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 June 16, 2002 ------------- OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from: ___________ to ___________ Commission file number: 333-74797 Domino's, Inc. (Exact name of registrant as specified in its charter) Delaware 38-3025165 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 30 Frank Lloyd Wright Drive Ann Arbor, Michigan 48106 (Address of principal executive offices) (734) 930-3030 (Registrant's telephone number, including area code) Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] The number of shares outstanding of the registrant's common stock as of July 22, 2002 was 10 shares.
Domino's, Inc. INDEX PART I. FINANCIAL INFORMATION Page No. -------- Item 1. Financial Statements Condensed Consolidated Balance Sheets - June 16, 2002 and December 30, 2001 3 Condensed Consolidated Statements of Income - Fiscal quarter and two fiscal quarters ended June 16, 2002 and June 17, 2001 4 Condensed Consolidated Statements of Cash Flows - Two fiscal quarters ended June 16, 2002 and June 17, 2001 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk 12 PART II. OTHER INFORMATION 13 SIGNATURES 13 2
PART I. FINANCIAL INFORMATION Item 1. Financial Statements Domino's, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (In thousands) June 16, 2002 December 30, 2001 Assets (Unaudited) (Note) ------------------- ----------------- Current assets: Cash and cash equivalents $ 8,127 $ 34,842 Accounts receivable 53,396 54,225 Notes receivable 4,394 4,024 Inventories 19,341 22,088 Prepaid expenses and other 9,425 4,892 Deferred income taxes 11,302 11,302 ---------------- ----------------- Total current assets 105,985 131,373 ---------------- ----------------- Property, plant and equipment: Land and buildings 16,055 15,983 Leasehold and other improvements 55,272 50,684 Equipment 133,063 114,904 Construction in progress 4,719 5,837 ---------------- ----------------- 209,109 187,408 Accumulated depreciation and amortization 102,180 99,763 ---------------- ----------------- Property, plant and equipment, net 106,929 87,645 ---------------- ----------------- Other assets: Deferred financing costs 21,644 24,594 Goodwill 27,267 12,673 Capitalized software 27,089 34,408 Deferred income taxes 63,915 66,270 Other 22,604 25,330 ---------------- ----------------- Total other assets 162,519 163,275 ---------------- ----------------- Total assets $ 375,433 $ 382,293 ================ ================= Liabilities and stockholder's deficit Current liabilities: Current portion of long-term debt $ 40,694 $ 43,157 Accounts payable 35,286 30,125 Insurance reserves 8,222 7,365 Other accrued liabilities 76,950 73,487 ---------------- ----------------- Total current liabilities 161,152 154,134 ---------------- ----------------- Long-term liabilities: Long-term debt, less current portion 581,940 611,532 Insurance reserves 9,999 6,334 Other accrued liabilities 30,997 35,167 ---------------- ----------------- Total long-term liabilities 622,936 653,033 ---------------- ----------------- Stockholder's deficit: Common stock - - Additional paid-in capital 120,723 120,202 Retained deficit (525,889) (542,540) Accumulated other comprehensive loss (3,489) (2,536) ---------------- ----------------- Total stockholder's deficit (408,655) (424,874) ---------------- ----------------- Total liabilities and stockholder's deficit $ 375,433 $ 382,293 ================ ================= ___________ Note: The balance sheet at December 30, 2001 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. See accompanying notes. 3
Domino's, Inc. and Subsidiaries Condensed Consolidated Statements of Income (Unaudited) Fiscal Quarter Ended Two Fiscal Quarters Ended June 16, June 17, June 16, June 17, (In thousands) 2002 2001 2002 2001 ---------------------------- ------------------------------ Revenues: Domestic corporate stores $ 88,482 $ 81,926 $ 178,388 $ 172,769 Domestic franchise 32,037 30,044 66,596 60,669 Domestic distribution 154,721 156,229 320,466 306,832 International 18,822 15,553 36,668 31,113 ------------ ------------ ------------ -------------- Total revenues 294,062 283,752 602,118 571,383 ------------ ------------ ------------ -------------- Operating expenses: Cost of sales 215,790 211,965 441,128 424,211 General and administrative 47,473 41,978 91,644 88,521 ------------ ------------ ------------ -------------- Total operating expenses 263,263 253,943 532,772 512,732 ------------ ------------ ------------ -------------- Income from operations 30,799 29,809 69,346 58,651 Interest income 50 420 268 1,015 Interest expense (13,694) (15,689) (27,213) (32,280) ------------ ------------ ------------ -------------- Income before provision for income taxes 17,155 14,540 42,401 27,386 Provision for income taxes 6,346 5,664 15,687 10,701 ------------ ------------ ------------ -------------- Net income $ 10,809 $ 8,876 $ 26,714 $ 16,685 ============ ============ ============ ============== _________ See accompanying notes. 4
