SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
For the quarterly period ended June 13, 2004
OR
For the transition period from: to
Commission file numbers:
Domino’s Pizza, Inc.
Domino’s, Inc.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
30 Frank Lloyd Wright Drive
Ann Arbor, Michigan 48106
(Address of principal executive offices)
(734) 930-3030
(Registrant’s telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act): Yes ¨ No x
As of July 19, 2004, Domino’s Pizza, Inc. had 68,653,626 shares of common stock, par value $0.01 per share, outstanding. As of July 19, 2004, Domino’s, Inc. had 10 shares of common stock, par value $0.01 per share, outstanding. All of the stock of Domino’s, Inc. was held by Domino’s Pizza, Inc.
This Quarterly Report on Form 10-Q is a combined quarterly report being filed separately by two registrants: Domino’s Pizza, Inc. and Domino’s, Inc. Except where the context clearly indicates otherwise, any references in this report to Domino’s Pizza, Inc. includes all subsidiaries of Domino’s Pizza, Inc., including Domino’s, Inc. Domino’s, Inc. makes no representation as to the information contained in this report in relation to Domino’s Pizza, Inc. and its subsidiaries, other than Domino’s, Inc. and its subsidiaries.
TABLE OF CONTENTS
PART I.
Item 1.
Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) – June 13, 2004 and December 28, 2003
Condensed Consolidated Statements of Income (Unaudited) – Fiscal quarter and two fiscal quarters ended June 13, 2004 and June 15, 2003
Condensed Consolidated Statements of Cash Flows (Unaudited) – Two fiscal quarters ended June 13, 2004 and June 15, 2003
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
PART II.
Legal Proceedings
Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
Defaults Upon Senior Securities
Submission of Matters to a Vote of Security Holders
Item 5.
Other Information
Item 6.
Exhibits and Reports on Form 8-K
SIGNATURES
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Domino’s Pizza, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
December 28, 2003
(Note)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable
Inventories
Notes receivable
Prepaid expenses and other
Advertising fund assets, restricted
Deferred income taxes
Total current assets
Property, plant and equipment:
Land and buildings
Leasehold and other improvements
Equipment
Construction in progress
Accumulated depreciation and amortization
Property, plant and equipment, net
Other assets:
Deferred financing costs
Goodwill
Capitalized software
Other assets
Total other assets
Total assets
Liabilities and stockholders’ deficit
Current liabilities:
Current portion of long-term debt
Accounts payable
Insurance reserves
Advertising fund liabilities
Other accrued liabilities
Total current liabilities
Long-term liabilities:
Long-term debt, less current portion
Total long-term liabilities
Stockholders’ deficit:
Class L common stock
Common stock
Additional paid-in capital
Retained deficit
Deferred stock compensation
Accumulated other comprehensive income
Total stockholders’ deficit
Total liabilities and stockholders’ deficit
Note: The balance sheet at December 28, 2003 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.
See accompanying notes.
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Condensed Consolidated Statements of Income
Revenues:
Domestic Company-owned stores
Domestic franchise
Domestic distribution
International
Total revenues
Cost of sales:
International and other
Total cost of sales
Operating margin
General and administrative
Income from operations
Interest income
Interest expense
Other
Income before provision for income taxes
Provision for income taxes
Net income
Net income available to common stockholders – basic and diluted
Earnings per share:
Class L common stock – basic
Class L common stock – diluted
Common stock – basic
Common stock – diluted
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Condensed Consolidated Statements of Cash Flows
Cash flows from operating activities:
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures
Net cash used in investing activities
Cash flows from financing activities:
Repayments of debt
Cash paid for financing fees
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Increase in cash and cash equivalents
Cash and cash equivalents, at beginning of period
Cash and cash equivalents, at end of period
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Notes to Condensed Consolidated Financial Statements
(Unaudited; tabular amounts in thousands, except share and per share amounts)
June 13, 2004
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto for the fiscal year ended December 28, 2003 included in our other filings with the Securities and Exchange Commission.
In the opinion of management, all adjustments, consisting of normal recurring items, considered necessary for a fair presentation have been included. Operating results for the fiscal quarter and two fiscal quarters ended June 13, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending January 2, 2005.
Domino’s Pizza, Inc. is the parent and holding company of Domino’s, Inc. Accordingly, all 10 outstanding shares of Domino’s, Inc. common stock, par value $0.01 per share, are owned by Domino’s Pizza, Inc. As the holding company of Domino’s, Inc, Domino’s Pizza, Inc. does not conduct ongoing business operations. As a result, the financial information for Domino’s Pizza, Inc. and subsidiaries and Domino’s, Inc. and subsidiaries is substantially similar. As the differences are minor, we have presented Domino’s Pizza, Inc. and subsidiaries information throughout this filing, except for the supplemental guarantor condensed consolidating financial statements of Domino’s, Inc. and subsidiaries included in footnote 7.
