Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2000
-----------------
OR
[_] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File No. 333-74797
DOMINO'S, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 38-3025165
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
30 Frank Lloyd Wright Drive
Ann Arbor, Michigan 48106
(Address of principal executive offices)
(734) 930-3030
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: [_]
The aggregate market value of the voting stock held by non-affiliates is zero.
As of March 15, 2001, there were 10 shares of the registrant's common stock
outstanding.
Part I
Item 1. Business.
Domino's, Inc. (referred to as "the Company", "Domino's", or in the
first person notations of "we", "us" and "our"), was incorporated under the laws
of the State of Delaware in 1991. We operate and franchise pizza delivery and
carry-out restaurants under the Domino's Pizza(R) trademark. We operate through
a worldwide network of nearly 7,000 franchise and Company-owned stores located
throughout the United States and 64 international markets and regional
distribution centers located in the United States. We generated system-wide
sales of approximately $3.5 billion for the fiscal year ended December 31, 2000.
System-wide sales by our domestic franchise and Company-owned stores accounted
for approximately 26% of the United States pizza delivery market in 2000.
Domino's is the leading pizza delivery company in the world.
We offer a focused menu of high quality, value priced pizza with three
types of crust (Hand-Tossed, Thin Crust and Deep Dish), along with buffalo
wings, cheesy bread, cinnamon sticks and bread sticks. Our hand-tossed pizza is
made from fresh dough produced in our regional distribution centers. We prepare
every pizza using real cheese, pizza sauce made from fresh tomatoes and a choice
of high quality meat and vegetable toppings in generous portions. Our focused
menu and use of premium ingredients enable us to consistently and efficiently
produce high quality pizza.
Over the 40 years since our founding, we have developed a simple,
cost-efficient model. We offer a limited menu, our stores are designed for
delivery and carry-out and we do not generally offer dine-in service. As a
result, our stores require relatively small, lower rent locations and limited
capital expenditures. Outside the United States, we generally follow the same
operating model with some adaptations to local eating habits and consumer
preferences. Our simple operating model helps to maintain consistent food
quality and minimizes store expenses and capital commitments.
Domino's operates three business segments:
. Domestic Stores, consisting of:
---------------
Corporate operations, which operates our domestic network of
626 Company-owned stores;
Franchise operations, which oversees our domestic network of
4,192 franchise stores; and
. Distribution, which operates our 18 regional distribution centers
------------
and one equipment and supply distribution center that distribute
food, equipment and supplies to our domestic stores and equipment
to our international stores; and
. International, which oversees our network of 2,157 franchise
-------------
stores in 64 international markets, including Alaska, Hawaii,
Puerto Rico, the United States Virgin Islands and Guam, and
operates two Company-owned stores in France; International also
distributes food to stores from distribution centers in Alaska,
Hawaii, Canada and France.
Industry Overview
The United States pizza market had sales of approximately $24.7 billion
in 2000. This market has three segments: dine-in, carry-out and delivery. We
focus on the delivery segment, which accounted for approximately $7.6 billion or
approximately 31% of the total United States pizza market in 2000. Pizza
delivery has been the fastest growing segment of this market, growing at a
compound annual rate of 9.3% between 1997 and 2000, as compared to 5.1% for the
dine-in segment and 4.9% for the carry-out segment over the same period.
Domestic pizza delivery sales have also shown long-term, stable growth.
From 1993 through 2000, pizza delivery sales in the United States grew at a
compound annual rate of 7.8%. Even in the recessionary period during 1990 and
1991, pizza delivery sales in the United States grew at a compound annual rate
of 2.5%.
1
We believe that the growth and stability of the pizza delivery market
will persist as a result of several continuing demographic factors. In
particular, we believe that longer work schedules and the increasing prevalence
of dual career families have led to rapid growth in the demand for delivered
food. We believe that delivered pizza is well positioned to capitalize on these
trends as other food products have difficulty matching the combination of value,
consistency, convenience and timely delivery of pizza.
Competitive Strengths
Leading Market Position. With system-wide sales accounting for
approximately 26% of the United States pizza delivery market in 2000, Domino's
is the leading pizza delivery company in the United States. Outside the United
States, we generally are the market share leaders or are a strong number two in
the key markets where we compete. Our leadership positions in these key markets
and our strong global presence provide significant cost and marketing advantages
relative to our delivery competitors.
Strong Brand Equity. Our brand name is widely recognized by consumers
in the United States as the leader in pizza delivery. Over the past five years,
Domino's and its franchisees have invested an estimated $1.1 billion on
national, market level and local advertising in the United States. We continue
to reinforce the strength of our brand name recognition with extensive
advertising through national, market level and local television, print and
direct mail campaigns. Domino's Pizza is one of Ad Age's "100 Megabrands," a
list which includes other prominent brands such as Coke(R), Campbell's(R),
Kodak(R) and Wrigley(R).
