10-Q 1 d10q.htm FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 5, 2004 For the quarterly period ended September 5, 2004
Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


 

FORM 10-Q

 


 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 5, 2004

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from:              to             

 

Commission file numbers:

 

Domino’s Pizza, Inc.   333-114442
Domino’s, Inc.   333-107774

 


 

Domino’s Pizza, Inc.

Domino’s, Inc.

(Exact name of registrant as specified in its charter)

 


 

Delaware   38-2511577
Delaware   38-3025165

(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  x    No  ¨

 

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 October 11, 2004, Domino’s Pizza, Inc. had 68,655,553 shares of common stock, par value $0.01 per share, outstanding. As of October 11, 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

Domino’s Pizza, Inc.

Domino’s, Inc.

 

TABLE OF CONTENTS

 

          Page No.

PART I.

   FINANCIAL INFORMATION     

Item 1.

   Financial Statements     
     Condensed Consolidated Balance Sheets (Unaudited) – September 5, 2004 and December 28, 2003    3
     Condensed Consolidated Statements of Income (Unaudited) – Fiscal quarter and three fiscal quarters ended     September 5, 2004 and September 7, 2003    4
     Condensed Consolidated Statements of Cash Flows (Unaudited) – Three fiscal quarters ended September 5,     2004 and September 7, 2003    5
     Notes to Condensed Consolidated Financial Statements (Unaudited)    6

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    13

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    20

Item 4.

   Controls and Procedures    20

PART II.

   OTHER INFORMATION     

Item 1.

   Legal Proceedings    21

Item 2.

   Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities    21

Item 3.

   Defaults Upon Senior Securities    21

Item 4.

   Submission of Matters to a Vote of Security Holders    21

Item 5.

   Other Information    21

Item 6.

   Exhibits and Reports on Form 8-K    21

SIGNATURES

   22

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

Domino’s Pizza, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

 

(In thousands)    September 5, 2004

    December 28, 2003
(Note)


 

Assets

                

Current assets:

                

Cash and cash equivalents

   $ 20,223     $ 42,852  

Accounts receivable

     64,091       64,571  

Inventories

     23,357       19,480  

Notes receivable

     1,479       3,785  

Prepaid expenses and other

     19,563       16,040  

Advertising fund assets, restricted

     28,043       30,544  

Deferred income taxes

     5,843       5,730  
    


 


Total current assets

     162,599       183,002  
    


 


Property, plant and equipment:

                

Land and buildings

     22,156       21,849  

Leasehold and other improvements

     70,935       61,433  

Equipment

     167,553       158,286  

Construction in progress

     6,466       6,133  
    


 


       267,110       247,701  

Accumulated depreciation and amortization

     131,326       120,634  
    


 


Property, plant and equipment, net

     135,784       127,067  
    


 


Other assets:

                

Deferred financing costs

     13,946       18,847  

Goodwill

     23,780       23,432  

Capitalized software

     25,003       27,197  

Other assets

     19,764       16,988  

Deferred income taxes

     40,167       52,042  
    


 


Total other assets

     122,660       138,506  
    


 


Total assets

   $ 421,043     $ 448,575  
    


 


Liabilities and stockholders’ deficit

                

Current liabilities:

                

Current portion of long-term debt

   $ 317     $ 18,572  

Accounts payable

     50,001       53,388  

Insurance reserves

     10,737       9,432  

Advertising fund liabilities

     28,043       30,544  

Other accrued liabilities

     57,023       72,327  
    


 


Total current liabilities

     146,121       184,263  
    


 


Long-term liabilities:

                

Long-term debt, less current portion

     804,004       941,165  

Insurance reserves

     17,928       15,941  

Other accrued liabilities

     27,925       25,169  
    


 


Total long-term liabilities

     849,857       982,275  
    


 


Stockholders’ deficit:

                

Class L common stock

     —         36  

Common stock

     687       327  

Additional paid-in capital

     302,004       181,897  

Retained deficit

     (881,842 )     (900,232 )

Deferred stock compensation

     (218 )     —    

Accumulated other comprehensive income

     4,434       9  
    


 


Total stockholders’ deficit

     (574,935 )     (717,963 )
    


 


Total liabilities and stockholders’ deficit

   $ 421,043     $ 448,575  
    


 



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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Table of Contents

Domino’s Pizza, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(Unaudited)

 

     Fiscal Quarter Ended

    Three Fiscal Quarters Ended

 
(In thousands, except per share data)    September 5,
2004


    September 7,
2003


    September 5,
2004


    September 7,
2003


 

Revenues:

                                

Domestic Company-owned stores

   $ 87,471     $ 82,419     $ 259,497     $ 258,236  

Domestic franchise

     35,199       31,411       103,604       98,164  

Domestic distribution

     177,422       157,689       529,199       479,757  

International

     24,886       21,329       75,669       64,159  
    


 


 


 


Total revenues

     324,978       292,848       967,969       900,316  
    


 


 


 


Cost of sales:

                                

Domestic Company-owned stores

     72,118       67,861       211,192       208,033  

Domestic distribution

     161,002       142,354       479,683       428,823  

International

     12,576       11,133       39,099       34,719  
    


 


 


 


Total cost of sales

     245,696       221,348       729,974       671,575  
    


 


 


 


Operating margin

     79,282       71,500       237,995       228,741  

General and administrative

     50,904       49,097       126,824       124,243  
    


 


 


 


Income from operations

     28,378       22,403       111,171       104,498  

Interest income

     226       124       409       320  

Interest expense

     (17,280 )     (30,967 )     (45,170 )     (54,320 )

Other

     (9,751 )     (20,422 )     (9,751 )     (22,164 )
    


 


 


 


Income (loss) before provision (benefit) for income taxes

     1,573       (28,862 )     56,659       28,334  

Provision (benefit) for income taxes

     594       (10,824 )     21,389       10,625  
    


 


 


 


Net income (loss)

   $ 979     $ (18,038 )   $ 35,270     $ 17,709  
    


 


 


 


Net income (loss) available to common stockholders – basic and diluted

   $ 979     $ (52,012 )   $ 35,270     $ (25,332 )
    


 


 


 


Earnings per share:

                                

Class L common stock – basic

   $ 0.50     $ 2.31     $ 5.57     $ 7.85  

Class L common stock – diluted

     0.50       2.31       5.57       7.83  

Common stock – basic

   $ (0.02 )   $ (1.85 )   $ 0.37     $ (1.64 )

Common stock – diluted

     (0.02 )     (1.85 )     0.35       (1.64 )

 

See accompanying notes.