2. Initial Public Offering
On July 16, 2004, Domino’s Pizza, Inc. completed its initial public offering of common stock (the “IPO”). Domino’s Pizza, Inc.’s common stock trades on the New York Stock Exchange under the ticker symbol “DPZ.” In the IPO, Domino’s Pizza, Inc. issued and sold 9,375,000 shares resulting in net proceeds to us of approximately $119.3 million. These net proceeds will be used to redeem, at a premium plus accrued interest, approximately $109.1 million aggregate principal amount of Domino’s, Inc. 8 1/4% senior subordinated notes. We expect this redemption to occur during the third quarter of fiscal 2004. In the IPO, existing shareholders sold an aggregate of 14,846,929 shares of common stock. We did not receive any proceeds from the sale of shares by the selling shareholders. Immediately following the closing of the IPO, we had 68,653,626 shares of common stock outstanding or approximately 72.6 million shares on a fully-diluted basis. Additionally, in connection with the IPO, we used general funds to:
In connection with the IPO, our board of directors approved certain new equity programs, including the 2004 equity incentive plan, the 2004 employee stock purchase plan and the dividend reinvestment and direct stock purchase plan, and approved the grant of options to purchase an aggregate of 1,713,870 shares of common stock to our directors, officers and other employees at an exercise price per share of $14.00.
In May 2004, we reincorporated in Delaware by way of a merger. In July 2004 and in connection with the IPO, we amended our certificate of incorporation and bylaws to, among other changes, convert all of our Class L common stock into shares of our common stock.
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3. Comprehensive Income
June 13,
2004
June 15,
2003
Unrealized gains (losses) on derivative instruments, net of tax
Reclassification adjustment for losses included in net income, net of tax
Currency translation adjustment
Comprehensive income
4. Segment Information
The following table summarizes revenues, income from operations and earnings before interest, taxes, depreciation, amortization, gains (losses) on sale/disposal of assets and other, which is the measure by which management allocates resources to its segments and which we refer to as Segment Income, for each of our reportable segments.
Revenues –
Income from operations –
Segment Income –
The following table reconciles Total Segment Income to consolidated income before provision for income taxes.
Total Segment Income
Depreciation and amortization
Gains (losses) on sale/disposal of assets
Non-cash stock compensation expense
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5. Earnings Per Share
Less -
Accumulated preferred stock dividends
Accretion amounts relating to redemption value of preferred stock
Allocation of net income to common stockholders:
Class L
Weighted average number of common shares:
Earnings per common share – basic:
Diluted weighted average number of common shares:
Earnings per common share – diluted:
6. Stock-Based Compensation
We account for our stock option plans under the recognition and measurement principles of APB Opinion No. 25 “Accounting for Stock Issued to Employees,” and related interpretations. The following table illustrates the effect on net income if we had applied the fair value recognition provisions of SFAS No. 123 “Accounting for Stock-Based Compensation” to the stock-based employee compensation.
Net income, as reported
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects
Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards, net of related tax effects
Net income, pro forma
The pro-forma basic and diluted earnings per share amounts for Class L and Common Stock are the same as reported amounts.
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7. Supplemental Guarantor Condensed Consolidating Financial Statements of Domino’s, Inc. and Subsidiaries
The tables below present condensed consolidating financial information for the applicable periods for: (1) Domino’s, Inc.; (2) on a combined basis, the guarantor subsidiaries of Domino’s, Inc.’s senior subordinated notes due 2011, which includes most of the domestic subsidiaries of Domino’s, Inc. and one foreign subsidiary of Domino’s, Inc.; and (3) on a combined basis, the non-guarantor subsidiaries of Domino’s, Inc.’s senior subordinated notes due 2011. The separate financial statements of Domino’s, Inc. and subsidiaries are presented using the equity method of accounting. Accordingly, Domino’s, Inc. investment in subsidiaries is included in “Other assets” and the net earnings of the subsidiaries are included in “Equity earnings in subsidiaries”. Except for the minor differences noted in the footnotes to the condensed consolidating financial statements below, the consolidated financial statements of Domino’s, Inc. and subsidiaries are substantially similar to the consolidated financial statements of Domino’s Pizza, Inc. and subsidiaries. Each of the guarantor subsidiaries is jointly, severally, fully and unconditionally liable under the related guarantee.