Focused and Cost-efficient Operating System. We have focused on pizza
delivery since our founding in 1960. Over this time, we have developed a simple,
cost-efficient operating system for producing a streamlined menu offering and
delivery system. Our limited menu, efficient food production processes supported
by our distribution system and extensive employee training programs allow us to
produce our pizza in approximately ten minutes. The simplicity and efficiency of
our store operations gives us significant advantages over competitors that also
participate significantly in the carry-out or dine-in segments of the pizza
market and, as a result, have more complex operations. Consequently, we believe
these competitors have a difficult time matching Domino's value, quality and
consistency in the delivery segment.
Minimal Capital Requirements. We have minimal capital expenditure and
working capital requirements. Our capital expenditures are low because we focus
on delivery and because our franchisees fund all capital expenditures for their
stores. Since our stores do not generally offer dine-in service, they do not
require expensive restaurant facilities, are relatively small (1,000-1,300
square feet) and are inexpensive to build and furnish as compared to other quick
service restaurant ("QSR") establishments. A new Domino's store typically
requires $125,000 to $250,000 in initial capital, far less than the typical
establishments of many of our major competitors. Because approximately 87% of
our domestic stores are franchised, our share of system-wide capital
expenditures is small. In addition, Domino's requires minimal working capital as
we collect more than 97% of our royalties from domestic franchisees within three
weeks of when the royalty is generated, collect approximately 95% of
Distribution receivables within 15 days of the related sale and generally
achieve approximately 40-50 inventory turns per year in our regional
distribution centers. We believe these minimal working capital requirements are
advantageous for funding our continued growth.
Strong Franchise Relationships. We believe that our strong
relationships with franchisees are a critical component of our success. We
support our franchisees by providing brand/sales building programs, employee
training, financial incentives and infrastructure support. We employ an
owner-operator model that results in our franchisees owning an average of three
stores, considerably fewer than most franchise models. We also believe that our
franchise owners enjoy some of the most attractive economics within the QSR
industry. Our strong cooperation with our franchisees is demonstrated by an over
97% voluntary participation rate in our domestic distribution system and strong
franchisee participation in cooperative advertising programs. We generally
experience a franchise contract renewal rate of over 99% and 140 new franchisees
entered our system in 2000. We believe our franchise system will continue to be
a growing component of our business.
2
Efficient National Distribution System. We operate a nationwide network
of 18 regional distribution centers. Each distribution center is generally
located within a 300-mile radius of the domestic stores it serves. We take
advantage of volume purchasing of food and supplies, to provide consistency,
efficiencies of scale and low cost distribution. Our distribution system has an
on-time accuracy rate of approximately 99% and allows our store managers to
focus on store operations and customer service.
Business Strategy
Our business strategy has been to grow revenues and profitability by
focusing on our delivery expertise: prompt delivery of high quality food
products, operational excellence and brand recognition through strong
promotional advertising. This strategy has resulted in our leading pizza
delivery market position and strong track record of profitable growth. We intend
to achieve further growth and strengthen our competitive position through the
continued implementation of this strategy and the following initiatives:
Focus on Core Competencies. We believe four core competencies are
crucial to our future growth: Build the Brand, Maintain High Standards, Flawless
Execution and PeopleFirst. We have streamlined our organization and structured
our operations, marketing and support services to achieve these objectives.
Capitalize on Strong Industry Dynamics. We believe that the pizza
delivery market will continue to show strong growth and stability as a result of
several positive demographic trends. These long-term trends include more dual
career families, longer work weeks and increased consumer emphasis on
convenience. In addition, we believe that the low cost and high value of
delivered pizza will support continued industry growth even during an economic
slowdown. Domino's is well positioned to take advantage of these dynamics, given
our market leadership position, strong brand name and cost-efficient operating
model.
Leverage Market Leadership Position and High Brand Awareness. Domino's
is the leading pizza delivery company in the United States. System-wide sales by
our Company-owned and domestic franchise stores accounted for approximately 26%
of the United States pizza delivery market in 2000. Our market leadership
position and strong brand give us significant marketing strength relative to
many of our competitors. We believe strong brand recognition is important in the
pizza delivery industry because consumer decisions are strongly influenced by
brand awareness. We intend to continue investments that promote our brand name
and enhance our recognition as the leader in pizza delivery.
Expand Store Base. We plan to continue expanding our base of
traditional domestic stores, enter new domestic markets with non-traditional
venues (e.g. convenience stores, stadiums, etc.) and increase our network of
international stores.
At the end of fiscal 2000, we had 160 non-traditional stores in
operation compared to 99 stores in operation at the end of fiscal 1999. Many of
these stores provide both delivery and carry-out services from convenience
stores in lightly populated markets. We intend to continue aggressively opening
these non-traditional stores.