Domino's, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) Two Fiscal Quarters Ended June 16, June 17, 2002 2001 ---------------- -------------- (In thousands) Cash flows from operating activities: Net cash provided by operating activities $ 61,961 $ 42,767 ---------------- -------------- Cash flows from investing activities: Capital expenditures (24,696) (17,438) Acquisitions of franchise operations (21,850) (145) Other (618) 4,476 ----------------- -------------- Net cash used in investing activities (47,164) (13,107) ----------------- --------------- Cash flows from financing activities: Capital contribution 521 - Repayments of debt (32,087) (11,760) Distributions to Parent (10,063) - ----------------- -------------- Net cash used in financing activities (41,629) (11,760) ----------------- -------------- Effect of exchange rate changes on cash and cash equivalents 117 (39) ---------------- --------------- Increase (decrease) in cash and cash equivalents (26,715) 17,861 Cash and cash equivalents, at beginning of period 34,842 25,136 ---------------- -------------- Cash and cash equivalents, at end of period $ 8,127 $ 42,997 ================ ============== _________ See accompanying notes. 5
Domino's, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited; tabular amounts in thousands) June 16, 2002 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring items, considered necessary for a fair presentation have been included. Operating results for the fiscal quarter and two fiscal quarters ended June 16, 2002 are not necessarily indicative of the results that may be expected for the year ending December 29, 2002. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 30, 2001 included in our Form 10-K. 2. Accounting Pronouncement On December 31, 2001, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets". During the second quarter of 2002, the Company performed the required impairment test on its existing goodwill and determined there was no impairment. Amortization of goodwill was approximately $474,000 and $956,000 for the second quarter and first two quarters of 2001, respectively. 3. Comprehensive Income Fiscal Quarter Ended Two Fiscal Quarters Ended ---------------------- ------------------------- June 16, June 17, June 16, June 17, 2002 2001 2002 2001 --------- -------- ---------- --------- Net income $ 10,809 $ 8,876 $ 26,714 $ 16,685 Cumulative effect of change in accounting principle, net of tax - - - 1,692 Unrealized loss on derivative instruments, net of tax (2,543) (414) (2,898) (2,090) Reclassification adjustment for (gains) losses included in net income, net of tax 726 32 1,465 (303) Currency translation adjustment 522 (42) 480 (229) --------- -------- ---------- ---------- Comprehensive income $ 9,514 $ 8,452 $ 25,761 $ 15,755 ========= ======== ========== ========== 4. Segment Information The following table summarizes revenues and earnings before interest, taxes, depreciation and amortization (EBITDA) for each of the Company's reportable segments. During the first quarter of 2002, the Company purchased 83 stores from our franchisee in Arizona. This acquisition resulted in an approximately $22.4 million increase in Domestic Store assets. Fiscal Quarter Ended June 16, 2002 and June 17, 2001 ---------------------------------------------------- Domestic Domestic Intersegment Stores Distribution International Revenues Other Total ------ ------------ ------------- -------- ----- ----- Revenues - 2002 $120,519 $179,391 $18,822 $(24,670) $ - $294,062 2001 111,970 179,667 15,553 (23,438) - 283,752 EBITDA - 2002 $ 34,598 $ 11,392 $ 5,200 $ - $ (9,543) $ 41,647 2001 31,252 10,086 4,011 - (8,769) 36,580 6
Two Fiscal Quarters Ended June 16, 2002 and June 17, 2001 --------------------------------------------------------- Domestic Domestic Intersegment Stores Distribution International Revenues Other Total ------ ------------ ------------- -------- ----- ----- Revenues - 2002 $244,984 $369,065 $ 36,668 $(48,599) $ - $602,118 2001 233,438 355,151 31,113 (48,319) - 571,383 EBITDA - 2002 $ 74,684 $ 23,229 $ 9,986 $ - $(20,511) $ 87,388 2001 63,936 19,574 7,904 - (18,083) 73,331 The following table reconciles total EBITDA to consolidated income before provision for income taxes. Fiscal Quarter Ended Two Fiscal Quarters Ended -------------------- ------------------------- June 16, June 17, June 16, June 17, 2002 2001 2002 2001 ---------- --------- ---------- --------- Total EBITDA $ 41,647 $ 36,580 $ 87,388 $ 73,331 Depreciation and amortization (6,671) (7,029) (13,823) (13,995) Interest expense (13,694) (15,689) (27,213) (32,280) Interest income 50 420 268 1,015 Loss on debt extinguishment (704) - (916) - Gain (loss) on sale/disposal of assets (3,473) 258 (3,303) (685) ---------- --------- ---------- --------- Income before provision for income taxes $ 17,155 $ 14,540 $ 42,401 $ 27,386 ========== ========= ========== ========= 5. Debt Retirements The Company retired approximately $7.8 million and $10.3 million of outstanding senior subordinated notes during the second quarter and first two quarters of 2002, respectively. The Company recognized losses of approximately $704,000 and $916,000 for the second quarter and first two quarters of 2002, respectively, reflecting the differences between the carrying value of the notes and the open market purchase price. 