Domino’s, Inc. and Subsidiaries
Supplemental Guarantor Condensed Consolidating Balance Sheets
Cash and cash equivalents (1)
Other current assets
Current assets
Other current liabilities
Current liabilities
Long-term debt
Other long-term liabilities
Long-term liabilities
Stockholder’s equity (deficit) (1)
Total liabilities and stockholder’s equity (deficit)
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Supplemental Guarantor Condensed Consolidating Statements of Income
Revenues
Cost of sales
Total operating expenses
Income (loss) from operations
Equity earnings in subsidiaries
Interest income (expense), net
Income (loss) before provision (benefit) for income taxes
Provision (benefit) for income taxes
Net income (loss)
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General and administrative (2)
Provision (benefit) for income taxes (2)
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Supplemental Condensed Consolidating Statements of Cash Flows
Net cash flows provided by (used in) operating activities
Net cash flows used in investing activities
Other (3)
Net cash flows provided by (used in) financing activities
Cash and cash equivalents, at beginning of period (3)
Cash and cash equivalents, at end of period (3)
Net cash flows provided by (used in) operating activities (3)
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Unaudited; tabular amounts in millions, except percentages and store data)
The 2004 and 2003 second quarters referenced herein represent the twelve-week periods ended June 13, 2004 and June 15, 2003, respectively. The 2004 and 2003 first two quarters referenced herein represent the twenty-four week periods ended June 13, 2004 and June 15, 2003, respectively.
Overview
During the second quarter and first two quarters of 2004, global retail sales at Company-owned and franchise stores grew 7.1% and 7.0%, respectively. During these same periods, revenues grew 9.8% and 5.8%, respectively, and we achieved an increase in income from operations, despite an intensely competitive landscape and an environment of rising costs negatively affecting many of our key expense items.
Our global retail sales, which include retail sales at both our franchise and Company-owned stores, benefited from strong international same store sales growth, an increase in our worldwide store counts and the positive effect of a weaker U.S. dollar in the key international markets in which we compete. The second quarter marked the 42nd consecutive quarter that we have grown our international same store sales and our worldwide store counts increased 239 stores from year-ago levels, led by our international operations. Additionally, during the second quarter and first two quarters of 2004, our domestic same stores sales increased 2.1% and 0.5%, respectively, led by our domestic franchise operations.
Income from operations was $39.3 million in the second quarter, up 0.5% from the comparable period in 2003. We achieved an increase in income from operations despite significant increases in food costs at Company-owned stores primarily as a result of a $0.90 increase in the average cheese block price per pound as compared to the comparable period in 2003. The cheese block price per pound at the end of the second quarter was at a very high level and, during the quarter, reached prices in excess of $2.00 per pound. Reported income from operations as a percentage of consolidated revenues declined 1.2 percentage points to 12.1%. Had the average 2004 cheese price been in effect during the second quarter of 2003, income from operations as a percentage of consolidated revenues would have been unchanged for the second quarter (12.1%). Net income, which decreased $1.6 million to $15.9 million in the second quarter, was negatively impacted by increased debt levels as a result of our June 2003 recapitalization, offset by decreases in income tax expense and other expense.
Same Store Sales Growth
The following is a summary of our same store sales growth for the second quarter and first two quarters of 2004.
Second Quarter
of 2004
First Two Quarters
Domestic franchise stores
Domestic stores
International stores
Store Growth Activity
The following is a summary of our store growth activity for the second quarter and first two quarters of 2004.
Domestic
Company-ownedStores
Store count at March 21, 2004
Openings
Closings
Transfers
Store count at June 13, 2004
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Store count at December 28, 2003
Income Statement Data
The following is a summary of income statement data for the second quarter and first two quarters of 2004 and 2003.
First Two
Quarters of 2003
Operating expenses:
Interest expense, net
Revenues include retail sales by Company-owned stores, royalties and fees from domestic and international franchise stores, and sales of food, equipment and supplies by our distribution centers to certain domestic and international franchise stores. Company-owned store and franchise store revenues may vary significantly from period to period due to changes in store count mix while distribution revenues may vary significantly as a result of fluctuations in food prices, primarily cheese prices.
Consolidated revenues increased $29.0 million or 9.8% to $324.2 million in the second quarter of 2004, from $295.2 million in the comparable period in 2003, and increased $35.5 million or 5.8% to $643.0 million in the first two quarters of 2004, from $607.5 million in the comparable period in 2003. These increases in revenues were due primarily to increases in domestic distribution and international revenues. These results are more fully described below.
Domestic Stores
Domestic stores revenues are comprised of revenues from our domestic Company-owned store operations and domestic franchise operations, as summarized in the following table.
