.
44
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
(10) PERIODIC FINANCIAL DATA
(Unaudited; in thousands)
The Company's convention with respect to reporting periodic financial
data is such that each of the first three fiscal quarters consists of
twelve weeks while the last fiscal quarter presented consists of
sixteen or seventeen weeks depending on the number of weeks in the
fiscal year (Note 1).
Sixteen
Twelve Weeks Ended Weeks Ended
------------------------------------ --------------
March 26, June 18, September 10, December 31,
2000 2000 2000 2000
--------- -------- ------------ --------------
Total revenues $266,918 $266,890 $267,826 $364,446
Income before provision
(benefit) for income taxes
and extraordinary item 8,803 9,509 8,663 14,123
Net income 5,047 5,420 4,758(6) 9,981(7)
Sixteen
Twelve Weeks Ended Weeks Ended
------------------------------------ --------------
March 28, June 20, September 12, January 2,
1999 1999 1999 2000
--------- -------- ------------ --------------
Total revenues $260,768 $256,112 $271,903 $367,856
Income (loss) before provision
(benefit) for income taxes 381 2,857(1) 1,432(2) (2,166)(3)
Net income (loss) 229 4,347(4) 754 (3,245)(5)
(1) Includes $1.6 million of restructuring charges.
(2) Includes $2.0 million of restructuring charges.
(3) Includes $4.0 million of restructuring charges and $5.0 million
relating to the settlement of a lawsuit subsequent to yearend.
(4) Includes $2.9 million state tax reserve reversal, net of federal
tax.
(5) Includes $1.0 million net tax provision resulting from S to C
Corporation conversion.
(6) Includes $181,000 extraordinary loss on debt extinguishment.
(7) Includes $362,000 extraordinary gain on debt extinguishment.
45
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
(11) PRO FORMA FINANCIAL DATA
(Unaudited; In thousands)
The following unaudited pro forma financial data is presented to
illustrate the estimated effects on net income if the Company had not
elected S Corporation status for substantially all of 1998.
Management estimates that the provision for income taxes would have
increased and net income would have decreased by approximately $36.8
million in 1998 had the Company remained a C Corporation for that
period.
1998 1998
Company Pro Forma 1998
Historical Adjustments Pro Forma
------------------ ----------------- ----------------
Total revenues $1,176,778 $ - $1,176,778
Income before provision (benefit) for income taxes 63,948 - 63,948
Provision (benefit) for income taxes (12,928) 36,805 23,877
------------------ ----------------- ----------------
Net income $ 76,876 $(36,805) $ 40,071
================== ================= ================
Comprehensive income $ 76,365 $(36,636) $ 39,729
================== ================= ================
46
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Part III
Item 10. Directors and Executive Officers of the Registrant.
The following is a list of directors for each of TISM and Domino's. All
directors of TISM and Domino's serve until a successor is duly elected and
qualified or until the earlier of his or her death, resignation or removal.
There are no family relationships between any of the directors or executive
officers of TISM, Domino's or Domino's Pizza LLC ("Domino's Pizza", Domino's
operating subsidiary).
Name Age
---- ---
David A. Brandon * 48
Andrew B. Balson 34
Christopher C. Behrens 40
Thomas S. Monaghan 63
Mark E. Nunnelly 42
Robert M. Rosenberg 63
Robert F. White 45
*Chairman of the Board of Directors
The following is a list of each person who is an executive officer of
one or more of Domino's, TISM and Domino's Pizza. The executive officers of
TISM, Domino's and Domino's Pizza are elected by and serve at the discretion of
their respective Board of Directors.
Name Age Position
---- --- --------
David A. Brandon 48 Chief Executive Officer of each of TISM, Domino's and
Domino's Pizza
Harry J. Silverman 42 Chief Financial Officer, Executive Vice President ("EVP"),
Finance of Domino's Pizza; Vice President and Treasurer of
each of TISM and Domino's.
Patricia A. Wilmot 52 EVP, PeopleFirst of Domino's Pizza
Patrick Knotts 46 EVP, Flawless Execution - Corporate of Domino's Pizza
Hoyt D. Jones, III 43 EVP, Flawless Execution - Franchise of Domino's Pizza
J. Patrick Doyle 37 EVP, International of Domino's Pizza and interim EVP -
Build the Brand
Michael D. Soignet 41 EVP, Maintain High Standards - Distribution of Domino's
Pizza
Elisa D. Garcia C. 43 EVP, General Counsel and Secretary of Domino's Pizza,
Secretary of each of TISM and Domino's
James G. Stansik 45 Special Assistant to the Chairman and Chief Executive
Officer
Timothy J. Monteith 48 Chief Information Officer of Domino's Pizza
David A. Brandon has served as Chairman, Chief Executive Officer and as
a Director of TISM and Domino's since March 1999. Mr. Brandon has also served as
Chairman, Chief Executive Officer and as a Manager of Domino's Pizza since March
1999. Mr. Brandon was President and Chief Executive Officer of Valassis
Communications, Inc., a company in the sales promotion and couponing industries,
from 1991 to 1998 and Chairman of the Board of Directors of Valassis
Communications, Inc. from 1997 to 1998.
47
Andrew B. Balson has served as a Director of each of TISM and Domino's
since March 1999. Mr. Balson has been a Managing Director of Bain Capital since
January 2001. Mr. Balson became a Partner of Bain Capital in June 1998, prior to
which he was an Associate from 1996 to 1998. From 1994 to 1996, Mr. Balson was a
consultant at Bain & Company. Mr. Balson serves on the Board of Managers of
Anthony Crane Rental, L.P. and the Board of Directors of Odwalla, Inc.
Christopher C. Behrens has served as a Director of each of TISM and
Domino's since October 1999. Mr. Behrens has been General Partner of JP Morgan
Capital Partners, LLC and its predecessor, Chase Capital Partners since 1999.
Prior to joining Chase Capital Partners, Mr. Behrens served as Vice President in
Chase's Merchant Banking Group. Mr. Behrens serves on the Board of Directors of
several companies, including Patina Oil & Gas Corporation, and Portola Packaging
Inc. as well as a number of private companies.
Thomas S. Monaghan founded Domino's Pizza in 1960 and served as its
President and Chief Executive Officer through July 1989 and from December 6,
1991 to December 21, 1998. Mr. Monaghan now serves as a Director of each of TISM
and Domino's. Mr. Monaghan has served as a Director of TISM since 1960 and as a
Director of Domino's since February 1999. Mr. Monaghan serves on the Board of
Directors of several private companies and non-profit organizations.