6. Senior Credit Facility On July 29, 2002, the Company entered into a senior credit facility with a consortium of banks (the "2002 Senior Credit Facility"). The 2002 Senior Credit Facility consists of a $365 million term loan expiring in June 2008 and a $100 million revolving credit facility expiring in June 2007. The Company's previously existing senior credit facility was paid in full and cancelled upon consummation of the 2002 Senior Credit Facility. The new agreement requires amortization of the term loans of $3.65 million per year during the first five years of the agreement with equal quarterly payments totaling $346.75 million in the final year of the agreement. The 2002 Senior Credit Facility contains customary financial and non-financial covenants and is guaranteed by TISM, Inc., our parent company, and each of our domestic subsidiaries. The 2002 Senior Credit Facility is secured by a first priority lien on substantially all of the assets of the Company. Borrowings under the 2002 Senior Credit Facility bear interest at LIBOR plus an applicable margin not to exceed 250 basis points. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation The 2002 and 2001 second quarters referenced herein represent the twelve-week periods ended June 16, 2002 and June 17, 2001, respectively. The 2002 and 2001 first two quarters referenced herein represent the twenty-four week periods ended June 16, 2002 and June 17, 2001, respectively. Store Growth Activity The following is a summary of the Company's store growth activity for the second quarter and first two quarters of 2002. Second Quarter of 2002 ------------------------------------------------------ Beginning End of of Period Opened Closed Transfers Period --------- ------ ------ --------- ------ Domestic Corporate Stores 598 1 (3) (13) 583 Domestic Franchise 4,212 19 (21) 13 4,223 ------- ----- ----- ------ ------- Domestic Stores 4,810 20 (24) - 4,806 International 2,266 49 (25) - 2,290 ------- ----- ----- ------ ------- Total 7,076 69 (49) - 7,096 ======= ===== ===== ====== ======= First Two Quarters of 2002 ------------------------------------------------------ Beginning End of of Period Opened Closed Transfers Period --------- ------ ------ --------- ------ Domestic Corporate Stores 519 2 (8) 70 583 Domestic Franchise 4,294 38 (39) (70) 4,223 ------- ----- ----- ------- ------- Domestic Stores 4,813 40 (47) - 4,806 International 2,259 76 (45) - 2,290 ------- ----- ----- ------- ------- Total 7,072 116 (92) - 7,096 ======= ===== ===== ======= ======= Revenues General. Revenues include retail sales of food by Company-owned stores, royalties and fees from domestic and international franchise stores, and sales of food, equipment and supplies by our distribution centers to domestic and international franchise stores. Total revenues increased 3.6% to $294.1 million in the second quarter of 2002, from $283.8 million for the comparable period in 2001, and increased 5.4% to $602.1 million for the first two quarters of 2002, from $571.4 million for the comparable period in 2001. This increase in total revenues in the second quarter of 2002 is due primarily to an increase in domestic franchise revenues, resulting from an increase in same store sales, an increase in domestic corporate store revenues, resulting from an increase in same store sales and the acquisition of 83 stores from our Arizona franchisee during the first quarter of 2002, and, to a lesser extent, an increase in international revenues. This increase was offset in part by a decrease in domestic distribution revenues due primarily to a market decrease in overall food basket prices, including lower cheese prices. This decrease in domestic distribution revenues was offset in part by an increase in distribution volumes primarily resulting from increases in domestic franchise same store sales. This increase in total revenues for the first two quarters of 2002 is due primarily to an increase in domestic distribution volumes, resulting from an increase in domestic franchise same store sales, an increase in domestic corporate store revenues, resulting from an increase in same store sales, and, to a lesser extent, an increase in international revenues. Domestic Stores Domestic Corporate Stores. Revenues from domestic corporate store operations increased 8.0% to $88.5 million in the second quarter of 2002, from $81.9 million for the comparable period in 2001, and increased 3.3% to $178.4 million for the first two quarters of 2002, from $172.8 million for the comparable period in 2001. 8