 

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Table of Contents

Domino’s Pizza, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

     Three Fiscal Quarters Ended

 
(In thousands)    September 5,
2004


    September 7,
2003


 

Cash flows from operating activities:

                

Net income

   $ 35,270     $ 17,709  

Adjustments to reconcile net income to net cash provided by operating activities:

                

Depreciation and amortization

     21,428       19,993  

Amortization of deferred financing costs

     6,535       18,674  

Provision for deferred income taxes

     8,927       3,901  

Other

     1,140       144  

Changes in operating assets and liabilities

     (15,552 )     (8,327 )
    


 


Net cash provided by operating activities

     57,748       52,094  
    


 


Cash flows from investing activities:

                

Capital expenditures

     (28,640 )     (17,567 )

Other

     1,945       7,653  
    


 


Net cash used in investing activities

     (26,695 )     (9,914 )
    


 


Cash flows from financing activities:

                

Proceeds from the issuance of long-term debt

     —         1,010,090  

Cash paid for financing fees

     (654 )     (20,048 )

Repayments of debt

     (155,593 )     (640,426 )

Net proceeds from the issuance of common stock

     119,550       —    

Purchases of preferred stock

     —         (200,557 )

Distributions

     (16,880 )     (188,333 )

Other

     (596 )     (372 )
    


 


Net cash used in financing activities

     (54,173 )     (39,646 )
    


 


Effect of exchange rate changes on cash and cash equivalents

     491       5  
    


 


Increase (decrease) in cash and cash equivalents

     (22,629 )     2,539  

Cash and cash equivalents, at beginning of period

     42,852       22,596  
    


 


Cash and cash equivalents, at end of period

   $ 20,223     $ 25,135  
    


 


 

See accompanying notes.

 

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Table of Contents

Domino’s Pizza, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited; tabular amounts in thousands, except share and per share amounts)

 

September 5, 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 three fiscal quarters ended September 5, 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. Comprehensive Income (Loss)

 

     Fiscal Quarter Ended

    Three Fiscal Quarters Ended

 
    

September 5,

2004


    September 7,
2003


   

September 5,

2004


    September 7,
2003


 

Net income (loss)

   $ 979     $ (18,038 )   $ 35,270     $ 17,709  

Unrealized gains (losses) on derivative instruments, net of tax

     (3,210 )     576       2,996       (990 )

Reclassification adjustment for losses included in net income (loss), net of tax

     366       906       1,703       2,999  

Currency translation adjustment

     134       (679 )     (274 )     556  
    


 


 


 


Comprehensive income (loss)

   $ (1,731 )   $ (17,235 )   $ 39,695     $ 20,274  
    


 


 


 


 

3. Segment Information

 

The following table summarizes revenues, income from operations and earnings before interest, taxes, depreciation, amortization 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.

 

     Fiscal Quarters Ended September 5, 2004 and September 7, 2003

     Domestic
Stores


   Domestic
Distribution


   International

   Intersegment
Revenues


    Other

    Total

Revenues –

                                           

2004

   $ 122,670    $ 203,401    $ 24,886    $ (25,979 )   $ —       $ 324,978

2003

     113,830      181,092      21,329      (23,403 )     —         292,848

Income from operations –

                                           

2004

   $ 29,480    $ 9,936    $ 7,238      N/A     $ (18,276 )   $ 28,378

2003

     25,625      9,195      6,654      N/A       (19,071 )     22,403

Segment Income –

                                           

2004

   $ 32,619    $ 12,530    $ 7,500      N/A     $ (6,524 )   $ 46,125

2003

     28,643      10,958      6,895      N/A       (4,486 )     42,010

 

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Table of Contents
     Three Fiscal Quarters Ended September 5, 2004 and September 7, 2003

     Domestic
Stores


   Domestic
Distribution


   International

   Intersegment
Revenues


    Other

    Total

Revenues –

                                           

2004

   $ 363,101    $ 603,527    $ 75,669    $ (74,328 )   $ —       $ 967,969

2003

     356,400      551,438      64,159      (71,681 )     —         900,316

Income from operations –

                                           

2004

   $ 89,598    $ 31,348    $ 22,227      N/A     $ (32,002 )   $ 111,171

2003

     86,452      31,526      18,666      N/A       (32,146 )     104,498

Segment Income –

                                           

2004

   $ 98,637    $ 38,490    $ 23,005      N/A     $ (17,096 )   $ 143,036

2003

     95,257      36,678      19,337      N/A       (13,980 )     137,292

 

The following table reconciles Total Segment Income to consolidated income (loss) before provision (benefit) for income taxes.

 

     Fiscal Quarter Ended

    Three Fiscal Quarters Ended

 
    

September 5,

2004


    September 7,
2003


   

September 5,

2004


    September 7,
2003


 

Total Segment Income

   $ 46,125     $ 42,010     $ 143,036     $ 137,292  

Depreciation and amortization

     (7,370 )     (6,668 )     (21,428 )     (19,993 )

Gains (losses) on sale/disposal of assets

     (365 )     2,795       (402 )     3,152  

Other non-cash stock compensation expense

     (12 )     —         (35 )     (219 )

Termination of management agreement

     (10,000 )     —         (10,000 )     —    

2003 recapitalization expenses

     —         (15,734 )     —         (15,734 )
    


 


 


 


Income from operations

     28,378       22,403       111,171       104,498  

Interest income

     226       124       409       320  

Interest expense

     (17,280 )     (30,967 )     (45,170 )     (54,320 )

Other

     (9,751 )     (20,422 )     (9,751 )     (22,164 )
    


 


 


 


Income (loss) before provision (benefit) for income taxes

   $ 1,573     $ (28,862 )   $ 56,659     $ 28,334  
    


 


 


 


 

4. Earnings Per Share

 

     Fiscal Quarter Ended

    Three Fiscal Quarters Ended

 
    

September 5,

2004


    September 7,
2003


   

September 5,

2004


   September 7,
2003


 

Net income (loss)

   $ 979     $ (18,038 )   $ 35,270    $ 17,709  

Accumulated preferred stock dividends

     —         (373 )     —        (9,125 )

Accretion amounts relating to redemption value of preferred stock

     —         (33,601 )     —        (33,916 )
    


 


 

  


Net income (loss) available to common stockholders – basic and diluted

   $ 979     $ (52,012 )   $ 35,270    $ (25,332 )
    


 


 

  


Allocation of net income (loss) to common stockholders:

                               

Class L

   $ 1,823     $ 8,350     $ 20,138    $ 28,357  

Common stock

     (844 )     (60,362 )     15,132      (53,689 )

Weighted average number of shares:

                               

Class L

     3,613,978       3,614,466       3,613,991      3,614,629  

Common stock

     55,813,460       32,705,967       40,406,868      32,707,435  

Earnings per share – basic:

                               

Class L

   $ 0.50     $ 2.31     $ 5.57    $ 7.85  

Common stock

     (0.02 )     (1.85 )     0.37      (1.64 )

Diluted weighted average number of shares:

                               

Class L

     3,617,682       3,619,134       3,617,371      3,620,502  

Common stock

     55,813,460       32,705,967       42,875,425      32,707,435  

Earnings per share – diluted:

                               

Class L

   $ 0.50     $ 2.31     $ 5.57    $ 7.83  

Common stock

     (0.02 )     (1.85 )     0.35      (1.64 )

 

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The denominator in calculating diluted earnings per share for common stock for the third quarter of 2004 does not include 2,441,176 dilutive shares resulting from stock options as their inclusion would be anti-dilutive. Additionally, the denominator in calculating diluted earnings per share for common stock for the third quarter and first three quarters of 2003 does not include 1,992,759 and 2,119,319, respectively, of dilutive shares resulting from stock options as their inclusion would be anti-dilutive.

 

5. 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.