Total domestic stores revenues
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Domestic stores revenues decreased $0.4 million or 0.3% to $117.8 million in the second quarter of 2004, from $118.2 million in the comparable period in 2003, and decreased $2.2 million or 0.9% to $240.4 million in the first two quarters of 2004, from $242.6 million in the comparable period in 2003. These decreases in revenues were due primarily to decreases in Company-owned same store sales, offset in part by increases in franchise same store sales and the average number of domestic franchise stores in operation during 2004. Domestic same store sales increased 2.1% and 0.5% in the second quarter and first two quarters of 2004, respectively, compared to the comparable periods in 2003. These changes in domestic stores revenues are more fully described below.
Domestic Company-Owned Stores
Revenues from domestic Company-owned store operations decreased $1.8 million or 2.1% to $84.1 million in the second quarter of 2004, from $85.9 million in the comparable period in 2003, and decreased $3.8 million or 2.2% to $172.0 million in the first two quarters of 2004, from $175.8 million in the comparable period in 2003. These decreases in revenues were due primarily to decreases in same store sales of 1.4% and 1.5% in the second quarter and first two quarters of 2004, respectively, compared to the comparable periods in 2003 and a decrease in the average number of Company-owned stores open during 2004. There were 577 and 579 domestic Company-owned stores in operation as of June 13, 2004 and June 15, 2003, respectively.
Domestic Franchise
Revenues from domestic franchise operations increased $1.5 million or 4.4% to $33.8 million in the second quarter of 2004, from $32.3 million in the comparable period in 2003, and increased $1.6 million or 2.5% to $68.4 million in the first two quarters of 2004, from $66.8 million in the comparable period in 2003. These increases in revenues were due primarily to increases in same store sales of 2.6% and 0.8% in the second quarter and first two quarters of 2004, respectively, compared to the comparable periods in 2003 and an increase in the average number of domestic franchise stores open during 2004. There were 4,348 and 4,283 domestic franchise stores in operation as of June 13, 2004 and June 15, 2003, respectively.
Domestic Distribution
Revenues from domestic distribution operations increased $26.3 million or 17.0% to $180.9 million in the second quarter of 2004, from $154.6 million in the comparable period in 2003, and increased $29.7 million or 9.2% to $351.8 million in the first two quarters of 2004, from $322.1 million in the comparable period in 2003. These increases in revenues were due primarily to an increase in overall food prices, primarily higher cheese prices, and were offset in part by a decrease in volumes. The cheese block price per pound averaged $2.01 and $1.67 in the second quarter and first two quarters of 2004, respectively, compared to $1.11 and $1.12 in the comparable periods in 2003. Had the average 2004 cheese prices been in effect during the comparable periods of 2003, revenues from distribution operations for the second quarter and first two quarters of 2003 would have been approximately $28.1 million and $34.3 million, respectively, higher than the reported 2003 amounts.
Revenues from international operations increased $3.1 million or 14.0% to $25.5 million in the second quarter of 2004, from $22.4 million in the comparable period in 2003, and increased $8.0 million or 18.6% to $50.8 million in the first two quarters of 2004, from $42.8 million in the comparable period in 2003. These increases in revenues were due to increases in same store sales, an increase in the average number of international stores open during 2004, and related increases in revenues from our international distribution operations. On a constant dollar basis, same store sales increased 5.0% and 5.7% in the second quarter and first two quarters of 2004, compared to the comparable periods in 2003. On a historical dollar basis, same store sales increased 9.4% and 13.0% in the second quarter and first two quarters of 2004, respectively, compared to the comparable periods in 2003, reflecting a generally weaker U.S. Dollar in those markets in which we compete. There were 2,605 and 2,429 international stores in operation as of June 13, 2004 and June 15, 2003, respectively.
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Cost of Sales / Operating Margin
Consolidated cost of sales is comprised primarily of domestic Company-owned store and domestic distribution costs incurred to generate related revenues. Components of consolidated cost of sales primarily include food, labor and occupancy costs.
The consolidated operating margin, which we define as revenues less cost of sales, increased $0.8 million or 1.1% to $77.6 million in the second quarter of 2004, from $76.8 million in the comparable period in 2003, and increased $1.5 million or 0.9% to $158.7 million in the first two quarters of 2004, from $157.2 million in the comparable period in 2003, as summarized in the following table.
Consolidated revenues
Consolidated cost of sales
Consolidated operating margin
The increases in the consolidated operating margin during the second quarter and first two quarters of 2004 were due primarily to increases in revenues from both our international and domestic franchise operations, offset in part by decreases in the operating margins at both our domestic Company-owned stores and domestic distribution operations. Franchise revenues do not have a cost of sales component and, as a result, increases in related franchise revenues have a disproportionate effect on the consolidated operating margin.