Mark E. Nunnelly has served as a Director of TISM since December 21,
1998 and as a Director of Domino's since February 1999. Mr. Nunnelly has been a
Managing Director of Bain Capital since 1990. Prior to that time, Mr. Nunnelly
was a Partner of Bain & Company, where he managed several relationships in the
manufacturing sector, and was employed by Procter & Gamble Company Inc. in
product management. Mr. Nunnelly serves on the Board of Directors of CTC
Communications, Inc. and DoubleClick, Inc., as well as a number of private
companies.
Robert M. Rosenberg has served as a Director of each of TISM and
Domino's since April 1999. Mr. Rosenberg served as President and Chief Executive
Officer of Allied Domecq Retailing, USA from 1993 to August 1999 when he
retired. Allied Domecq Retailing, USA is comprised of Dunkin' Donuts, Baskin-
Robbins and Togo's Eateries. Mr. Rosenberg also serves on the Board of Directors
of Sonic Industries, Inc.
Robert F. White has served as a Director of TISM since December 21,
1998 and as a Director of Domino's since February 1999. Mr. White joined Bain
Capital at its inception in 1984. He has been a Managing Director since 1985.
Mr. White has served as the Chief Financial Officer and a founder of MediVision,
a medical services company founded and financed by Bain Capital. Prior to
joining Bain Capital, Mr. White was a Manager at Bain & Company and a Senior
Accountant with Price Waterhouse LLP. Mr. White serves on the Board of Directors
of Brookstone, Inc., as well as a number of private companies.
Harry J. Silverman has served as Chief Financial Officer, Executive
Vice President of Finance and as a Manager of Domino's Pizza since 1993. Mr.
Silverman has served as Vice President of each of TISM and Domino's since
December, 1998 and as Treasurer of each of TISM and Domino's since February
2000. Mr. Silverman joined Domino's Pizza in 1985 as Controller for the Chicago
Regional Office. Mr. Silverman was named National Operations Controller in 1988
and later Vice President of Finance for Domino's Pizza. Mr. Silverman serves on
the Board of Directors of Dynagen, Inc.
Patricia A. Wilmot has served as Executive Vice President, PeopleFirst
of Domino's Pizza since July 2000. Ms. Wilmot served as Vice President, Human
Resources for Brach & Brock Confections from 1998 to July 2000 and as Vice
President, Human and Strategic Planning for ACX Technologies from 1996 to 1998.
Ms. Wilmot served as Senior Vice President of Human Resources for the
Haagen-Dazs Company from 1993 to 1996.
Patrick W. Knotts has served as Executive Vice President of Flawless
Execution - Corporate of Domino's Pizza since January 2001. Mr. Knotts served as
Senior Vice President of Operations for Mrs. Fields Original Cookie, Inc. from
September 1996 to January 2001. Mr. Knotts served in various positions,
including Executive Vice President of Operations, at Midial S.A. U.S. Retail
Group from January 1992 to September 1996.
Hoyt D. Jones, III has served as Executive Vice President, Flawless
Execution - Franchise of Domino's Pizza since December 1999, prior to which he
was Regional Vice President of Franchise Operations (Northeast) of Domino's
Pizza since August, 1992. Mr. Jones joined Domino's Pizza in 1985.
48
J. Patrick Doyle has served as Executive Vice President of
International of Domino's Pizza since May 1999 and as interim Executive Vice
President, Build the Brand since December 2000. Mr. Doyle served as Senior Vice
President of Marketing from the time he joined Domino's Pizza in 1997. From 1991
to 1997, Mr. Doyle served as Vice President and General Manager of Gerber
Products Company for the United States baby food business and as Vice President
and General Manager of their Canadian subsidiary.
Michael D. Soignet has served as Executive Vice President of Maintain
High Standards - Distribution of Domino's Pizza, overseeing global distribution
center operations since 1993. Mr. Soignet joined the Company in 1981.
Elisa D. Garcia C. has served as Executive Vice President, General
Counsel of Domino's Pizza since April 2000. She has also served as Secretary of
each of TISM, Domino's and Domino's Pizza since such date. Ms. Garcia was
Regional Counsel for Philip Morris International Inc.'s northern Latin America
Region from 1998 to April 2000, prior to which she was Assistant Regional
Counsel for Latin America since 1994.
James G. Stansik has served as Special Assistant to the Chairman and
Chief Executive Officer since August 1999. Mr. Stansik also served as interim
Executive Vice President, Flawless Execution - Corporate of Domino's Pizza from
July 2000 through January 2001. Mr. Stansik was Senior Vice President of
Franchise Administration from 1994 through August 1999. Mr. Stansik joined the
Company in 1985.
Timothy J. Monteith has served as Chief Information Officer and
Executive Vice President of Domino's Pizza since October 1999. Mr. Monteith
served as the Senior Vice President of Information Services and Administration
of Domino's Pizza from 1992-1999. From 1988 to 1992, Mr. Monteith was the Chief
Operating Officer and Executive Vice President of Thomas S. Monaghan, Inc. Mr.
Monteith served as Vice President and then President of T and B Computing of Ann
Arbor, Michigan, from 1981 to 1988.
Item 11. Executive Compensation.
The following table sets forth information concerning the compensation
for the fiscal year ended December 31, 2000 of David A. Brandon, Chairman and
Chief Executive Officer, and the four other most highly compensated executive
officers of the Company (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Other Securities
Name and Annual Underlying All Other
Principal Position Year Salary Bonus(1) Compensation(2) Options(3) Compensation(4)
- ------------------ ---- ------ -------- --------------- ---------- ---------------
David A. Brandon - 2000 $600,000 $ 805,000 35 - 1,575
Chairman and Chief 1999 475,385 712,500 22 1,512,516 842
Executive Officer (5)
Harry J. Silverman 2000 309,122 345,696 105 - 4,956
Chief Financial 1999 264,373 311,167 115 550,000 41,599
Officer, Executive 1998 268,578 3,076,538 866 111,111 55,656
Vice President
Michael D. Soignet 2000 284,185 300,692 79 - 4,346
Executive Vice 1999 242,637 285,305 127 500,000 37,606
President 1998 246,496 1,832,497 912 111,111 59,276
J. Patrick Doyle 2000 241,885 275,473 15 - 6,017
Executive Vice 1999 196,158 232,660 3 250,000 4,200
President 1998 162,564 47,785 4 - 21,909
49
James G. Stansik 2000 199,815 225,683 15 - 12,503
Special Assistant 1999 188,705 224,784 4 225,000 14,731
to the CEO 1998 185,922 60,982 4 - 82,671
Cheryl A. Bachelder 2000 329,092 - 79 - 5,535
Former Executive Vice 1999 282,801 332,856 89 600,000 38,477
President, Marketing 1998 287,300 1,805,657 1,103 - 49,173
And Product Development (6)
Patrick Kelly 2000 223,547 120,776 44 - 468,040
Former Executive Vice 1999 255,322 300,514 60 250,000 6,205
President, Corporate 1998 259,720 1,793,547 1,860 166,667 3,403
Operations (6)
(1) These amounts for 1998 include bonuses of $1,637,697 for Ms. Bachelder,
Mr. Kelly and Mr. Soignet and $2,851,078 for Mr. Silverman. Ms.