 

     Fiscal Quarter Ended

    Three Fiscal Quarters Ended

 
    

September 5,

2004


    September 7,
2003


   

September 5,

2004


    September 7,
2003


 

Net income (loss), as reported

   $ 979     $ (18,038 )   $ 35,270     $ 17,709  

Add: Stock-based employee compensation expense included in reported net income, net of related tax effects

     12       1,726       35       1,863  

Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards, net of related tax effects

     (210 )     (2,534 )     (381 )     (2,771 )
    


 


 


 


Net income (loss), pro forma

   $ 781     $ (18,846 )   $ 34,924     $ 16,801  
    


 


 


 


 

The pro forma basic and diluted earnings per share amounts for Class L and common stock are the same as reported amounts.

 

6. Significant Changes in Equity

 

Prior to the Domino’s Pizza, Inc. initial public offering of common stock (the “IPO”) completed on July 16, 2004, the Company amended its certificate of incorporation and bylaws to, among other changes, convert all of its Class L common stock into shares of its common stock. In the IPO, Domino’s Pizza, Inc. issued and sold 9,375,000 shares of common stock resulting in net proceeds to the Company of approximately $119.6 million. Also in the IPO, existing shareholders sold an aggregate of 14,846,929 shares of common stock. The Company did not receive any proceeds from the sale of shares by the selling shareholders. Immediately following the closing of the IPO, the Company had 68,653,626 shares of common stock outstanding. Additionally, in connection with the IPO, the Company used general funds to pay in full $16.9 million of contingent notes held by our founder and former majority stockholder and his spouse.

 

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.’s 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.

 

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Domino’s, Inc. and Subsidiaries

Supplemental Guarantor Condensed Consolidating Balance Sheets

 

     As of September 5, 2004

 
     Domino’s, Inc.

    Guarantor
Subsidiaries


   Non-Guarantor
Subsidiaries


   Eliminations

    Consolidated

 

Cash and cash equivalents

   $ 3,109     $ 15,533    $ 1,581    $ —       $ 20,223  

Accounts receivable

     —         57,422      6,669      —         64,091  

Advertising fund assets, restricted

     —         —        28,043      —         28,043  

Other current assets

     7,735       39,441      3,066      —         50,242  
    


 

  

  


 


Current assets

     10,844       112,396      39,359      —         162,599  

Property, plant and equipment, net

     —         130,178      5,606      —         135,784  

Other assets

     220,700       70,604      780      (169,424 )     122,660  
    


 

  

  


 


Total assets

   $ 231,544     $ 313,178    $ 45,745    $ (169,424 )   $ 421,043  
    


 

  

  


 


Current portion of long-term debt

   $ —       $ 235    $ 82    $ —       $ 317  

Accounts payable

     —         35,659      14,342      —         50,001  

Advertising fund liabilities

     —         —        28,043      —         28,043  

Other current liabilities

     8,077       57,854      1,429      —         67,360  
    


 

  

  


 


Current liabilities (1)

     8,077       93,748      43,896      —         145,721  

Long-term debt

     798,002       5,771      231      —         804,004  

Other long-term liabilities

     —         45,594      259      —         45,853  
    


 

  

  


 


Long-term liabilities

     798,002       51,365      490      —         849,857  

Stockholder’s equity (deficit) (1)

     (574,535 )     168,065      1,359      (169,424 )     (574,535 )
    


 

  

  


 


Total liabilities and stockholder’s equity (deficit)

   $ 231,544     $ 313,178    $ 45,745    $ (169,424 )   $ 421,043  
    


 

  

  


 


 

     As of December 28, 2003

 
     Domino’s, Inc.

    Guarantor
Subsidiaries


   Non-Guarantor
Subsidiaries


   Eliminations

    Consolidated

 

Cash and cash equivalents (1)

   $ —       $ 41,123    $ 1,603    $ —       $ 42,726  

Accounts receivable

     —         59,109      5,462      —         64,571  

Advertising fund assets, restricted

     —         —        30,544      —         30,544  

Other current assets

     7,664       35,243      2,128      —         45,035  
    


 

  

  


 


Current assets

     7,664       135,475      39,737      —         182,876  

Property, plant and equipment, net

     —         122,815      4,252      —         127,067  

Other assets

     248,660       81,897      805      (192,856 )     138,506  
    


 

  

  


 


Total assets

   $ 256,324     $ 340,187    $ 44,794    $ (192,856 )   $ 448,449  
    


 

  

  


 


Current portion of long-term debt

   $ 18,234     $ 221    $ 117    $ —       $ 18,572  

Accounts payable

     —         41,832      11,556      —         53,388  

Advertising fund liabilities

     —         —        30,544      —         30,544  

Other current liabilities

     20,944       59,721      1,094      —         81,759  
    


 

  

  


 


Current liabilities

     39,178       101,774      43,311      —         184,263  

Long-term debt

     934,914       5,931      320      —         941,165  

Other long-term liabilities

     321       40,521      268      —         41,110  
    


 

  

  


 


Long-term liabilities

     935,235       46,452      588      —         982,275  

Stockholder’s equity (deficit) (1)

     (718,089 )     191,961      895      (192,856 )     (718,089 )
    


 

  

  


 


Total liabilities and stockholder’s equity (deficit)

   $ 256,324     $ 340,187    $ 44,794    $ (192,856 )   $ 448,449  
    


 

  

  


 



(1) Domino’s Pizza, Inc. and subsidiaries had current liabilities of $146,121, or $400 more than Domino’s, Inc. and subsidiaries at September 5, 2004. Domino’s Pizza, Inc. and subsidiaries had cash and cash equivalents of $42,852, or $126 more than Domino’s, Inc. and subsidiaries at December 28, 2003. Domino’s Pizza, Inc. and subsidiaries had total stockholders’ deficit of $(574,935) and $(717,963), or $400 more than and $126 less than Domino’s, Inc. and subsidiaries at September 5, 2004 and December 28, 2003, respectively. There were no other differences between Domino’s, Inc. and subsidiaries as compared to Domino’s Pizza, Inc. and subsidiaries for the periods presented.

 

9


Table of Contents

Domino’s, Inc. and Subsidiaries

Supplemental Guarantor Condensed Consolidating Statements of Income

 

     Fiscal Quarter Ended September 5, 2004

 
     Domino’s, Inc.

    Guarantor
Subsidiaries


    Non-Guarantor
Subsidiaries


    Eliminations

    Consolidated

 

Revenues

   $ —       $ 318,623     $ 6,355     $ —       $ 324,978  

Cost of sales

     —         240,944       4,752       —         245,696  
    


 


 


 


 


Operating margin

     —         77,679       1,603       —         79,282  

General and administrative

     —         48,831       2,073       —         50,904  
    


 


 


 


 


Income (loss) from operations

     —         28,848       (470 )     —         28,378  

Equity earnings in subsidiaries

     17,520       —         —         (17,520 )     —    

Interest income (expense), net (2)

     (16,921 )     (501 )     344       —         (17,078 )

Other expense

     (9,751 )     —         —         —         (9,751 )
    


 


 


 


 


Income (loss) before provision (benefit) for income taxes

     (9,152 )     28,347       (126 )     (17,520 )     1,549  

Provision (benefit) for income taxes

     (10,107 )     10,701       —         —         594  
    


 


 


 


 


Net income (loss) (2)

   $ 955     $ 17,646     $ (126 )   $ (17,520 )   $ 955  
    


 


 


 


 


 

     Three Fiscal Quarters Ended September 5, 2004

 
     Domino’s, Inc.