As a percentage of total revenues, the decreases in the consolidated operating margin were due primarily to increases in domestic distribution revenues and related costs as a result of a market increase in overall food prices, primarily cheese, as well as increased food costs at our domestic Company-owned stores. The average cheese block price increased $0.90 and $0.55 per pound during the second quarter and first two quarters of 2004, respectively, which impacted both our domestic distribution and Company-owned store margins. These decreases in operating margin as a percentage of total revenues were offset in part by the aforementioned increases in domestic franchise and international revenues. Changes in the operating margins at domestic Company-owned store operations and domestic distribution operations are more fully described below.
The domestic Company-owned store operating margin decreased $2.4 million or 13.6% to $15.1 million in the second quarter of 2004, from $17.5 million in the comparable period in 2003, and decreased $2.6 million or 7.6% to $33.0 million in the first two quarters of 2004, from $35.6 million in the comparable period in 2003, as summarized in the following table.
Store operating margin
The decreases in the domestic Company-owned store operating margin during the second quarter and first two quarters of 2004, respectively, were due primarily to decreases in same store sales and a market increase in overall food prices, primarily cheese.
As a percentage of store revenues, the store operating margin decreased 2.4 percentage points to 18.0% in the second quarter of 2004, from 20.4% in the comparable period in 2003, and decreased 1.1 percentage points to 19.2% in the first two quarters of 2004, from 20.3% in the comparable period in 2003.
As a percentage of store revenues, food costs increased 3.2 percentage points to 29.6% in the second quarter of 2004, from 26.4% in the comparable period in 2003 and increased 1.1 percentage points to 27.9% in the first two quarters of 2004, from 26.8% in the comparable period in 2003. These increases in food costs as a percentage of store revenues were due primarily to a market increase in overall food prices, primarily cheese, and were offset in part by a change in product mix per order primarily as a result of more aggressive promotions in 2003. The cheese block price per pound averaged $2.01 and $1.67 in the second quarter and first two quarters of 2004, respectively, compared to $1.11 and $1.12 in the comparable periods in 2003.
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As a percentage of store revenues, occupancy costs, which include rent, telephone, utilities and depreciation, increased 0.1 percentage points to 11.3% in the second quarter of 2004, from 11.2% in the comparable period in 2003, and increased 0.4 percentage points to 11.2% in the first two quarters of 2004, from 10.8% in the comparable period in 2003.
As a percentage of store revenues, labor costs decreased 0.8 percentage points to 29.3% in the second quarter of 2004, from 30.1% in the comparable period in 2003 and decreased 0.3 percentage points to 30.0% in the first two quarters of 2004, from 30.3% in the comparable period in 2003.
The domestic distribution operating margin decreased $0.5 million or 2.6% to $16.4 million in the second quarter of 2004, from $16.9 million in the comparable period in 2003, and decreased $2.5 million or 7.0% to $33.1 million in the first two quarters of 2004, from $35.6 million in the comparable period in 2003, as summarized in the following table.
Distribution operating margin
The decreases in the domestic distribution operating margin during the second quarter and first two quarters of 2004 were due primarily to decreases in volumes and, to a lesser extent, increases in insurance, delivery and depreciation costs.
As a percentage of distribution revenues, the distribution operating margin decreased 1.8 percentage points to 9.1%, in the second quarter of 2004 from 10.9% in the comparable period in 2003, and decreased 1.7 percentage points to 9.4%, in the first two quarters of 2004 from 11.1% in the comparable period in 2003. These decreases were due primarily to increased food prices, including cheese, and a decrease in volumes shipped to domestic stores. Increases in certain food prices, primarily cheese, have a negative effect on the distribution operating margin due to the fixed dollar margin earned by domestic distribution on the sale of certain food items. Had the 2004 average cheese prices been in effect during the comparable periods of 2003, the distribution operating margin for the second quarter and first two quarters of 2003 would have been approximately 9.2% and 10.0% of distribution revenues, respectively, or 1.7 percentage points and 1.1 percentage points, respectively, lower than the reported 2003 amounts.
General and Administrative Expenses
General and administrative expenses increased $0.6 million or 1.7% to $38.3 million in the second quarter of 2004, from $37.7 million in the comparable period in 2003, and increased $0.8 million or 1.0% to $75.9 million in the first two quarters of 2004, from $75.1 million in the comparable period in 2003. The increases in general and administrative expenses were due primarily to increases in rents, insurance and labor costs.