Bachelder received her entire bonus at the closing of the
recapitalization. Messrs. Silverman, Kelly and Soignet received a
portion of their bonuses in cash at the closing of the
recapitalization, and the receipt of the remaining portion of each
other bonus was deferred under the Senior Executive Deferred Bonus
Plan. See "Senior Executive Deferred Bonus Plan."
(2) These amounts include reimbursements during the fiscal year for the
payment of taxes related to insurance premiums paid on behalf of the
Named Executive Officers.
(3) The options are for the purchase of common stock of TISM.
(4) These amounts primarily represent matching and supplemental
contributions made by us pursuant to our deferred compensation plan in
1999 and 1998, contributions made under our 401(k) plan, automobile
allowances and term life insurance premiums paid by the Company for the
benefit of the Named Executive Officers.
(5) Mr. Brandon was elected Chairman and Chief Executive Officer on March
31, 1999.
(6) Ms. Bachelder and Mr. Kelly ceased employment with the Company during
2000. Included in All Other Compensation is approximately $321,000 in
severance paid to Mr. Kelly in accordance with his employment agreement
and approximately $142,000 paid to Mr. Kelly in accordance with his
TISM Class L stock option agreement. Mr. Kelly also received $750,000
in bonus he had deferred at the time of the recapitalization.
Option Grants
There were no option grants to Named Executive Officers during 2000.
Option Exercises and Fiscal Yearend Values
The following table sets forth certain information concerning the
number and value of unexercised stock options of TISM held by each of the Named
Executive Officers as of December 31, 2000.
50
FISCAL YEAR-END OPTIONS VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options At
Options At Fiscal Year-End Fiscal Year-End
Exercisable Unexercisable Exercisable Unexercisable
Name (#) (#) ($) ($)
David A. Brandon 302,504 1,210,012 - -
Harry J. Silverman (2) 231,111 330,000 122,109 -
Michael D. Soignet (2) 211,111 300,000 122,109 -
J. Patrick Doyle 100,000 150,000 - -
James G. Stansik 90,000 135,000 - -
(1) There was no public trading market for the common stock of TISM as of
December 31, 2000. Accordingly, these values have been calculated on
the basis of the fair market value of such securities on December 31,
2000, less the applicable exercise price.
(2) Messrs. Silverman and Soignet each have the option to purchase 11,111
of TISM's Class L common stock in addition to options to purchase
TISM's Class A-3 common stock. Mr. Silverman has the option to purchase
550,000 Class A-3 shares and Mr. Soignet has the option to purchase
500,000 Class A-3 shares. The Class L options are fully vested as of
December 31, 2000. The in-the-money value reported above represents the
12% Class L priority return compounded quarterly from the date of grant
until December 31, 2000.
Compensation of Directors
TISM and Domino's reimburse members of the board of directors for any
out-of-pocket expenses incurred by them in connection with services provided in
such capacity. In addition, TISM and Domino's may compensate independent members
of the board of directors for services provided in such capacity. In April 1999,
Mr. Rosenberg, an independent Director, was granted a stock option for 55,555
shares of TISM Class A-3 common stock. These options vest 20% annually beginning
on March 31, 2000. As of December 31, 2000, these options were still held by Mr.
Rosenberg.
Employment Contracts, Termination of Employment and Change of Control
Arrangements
Consulting Agreement with Thomas S. Monaghan
In connection with the closing of the recapitalization, Mr. Monaghan
entered into a consulting agreement with Domino's Pizza (the Consulting
Agreement). The Consulting Agreement has a term of ten years, is terminable by
either the Company or Mr. Monaghan upon thirty days prior written notice, and
may be extended or renewed by written agreement. Under the Consulting Agreement,
Mr. Monaghan may be required to make himself available to Domino's Pizza on a
limited basis. Mr. Monaghan will receive a retainer of $1.0 million for the
first twelve months of the agreement and $0.5 million per year for the remainder
of the term of the agreement. If we terminate the agreement for any reason, we
are required to remit to Mr. Monaghan a lump sum payment within thirty days of
the termination of the agreement in the full amount of the retainer payable for
the remainder of the term of the Consulting Agreement. As a consultant, Mr.
Monaghan is entitled to reimbursement of travel and other expenses incurred in
performance of his duties but is not entitled to participate in any of our
employee benefit plans or other benefits or conditions of employment available
to our employees.
51
Employment Agreements
Mr. Brandon is employed as Chief Executive Officer and Chairman
pursuant to an employment agreement. Under the employment agreement, Mr. Brandon
is entitled to receive an annual salary of $600,000 and is eligible for an
annual bonus based on achievement of performance objectives. If Mr. Brandon is
terminated other than for cause or resigns voluntarily for good reason, he is
entitled to receive continued salary for two years. If Mr. Brandon's employment
is terminated by reason of physical or mental disability, he is entitled to
receive continued salary less the amount of disability income benefits received
by him and continued coverage under group medical plans for 18 months. Mr.
Brandon is subject to certain non-competition, non-solicitation and
confidentiality provisions.
Each of the other Named Executive Officers is employed pursuant to a
written employment agreement. The stated term of the employment agreement with
Mr. Silverman concludes June 30, 2003, with Mr. Soignet concludes December 31,
2002, with Mr. Doyle concludes December 31, 2002 and with Mr. Stansik concludes
June 30, 2002. Under each employment agreement, the Named Executive Officer is
entitled to receive an annual salary. Each of the above Named Executive officers
is also eligible to receive an annual formula bonus based on achievement of
performance objectives and a discretionary bonus. Each of the Named Executive
Officers' employment agreement contains a clause allowing for an automatic
one-year renewal of such agreement.
If the employment of any of the above Named Executive Officers is
terminated other than for cause or resigns voluntarily for good reason, the
affected Named Executive Officer is entitled continue to receive his or her
salary for the remainder of the stated term. If the employment of any of the
above Named Executive Officers is terminated by reason of physical or mental
disability, he or she is entitled to receive continued salary less the amount of
disability income benefits received by him or her and continued coverage under
group medical plans for 18 months. Each of the Named Executive Officers is
subject to certain non-competition, non-solicitation and confidentiality
provisions. The employment agreements with certain of the above Named Executive
Officers provides for the waiver of any and all rights and benefits to which he
or she was entitled under the August 4, 1998 Severance Agreements to which each
of the above Named Executive Officers and Domino's Pizza are party and expressly
provides for the termination of such severance agreements.