Company History
Thomas S. Monaghan founded the Company in 1960. Prior to December 1998,
Domino's was a wholly-owned subsidiary of Domino's Pizza LLC ("Domino's Pizza")
(formerly Domino's Pizza, Inc.). During December 1998, prior to the
recapitalization described below, Domino's Pizza distributed its ownership
interest in Domino's to TISM, Inc. ("TISM"), the current parent corporation of
Domino's. TISM then contributed its ownership interest in Domino's Pizza, which
had been a wholly-owned subsidiary of TISM, to Domino's, effectively converting
Domino's from a subsidiary of Domino's Pizza to the parent of Domino's Pizza.
3
On December 21, 1998, investors, including funds associated with Bain
Capital, Inc. ("Bain Capital"), management and others (collectively, "Investor
Group"), acquired a controlling interest in Domino's through a recapitalization
of TISM that resulted in the reorganization and acquisition of Domino's by the
Investor Group from Thomas S. Monaghan and certain members of his family
(collectively, "Original Stockholders"). Specifically:
. The Investor Group invested $229.2 million to acquire common
stock of TISM, which represented approximately 93% of its
outstanding common stock immediately following the
recapitalization, and $101.1 million to acquire cumulative
preferred stock of TISM, which represented 100% of its
outstanding preferred stock immediately following the
recapitalization.
. The Original Stockholders retained a portion of their voting
common stock in TISM equal to $17.5 million, or approximately
7% of the outstanding common stock of TISM immediately
following the recapitalization. The Original Stockholders
received $903.2 million for their remaining common stock and
TISM contingent notes payable for up to an aggregate of $15
million in certain circumstances upon the sale or transfer to
non-affiliates by the Bain Capital funds of more than 50% of
their initial common stock ownership in TISM.
. Thomas S. Monaghan received $50 million for a covenant not-to-
compete.
The recapitalization and related expenses were financed in part through
the investments of the Investor Group and:
. Borrowings under a new senior credit facility with aggregate
availability of $545 million, consisting of $445 million in
term loans and a revolving credit facility of up to $100
million; and
. The sale of $275 million of 10 3/8% Senior Subordinated Notes
due in 2009.
Operations
General. We believe our operating model is differentiated from other
pizza competitors that are not focused primarily on the delivery business. Our
business model has competitive advantages, including production-oriented store
design, efficient and consistent operational processes, strategic location to
facilitate delivery service, favorable store economics and a focused menu.
Production-Oriented Store Design. Our typical store is small, occupying
approximately 1,000 to 1,300 square feet, and is designed with a focus on
efficient and timely production of consistent, high-quality pizza for delivery.
Our stores are primarily production facilities and, accordingly, do not
generally have a dine-in section.
Efficient and Consistent Operational Processes. Each store executes an
operational process which includes order taking, pizza preparation, cooking (via
automated, conveyor-driven ovens), boxing and delivery. The entire order taking
and pizza production process is designed for completion in approximately ten
minutes to allow sufficient time for safe delivery generally within 25 to 30
minutes of ordering. This simple and focused operational process has been
achieved through years of continuous improvement, resulting in a high level of
efficiency.
Strategic Locations. We locate our stores strategically to facilitate
quality delivery service to our customers. The majority of our stores are
located in populated areas in or adjacent to large or mid-size cities, on or
near college campuses or military bases. The majority of our stores serve
approximately 5,000 to 15,000 addresses. We use geographic information software,
which incorporates variables such as household count, traffic volumes,
competitor locations, household demographics and visibility, to evaluate and
identify potential store locations.
4
Favorable Store Economics. Because our stores do not generally offer
dine-in service or rely heavily on carry-out, the stores typically do not
require expensive real estate, are relatively small, and are inexpensive to
build-out and furnish as compared to other QSR establishments. A new Domino's
store typically requires only $125,000 to $250,000 in initial capital, far less
than many other QSR establishments. Our stores also benefit from lower
maintenance costs as store assets have long lives and updates are not frequently
required.
Focused Menu. We maintain a focused menu that is designed to present an
attractive, high quality offering to customers, while minimizing errors in the
order taking and food preparation process and expediting safe delivery. Our
basic menu has three simple components: pizza size, pizza type and pizza
toppings. Most stores carry two sizes of traditional Hand-Tossed, Thin Crust and
Deep Dish pizza. The typical store also offers bread sticks, cheesy bread,
cinnamon sticks, Coca-Cola(R) soft drink products and buffalo wings. We also
occasionally offer new products on a promotional basis. We believe that our
focused menu creates a strong identity among consumers, improves operating
efficiency and maintains food quality and consistency.