As a percentage of revenues, general and administrative expenses decreased 0.9 percentage points to 11.8% in the second quarter of 2004, from 12.7% in the comparable period in 2003, and decreased 0.6 percentage points to 11.8% in the first two quarters of 2004, from 12.4% in the comparable period in 2003. These decreases in general and administrative expenses as a percentage of revenues were due primarily to the positive impact on general and administrative expenses as a percentage of revenues that resulted from increased revenues in our distribution centers related to rising food prices. Had the 2004 average cheese prices been in effect during the comparable periods of 2003, general and administrative costs as a percentage of revenues for the second quarter and first two quarters of 2003 would have been approximately 11.6% and 11.7% of revenues, respectively, or 1.1 percentage points and 0.7 percentage points, respectively, lower than the reported 2003 amounts.
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Interest Expense
Interest expense increased $2.9 million or 26.2% to $13.9 million in the second quarter of 2004, from $11.0 million in the comparable period in 2003 and increased $4.5 million or 19.4% to $27.9 million in the first two quarters of 2004, from $23.4 million in the comparable period in 2003. These increases in interest expense were due primarily to increased debt levels as a result of our June 2003 recapitalization, offset in part by more favorable interest rates. Our average outstanding debt balance, excluding capital lease obligations, increased $343.6 million to $933.5 million in the first two quarters of 2004, from $589.9 million in the comparable period in 2003. Our effective borrowing rate, including the effect of interest rate derivatives, decreased 1.6 percentage points to 5.9% during the first two quarters of 2004, from 7.5% in the comparable period in 2003.
Other expense decreased $1.7 million in the first two quarters of 2004. This decrease was due to losses incurred in connection with redeeming $20.5 million of Domino’s, Inc. senior subordinated notes in the first quarter of 2003.
Provision for Income Taxes
Provision for income taxes decreased $1.1 million to $9.6 million in the second quarter of 2004, from $10.7 million in the comparable period in 2003, and decreased $0.6 million to $20.8 million in the second quarter of 2004, from $21.4 million in the comparable period in 2003.
Liquidity and Capital Resources
We had working capital of $32.5 million and cash and cash equivalents of $51.3 million at June 13, 2004. Historically, we have operated with minimal positive 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. We generally collect our receivables within three weeks from the date of the related sale and we generally experience 40 to 50 inventory turns per year. In addition, our sales are not typically seasonal, which further limits our working capital requirements. These factors, coupled with significant and ongoing cash flows from operations, which are primarily used to repay debt and invest in long-term assets, reduce our working capital amounts. More recently, due to the one percent annual amortization payments required by our senior secured credit facility, as well as voluntary prepayments we have made on the senior secured credit facility principal amount, we do not have a significant current portion of long-term debt. Accordingly, our working capital has been positively impacted. Our primary sources of liquidity are cash flows from operations and availability of borrowings under our revolving credit facility. We expect to fund planned capital expenditures and debt repayments from these sources. We did not have any material commitments for capital expenditures as of June 13, 2004.
As of June 13, 2004, we had $929.2 million of debt, of which $0.3 million was classified as a current liability. There were no borrowings under our $125.0 million revolving credit facility. Letters of credit issued under the revolving credit facility were $24.8 million. These letters of credit are primarily related to our casualty insurance programs and distribution center leases. 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 $52.5 million and $60.4 million in the first two quarters of 2004 and 2003, respectively. The $7.9 million decrease was due primarily to a $1.5 million decrease in net income and a $6.3 million net change in operating assets and liabilities.
Cash used in investing activities was $17.3 million and $9.6 million in the first two quarters of 2004 and 2003, respectively. The $7.7 million increase was due primarily to a $6.1 million increase in capital expenditures, due primarily to renovations of our corporate headquarters, and a $0.8 million decrease in net repayments of notes receivable.
Cash used in financing activities was $27.3 million and $21.8 million in the first two quarters of 2004 and 2003, respectively. The $5.5 million increase was due primarily to a $5.0 million increase in repayments of debt and a $0.6 million increase in cash paid for financing costs.
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On July 16, 2004, Domino’s Pizza, Inc. completed an initial public offering of its common stock. With the proceeds to us from that offering, Domino’s, Inc. will redeem approximately $109.1 million of its senior subordinated notes due 2011. The redemption is expected to occur during the third fiscal quarter of 2004 at 108.25% of par value of the notes plus accrued interest. Prior to the completion of the offering, Domino’s, Inc. amended and restated its senior secured credit facility to, among other amendments, allow for such use of proceeds from the initial public offering.