This increase in revenues in the second quarter of 2002 is due primarily to an increase in same store sales and an increase in the average number of domestic Company-owned stores open during 2002 due in part to the Arizona acquisition completed in February of 2002, offset in part by store divestitures in 2001. Same store sales for domestic Company-owned stores increased 1.5% for the second quarter of 2002, compared to the same period in 2001. This increase in revenues for the first two quarters of 2002 is due primarily to an increase in same store sales offset in part by a decrease in the average number of domestic Company-owned stores open during 2002. Same store sales for domestic Company-owned stores increased 3.3% for the first two quarters of 2002, compared to the same period in 2001. Domestic Franchise. Revenues from domestic franchise operations increased 6.6% to $32.0 million in the second quarter of 2002, from $30.0 million for the comparable period in 2001, and increased 9.8% to $66.6 million for the first two quarters of 2002, from $60.7 million for the comparable period in 2001. This increase in revenues for the second quarter of 2002 is due primarily to an increase in same store sales offset in part by a decrease in the average number of domestic franchise stores open during 2002 due in part to the Arizona acquisition. Same store sales for domestic franchise stores increased 4.7% in the second quarter of 2002, compared to the same period in 2001. This increase in revenues for the first two quarters of 2002 is due primarily to an increase in same store sales and an increase in the average number of domestic franchise stores open during 2002. Same store sales for domestic franchise stores increased 6.4% for the first two quarters of 2002, compared to the same period in 2001. Domestic Distribution Revenues from domestic distribution operations decreased 1.0% to $154.7 million in the second quarter of 2002, from $156.2 million for the comparable period in 2001, and increased 4.4% to $320.5 million for the first two quarters of 2002, from $306.8 million for the comparable period in 2001. This decrease in revenues in the second quarter of 2002 is due primarily to a market decrease in overall food basket prices, including lower cheese prices. This decrease in revenues was offset in part by an increase in distribution volumes primarily resulting from increases in domestic franchise same store sales in 2002. The average cheese block price decreased to approximately $1.22 per pound in the second quarter of 2002, from approximately $1.44 per pound for the comparable period in 2001. This increase in revenues for the first two quarters of 2002 is due primarily to an increase in volumes resulting from increases in domestic franchise same store sales and store counts in 2002. This increase in revenues was offset in part by a market decrease in overall food basket prices, including lower cheese prices. The average cheese block price decreased to approximately $1.24 per pound for the first two quarters of 2002, from approximately $1.30 per pound for the comparable period in 2001. International Revenues from international operations increased 21.0% to $18.8 million in the second quarter of 2002, from $15.6 million for the comparable period in 2001, and increased 17.9% to $36.7 million in the first two quarters of 2002, from $31.1 million for the comparable period in 2001. These increases in revenues are due primarily to increases resulting from the acquisition of the Netherlands franchise operations in the fourth quarter of 2001, as well as increases in same store sales and in the average number of international stores open during 2002. On a constant dollar basis, same store sales increased 4.7% and 4.1% for the second quarter and first two quarters of 2002, respectively, compared to the same periods in 2001. On a historical dollar basis, same store sales increased 3.9% and 2.2% for the second quarter and first two quarters of 2002, respectively, compared to the same periods in 2001, reflecting a relatively strong U.S. Dollar. 9
Operating Expenses Cost of sales increased 1.8% to $215.8 million in the second quarter of 2002, from $212.0 million for the comparable period in 2001, and increased 4.0% to $441.1 million for the first two quarters of 2002, from $424.2 million for the comparable period in 2001. Gross profit increased 9.0% to $78.3 million in the second quarter of 2002, from $71.8 million for the comparable period in 2001, and increased 9.4% to $161.0 million for the first two quarters of 2002, from $147.2 million for the comparable period in 2001. As a percentage of total revenues, gross profit increased 1.3% to 26.6% in the second quarter of 2002, from 25.3% for the comparable period in 2001, and increased 0.9% to 26.7% for the first two quarters of 2002, from 25.8% for the comparable period in 2001. These increases in gross profit are due primarily to increases in domestic store revenues, primarily due to increases in domestic Company-owned and franchise same store sales and increases in