Deferred Compensation Plan
Domino's Pizza has adopted a Deferred Compensation Plan for the benefit
of certain of its executive and managerial employees, including certain of the
Named Executive Officers. Under the plan, eligible employees are permitted to
defer up to 40% of their compensation. In 1999, Domino's Pizza was required to
match 30% of the amount deferred by a participant under the plan with respect to
the first 15%, 20% or 25% of the participant's compensation, depending on the
employee. In addition, in 1999, Domino's Pizza made a supplemental contribution,
in addition to the matching contribution, of 10% of the deferred amounts. In
December 1999, we amended the plan to eliminate the matching requirement and the
supplemental contribution beginning in 2000. The amounts under the plan are
required to be paid out upon termination of employment or a change in control of
Domino's Pizza.
Senior Executive Deferred Bonus Plan
Prior to the recapitalization, Domino's Pizza entered into bonus
agreements with Messrs. Silverman, Soignet and Patrick Kelly, former Executive
Vice President - Corporate. The bonus agreements, as amended, provided for bonus
payments, a portion of which were payable in cash upon the closing of the
recapitalization and a portion of which were deferred under the Senior Executive
Deferred Bonus Plan. Domino's Pizza adopted a Senior Executive Deferred Bonus
Plan, effective December 21, 1998, which established deferred bonus accounts for
the benefit of the three executives listed above. Domino's Pizza must pay the
deferred amounts in each account to the respective executive upon the earlier of
(i) a change of control, (ii) a qualified public offering, (iii) the
cancellation or forfeiture of stock options held by such executive or (iv) ten
years and 180 days after December 21, 1998. If the board of directors of
Domino's Pizza terminates the plan, it may pay the amounts in the deferred bonus
accounts to the participating executives at that time or make the payments as if
the plan had continued to be in effect. Mr. Kelly was paid his deferred bonus
during 2000.
52
Compensation Committee Interlocks and Insider Participation
The Company does not have a compensation committee. Compensation
decisions for 2000 regarding the Company's executive officers were made by the
Board of Directors.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
All of Domino's issued and outstanding common stock is owned by TISM.
The issued and outstanding capital stock of TISM consists of (i) 50,012,484
shares of Class A Common Stock, of which 9,641,874 shares are of Class A-1
Common Stock, par value $0.001 per share, 9,866,633 shares are Class A-2 Common
Stock, par value $0.001 per share, and 30,503,977 shares are Class A-3 Common
Stock, par value $0.001 per share, (ii) 5,534,708 shares of Class L Common
Stock, par value $0.001 per share, and (iii) 1,002,155 shares of 11.5%
Cumulative Preferred Stock. Only the shares of Class A-1 Common Stock have
voting rights. The Class L Common Stock is identical to the Class A Common Stock
except that the Class L Common Stock is nonvoting and is entitled to a
preference over the Class A Common Stock, with respect to any distribution by
TISM to holders of its capital stock, equal to the original cost of such share
plus an amount which accrues at a rate of 12% per annum, compounded quarterly.
The Class L Common Stock is convertible upon an initial public offering, or
certain other dispositions, of TISM into Class A Common Stock upon a vote of the
board of directors of TISM. The Cumulative Preferred Stock has no voting rights
except as required by law.
The following table sets forth information with respect to ownership of
TISM Class A-1 Common Stock as of March 1, 2001 (i) by each person known to the
Company to own beneficially more than 5% of such class of securities, and (ii)
by each Director and Named Executive Officer, and all Directors and Executive
Officers as a group. Unless otherwise noted, to our knowledge, each of such
stockholders has sole voting and investment power as to the shares shown.
Amount and Nature of Percentage of Outstanding
Name and Address Beneficial Ownership Voting Securities
- ---------------- -------------------- -----------------
Principal Stockholders:
Bain Capital Funds 4,724,518 (1) 49.0%
c/o Bain Capital, Inc.
Two Copley Place
Boston, Massachusetts 02116
Thomas S. Monaghan+ 3,500,000 (2) 36.3%
24 Frank Lloyd Wright Drive
Ann Arbor, Michigan 48106
Directors and Named Executive Officers:
David A. Brandon*+ -- --
Harry J. Silverman* -- --
Michael D. Soignet* -- --
J. Patrick Doyle* -- --
James G. Stansik* -- --
Cheryl A. Bachelder* -- --
Patrick Kelly* -- --
53
Andrew B. Balson+ 36,264 (3) **
Thomas S. Monaghan+ (See above)
Mark E. Nunnelly+ 252,430 (4) 2.6%
Christopher C. Behrens+ 472,452 (5) 4.9%
Robert F. White+ 252,430 (6) 2.6%
Robert M. Rosenberg+ --
All Directors and Executive 44.2%
Officers as a Group (16 Persons)
+ Director
* Named Executive Officer
** Less than one percent.
(1) Consists of (i) 1,849,036 shares of Class A-1 Common Stock owned by
Bain Capital Fund VI, L.P. ("Fund VI"), whose sole general partner is
Bain Capital Partners VI, L.P., whose sole general partner is Bain
Capital Investors VI, Inc., a Delaware corporation wholly owned by W.
Mitt Romney, (ii) 2,104,694 shares of Class A-1 Common Stock owned by
Bain Capital VI Coinvestment Fund ("Coinvest Fund"), whose sole general
partner is Bain Capital Partners VI, L.P., whose sole general partner
is Bain Capital Investors VI, Inc., a Delaware corporation wholly owned
by W. Mitt Romney, (iii) 96,419 shares of Class A-1 Common Stock owned
by Sankaty High Yield Asset Partners, L.P. ("Sankaty"), whose sole
general partner is Sankaty High Yield Asset Investors, LLC, whose
managing member is Sankaty High Yield Asset Investors, Ltd., a Bermuda
corporation wholly owned by W. Mitt Romney, (iv) 385,675 shares of
Class A-1 Common Stock owned by Brookside Capital Partners Fund, L.P.
("Brookside"), whose sole general partner is Brookside Capital
Investors, L.P., whose sole general partner is Brookside Capital
Investors, Inc., a Delaware corporation wholly owned by W. Mitt Romney,
(v) 6,164 shares of Class A-1 Common Stock owned by PEP Investments PTY
Ltd. ("PEP"), whose controlling persons are Timothy J. Sims, Richard J.