Divisional Overview
General. We operate three business segments: (i) Domestic Stores,
consisting of Corporate operations, which operates our network of 626
Company-owned stores, and Franchise operations, which oversees our domestic
network of 4,192 franchise stores; (ii) Distribution, which operates 18 regional
food distribution centers and one equipment distribution center supplying food,
equipment and supplies to our domestic stores and equipment to our international
stores; and (iii) International, which oversees our network of 2,157
international franchise stores in 64 international markets including Alaska,
Hawaii, Puerto Rico, the United States Virgin Islands and Guam, and operates our
two Company-owned stores in France. International also distributes food to
stores from distribution centers in Alaska, Hawaii, Canada and France.
Domestic Stores. Our network of Company-owned stores plays an important
strategic role in our predominately franchised system. In addition to generating
significant revenues and profits, we utilize our Company-owned stores as a forum
for training new store managers and prospective franchisees, and as a test site
for new products and promotions and store operational improvements. We also
believe that our Company-owned stores add economies of scale for advertising,
marketing and other fixed costs traditionally borne by franchisees. Corporate
operations is divided into two geographic regions and is managed through 13
field offices in the contiguous United States.
Our domestic franchises are operated by highly qualified entrepreneurs
who own and operate an average of three stores. Our principal sources of revenue
from domestic franchise store operations are royalty payments based on store
sales and, to a much lesser extent, fees for store openings and transfers.
Our domestic franchises are currently managed through five regional
offices located in Dallas, Texas, Atlanta, Georgia, Santa Ana, California,
Linthicum, Maryland and Ann Arbor, Michigan. The regional offices provide
training, financial analysis, store development, store operational audits and
marketing services for our franchisees. We maintain a close relationship and
direct link with our franchise stores through regional franchise teams, an array
of computer-based training materials that ensure franchise stores operate in
compliance with specified standards, and franchise advisory groups that
facilitate communications between us and our franchisees.
Distribution. Distribution operates distribution centers that purchase,
receive, store and deliver uniform, high-quality pizza-related food products,
supplies and equipment to domestic stores. Each regional food distribution
center serves an average of 268 stores, generally located within a 300-mile
radius.
Distribution services all of our domestic Company-owned stores and over
97% of our domestic franchise stores. We believe that this participation rate is
particularly impressive and reflective of our world-class distribution centers
given the fact that our domestic franchisees have the option of purchasing food,
supply and equipment from approved independent suppliers. Distribution supplies
products ranging from fresh dough, cheese and basic food items to pizza boxes
and cleaning supplies. Distribution drivers generally unload supplies and stock
store shelves after hours, thereby minimizing disruption of store operations
during peak hours. We believe that franchisees choose to obtain supplies from us
because we provide the most efficient, convenient and cost-effective
alternative.
5
Distribution offers a profit-sharing arrangement to stores that
purchase 100% of their food and supplies from Distribution. All of our domestic
Company-owned stores and substantially all domestic franchise stores buying from
Distribution participate in our profit-sharing program. We believe these
arrangements strengthen our ties with these franchisees, secure a stable source
of revenue and profits for the Company and provide incentives for franchisees to
work closely with us to reduce costs. These profit-sharing arrangements provide
Company-owned stores and participating franchisees with approximately 50% of
their regional distribution center's pre-tax profits. Distribution paid out
approximately $32.0 million to franchisees participating in the profit-sharing
program in 2000.
Distribution's information systems are an integral part of its superior
customer service. Distribution employs routing strategies to maximize on-time
deliveries, utilizing software to determine store routes on a daily basis for
optimal efficiency. Through our strategic distribution center locations and
proven routing systems, we achieved on-time delivery rates of approximately 99%
in 2000.
International. International oversees our network of 2,157 stores in 64
international markets, including Alaska, Hawaii, Puerto Rico, the United States
Virgin Islands and Guam, and operates our two Company-owned stores in France.
We have over 400 franchise stores in Mexico, more than 200 franchise
stores in both Canada and the United Kingdom and over 100 franchise stores in
each of Japan, Australia, South Korea and Taiwan. The principal sources of
revenues from international operations are royalty payments based on sales from
franchisees and, to a lesser extent, food sales to franchisees and fees from
master franchise agreements and store openings.
We generally grant international franchises through master franchise
agreements to entities that have knowledge of the local markets. These master
franchise agreements generally grant the franchisee exclusive rights to develop
or sub-franchise stores and distribution centers in a particular geographic area
and contain growth clauses requiring franchisees to open a minimum number of
stores within a specified period. In a small number of countries, we franchise
directly to individual store operators.
Franchise Program
General. The success of our unique franchise formula, together with the
relatively low initial capital investment required to open a franchise store,
has enabled us to attract a large number of highly motivated entrepreneurs as
franchisees. We consider franchisees to be a vital part of our continued growth
and believe our relationships with franchisees are excellent.