    Guarantor
Subsidiaries


    Non-Guarantor
Subsidiaries


    Eliminations

    Consolidated

 

Revenues

   $ —       $ 948,696     $ 19,273     $ —       $ 967,969  

Cost of sales

     —         715,672       14,302       —         729,974  
    


 


 


 


 


Operating margin

     —         233,024       4,971       —         237,995  

General and administrative

     —         120,960       5,864       —         126,824  
    


 


 


 


 


Income (loss) from operations

     —         112,064       (893 )     —         111,171  

Equity earnings in subsidiaries

     68,688       —         —         (68,688 )     —    

Interest income (expense), net (2)

     (44,452 )     (412 )     78       —         (44,786 )

Other expense

     (9,751 )     —         —         —         (9,751 )
    


 


 


 


 


Income (loss) before provision (benefit) for income taxes

     14,485       111,652       (815 )     (68,688 )     56,634  

Provision (benefit) for income taxes

     (20,760 )     42,149       —         —         21,389  
    


 


 


 


 


Net income (loss) (2)

   $ 35,245     $ 69,503     $ (815 )   $ (68,688 )   $ 35,245  
    


 


 


 


 


 

     Fiscal Quarter Ended September 7, 2003

 
     Domino’s, Inc.

    Guarantor
Subsidiaries


   Non-Guarantor
Subsidiaries


    Eliminations

    Consolidated

 

Revenues

   $ —       $ 288,044    $ 4,804     $ —       $ 292,848  

Cost of sales

     —         217,603      3,745       —         221,348  
    


 

  


 


 


Operating margin

     —         70,441      1,059       —         71,500  

General and administrative (2)

     —         48,260      1,315       —         49,575  
    


 

  


 


 


Income (loss) from operations

     —         22,181      (256 )     —         21,925  

Equity earnings in subsidiaries

     13,624       —        —         (13,624 )     —    

Interest income (expense), net

     (30,915 )     147      (75 )     —         (30,843 )

Other expense

     (20,422 )     —        —         —         (20,422 )
    


 

  


 


 


Income (loss) before provision (benefit) for income taxes

     (37,713 )     22,328      (331 )     (13,624 )     (29,340 )

Provision (benefit) for income taxes (2)

     (19,375 )     8,373      —         —         (11,002 )
    


 

  


 


 


Net income (loss) (2)

   $ (18,338 )   $ 13,955    $ (331 )   $ (13,624 )   $ (18,338 )
    


 

  


 


 


 

10


Table of Contents
     Three Fiscal Quarters Ended September 7, 2003

 
     Domino’s, Inc.

    Guarantor
Subsidiaries


   Non-Guarantor
Subsidiaries


    Eliminations

    Consolidated

 

Revenues

   $ —       $ 885,540    $ 14,776     $ —       $ 900,316  

Cost of sales

     —         660,234      11,341       —         671,575  
    


 

  


 


 


Operating margin

     —         225,306      3,435       —         228,741  

General and administrative (2)

     —         120,647      3,854       —         124,501  
    


 

  


 


 


Income (loss) from operations

     —         104,659      (419 )     —         104,240  

Equity earnings in subsidiaries

     65,020       —        —         (65,020 )     —    

Interest income (expense), net

     (54,169 )     375      (207 )     —         (54,001 )

Other expense

     (22,164 )     —        —         —         (22,164 )
    


 

  


 


 


Income (loss) before provision (benefit) for income taxes

     (11,313 )     105,034      (626 )     (65,020 )     28,075  

Provision (benefit) for income taxes (2)

     (28,860 )     39,388      —         —         10,528  
    


 

  


 


 


Net income (loss) (2)

   $ 17,547     $ 65,646    $ (626 )   $ (65,020 )   $ 17,547  
    


 

  


 


 



(2) Domino’s Pizza, Inc. and subsidiaries incurred interest expense, net of $17,054 and $44,761 or $24 and $25 less than Domino’s, Inc. and subsidiaries, during the third quarter and first three quarters of 2004, respectively. Accordingly, Domino’s Pizza, Inc. and subsidiaries net income was $24 and $25 more than Domino’s, Inc. and subsidiaries for the third quarter and first three quarters of 2004, respectively. Domino’s Pizza, Inc. and subsidiaries incurred general and administrative expenses of $49,097 and $124,243 or $478 and $258 less than Domino’s, Inc. and subsidiaries, during the third quarter and first three quarters of 2003, respectively and incurred related provision (benefit) for income taxes of $(10,824) and $10,625, or $178 and $97 more than Domino’s, Inc. and subsidiaries, during the third quarter and first three quarters of 2003, respectively. Accordingly, Domino’s Pizza, Inc. and subsidiaries net income (loss) was $300 and $162 more than Domino’s, Inc. and subsidiaries for the third quarter and first three quarters of 2003, respectively. There were no other differences between Domino’s, Inc. and subsidiaries as compared to Domino’s Pizza, Inc. and subsidiaries for the periods presented.

 

Domino’s, Inc. and Subsidiaries

Supplemental Condensed Consolidating Statements of Cash Flows

 

     Three Fiscal Quarters Ended September 5, 2004

 
     Domino’s, Inc.

    Guarantor
Subsidiaries


    Non-Guarantor
Subsidiaries


    Eliminations

   Consolidated

 

Net cash provided by (used in) operating activities (3)

   $ (57,392 )   $ 112,377     $ 2,338     $ —      $ 57,323  
    


 


 


 

  


Capital expenditures

     —         (26,404 )     (2,236 )     —        (28,640 )

Other

     —         1,945       —         —        1,945  
    


 


 


 

  


Net cash used in investing activities

     —         (24,459 )     (2,236 )     —        (26,695 )
    


 


 


 

  


Repayments of debt

     (155,334 )     (156 )     (103 )     —        (155,593 )

Distributions to parent, net

     216,489       (113,864 )     —         —        102,625  

Other

     (654 )     —         —         —        (654 )
    


 


 


 

  


Net cash provided by (used in) financing activities (3)

     60,501       (114,020 )     (103 )     —        (53,622 )
    


 


 


 

  


Effect of exchange rate changes on cash and cash equivalents

     —         512       (21 )     —        491  
    


 


 


 

  


Increase (decrease) in cash and cash equivalents

     3,109       (25,590 )     (22 )     —        (22,503 )
    


 


 


 

  


Cash and cash equivalents, at beginning of period (3)

     —         41,123       1,603       —        42,726  
    


 


 


 

  


Cash and cash equivalents, at end of period

   $ 3,109     $ 15,533     $ 1,581     $ —      $ 20,223  
    


 


 


 

  


 

11


Table of Contents
     Three Fiscal Quarters Ended September 7, 2003

 
     Domino’s, Inc.