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 twelve months. Our ability to continue to fund these items and continue to reduce debt could be adversely affected by the occurrence of any of the events described under “Risk Factors” in our filings with the Securities and Exchange Commission. There can be no assurance, however, that our business will generate sufficient cash flows from operations or that future borrowings will be available under the senior secured credit facility or otherwise to enable us to service our indebtedness, including the senior secured credit facility and the senior subordinated notes, or to make anticipated capital expenditures, or to make anticipated dividend payments. Our future operating performance and our ability to service or refinance the senior subordinated notes and to service, extend or refinance the senior secured credit facility will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. Additionally, Domino’s, Inc. may be requested to provide funds to its parent company, Domino’s Pizza, Inc. for dividends, distributions and/or other cash needs of Domino’s Pizza, Inc.
Forward-Looking Statements
Certain statements contained in this filing relating to capital spending levels and the adequacy of our capital resources are forward-looking. Also, statements that contain words such as “believes,” “expects,” “anticipates,” “intends,” “estimates” or similar expressions are forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Among these risks and uncertainties are competitive factors, increases in our operating costs, ability to retain our key personnel, our substantial leverage, ability to implement our growth and cost-saving strategies, industry trends and general economic conditions, adequacy of insurance coverage and other factors, all of which are described in our filings with the Securities and Exchange Commission. We do not undertake to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
We are exposed to market risks from interest rate changes on our variable rate debt. Management actively monitors this exposure. We do not engage in speculative transactions nor do we hold or issue financial instruments for trading purposes.
Interest Rate Derivatives
We enter into interest rate swaps, collars or similar instruments with the objective of reducing volatility relating to our borrowing costs.
We are party to three interest rate swap agreements which effectively convert the variable LIBOR component of the effective interest rate on a portion of our debt under our senior secured credit facility to various fixed rates over various terms. We are also party to two interest rate swap agreements which effectively convert the fixed component of our debt under our senior subordinated notes to variable LIBOR rates over the term of the senior subordinated notes.
These agreements are summarized in the following table.
Derivative
Total
Notional Amount
Domino’s
Pays
Counterparty
Interest Rate Swap
In 2004, we entered into two additional interest rate swap agreements effectively converting the variable Eurodollar component on a portion of our senior secured credit facility term debt to various fixed rates over various terms. The first agreement has a notional amount of $300.0 million, begins in June 2004, ends in June 2005 and fixes our interest rate at 1.62%. The second agreement has a notional starting amount of $350.0 million, begins in June 2005, ends in June 2007 and fixes our interest rate at 3.21%. We pay a fixed interest rate under these agreements while the counterparty pays a floating rate.
Interest Rate Risk
Our variable interest expense is sensitive to changes in the general level of interest rates. At June 13, 2004, the weighted average interest rate on our $458.0 million of variable interest debt was 3.75%.
We had total interest expense of approximately $27.9 million in the first two quarters of 2004. The estimated increase in interest expense for this period from a hypothetical 200 basis point adverse change in applicable variable interest rates would be approximately $4.3 million.
Item 4. Controls and Procedures
Domino’s Pizza, Inc.’s Chairman and Chief Executive Officer, David A. Brandon, and Executive Vice President and Chief Financial Officer, Harry J. Silverman, performed an evaluation of the effectiveness of Domino’s Pizza, Inc.’s and Domino’s, Inc.’s disclosure controls and procedures (as that term is defined in Rule 13a-15(e) under the Securities Exchange of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, Messrs. Brandon and Silverman concluded that each of Domino’s Pizza, Inc.’s and Domino’s, Inc.’s disclosure controls and procedures were effective.
During the quarterly period ended June 13, 2004 there have been no changes in either Domino’s Pizza, Inc.’s or Domino’s, Inc.’s internal controls over financial reporting that have materially affected or are reasonably likely to materially affect Domino’s Pizza, Inc.’s or Domino’s, Inc.’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are a party to lawsuits, revenue agent reviews by taxing authorities and administrative proceedings in the ordinary course of business which include workers’ compensation, general liability, automobile and franchisee claims. We are also subject to suits related to employment practices and, specifically in California, wage and hour claims and an action alleging that our store managers are misclassified as exempt employees. We believe that these matters, individually and in the aggregate, will not have a significant adverse effect on our financial condition and that our established reserves adequately provide for the estimated resolution of such claims.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
On July 12, 2004, the Securities and Exchange Commission declared Domino’s Pizza, Inc.’s Registration Statement on Form S-1 (File No. 333-114442-01) effective. On July 16, 2004, Domino’s Pizza, Inc. closed its offering for an aggregate of 9,375,000 shares of Domino’s Pizza, Inc.’s common stock, $.01 par value per share, at an initial public offering price of $14.00 per share (subject to an underwriting discount of $0.96 per share). In addition, the selling stockholders identified in the registration statement sold an aggregate of 14,846,929 shares of Domino’s Pizza, Inc. common stock at an initial public offering price of $14.00 (subject to an underwriting discount of $0.96 per share). The underwriters have an option, exercisable for a period of 30 days from the date of the final prospectus related to the initial public offering, to purchase from certain selling stockholders up to an additional 3,633,289 shares of Domino’s Pizza, Inc. common stock at an initial public offering price of $14.00 per share (subject to an underwriting discount of $0.96 per share) to cover over-allotments, if any.