Gardell, Simon D. Pillar and Paul J. McCullagh, (vi) 161,215 shares of
Class A-1 Common Stock owned by BCIP Associates II ("BCIP II"), whose
managing partner is Bain Capital, Inc., a Delaware corporation wholly
owned by W. Mitt Romney, (vii) 34,702 shares of Class A-1 Common Stock
owned by BCIP Trust Associates II, L.P.("BCIP Trust II"), whose general
partner is Bain Capital, Inc., a Delaware corporation wholly owned by
W. Mitt Romney, (viii) 26,043 shares of Class A-1 Common Stock owned by
BCIP Associates II-B ("BCIP II-B"), whose managing partner is Bain
Capital, Inc., a Delaware corporation wholly owned by W. Mitt Romney,
(ix) 10,221 shares of Class A-1 Common Stock owned by BCIP Trust
Associates II-B, L.P. ("BCIP Trust II-B"), whose general partner is
Bain Capital, Inc., a Delaware corporation wholly owned by W. Mitt
Romney, and (x) 50,349 shares of Class A-1 Common Stock owned by BCIP
Associates II-C ("BCIP II-C" and collectively with BCIP II, BCIP Trust
II, BCIP II-B and BCIP Trust II-B, the "BCIPs" and the BCIPs, Fund VI,
Coinvest Fund, Sankaty, Brookside and PEP, collectively, the "Bain
Capital funds"), whose managing partner is Bain Capital, Inc., a
Delaware corporation wholly owned by W. Mitt Romney.
54
(2) Includes shares of Class A-1 Common Stock owned by Mrs. Monaghan.
(3) Consists of (i) 26,043 shares of Class A-1 Common Stock owned by BCIP
II-B, a Delaware general partnership of which Mr. Balson is a general
partner, and (ii) 10,221 shares of Class A-1 Common Stock owned by BCIP
Trust II-B, a Delaware limited partnership of which Mr. Balson is a
general partner. Mr. Balson disclaims beneficial ownership of any such
shares in which he does not have a pecuniary interest.
(4) Consists of (i) 161,215 shares of Class A-1 Common Stock owned by BCIP
II, a Delaware general partnership of which Mr. Nunnelly is a general
partner, (ii) 34,702 shares of Class A-1 Common Stock owned by BCIP
Trust II, a Delaware limited partnership of which Mr. Nunnelly is a
general partner, (iii) 50,349 shares of Class A-1 Common Stock owned by
BCIP II-C, a Delaware general partnership of which Mr. Nunnelly is a
general partner, and (iv) 6,164 shares of Class A-1 Common Stock owned
by PEP, a New South Wales limited company for which Mr. Nunnelly has a
power of attorney. Mr. Nunnelly disclaims beneficial ownership of any
such shares in which he does not have a pecuniary interest.
(5) Mr. Behrens is a partner of JP Morgan Capital Partners LLC, the
general partner of Chase Equity Associates, L.P. Chase Equity
Associates, L.P. is a shareholder in DP Investors I, LLC which holds
472,452 shares of Class A-1 Common Stock. Accordingly, Mr. Behrens may
be deemed to beneficially own shares beneficially owned by JP Morgan
Capital Partners through DP Investors I, LLC. Mr. Behrens disclaims
beneficial ownership of any such shares in which he does not have a
pecuniary interest.
(6) Consists of (i) 161,215 shares of Class A-1 Common Stock owned by BCIP
II, a Delaware general partnership of which Mr. White is a general
partner, (ii) 34,702 shares of Class A-1 Common Stock owned by BCIP
Trust II, a Delaware limited partnership of which Mr. White is a
general partner, (iii) 50,349 shares of Class A-1 Common Stock owned by
BCIP II-C, a Delaware general partnership of which Mr. White is a
general partner, and (iv) 6,164 shares of Class A-1 Common Stock owned
by PEP, a New South Wales limited company for which Mr. White has a
power of attorney. Mr. White disclaims beneficial ownership of any such
shares in which he does not have a pecuniary interest.
Item 13. Certain Relationships and Related Transactions.
Stockholders Agreement
In connection with the recapitalization, TISM, certain of its
subsidiaries, including the Company, and all of the equity holders of TISM
(including the Bain Capital funds), entered into a stockholders agreement that,
among other things, provides for tag-along rights, drag-along rights,
registration rights, restrictions on the transfer of shares held by parties to
the stockholders agreement and certain preemptive rights for certain
stockholders. Under the terms of the stockholders agreement, the approval of the
Bain Capital funds will be required for TISM, its subsidiaries, including the
Company, and its stockholders to take various specified actions, including major
corporate transactions such as a sale or initial public offering, acquisitions,
divestitures, financings, recapitalizations and mergers, as well as other
actions such as hiring and firing senior managers, setting management
compensation and establishing capital and operating budgets and business plans.
Pursuant to the stockholders agreement and TISM's Articles of Incorporation, the
Bain Capital funds have the power to elect up to half of the Board of Directors
of TISM. The stockholders agreement includes customary indemnification
provisions in favor of controlling persons against liabilities under the
Securities Act.
55
Management Agreement
In connection with the recapitalization, TISM and certain of its direct
and indirect subsidiaries entered into a management agreement with Bain Capital
Partners VI, L.P. pursuant to which it provides financial, management and
operation consulting services. In exchange for such services, Bain Capital
Partners VI, L.P. is entitled to an annual management fee of $2.0 million plus
the reasonable out-of-pocket expenses of Bain Capital Partners VI, L.P. and its
affiliates. In addition, in exchange for assisting the Company in negotiating
the senior financing for any recapitalization, acquisition or other similar
transaction, Bain Capital Partners VI, L.P. is entitled to a transaction fee
equal to 1% of the gross purchase price, including assumed liabilities, for such
transaction, irrespective of whether such senior financing is actually committed
or drawn upon. In connection with the recapitalization, Bain Capital Partners
VI, L.P. received a fee of $11.75 million. The management agreement will
continue in effect as long as Bain Capital Partners VI, L.P. continues to
provide such services. The management agreement, however, may be terminated (i)
by mutual consent of the parties, (ii) by either party following a material
breach of the management agreement by the other party and the failure of such
other party to cure the breach within thirty days of written notice of such
breach or (iii) by Bain Capital Partners VI, L.P. upon sixty days written
notice. The management agreement includes customary indemnification provisions
in favor of Bain Capital Partners VI, L.P. and its affiliates.
Consulting and Service Agreements
The Company engaged a Bain Capital affiliate to provide consulting
services during 2000 and 1999. In 2000, the Company incurred $688,000 for
consulting services. In 1999, the Company incurred $2.2 million for consulting
services. Additionally, we entered into an agreement during 2000 under which the
Company is committed to pay a Bain Capital affiliate approximately $500,000
during 2001 for marketing and advertising services. We believe that all fees
paid and committed to are no less favorable than fees paid or payable to an
unrelated third party for similar services.