    Guarantor
Subsidiaries


    Non-Guarantor
Subsidiaries


    Eliminations

   Consolidated

 

Net cash provided by (used in) operating activities

   $ (57,872 )   $ 109,672     $ 294     $ —      $ 52,094  
    


 


 


 

  


Capital expenditures

     —         (17,065 )     (502 )     —        (17,567 )

Other

     —         7,653       —         —        7,653  
    


 


 


 

  


Net cash used in investing activities

     —         (9,412 )     (502 )     —        (9,914 )
    


 


 


 

  


Proceeds from issuance of long-term debt

     1,010,090       —         —         —        1,010,090  

Repayments of debt

     (640,381 )     —         (45 )     —        (640,426 )

Distributions to parent, net

     (291,789 )     (97,474 )     —         —        (389,262 )

Other

     (20,048 )     —         —         —        (20,048 )
    


 


 


 

  


Net cash provided by (used in) financing activities

     57,872       (97,474 )     (45 )     —        (39,646 )
    


 


 


 

  


Effect of exchange rate changes on cash and cash equivalents

     —         (22 )     27       —        5  
    


 


 


 

  


Increase (decrease) in cash and cash equivalents

     —         2,764       (226 )     —        2,539  
    


 


 


 

  


Cash and cash equivalents, at beginning of period (3)

     —         21,522       950       —        22,472  
    


 


 


 

  


Cash and cash equivalents, at end of period (3)

   $ —       $ 24,286     $ 724     $ —      $ 25,010  
    


 


 


 

  



(3) Domino’s Pizza, Inc. and subsidiaries had net cash provided by operating activities of $57,748, or $425 more than Domino’s, Inc. and subsidiaries, during the first three quarters of 2004 and had net cash used in financing activities of $54,173, or $551 more than Domino’s, Inc. and subsidiaries, during the first three quarters of 2004. Cash and cash equivalents for Domino’s Pizza, Inc. and subsidiaries was $42,852, $25,135 and $22,596 at December 28, 2003, September 7, 2003 and December 29, 2002, respectively. There were no other differences between Domino’s, Inc. and subsidiaries as compared to Domino’s Pizza, Inc. and subsidiaries for the periods presented.

 

12


Table of Contents

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 third quarters referenced herein represent the twelve-week periods ended September 5, 2004 and September 7, 2003, respectively. The 2004 and 2003 first three quarters referenced herein represent the thirty-six week periods ended September 5, 2004 and September 7, 2003, respectively.

 

Overview

 

During the third quarter and first three quarters of 2004, global retail sales, comprised of retail sales at both our franchise and Company-owned stores worldwide, grew 12.0% and 8.6%, respectively. During these same periods, revenues grew 11.0% and 7.5%, respectively. Excluding costs incurred in connection with our IPO in the third quarter of 2004 and costs incurred in connection with our recapitalization in the third quarter of 2003, we achieved an increase in income from operations, despite an intensely competitive landscape, an environment of rising commodity prices negatively affecting our food costs and an increase in losses on sale/disposal of assets of $3.2 million (comprised of a $ 0.4 million net loss in 2004 and a $2.8 million net gain in 2003).

 

Our global retail sales benefited from strong same store sales growth, both domestically and internationally, 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. During the third quarter and first three quarters of 2004, domestic same store sales increased 8.0% and 2.9%, respectively, led by our domestic franchise operations. These positive same store sales results were driven by positive consumer response to the Company’s marketing and promotional activities. We also had continued strong sales from our international operations, which increased 5.9% and 5.8% on a constant dollar basis during the third quarter and first three quarters of 2004. On a historical dollar basis, international same store sales increased 9.9% and 12.0% during the third quarter and first three quarters of 2004. The third quarter marked the 43rd consecutive quarter that we have grown our international same store sales. Additionally, our worldwide store counts increased 271 stores from year-ago levels, led by our international operations.

 

Income from operations increased $6.0 million to $28.4 million in the third quarter. This increase was driven largely by $15.7 million of costs incurred in connection with our 2003 recapitalization, offset by $10.0 million of costs incurred in connection with our initial public offering. Additionally, income from operations improved despite the negative impact of a $3.2 million increase in losses on sale/disposal of assets and increases in food costs at Company-owned stores, primarily cheese. The average published cheese block price per pound increased $0.22 to $1.60 in the third quarter of 2004 compared to the prior year. Net income increased $19.0 million to nearly $1.0 million in the third quarter.

 

Same Store Sales Growth

 

The following is a summary of our same store sales growth for the third quarter and first three quarters of 2004.

 

    

Third Quarter

of 2004


   

First Three

Quarters of 2004


 

Domestic Company-owned stores

   + 6.8 %   + 1.1 %

Domestic franchise stores

   + 8.2 %   + 3.1 %
    

 

Domestic stores

   + 8.0 %   + 2.9 %

International:

            

Constant dollar

   + 5.9 %   + 5.8 %

Historical dollar

   + 9.9 %   + 12.0 %

 

13


Table of Contents

Store Growth Activity

 

The following is a summary of our store growth activity for the third quarter and first three quarters of 2004.

 

     Third Quarter of 2004

 
    

Domestic

Company-owned
Stores


   Domestic
Franchise
Stores


    Domestic
Stores


    International
Stores


    Total

 

Store count at June 13, 2004

   577    4,348     4,925     2,605     7,530  

Openings

   1    32     33     59     92  

Closings

   —      (13 )   (13 )   (6 )   (19 )

Transfers

   —      —       —       —       —    
    
  

 

 

 

Store count at September 5, 2004

   578    4,367     4,945     2,658     7,603  
    
  

 

 

 

 

     First Three Quarters of 2004

 
    

Domestic

Company-owned
Stores


    Domestic
Franchise
Stores


    Domestic
Stores


    International
Stores


    Total

 

Store count at December 28, 2003

   577     4,327     4,904     2,523     7,427  

Openings

   2     81     83     154     237  

Closings

   (1 )   (41 )   (42 )   (19 )   (61 )

Transfers

   —       —       —       —       —    
    

 

 

 

 

Store count at September 5, 2004

   578     4,367     4,945     2,658     7,603  
    

 

 

 

 

 

Income Statement Data

 

The following is a summary of income statement data for the third quarter and first three quarters of 2004 and 2003.