The registration statement referred to above, together with Domino’s Pizza, Inc.’s registration statement on Form S-1 (File No. 333-117324) filed on July 12, 2004 pursuant to Rule 462(b) under the Securities Act of 1933, registered a total of 9,375,000 shares of Domino’s Pizza, Inc. common stock to be sold by Domino’s Pizza, Inc. and a total of 18,480,218 shares of Domino’s Pizza, Inc. common stock to be sold by selling stockholders, including 3,633,289 shares of Domino’s Pizza, Inc. common stock subject to the over-allotment option referred to above. The shares sold by Domino’s Pizza, Inc. have an aggregate offering price (net of the related underwriting discount) of approximately $122.3 million and the shares sold by the selling stockholders have an aggregate offering price (net of the related underwriting discount) of approximately $193.6 million. Including the shares that are subject to the over-allotment option, the shares registered for sale by the selling stockholders have an aggregate offering price (net of the related underwriting discount) of approximately $241.0 million.
The managing underwriters for the offering were J.P. Morgan Securities Inc., Citigroup Global Markets Inc., Bear, Stearns & Co. Inc., Credit Suisse First Boston LLC and Lehman Brothers Inc. Net proceeds to Domino’s Pizza, Inc. were approximately $119.3 million after deducting underwriting discounts of $9.0 million and estimated offering expenses of approximately $3.0 million. All of such underwriting discounts and estimated expenses represent amounts payable to persons not affiliated with Domino’s Pizza, Inc.
All of the net proceeds to Domino’s Pizza, Inc. will be used to redeem, at a premium plus accrued interest, approximately $109.1 million in aggregate principal amount of Domino’s, Inc.’s outstanding 8 1/4% senior subordinated notes due 2011. The redemption is expected to occur during the third quarter of fiscal 2004.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
Pursuant to Section 228 of the General Corporation Law of the State of Delaware, on April 19, 2004 TISM, Inc., as sole stockholder of Domino’s Pizza, Inc., by written consent without a meeting, adopted resolutions approving the reincorporation merger of TISM, Inc. and Domino’s Pizza, Inc.
Votes cast for the above matters: Common Stock – 1,000 shares
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Pursuant to Section 228 of the General Corporation Law of the State of Delaware, on June 2, 2004 the stockholders of Domino’s Pizza, Inc., by written consent without a meeting, adopted resolutions:
Votes cast for the above matters: Common Stock – 21,208,686 shares
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Description
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The following Current Reports on Form 8-K were filed with or furnished to the SEC during the period covered by this report:
Current Report on Form 8-K of Domino’s, Inc. dated March 23, 2004, which included a press release announcing financial results for the fourth quarter and fiscal year ended December 28, 2003.
Current Report on Form 8-K of Domino’s, Inc. dated April 13, 2004, which included a press release announcing that TISM, Inc., the parent company of Domino’s, Inc., and one of TISM’s subsidiaries, Domino’s Pizza, Inc., filed a registration statement on Form S-1 with the Securities and Exchange Commission to register the sale of shares of common stock in an initial public offering.
Current Report on Form 8-K of Domino’s, Inc. dated May 4, 2004, which included a press release announcing financial results for the first quarter of 2004 which ended March 21, 2004.
Current Report on Form 8-K of Domino’s, Inc. dated May 6, 2004, which included a press release announcing that Domino’s, Inc., together with its parent company, TISM, Inc., and various subsidiaries of TISM entered into a Second Amendment and Consent to Credit Agreement and First Amendment to Subsidiaries Guaranty with J.P. Morgan Securities Inc., as sole lead arranger and book runner, JPMorgan Chase Bank, as administrative agent for Lenders, CITICORP North America, Inc., as syndication agent and BANK ONE, NA as documentation agent and the other lenders party thereto, and including such amendment as an exhibit to the report.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on its behalf by the undersigned duly authorized officer.
/s/ Harry J. Silverman
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