Shareholder Indemnification of Legal Settlement
In 2000, the Company settled a lawsuit in which the Company paid the
plaintiffs $5.0 million for a full release of all related claims. Thomas S.
Monaghan agreed to indemnify TISM for $4.0 million of this legal settlement. Mr.
Monaghan paid $4.0 million to the Company in 2000.
Covenant not-to-compete
In connection with the recapitalization, TISM entered into a 3-year
covenant not-to-compete with Thomas S. Monaghan. TISM paid Mr. Monaghan $50.0
million for this covenant not-to-compete in 1998.
Lease Agreement
In connection with the recapitalization, Domino's entered into a new
lease agreement with Domino's Farms Office Park Limited Partnership with respect
to its executive offices, world headquarters and Michigan distribution center.
The lease provides for lease payments of $4.3 million in the first year,
increasing annually to approximately $4.7 million in the fifth year. Thomas S.
Monaghan, who is a director of TISM and Domino's, is the ultimate general
partner of Domino's Farms Office Park Limited Partnership. We believe that this
lease is on terms no less favorable than are obtainable from unrelated third
parties.
Sale of Assets
Domino's Pizza entered into a Sale of Assets Agreement dated October
14, 2000, with Michna, Inc.("Buyer"), a Michigan corporation, pursuant to which
it sold the assets used in the operation of fourteen (14) Company-owned stores
in the Detroit, Michigan market and eighteen (18) Company-owned stores in the
Nashville, Tennessee market (including a store in Scottsville, KY) and the
obligation to assume the leases for three (3) additional store locations in the
Nashville area that were under lease and/or construction at the time of closing.
Patrick Kelly, a Named Executive Officer is the controlling owner and chief
executive and operating officer of the Buyer. The Buyer will continue to operate
the stores as a franchisee of Domino's Pizza.
56
The sales price, after adjustments, was approximately $5.6 million,
which was funded through cash and a secured promissory note, in the amount of
approximately $4.4 million (the "Note"). The Note is personally guaranteed by
Patrick Kelly and Buyer's obligations under the Note are secured by a lien on
the assets of the stores being transferred in the transaction.
Mr. Kelly executed and delivered to Domino's Pizza a Release and Mutual
Termination of Contracts by which he released any and all claims against
Domino's Pizza and its related companies and terminated existing agreements
between Domino's Pizza and Mr. Kelly (including employment agreements).
Mr. Kelly and all business entities owned or controlled by him also
entered into a Requirements and Profit Sharing Agreement requiring the purchase
of food and supplies from Domino's Pizza for a period of five (5) years. The
agreement is substantially the same as the agreement entered into with other
franchisees.
57
Part IV
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K.
(a) 1. Financial Statements: The following financial statements of Domino's,
Inc. are included in Item 8, "Financial Statements and Supplementary
Data":
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 2000 and January
2, 2000
Consolidated Statements of Income for the Years Ended
December 31, 2000, January 2, 2000, and January 3, 1999
Consolidated Statements of Comprehensive Income for the Years
Ended December 31, 2000, January 2, 2000, and January 3, 1999
Consolidated Statements of Stockholder's Equity (Deficit) for the
Years Ended December 31, 2000, January 2, 2000, and January 3,
1999
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, January 2, 2000, and January 3, 1999
Notes to Consolidated Financial Statements
2. Financial Statement Schedules: The following financial statement
schedule is attached to this report.
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable, not required,
or the information is included in the financial statements or the notes thereto.
3. Exhibits: Certain of the following Exhibits have been previously filed
with the Securities and Exchange Commission pursuant to the requirements of the
Securities Act of 1933 and the Securities Exchange Act of 1934. Such exhibits
are identified by the parenthetical references following the listing of each
such exhibit and are incorporated herein by reference.
Exhibit
Number Description
- ------ -----------
2.1 Agreement and Plan of Merger dated as of September 25, 1998
(Form S-4 Registration Statement filed March 22, 1999).
2.2 Amendment No. 1 to Agreement and Plan of Merger dated as of
November 24, 1998 (Form S-4 Registration Statement filed March
22, 1999).
2.3 Amendment No. 2 to Agreement and Plan of Merger dated as of
November 24, 1998 (Form S-4 Registration Statement filed March
22, 1999).
2.4 Amendment No. 3 to Agreement and Plan of Merger dated December
18, 1998 (Form S-4 Registration Statement filed March 22,
1999).
3.1 Domino's, Inc. Amended and Restated Certificate of
Incorporation (Form S-4 Registration Statement filed March 22,
1999).
3.2 Domino's, Inc. Amended and Restated By-Laws (Form S-4
Registration Statement filed March 22, 1999).
3.3 Domino's Pizza, Inc. Restated Articles of Incorporation (Form
S-4 Registration Statement filed March 22, 1999).
58
3.4 Domino's Pizza, Inc. By-Laws (Form S-4 Registration Statement
filed March 22, 1999).
3.5 Domino's Pizza PMC, Inc. Articles of Incorporation (Exhibit to
our Annual Report on Form 10-K for the fiscal year ended
January 2, 2000 is incorporated herein by reference).
3.6 Domino's Pizza PMC, Inc. By-Laws (Exhibit to our Annual Report
on Form 10-K for the fiscal year ended January 2, 2000 is
incorporated herein by reference).
3.7 Domino's Franchise Holding Co. Articles of Incorporation (Form
S-4 Registration Statement filed March 22, 1999).
3.8 Domino's Franchise Holding Co. By-Laws (Form S-4 Registration
Statement filed March 22, 1999).
3.9 Domino's Pizza International, Inc. Amended and Restated
Certificate of Incorporation (Form S-4 Registration Statement
filed March 22, 1999).
3.10 Domino's Pizza International, Inc. Amended and Restated
By-Laws (Form S-4 Registration Statement filed March 22,
1999).
3.11 Domino's Pizza International Payroll Services, Inc. Articles
of Incorporation (Form S-4 Registration Statement filed March
22, 1999).
3.12 Domino's Pizza International Payroll Services, Inc. By-Laws
(Form S-4 Registration Statement filed March 22, 1999).
3.13 Domino's Pizza-Government Services Division, Inc. Articles of
Incorporation (Form S-4 Registration Statement filed March 22,
1999).
3.14 Domino's Pizza-Government Services Division, Inc. By-Laws
(Form S-4 Registration Statement filed March 22, 1999).
3.15 Domino's Pizza LLC Articles of Organization (Exhibit to our
Annual Report on Form 10-K for the fiscal year ended January
2, 2000 is incorporated herein by reference).