distribution volumes. Additionally, these gross profit improvements were positively impacted by a decrease in food basket costs, including lower cheese costs. These increases in gross profit were offset in part by Company-wide increases in insurance costs. General and administrative expenses increased 13.1% to $47.5 million in the second quarter of 2002, from $42.0 million for the comparable period in 2001, and increased 3.5% to $91.6 million for the first two quarters of 2002, from $88.5 million for the comparable period in 2001. As a percentage of total revenues, general and administrative expenses increased 1.3% to 16.1% in the second quarter of 2002, from 14.8% for the comparable period in 2001, and decreased 0.3% to 15.2% for the first two quarters of 2002, from 15.5% for the comparable period in 2001. These increases in total general and administrative expenses are due primarily to the write-off of approximately $5.3 million of certain capitalized software costs during the second quarter of 2002 offset in part by the favorable impact of no longer amortizing goodwill and the absence of certain covenant not-to-compete amortization expenses related to an asset that was fully amortized by the end of 2001. Goodwill amortization expense for the first two quarters of 2001 was approximately $1.0 million and covenant not-to-compete amortization expense related to this asset was approximately $2.6 million. Total revenues continued to outpace the growth of total general and administrative expenses for the first two quarters of 2002, reflecting management's commitment to continuous process improvements throughout the Company. Interest Expense Interest expense decreased 12.7% to $13.7 million in the second quarter of 2002, from $15.7 million for the comparable period in 2001, and decreased 15.7% to $27.2 million for the first two quarters of 2002, from $32.3 million for the comparable period in 2001. These decreases are due primarily to decreases in related variable interest rates on our senior credit facility and reduced debt levels. Provision for Income Taxes Provision for income taxes increased $682,000 to $6.3 million in the second quarter of 2002, from $5.7 million for the comparable period in 2001, and increased $5.0 million to $15.7 million for the first two quarters of 2002, from $10.7 million for the comparable period in 2001. These increases are due primarily to increases in pre-tax income. Liquidity and Capital Resources We had negative working capital of $55.2 million and cash and cash equivalents of $8.1 million at June 16, 2002. The increase in negative working capital at June 16, 2002 compared to December 30, 2001 is due in part to the approximately $21.9 million purchase of 83 domestic franchise stores in Arizona during the first quarter of 2002 in addition to a related distribution to parent of approximately $9.1 million. Historically, we have operated with minimal positive working capital or negative working capital primarily because our receivable collection periods and inventory turn rates are faster than the normal payment terms on our current liabilities. In addition, our sales are not typically seasonal, which further limits our working capital requirements. Our primary sources of liquidity are cash flows from operations and availability of borrowings under our revolving credit facility. We expect to fund planned capital expenditures and debt repayments from these sources. 10
As of June 16, 2002, we had $622.6 million of long-term debt, of which $40.7 million was classified as a current liability. There were no borrowings under our $100 million revolving credit facility. Letters of credit issued under the revolving credit facility were $17.4 million. Borrowings under the revolving credit facility are available to fund our working capital requirements, capital expenditures and other general corporate purposes. Cash provided by operating activities was $62.0 million and $42.8 million in the first two quarters of 2002 and 2001, respectively. The $19.2 million increase is due primarily to a $10.0 million increase in net income and a $6.4 million net change in operating assets and liabilities. Cash used in investing activities was $47.2 million and $13.1 million in the first two quarters of 2002 and 2001, respectively. The $34.1 million increase is due primarily to a $21.7 million increase in acquisitions of franchise operations and a $7.3 million increase in capital expenditures. The increase in acquisitions of franchise operations is due primarily to the Company's purchase of 83 domestic franchise stores in Arizona during the first quarter of 2002. Cash used in financing activities was $41.6 million and $11.8 million in the first two quarters of 2002 and 2001, respectively. The $29.8 million increase is due primarily to a $10.1 million increase in distributions to parent and a $20.3 million increase in repayments of long-term debt. This increase in repayments of long-term debt is due primarily to the retirement