 

    

Third Quarter

of 2004


   

Third Quarter

of 2003


    First Three
Quarters of 2004


    First Three
Quarters of 2003


 

Revenues:

                                                     

Domestic Company-owned stores

   $ 87.5    26.9 %   $ 82.4     28.1 %   $ 259.5    26.8 %   $ 258.2    28.7 %

Domestic franchise

     35.2    10.8       31.4     10.7       103.6    10.7       98.2    10.9  

Domestic distribution

     177.4    54.6       157.7     53.9       529.2    54.7       479.8    53.3  

International

     24.9    7.7       21.3     7.3       75.7    7.8       64.2    7.1  
    

  

 


 

 

  

 

  

Total revenues

     325.0    100.0       292.8     100.0       968.0    100.0       900.3    100.0  
    

  

 


 

 

  

 

  

Operating expenses:

                                                     

Cost of sales

     245.7    75.6       221.3     75.6       730.0    75.4       671.6    74.6  

General and administrative

     50.9    15.7       49.1     16.8       126.8    13.1       124.2    13.8  
    

  

 


 

 

  

 

  

Income from operations

     28.4    8.7       22.4     7.7       111.2    11.5       104.5    11.6  

Interest expense, net

     17.1    5.2       30.8     10.5       44.8    4.6       54.0    6.0  

Other

     9.8    3.0       20.4     7.0       9.8    1.0       22.2    2.5  
    

  

 


 

 

  

 

  

Income (loss) before provision

(benefit) for income taxes

     1.6    0.5       (28.9 )   (9.9 )     56.7    5.9       28.3    3.1  

Provision (benefit) for income taxes

     0.6    0.2       (10.8 )   (3.7 )     21.4    2.2       10.6    1.2  
    

  

 


 

 

  

 

  

Net income (loss)

   $ 1.0    0.3 %   $ (18.0 )   (6.2 )%   $ 35.3    3.6 %   $ 17.7    2.0 %
    

  

 


 

 

  

 

  

 

Revenues

 

        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 $32.2 million or 11.0% to $325.0 million in the third quarter of 2004, from $292.8 million in the comparable period in 2003, and increased $67.7 million or 7.5% to $968.0 million in the first three quarters of 2004, from $900.3 million in the comparable period in 2003. These increases were a result of increases in revenues at each of our reportable segments and are more fully described below.

 

14


Table of Contents

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.

 

Domestic Stores


  

Third Quarter

of 2004


   

Third Quarter

of 2003


    First Three
Quarters of 2004


    First Three
Quarters of 2003


 

Domestic Company-owned stores

   $ 87.5    71.3 %   $ 82.4    72.4 %   $ 259.5    71.5 %   $ 258.2    72.5 %

Domestic franchise

     35.2    28.7       31.4    27.6       103.6    28.5       98.2    27.5  
    

  

 

  

 

  

 

  

Total domestic stores revenues

   $ 122.7    100.0 %   $ 113.8    100.0 %   $ 363.1    100.0 %   $ 356.4    100.0 %
    

  

 

  

 

  

 

  

 

Domestic stores revenues increased $8.9 million or 7.8% to $122.7 million in the third quarter of 2004, from $113.8 million in the comparable period in 2003, and increased $6.7 million or 1.9% to $363.1 million in the first three quarters of 2004, from $356.4 million in the comparable period in 2003. These increases in revenues were due primarily to increases in both our domestic Company-owned and domestic franchise same store sales as well as increases in the average number of domestic franchise stores in operation during 2004. Domestic same store sales increased 8.0% and 2.9% in the third quarter and first three quarters of 2004, respectively, compared to the same periods in 2003, driven by positive consumer response to the Company’s marketing and promotional activities. These changes in domestic stores revenues are more fully described below.

 

Domestic Company-Owned Stores

 

Revenues from domestic Company-owned store operations increased $5.1 million or 6.1% to $87.5 million in the third quarter of 2004, from $82.4 million in the comparable period in 2003, and increased $1.3 million or 0.5% to $259.5 million in the first three quarters of 2004, from $258.2 million in the comparable period in 2003. These increases in revenues were due primarily to increases in same store sales of 6.8% and 1.1% in the third quarter and first three quarters of 2004, respectively, compared to the same periods in 2003. There were 578 and 579 domestic Company-owned stores in operation as of September 5, 2004 and September 7, 2003, respectively.

 

Domestic Franchise

 

Revenues from domestic franchise operations increased $3.8 million or 12.1% to $35.2 million in the third quarter of 2004, from $31.4 million in the comparable period in 2003, and increased $5.4 million or 5.5% to $103.6 million in the first three quarters of 2004, from $98.2 million in the comparable period in 2003. These increases in revenues were due primarily to increases in same store sales of 8.2% and 3.1% in the third quarter and first three quarters of 2004, respectively, compared to the same periods in 2003 and an increase in the average number of domestic franchise stores open during 2004. There were 4,367 and 4,296 domestic franchise stores in operation as of September 5, 2004 and September 7, 2003, respectively.

 

Domestic Distribution

 

Revenues from domestic distribution operations increased $19.7 million or 12.5% to $177.4 million in the third quarter of 2004, from $157.7 million in the comparable period in 2003, and increased $49.4 million or 10.3% to $529.2 million in the first three quarters of 2004, from $479.8 million in the comparable period in 2003. The increase in domestic distribution revenues in the third quarter of 2004 was due primarily to increases in volumes related to increases in domestic franchise retail sales and a market increase in overall food prices, primarily higher cheese prices. The increase in domestic distribution revenues in the first three quarters of 2004 was due primarily to a market increase in overall food prices, primarily higher cheese prices. The published cheese block price-per-pound averaged $1.60 and $1.65 in the third quarter and first three quarters of 2004, respectively, up from $1.38 and $1.21 in the comparable periods in 2003. Had the 2004 average cheese prices been in effect during the comparable periods of 2003, distribution revenues for the third quarter and first three quarters of 2003 would have been approximately $6.8 million and $40.9 million higher than the reported 2003 amounts, respectively.

 

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Table of Contents

International

 

Revenues from international operations increased $3.6 million or 16.7% to $24.9 million in the third quarter of 2004, from $21.3 million in the comparable period in 2003, and increased $11.5 million or 17.9% to $75.7 million in the first three quarters of 2004, from $64.2 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 5.9% and 5.8% in the third quarter and first three quarters of 2004, compared to the same periods in 2003. On a historical dollar basis, same store sales increased 9.9% and 12.0% in the third quarter and first three quarters of 2004, respectively, compared to the same periods in 2003, reflecting a generally weaker U.S. Dollar in those markets in which we compete. There were 2,658 and 2,457 international stores in operation as of September 5, 2004 and September 7, 2003, respectively.

 

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 $7.8 million or 10.9% to $79.3 million in the third quarter of 2004, from $71.5 million in the comparable period in 2003, and increased $9.3 million or 4.0% to $238.0 million in the first three quarters of 2004, from $228.7 million in the comparable period in 2003, as summarized in the following table.

 

    

Third Quarter

of 2004


   

Third Quarter

of 2003


    First Three
Quarters of 2004


   

First Three

Quarters of 2003


 

Consolidated revenues

   $ 325.0    100.0 %   $ 292.8    100.0 %   $ 968.0    100.0 %   $ 900.3    100.0 %

Consolidated cost of sales

     245.7    75.6       221.3    75.6       730.0    75.4       671.6    74.6  
    

  

 

  

 

  

 

  

Consolidated operating margin

   $ 79.3    24.4 %   $ 71.5    24.4 %   $ 238.0    24.6 %   $ 228.7    25.4 %
    

  

 

  

 

  

 

  

 

The increases in consolidated operating margin for the third quarter and first three quarters of 2004 were due primarily to increases in domestic franchise and international revenues resulting from strong retail sales growth. As a percentage of revenues, the consolidated operating margin was flat in the third quarter of 2004 compared to the same period in 2003 and decreased 0.8 percentage points to 24.6% in the first three quarters of 2004, from 25.4% in the comparable period in 2003.