3.16 Domino's Pizza LLC By-laws (Exhibit to our Annual Report on
Form 10-K for the fiscal year ended January 2, 2000 is
incorporated herein by reference).
3.17 DP CA COMM, Inc. Articles of Incorporation (Exhibit to our
Annual Report on Form 10-K for the fiscal year ended January
2, 2000 is incorporated herein by reference).
3.18 DP CA COMM, Inc. By-laws (Exhibit to our Annual Report on Form
10-K for the fiscal year ended January 2, 2000 is incorporated
herein by reference).
3.19 DP CA CORP, Inc. Articles of Incorporation (Exhibit to our
Annual Report on Form 10-K for the fiscal year ended January
2, 2000 is incorporated herein by reference).
3.20 DP CA CORP, Inc. By-laws (Exhibit to our Annual Report on Form
10-K for the fiscal year ended January 2, 2000 is incorporated
herein by reference).
3.21 Domino's Pizza California LLC Articles of Organization
(Exhibit to our Annual Report on Form 10-K for the fiscal year
ended January 2, 2000 is incorporated herein by reference).
3.22 Domino's Pizza California LLC Operating Agreement (Exhibit to
our Annual Report on Form 10-K for the fiscal year ended January 2,
2000 is incorporated herein by reference).
3.23 Domino's Pizza NS Co. Articles of Association (Exhibit to our Annual
Report on Form 10-K for
59
the fiscal year ended January 2, 2000 is incorporated herein by
reference).
4.1 Indenture dated as of December 21, 1998 by and among Domino's
Inc., Domino's Pizza, Inc., Metro Detroit Pizza, Bluefence,
Inc., Domino's Pizza International, Inc., Domino's Pizza
International Payroll Services, Inc., Domino's
Pizza-Government Services Division, Inc. and IBJ Schroder Bank
and Trust Company (Form S-4 Registration Statement filed March
22, 1999).
4.2 Registration Rights Agreement dated as of December 21, 1998 by
and among Domino's, Inc., Domino's Pizza, Inc., Metro Detroit
Pizza, Inc., Bluefence, Inc., Domino's Pizza International,
Inc., Domino's Pizza International Payroll Services, Inc.,
Domino's Pizza-Government Services Division, Inc., J.P. Morgan
Securities, Inc. and Goldman, Sachs & Co (Form S-4
Registration Statement filed March 22, 1999).
10.1 Amended and Restated Purchase Agreement dated December 21,
1998 by and among Domino's Inc., Domino's Pizza, Inc., Metro
Detroit Pizza, Inc., Bluefence, Inc., Domino's Pizza
International, Inc., Domino's Pizza International Payroll
Services, Inc., Domino's Pizza-Government Services Division,
Inc., J.P. Morgan Securities, Inc. and Goldman, Sachs & Co
(Form S-4 Registration Statement filed March 22, 1999).
10.2 Consulting Agreement dated December 21, 1998 by and between
Domino's Pizza, Inc. and Thomas S. Monaghan (Form S-4
Registration Statement filed March 22, 1999).
10.3 Lease Agreement dated as of December 21, 1998 by and between
Domino's Farms Office Park Limited Partnership and Domino's
Pizza, Inc (Form S-4 Registration Statement filed March 22,
1999).
10.4 Management Agreement by and among TISM, Inc., each of its
direct and indirect subsidiaries and Bain Capital Partners VI,
L.P (Form S-4 Registration Statement filed March 22, 1999).
10.5 Stockholders Agreement dated as of December 21, 1998 by and
among TISM, Inc., Domino's, Inc., Bain Capital Fund VI, L.P.,
Bain Capital VI Coinvestment Fund, L.P., BCIP, PEP Investments
PTY Ltd., Sankaty High Yield Asset Partners, L.P., Brookside
Capital Partners Fund, L.P., RGIP, LLC, DP Investors I, LLC,
DP Investors II, LLC, J.P. Morgan Capital Corporation, Sixty
Wall Street Fund, L.P., DP Transitory Corporation, Thomas S.
Monaghan, individually and in his capacity as trustee, and
Marjorie Monaghan, individually and in her capacity as
trustee, Harry J. Silverman, Michael D. Soignet, Stuart K.
Mathis, Patrick Kelly, Gary M. McCausland and Cheryl Bachelder
(Form S-4 Registration Statement filed March 22, 1999).
10.6 Senior Executive Deferred Bonus Plan of Domino's, Inc. dated
as of December 21, 1998 (Form S-4 Registration Statement filed
March 22, 1999).
10.7 Domino's Pizza, Inc. Deferred Compensation Plan adopted
effective January 4, 1999 (Form S-4 Registration Statement
filed March 22, 1999).
10.8 Domino's Pizza, Inc. Amendment to the Deferred Compensation
Plan (Exhibit to our Annual Report on Form 10-K for the fiscal
year ended January 2, 2000 is incorporated herein by
reference).
10.9 Employment Agreement dated as of December 14, 1999 between
Harry Silverman and Domino's Pizza, Inc. (Exhibit to our
Annual Report on Form 10-K for the fiscal year ended January
2, 2000 is incorporated herein by reference).
10.10 Employment Agreement dated as of December 14, 1999 between
Cheryl Bachelder and Domino's Pizza, Inc. (Exhibit to our
Annual Report on Form 10-K for the fiscal year ended January
2, 2000 is incorporated herein by reference).
60
10.11 Employment Agreement dated as of December 14, 1999 between
James Stansik and Domino's Pizza, Inc. (Exhibit to our Annual
Report on Form 10-K for the fiscal year ended January 2, 2000
is incorporated herein by reference).
10.12 Employment Agreement dated as of December 14, 1999 between
Michael Soignet and Domino's Pizza, Inc. (Exhibit to our
Annual Report on Form 10-K for the fiscal year ended January
2, 2000 is incorporated herein by reference).
10.13 Employment Agreement dated as of December 14, 1999 between
Hoyt Jones and Domino's Pizza, Inc. (Exhibit to our Annual
Report on Form 10-K for the fiscal year ended January 2, 2000
is incorporated herein by reference).
10.14 Employment Agreement dated as of December 14, 1999 between J.
Patrick Doyle and Domino's Pizza, Inc. (Exhibit to our Annual
Report on Form 10-K for the fiscal year ended January 2, 2000
is incorporated herein by reference).
10.15 Credit Agreement dated as of December 21, 1998 by and among
Domino's, Inc., Bluefence, Inc., J.P. Morgan Securities, Inc.,
Morgan Guaranty Trust Company of New York, Bank One and
Comerica Bank (Form S-4 Registration Statement filed March 22,
1999).