of $10.3 million of outstanding senior subordinated notes and an increase in periodic amortization and cash sweep payments made under our senior credit facility in 2002, compared to 2001. On July 29, 2002, the Company entered into a senior credit facility with a consortium of banks (the "2002 Senior Credit Facility"). The 2002 Senior Credit Facility consists of a $365 million term loan expiring in June 2008 and a $100 million revolving credit facility expiring in June 2007. The Company's previously existing senior credit facility was paid in full and cancelled upon consummation of the 2002 Senior Credit Facility. The new agreement requires amortization of the term loans of $3.65 million per year during the first five years of the agreement with equal quarterly payments totaling $346.75 million in the final year of the agreement. Based upon the current level of operations and anticipated growth, we believe that the cash generated from operations and amounts available under the revolving credit facility will be adequate to meet our anticipated debt service requirements, capital expenditures and working capital needs for the next several years. There can be no assurance, however, that our business will generate sufficient cash flows from operations or that future borrowings will be available under the senior credit facilities or otherwise to enable us to service our indebtedness, including the senior credit facilities and the Senior Subordinated Notes, to redeem or refinance TISM's, our Parent company, Cumulative Preferred Stock or to make anticipated capital expenditures. Our future operating performance and our ability to service or refinance the Senior Subordinated Notes and to service, extend or refinance the senior credit facilities will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. Forward-Looking Statements Certain statements contained in this filing relating to capital spending levels and the adequacy of our capital resources are forward-looking. Also, statements that contain words such as "believes," "expects," "anticipates," "intends," "estimates" or similar expressions are forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Among these risks and uncertainties are competitive factors, increases in our operating costs, ability to retain our key personnel, our substantial leverage, ability to implement our growth and cost-saving strategies, industry trends and general economic conditions, adequacy of insurance coverage and other factors, all of which are described in the Form 10-K for the year ended December 30, 2001 and our other filings with the Securities and Exchange Commission. We do not undertake to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk Market Risk The Company is exposed to market risks primarily from interest rate changes on our variable rate debt. Management actively monitors this exposure. The Company does not engage in speculative transactions nor does it hold or issue financial instruments for trading purposes. Interest Rate Derivatives The Company may enter into interest rate swaps, collars or similar instruments with the objective of reducing volatility relating to our borrowing costs. During 2001, we entered into an interest rate collar and three interest rate swap agreements to effectively convert the variable Eurodollar component of the effective interest rate on a portion of the Company's debt to various fixed rates over various terms. These agreements are summarized as follows: Total Notional Derivative Amount Term Rate ---------- ------ ---- ---- Interest Rate Collar $75.0 million June 2001 - June 2003 3.86% - Floor 6.00% - Ceiling Interest Rate Swap $75.0 million June 2001 - June 2004 4.90% Interest Rate Swap $37.5 million September 2001 - September 2003 3.645% Interest Rate Swap $37.5 million September 2001 - September 2004 3.69% Interest Rate Risk The Company's variable interest expense is sensitive to changes in the general level of interest rates. As of June 16, 2002, a portion of the Company's debt is borrowed at Eurodollar rates plus a blended margin rate of approximately 3.1%. At June 16, 2002, the weighted average interest rate on our $148.6 million of variable interest debt was approximately 5.1%. The Company had total interest expense of approximately $27.2 million in the first two quarters of 2002. The estimated increase in interest expense from a hypothetical 200 basis point adverse change in applicable variable interest rates would be approximately $1.5 million. 12
PART II. OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Changes in Securities and Use of Proceeds None. Item 3. Defaults Under Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K a. Exhibits None. b. Current Reports on Form 8-K There were no reports filed on Form 8-K during the quarter ended June 16, 2002. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DOMINO'S, INC. (Registrant) Date: July 30, 2002 /s/ Harry J. Silverman ---------------------------- ` Chief Financial Officer 13