 

Cheese price changes are a “pass-through” in domestic distribution revenues and cost of sales and, as such, have no impact on operating margin or income. However, cheese price changes do impact operating margin as a percentage of revenues. Had the 2004 average cheese prices been in effect during the comparable periods of 2003, the total operating margin for the third quarter and first three quarters of 2003 would have been approximately 23.9% and 24.3% of total revenues, respectively, or an improvement of 0.5 and 0.3 percentage points in the third quarter and first three quarters of 2004, respectively.

 

Domestic Company-Owned Stores

 

The domestic Company-owned store operating margin increased $0.8 million or 5.4% to $15.4 million in the third quarter of 2004, from $14.6 million in the comparable period in 2003, and decreased $1.9 million or 3.8% to $48.3 million in the first three quarters of 2004, from $50.2 million in the comparable period in 2003, as summarized in the following table.

 

Domestic Company-Owned Stores


   Third Quarter
of 2004


    Third Quarter
of 2003


    First Three
Quarter of 2004


   

First Three

Quarters of 2003


 

Revenues

   $ 87.5    100.0 %   $ 82.4    100.0 %   $ 259.5    100.0 %   $ 258.2    100.0 %

Cost of sales

     72.1    82.4       67.9    82.3       211.2    81.4       208.0    80.6  
    

  

 

  

 

  

 

  

Store operating margin

   $ 15.4    17.6 %   $ 14.6    17.7 %   $ 48.3    18.6 %   $ 50.2    19.4 %
    

  

 

  

 

  

 

  

 

The increase in the domestic Company-owned store operating margin during the third quarter of 2004 was due primarily to an increase in same store sales, offset in part by an increase in overall food costs, primarily cheese. The decrease in the domestic Company-owned store operating margin during first three quarters of 2004 was due primarily to an increase in overall food costs and an increase insurance costs, offset in part by an increase in same store sales.

 

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Table of Contents

As a percentage of store revenues, the store operating margin decreased 0.1 percentage points to 17.6% in the third quarter of 2004, from 17.7% in the comparable period in 2003, and decreased 0.8 percentage points to 18.6% in the first three quarters of 2004, from 19.4% in the comparable period in 2003.

 

As a percentage of store revenues, food costs increased 1.3 percentage points to 29.0% in the third quarter of 2004, from 27.7% in the comparable period in 2003 and increased 1.2 percentage points to 28.3% in the first three quarters of 2004, from 27.1% in the comparable period in 2003. These increases in food costs as a percentage of store revenues were due primarily to an increase in overall food prices, primarily cheese.

 

As a percentage of store revenues, labor costs decreased 0.6 percentage points to 30.0% in the third quarter of 2004, from 30.6% in the comparable period in 2003 and decreased 0.4 percentage points to 30.0% in the first three quarters of 2004, from 30.4% in the comparable period in 2003.

 

As a percentage of store revenues, occupancy costs, which include rent, telephone, utilities and depreciation, decreased 0.2 percentage points to 11.6% in the third quarter of 2004, from 11.8% in the comparable period in 2003, and increased 0.1 percentage points to 11.3% in the first three quarters of 2004, from 11.2% in the comparable period in 2003.

 

Domestic Distribution

 

The domestic distribution operating margin increased $1.1 million or 7.1% to $16.4 million in the third quarter of 2004, from $15.3 million in the comparable period in 2003, and decreased $1.4 million or 2.8% to $49.5 million in the first three quarters of 2004, from $50.9 million in the comparable period in 2003, as summarized in the following table.

 

Domestic Distribution


  

Third Quarter

of 2004


   

Third Quarter

of 2003


    First Three
Quarters of 2004


   

First Three

Quarters of 2003


 

Revenues

   $ 177.4    100.0 %   $ 157.7    100.0 %   $ 529.2    100.0 %   $ 479.8    100.0 %

Cost of sales

     161.0    90.7       142.4    90.3       479.7    90.6       428.8    89.4  
    

  

 

  

 

  

 

  

Distribution operating margin

   $ 16.4    9.3 %   $ 15.3    9.7 %   $ 49.5    9.4 %   $ 50.9    10.6 %
    

  

 

  

 

  

 

  

 

The increase in the domestic distribution operating margin during the third quarter of 2004 was due primarily to increases in volumes as a result of increases in domestic retail sales, offset in part by increases in insurance, occupancy and delivery costs. The decrease in domestic distribution operating margin during the first three quarters of 2004 was due primarily to increases in insurance, occupancy and delivery costs.

 

As a percentage of distribution revenues, the distribution operating margin decreased 0.4 percentage points to 9.3% in the third quarter of 2004, from 9.7% in the comparable period in 2003, and decreased 1.2 percentage points to 9.4% in the first three quarters of 2004, from 10.6% in the comparable period in 2003. The decreases in the domestic distribution operating margin as a percentage of revenues were due primarily to the negative impact on operating margin due to increases in food prices.

 

Had the 2004 average cheese prices been in effect during the comparable periods of 2003, the distribution operating margin for the third quarter and first three quarters of 2003 would have been approximately 9.3% and 9.8% of distribution revenues, respectively, or flat for the third quarter of 2004 and a decrease of 0.4 percentage points during the first three quarters of 2004.

 

General and Administrative Expenses

 

General and administrative expenses increased $1.8 million or 3.7% to $50.9 million in the third quarter of 2004, from $49.1 million in the comparable period in 2003, and increased $2.6 million or 2.1% to $126.8 million in the first three quarters of 2004, from $124.2 million in the comparable period in 2003. General and administrative expenses during the third quarter were negatively impacted as compared to 2003 by a $10.0 million payment made in connection with our IPO to an affiliate of our former majority stockholder to terminate its management agreement, as well as a $3.2 million year-over-year increase in losses on sale/disposal of assets, including a $2.8 million gain relating to the collection of a note receivable in 2003. Separately, the Company recognized $0.9 million in 2003 relating to the collection of a previously fully reserved note receivable. The Company also experienced increases in administrative labor, rents, advertising and insurance during 2004. Offsetting these increases in general and administrative expenses was approximately $15.7 million of expenses incurred in connection with the Company’s 2003 recapitalization.

 

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Table of Contents

Interest Expense

 

Interest expense decreased $13.7 million or 44.2% to $17.3 million in the third quarter of 2004, from $31.0 million in the comparable period in 2003 and decreased $9.1 million or 16.8% to $45.2 million in the first three quarters of 2004, from $54.3 million in the comparable period in 2003. These decreases in interest expense were due primarily to approximately $15.6 million of financing fees that were written-off in connection with the Company’s 2003 recapitalization, offset by approximately $3.7 million of financing fees that were written-off in connection with the retirement of $109.1 million of senior subordinated notes in the third quarter of 2004.

 

Additionally, interest expense was positively impacted by more favorable interest rates. Our effective borrowing rate decreased 0.8 and 1.3 percentage points to 5.6% and 5.7% during the third quarter and first three quarters of 2004, respectively. Our average outstanding debt balance, excluding capital lease obligations, decreased $52.6 million to $898.3 million in the third quarter of 2004, from $950.9 million in the comparable period in 2003. Our average outstanding debt, excluding capital lease obligations, balance increased $211.7 million to $921.9 million in the first three quarters of 2004, from $710.2 million in the comparable period in 2003.