10.16 Borrower Pledge Agreement dated as of December 21, 1998 by and
among Domino's, Inc., Bluefence, Inc. and Morgan Guaranty
Trust Company of New York, as Collateral Agent (Form S-4
Registration Statement filed March 22, 1999).
10.17 Subsidiary Pledge Agreement dated as of December 21, 1998 by
and among Domino's Pizza, Inc., Metro Detroit Pizza, Inc.,
Domino's Pizza International, Inc., Domino's Pizza
International Payroll Services, Inc., Domino's
Pizza-Government Services Division, Inc. and Morgan Guaranty
Trust Company of New York, as Collateral Agent (Form S-4
Registration Statement filed March 22, 1999).
10.18 Borrower Security Agreement dated as of December 21, 1998 by
and among Domino's, Inc., Bluefence, Inc. and Morgan Guaranty
Trust Company of New York, as Collateral Agent (Form S-4
Registration Statement filed March 22, 1999).
10.19 Subsidiary Security Agreement dated as of December 21, 1998 by
and among Domino's Pizza, Inc., Metro Detroit Pizza, Inc.,
Domino's Pizza International, Inc., Domino's Pizza
International Payroll Services, Inc., Domino's
Pizza-Government Services Division, Inc. and Morgan Guaranty
Trust Company of New York, as Collateral Agent (Form S-4
Registration Statement filed March 22, 1999).
10.20 Collateral Account Agreement dated as of December 21, 1998 by
and among Domino's, Inc., Bluefence, Inc. and Morgan Guaranty
Trust Company of New York, as Collateral Agent (Form S-4
Registration Statement filed March 22, 1999).
10.21 Employment Agreement dated as of March 31, 1999 between David
A. Brandon and TISM, Inc., Domino's Inc. and Domino's Pizza,
Inc. (Form S-4 Registration Statement filed March 22, 1999).
10.22 Employment Agreement dated as of January 2, 2000 between
Patrick Kelly and Domino's Pizza, Inc. (Exhibit to our Annual
Report on Form 10-K for the fiscal year ended January 2, 2000
is incorporated herein by reference).
10.23 TISM, Inc. Third Amended and Restated Stock Option Plan
(Exhibit to our Annual Report on Form 10-K for the fiscal year
ended January 2, 2000 is incorporated herein by reference).
10.24 Employment Agreement dated as of April 1, 2000 between
Domino's Pizza, Inc. and Elisa D. Garcia C. (Exhibit to our
Quarterly Report on Form 10-Q for the fiscal quarter ended
June 18, 2000 is incorporated herein by reference).
61
10.25 First Amendment to the TISM, Inc. Third Amended and Restated
Stock Option Plan (Exhibit to our Quarterly Report on Form
10-Q for the fiscal quarter ended June 18, 2000 is
incorporated herein by reference).
10.26 Employment Agreement dated as of July 10, 2000 between
Domino's Pizza LLC and Patricia A. Wilmot (Exhibit to our
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 10, 2000 is incorporated herein by reference).
10.27 Supplemental Indenture dated as of June 7, 2000 (Exhibit to
our Quarterly Report on Form 10-Q for the fiscal quarter ended
June 18, 2000 is incorporated herein by reference).
10.28 First Amendment, dated as of February 10, 1999, to Credit
Agreement, dated as of December 21, 1998, as amended
10.29 Second Amendment, dated as of April 16, 1999, to Credit
Agreement, dated as of December 21, 1998, as amended
10.30 Third Amendment, dated as of July 17, 2000, to Credit
Agreement, dated as of December 21, 1998, as amended (Exhibit
to our Quarterly Report on Form 10-Q/A for the fiscal quarter
ended September 10, 2000 is incorporated herein by reference).
10.31 Employment Agreement dated as of December 31, 2000 between
Domino's Pizza LLC and Patrick Knotts.
10.32 Amendment, dated February 7, 2000, to Lease Agreement dated
December 21, 1998 by and between Domino's Farms Office Park
Limited Partnership and Domino's Pizza, Inc.
10.33 Settlement Letter, dated March 23, 2000, between TISM, Inc.
and Thomas S. Monaghan
21.1 Domino's, Inc. subsidiaries
99.1 Risk Factors
- -------------
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter of the year
ended December 31, 2000.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
No annual report has been sent to security holders covering the
registrant's last fiscal year and no proxy materials have been sent to more than
10 of the registrant's security holders during the registrant's last fiscal
year.
62
Report of Independent Public Accountants
To Domino's, Inc.:
We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of Domino's, Inc. and
Subsidiaries (the Company) included in this Form 10-K, and have issued our
report thereon dated January 30, 2001. Our audit was made for the purpose of
forming an opinion on the basic consolidated financial statements taken as a
whole. The schedule listed in the accompanying index is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
Detroit, Michigan, /s/ ARTHUR ANDERSEN LLP
January 30, 2001.
SCHEDULE II - VALUATION and QUALIFYING ACCOUNTS
DOMINO'S, INC. and SUBSIDIARIES
(Dollars In Thousands)
Balance * Additions / Balance
Beginning Provision Deductions Translation End of
of Year (Benefit) from Reserves Adjustments Year
------- --------- ------------- ----------- ----
Allowance for doubtful accounts receivable
2000 2,444 1,996 (827) (52) 3,561
1999 2,794 905 (1,242) (13) 2,444
1998 3,978 174 (1,362) 4 2,794
Allowance for doubtful notes receivable
2000 3,537 205 (601) - 3,141
1999 3,165 1,066 (694) - 3,537
1998 5,708 (3,386) 837 6 3,165
- -----------
* Consists primarily of write-offs and recoveries of bad debts
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this annual report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
Township of Ann Arbor, State of Michigan on the 28th day of March, 2001.
DOMINO'S, INC.
/s/ Harry J. Silverman
--------------------------
Harry J. Silverman
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 28, 2001.
/s/ David A. Brandon Chairman, CEO and Director
- ----------------------------- (Principal Executive Officer)
David A. Brandon
/s/ Harry J. Silverman Chief Financial Officer
- ----------------------------- (Principal Financial and Accounting Officer)
Harry J. Silverman
/s/ Andrew B. Balson
- -----------------------------
Andrew B. Balson Director
/s/ Christopher C. Behrens
- -----------------------------
Christopher C. Behrens Director
/s/ Thomas S. Monaghan
- -----------------------------
Thomas S. Monaghan Director
/s/ Mark E. Nunnelly
- -----------------------------
Mark E. Nunnelly Director
/s/ Robert M. Rosenberg
- -----------------------------
Robert M. Rosenberg Director
/s/ Robert F. White
- -----------------------------
Robert F. White Director