Domestic Franchisees. We maintain the strength of our franchise store
base by seeking franchisees who are willing to commit themselves to operating
franchise stores and by applying rigorous standards to prospective franchisees.
Specifically, we generally require prospective domestic franchisees to manage a
store for at least one year before being granted a franchise. This enables us to
observe the operational and financial performance of domestic franchisees prior
to entering into a long-term contract. We also restrict the ability of domestic
franchisees to become involved in outside business investments, which focuses
the franchisees on operating their stores. We believe these standards are unique
to the franchise industry and result in highly qualified and focused store
operators, while helping to maintain the strength of the Domino's Pizza brand.
We enter into franchise agreements with domestic franchisees under
which the franchisee is granted the right to operate a store for a term of ten
years, with an option to renew for an additional ten years. Under the current
standard franchise agreement, we assign an exclusive area of primary
responsibility to each franchise store. During the term of the franchise
agreement, the franchisee is generally required to pay a 5.5% royalty fee on
sales, subject, in certain instances, to lower rates based on area development
agreements, sales initiatives and new store incentives. We have the contractual
right, subject to state law, to terminate a franchise agreement for a variety of
reasons, including, but not limited to, a franchisee's failure to make payments
when due or failure to adhere to specified company policies and standards.
6
International Franchisees. The majority of franchisees outside of the
contiguous United States are master franchisees with franchise and distribution
rights for entire regions or countries. Prospective candidates are required to
possess or have access to local market knowledge required to establish and
develop Domino's Pizza stores and a distribution system. The local market
knowledge focuses on the ability to identify and access targeted real estate
sites along with expertise in local customs, culture and laws. We also encourage
our candidates to have access to sufficient capital to meet growth and
development plans.
We enter into master franchise agreements with our international
franchisees under which the master franchisee may open and operate franchise
stores or, under specified conditions, enter into sub-franchise agreements for a
term of ten to twenty years, with an option to renew for an additional ten year
term. The master franchisee is generally required to pay an initial, one-time
franchisee fee, as well as an additional franchise fee upon the opening of each
new store. In addition, the master franchisee is required to pay a continuing
royalty fee as a percentage of sales, which also varies.
Franchise Store Development. We furnish each domestic franchisee with
assistance in selecting sites, developing stores and conforming to the physical
specifications for typical stores. Each domestic franchisee is responsible for
selecting the location for a store but must obtain approval for store design and
location based on accessibility and visibility of the site and targeted
demographic factors, including population density and traffic. We provide design
plans, fixtures and equipment for most franchise locations at competitive
prices.
Franchisee Financing Programs. We have an established internal
financing program to assist franchisees in opening stores. We generally provide
financing of up to $100,000 for the purpose of opening new stores to franchisees
who are creditworthy and have adequate working capital. The franchisees may use
the funds to purchase equipment, signage, leasehold improvements or supplies,
with the condition that leasehold improvements cannot exceed $35,000. We have
also historically offered to finance the sale of certain Company-owned stores to
domestic franchisees and finance the implementation of new products and programs
such as the 1998 rollout of our HeatWave(R) hot bag systems. In addition, we
have notes outstanding to various international franchisees. At December 31,
2000, loans outstanding under our franchisee financing programs totaled $19.0
million.
Franchise Training and Support. Training store managers and employees
is a critical component of our success. We require all domestic franchisees to
complete initial and ongoing training programs provided by us. In addition,
under the standard domestic franchise agreement, domestic franchisees are
required to implement training programs for their store employees. We assist our
domestic and international franchisees by providing training services for store
managers and employees, including computer-based training materials,
comprehensive operations manuals and franchise development classes.
Franchise Operations. We maintain strict control over franchise
operations to protect our brand and image. All franchisees are required to
operate their stores in compliance with written policies, standards and
specifications, including matters such as menu items, ingredients, materials,
supplies, services, furnishings, decor and signs. Each franchisee has full
discretion to determine the product prices to be charged to its customers. We
also provide support to our franchisees, including training, marketing
assistance and consultation to franchisees who experience financial or
operational difficulties. We have established several advisory boards through
which franchisees can contribute to corporate level initiatives.
Domino's Image 2000 Campaign
We have implemented a relocation and reimaging campaign called Domino's
Image 2000. The relocation program is aimed at increasing store sales and market
share through improved brand visibility and maximization of carry-out sales. It
involves relocating selected stores, upgrading store interiors, adding new
signage to draw attention to the store and providing contemporary uniforms for
employees. If a store is already in a strong location, the signage and carry-out
areas are updated. We believe that average per Company-owned store capital
expenditures for the reimaging campaign will approximate $30,000. The capital
expenditures for relocating a Company-owned store averages approximately
$170,000 to $190,000 per store.