 

Other

 

Other expense decreased $10.6 million or 52.3% to $9.8 million in the third quarter of 2004, from $20.4 million in the comparable period in 2003 and decreased $12.4 million or 56.0% to $9.8 million in the first three quarters of 2004, from $22.2 million in the comparable period in 2003. The other amount of $9.8 million for the third quarter and first three quarters of 2004 is comprised of losses incurred in connection with debt retirements, including $9.0 million incurred in connection with the redemption of $109.1 million of Domino’s, Inc.’s senior subordinated notes in August 2004. The other amounts of $20.4 million and $22.2 million for the third quarter and first three quarters of 2003, respectively, are comprised of losses incurred in connection with debt retirements, including $20.4 million of bond tender fees incurred in connection with the recapitalization in the third quarter of 2003.

 

Provision for Income Taxes

 

Provision for income taxes increased $11.4 million to $0.6 million in the third quarter of 2004, from a benefit of $10.8 million in the comparable period in 2003, and increased $10.8 million to $21.4 million in the first three quarters of 2004, from $10.6 million in the comparable period in 2003. The effective tax rate for all periods presented has remained relatively flat.

 

Liquidity and Capital Resources

 

We had working capital of $16.5 million and cash and cash equivalents of $20.2 million at September 5, 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 September 5, 2004.

 

As of September 5, 2004, we had $804.3 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 $26.1 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.

 

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Table of Contents

We enter into interest rate swaps, collars or similar instruments with the objective of reducing volatility relating to our borrowing costs. As of September 5, 2004, we are party to interest rate derivatives in the total notional amount of $505.0 million.

 

Cash provided by operating activities was $57.7 million and $52.1 million in the first three quarters of 2004 and 2003, respectively. The $5.6 million increase was due primarily to a $17.6 million increase in net income, offset by a $12.1 million decrease in amortization of deferred financing costs.

 

Cash used in investing activities was $26.7 million and $9.9 million in the first three quarters of 2004 and 2003, respectively. The $16.8 million increase was due primarily to an $11.1 million increase in capital expenditures, due primarily to renovations of our corporate headquarters, and a $5.2 million decrease in net repayments of notes receivable.

 

Cash used in financing activities was $54.2 million and $39.6 million in the first three quarters of 2004 and 2003, respectively. The $14.6 million increase was due primarily to net cash used in our initial public offering in 2004 exceeding the net cash used in our recapitalization in 2003. In connection with our initial public offering in 2004, we received net proceeds from the issuance of common stock of approximately $119.6 million. We used these net proceeds and cash from operations to repurchase approximately $109.1 million of senior subordinated notes, and repay approximately $16.9 million of notes payable to our founder and former majority stockholder and his wife. Additionally, during the first three quarters of 2004, we repaid approximately $46.5 million of additional debt obligations. In connection with our recapitalization in 2003, we received proceeds from the issuance of long-term debt of approximately $1.0 billion. We used these proceeds to repay approximately $362.3 million outstanding under our then existing credit facility, repurchase approximately $206.7 million of senior subordinated notes, retire our preferred stock for approximately $200.6 million, distribute $188.3 million to our shareholders and pay approximately $20.0 million of financing fees. Furthermore, during the first three quarters of 2003, we repaid approximately $71.4 million of additional debt obligations.

 

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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Table of Contents

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


   Term

  

Domino’s

Pays


 

Counterparty

Pays


Interest Rate Swap

   $ 30.0 million    September 2001 – September 2004    3.69%   LIBOR

Interest Rate Swap

   $ 75.0 million    August 2002 – June 2005    3.25%   LIBOR

Interest Rate Swap

   $ 50.0 million    August 2003 – July 2011    LIBOR plus
319 basis points
  8.25%

Interest Rate Swap

   $ 50.0 million    August 2003 – July 2011    LIBOR plus
324 basis points
  8.25%

Interest Rate Swap

   $ 300.0 million    June 2004 – June 2005    1.62%   LIBOR

 

In 2004, we entered into an additional interest rate swap agreement effectively converting the variable LIBOR component on a portion of our senior secured credit facility term debt to various fixed rates over various terms. The 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 September 5, 2004, the weighted average interest rate on our $208.0 million of variable interest debt was 4.2%.

 

We had total interest expense of approximately $45.2 million in the first three 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 $5.6 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 September 5, 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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Table of Contents

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 actions 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

 

Period


   (a) Total Number
of Shares (or
Units) Purchased


    (b) Average
Price Paid
per Share
(or Unit)


  

(c) Total Number

of Shares

(or Units)

Purchased as

Part of Publicly

Announced
Plans or
Programs


  

(d) Maximum

Number (or
Approximate
Dollar Value)
of Shares (or
Units) that
May Yet Be
Purchased
Under the
Plans or
Programs


Period #1 (June 14, 2004 to July 11, 2004)

   107,952 (1)   $ 14.00    —      —  

Period #2 (July 12, 2004 to August 8, 2004)

   —         —      —      —  

Period #3 (August 9, 2004 to September 5, 2004)

   —         —      —      —  
    

 

  
  

Total

   107,952     $ 14.00    —      —  
    

 

  
  

 

(1) As previously disclosed, following our IPO, we repurchased from each of Messrs. Silverman and Soignet the outstanding options to purchase shares of our Class L common stock that were held by them. Each of Messrs. Silverman and Soignet had the right to acquire 53,976 shares of our common stock pursuant to the exercise of these options. We repurchased these options at a price equal to the difference between our initial public offering price per share ($14.00) and the exercise price per share applicable to such options ($8.34). Each of Messrs. Silverman and Soignet received approximately $305,000 in connection with the repurchase of these options.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Submission of Matters to a Vote of Security Holders

 

None.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits and Reports on Form 8-K

 

a. Exhibits

 

Exhibit
Number


 

Description


31.1   Certification by David A. Brandon pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, relating to Domino’s Pizza, Inc.
31.2   Certification by Harry J. Silverman pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, relating to Domino’s Pizza, Inc.
31.3   Certification by David A. Brandon pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, relating to Domino’s, Inc.
31.4   Certification by Harry J. Silverman pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, relating to Domino’s, Inc.
32.1   Certification by David A. Brandon pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, relating to Domino’s Pizza, Inc.
32.2   Certification by Harry J. Silverman pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, relating to Domino’s Pizza, Inc.
32.3   Certification by David A. Brandon pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, relating to Domino’s, Inc.
32.4   Certification by Harry J. Silverman pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, relating to Domino’s, Inc.

 

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Table of Contents

b. Reports on Form 8-K.

 

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 Pizza, Inc. dated July 27, 2004, which included a press release announcing financial results for the second quarter of 2004 which ended June 13, 2004.

 

Current Report on Form 8-K of Domino’s Pizza, Inc. and Domino’s, Inc. dated August 24, 2004, which included a press release announcing the Company’s purchase of $109.1 million of Domino’s, Inc.’s 8.25% senior subordinated notes due 2011.

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned duly authorized officer.

 

   

DOMINO’S PIZZA, INC.

   

DOMINO’S, INC.

   

(Registrants)

Date: October 19, 2004

 

/s/ Harry J. Silverman


   

Harry J. Silverman

   

Chief Financial Officer

 

22