7
Marketing Operations
We coordinate the domestic advertising and marketing efforts at the
national and cooperative market levels. We require Company-owned and domestic
franchise stores to contribute 3% of their net sales to fund national marketing
and advertising campaigns. The fund is used primarily to purchase television
advertising, but also supports market research, field communications, commercial
production, talent payments and other activities supporting the Domino's Pizza
brand. We can require stores to additionally contribute a minimum of 1% up to a
maximum of 3% of net sales to market level media campaigns. Franchise store
contributions to market level media campaigns currently average approximately
2.3% of net sales in our top 40 markets.
We estimate that Company-owned and domestic franchise stores also spend
an additional 3% to 5% of their net sales on local store marketing, including
targeted database mailings, saturation print mailings to households in a target
area and community involvement through school and civic organizations. We offer
a national print program which provides cost-effective print materials as an
incentive for franchisees to use marketing material prepared by us and which
reinforces our national branding strategy.
By communicating common brand direction at the national, market and
local market levels, we create a consistent marketing message to our customers.
Over the past five years, we estimate that we and our domestic franchisees have
invested approximately $1.1 billion in system-wide advertising at the national,
market and local community levels.
Suppliers
We believe that the length and quality of our relationships with
suppliers provides us with priority service at competitive prices. We have
maintained active relationships of over 15 years with more than half of our
major suppliers. As a result, we have typically relied on oral rather than
written contracts with our suppliers. In addition, we believe that two factors
have been critical to maintaining long-lasting relationships and keeping our
purchasing costs low. First, we are one of the largest volume purchasers of
pizza-related products such as flour, cheese, sauce and pizza boxes, which gives
us the ability to maximize leverage with our suppliers. Second, in four of our
five key product categories (meats, dough products, boxes and sauce), we
generally retain active purchasing relationships with at least two separate
suppliers. This purchasing strategy allows us to shift purchases among suppliers
based on quality, price and timeliness of delivery. For the year ended December
31, 2000, our cheese supplier accounted for approximately 33% of our
distribution cost of sales. Prices charged to us by our suppliers are subject to
fluctuation and we have historically been able to pass increased costs onto our
Distribution customers. There can be no assurances that we will be able to
continue this in the future.
Competition
The pizza delivery market is highly fragmented. In this market, we
compete against regional and local companies, as well as three national chains:
Pizza Hut(R), Papa John's(R) and Little Caesar's(R). We generally compete on the
basis of product quality, location, delivery time, service and price. We also
compete on a broader scale with other international, national, regional and
local restaurants and QSR establishments. The overall food service industry and
the QSR segment is intensely competitive with respect to product quality, price,
service, convenience and concept. The industry is often affected by changes in
consumer tastes, national, regional or local economic conditions, currency
fluctuations to the extent international operations are involved, demographic
trends and disposable purchasing power. We compete within the food service
industry and the QSR segment not only for customers, but also for management and
hourly personnel, suitable real estate sites and qualified franchisees.
Government Regulation
We are subject to various federal, state and local laws affecting the
operation of our business, as are our franchisees. Each store is subject to
licensing and regulation by a number of governmental authorities, which include
zoning, health, safety, sanitation, building and fire agencies in the
jurisdiction in which the store is located. Difficulties in obtaining, or the
failure to obtain, required licenses or approvals can delay or prevent the
opening of a new store in a particular area or cause an existing store to cease
operations. Our distribution facilities are licensed and subject to regulation
by federal, state and local health and fire codes.
8
We are subject to the rules and regulations of the Federal Trade
Commission (FTC) and various state laws regulating the offer and sale of
franchises. The FTC and various state laws require that we furnish a franchise
offering circular containing certain information to prospective franchisees. A
number of states regulate the sale of franchises and require registration of the
franchise offering circular with state authorities and the delivery of a
franchise offering circular to prospective franchisees. We are operating under
exemptions from registration in several states based on net worth and
experience. Substantive state laws that regulate the franchisor-franchisee
relationship presently exist in a substantial number of states, and bills have
been introduced in Congress from time to time which would provide for federal
regulation of the franchisor-franchisee relationship. The state laws often
limit, among other things, the duration and scope of non-competition provisions,
the ability of a franchisor to terminate or refuse to renew a franchise and the
ability of a franchisor to designate sources of supply.
Internationally, our franchise stores are subject to national and local
laws and regulations which often are similar to those affecting our domestic
stores, including laws and regulations concerning franchises, labor, health,
sanitation and safety. Our international franchise stores are also often subject
to tariffs and regulations on imported commodities and equipment and laws
regulating foreign investment.
Trademarks
Domino's has several registered trademarks and service marks and
believes that the Domino's Pizza mark has significant value and is materially
important to our business. Our policy is to pursue registration of our important
trademarks whenever possible and to vigorously oppose the infringement of any of
our registered or unregistered trademarks. Domino's licenses the use of its
registered marks to franchisees through their franchise agreements.
Working Capital
Information about the Company's working capital is included in
Management's Discussion and Analysis of Financial Condition and Results of
Operation in Part II, Item 7., page 16.
Customers
The Company's business is not dependent upon a single customer or small
group of customers. No customer accounted for more than 10% of total
consolidated revenues in 2000, 1999 or 1998.
Seasonal Operations
The Company's business is not typically seasonal.
Backlog Orders
Company-owned stores and distribution centers have no backlog orders as
of December 31, 2000.
Government Contracts
No material portion of the Company's business is subject to
renegotiation of profits or termination of contracts or subcontracts at the
election of the United States government.
Research and Development
The Company operates research and product development facilities at its
corporate headquarters in Ann Arbor, Michigan. The Company incurred research and
development expense of approximately $1,009,000, $788,000 and $620,000 in 2000,
1999 and 1998, respectively.
9
Environmental Matters
The Company is not aware of any Federal, state or local environmental
laws or regulations that will materially affect its earnings or competitive
position, or result in material capital expenditures. However, we cannot predict
the effect of possible future environmental legislation or regulations. During
2000, there were no material capital expenditures for environmental control
facilities and no such material expenditures are expected.
Employees
As of December 31, 2000, we had approximately 14,600 employees,
excluding employees of franchise-operated stores. None of our domestic employees
are represented by unions. We consider our relationships with our employees to
be excellent.
Financial Information about Geographic Areas
Financial information about international and United States markets is
incorporated herein by reference from Selected Financial Data, Management's
Discussion and Analysis of Financial Condition and Results of Operation and the
consolidated financial statements and related footnotes in Part II, Item 6.,
pages 11 through 12, Item 7. pages 13 through 16 and Item 8. pages 19 through
46, respectively of this Form 10-K.
Item 2. Properties.
We lease approximately 185,000 square feet for our executive offices,
world headquarters and distribution facility located in Ann Arbor, Michigan
under an operating lease with Domino's Farms Office Park Limited Partnership, a
related party, for a term of five years commencing December 21, 1998, with an
option to renew for an additional five-year term.
We own facilities at fourteen Company-owned stores and five
distribution facilities. We also own and lease seven store facilities to
domestic franchisees. There are no mortgages on any of these facilities other
than mortgages on the distribution facilities granted in connection with our
senior credit facilities. All other Company-owned stores and facilities are
leased by us, typically with five-year leases with one or two five-year renewal
options. All other franchise stores are leased or owned directly by the
franchisees.
Item 3. Legal Proceedings.
The Company is a party to lawsuits, revenue agent reviews by taxing
authorities and legal proceedings, of which the majority involve workers'
compensation, employment practices liability, general liability, automobile and
franchisee claims arising in the ordinary course of business. In the opinion of
the Company's management, these matters, individually and in the aggregate, will
not have a material adverse effect on the financial condition and results of
operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
10
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
As of March 15, 2001, Domino's had 3,000 authorized shares of common
stock, par value $0.01 per share, of which 10 were issued and outstanding and
held by TISM. There is no established public trading market for Domino's common
stock. Domino's ability to pay dividends is limited under the indenture related
to the Senior Subordinated Notes.
Item 6. Selected Financial Data.
The following selected financial data, as of and for the fiscal years
ended December 31, 2000, January 2, 2000, January 3, 1999 (consists of 53
weeks), December 28, 1997 and December 29, 1996, is derived from the audited
consolidated financial statements of Domino's, Inc. and subsidiaries except for
the historical balance sheet data as of December 29, 1996 which was derived from
unaudited consolidated financial statements of Domino's, Inc. and subsidiaries
which, in the opinion of management, include all adjustments necessary for a
fair presentation. The data should be read in conjunction with, and is qualified
by reference to, Management's Discussion and Analysis of Financial Condition and
Results of Operation.
(In thousands) 2000 1999 (a) 1998 1997 1996
---- -------- ---- ---- ----
System-wide Sales (unaudited):
Domestic $2,647,221 $2,563,311 $2,505,991 $2,294,224 $2,110,324
International 896,254 800,989 717,694 633,857 524,496
---------- ---------- ---------- ---------- ----------
$3,543,475 $3,364,300 $3,223,685 $2,928,081 $2,634,820
========== ========== ========== ========== ==========
Operating Data:
Revenues $1,166,080 $1,156,639 $1,176,778 $1,044,790 $969,937
Income from operations 112,354 75,628 70,269 65,004 56,501
Income before provision (benefit)
for income taxes and
extraordinary item 41,098 2,504 63,948 61,471 50,611
Provision (benefit) for income
taxes (b) 16,073 419 (12,928) 366 30,884
Extraordinary gain on debt
extinguishment, net of income
taxes 181 - - - -
Net income 25,206 2,085 76,876 61,105 19,727
Other Financial Data:
EBITDA (c) $147,296 $131,055 $94,962 $83,140 $72,340
Net cash provided by operating
activities 57,602 63,268 64,731 73,408 53,225
Depreciation and other non-cash
items 34,942 51,427 24,693 18,136 15,839
Capital expenditures 37,903 27,882 48,359 31,625 15,472
Balance Sheet Data:
Total assets $ 369,629 $ 381,130 $ 387,891 $ 212,978 $ 155,454
Long-term debt 664,592 696,132 720,480 36,438 46,224
Total debt 686,074 717,570 728,126 44,408 70,067
Stockholder's equity (deficit) (454,807) (478,966) (483,775) 26,118 (34,868)
11
(a) In 1999, the Company recognized $7.6 million in restructuring charges
comprised of staff reduction costs of $6.3 million and exit cost liabilities
of 1.3 million.
(b) On December 30, 1996, the Company elected to be an "S" Corporation for
federal income tax purposes. The Company reverted to "C" Corporation status
effective December 21, 1998. On a pro forma basis, had the Company been a
"C" Corporation throughout this period, income tax expense would have been
higher by the following amounts: fiscal year ended December 28, 1997 --
$25.4 million; fiscal year ended January 3, 1999 -- $36.8 million.
(c) EBITDA represents earnings before interest, taxes, depreciation,
amortization, gain (loss) on sale of assets and, in 1999, the legal
settlement expense indemnified by a TISM stockholder. EBITDA is presented
because we utilize it extensively in internal management reporting to
evaluate our business segments, we believe it is frequently used by security
analysts in the evaluation of companies and is an important financial
measure in our indenture and credit agreements. However, EBITDA should not
be considered as an alternative to cash flow from operating activities as a
measure of liquidity or as an alternative to net income as an indicator of
our operating performance or any other measure of performance in accordance
with generally accepted accounting principles.
The following table sets forth a reconciliation of income from operations to
EBITDA:
-------------------------------------------------------------
Fiscal Year
-------------------------------------------------------------
Dollars in Thousands 2000 1999 1998 1997 1996
-------- -------- --------- -------- --------
Income from operations........................... $112,354 $ 75,628 $70,269 $ 65,004 $ 56,501
Loss (gain) on sale of assets ................... 1,338 (316) 1,570 1,197 353
Legal settlement expense indemnified by a TISM
stockholder.................................. - 4,000 - - -
Depreciation and amortization.................... 33,604 51,743 23,123 16,939 15,486
-------- -------- --------- -------- --------
EBITDA........................................... $147,296 $131,055 $ 94,962 $ 83,140 $ 72,340
======== ======== ========= ======== ========
12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
The following discussion and analysis of financial condition and
results of operation relates, in part, to periods prior to TISM's
recapitalization in December 1998. As a result of the recapitalization, the
Company entered into new financing arrangements under which the Company incurred
significant indebtedness. The Company also has a different capital structure,
and changes in ownership and executive leadership team composition subsequent to
the recapitalization. Accordingly, the results of operations for the year ended
January 3, 1999, which consists of 53 weeks, will not necessarily be comparable
to the years ended January 2, 2000 and December 31, 2000, respectively.
2000 Compared to 1999
Revenues
- --------
General. Revenues primarily include retail sales of food by Company-owned
stores, royalties and fees from domestic and international franchise stores, and
sales of food, equipment and supplies by our distribution centers to domestic
and international franchise stores.
Total revenues increased 0.8% to $1.166 billion in 2000, from $1.157 billion in
1999. This increase in total revenues is due primarily to increased
international and domestic franchise revenues. These results are more fully
described below.
Domestic Stores
- ---------------
Corporate Stores. Revenues from corporate store operations decreased slightly
to $378.0 million in 2000, from $378.1 million in 1999.
This slight decrease is due primarily to a decrease in same store sales offset
in part by an increase in the average number of Company-owned stores open during
2000. Same store sales for Company-owned stores decreased 0.9% in 2000 compared
to 1999. The number of Company-owned stores was 626 as of December 31, 2000, as
compared to 656 as of January 2, 2000. The average number of Company-owned
stores open during 2000 increased by 2 stores compared to 1999.
Domestic Franchise. Revenues from domestic franchise operations increased 3.3%
to $120.6 million in 2000, from $116.7 million in 1999.
This increase is due primarily to an increase in the average number of domestic
franchise stores open during 2000 and an increase in same store sales. Same
store sales for domestic franchise stores increased 0.1% in 2000 compared to
1999. The number of domestic franchise stores was 4,192 as of December 31, 2000,
as compared to 3,973 as of January 2, 2000. The average number of domestic
franchise stores open during 2000 increased by 165 stores compared to 1999.
Domestic Distribution
- ---------------------
Revenues from domestic distribution operations increased 0.1% to $604.1 million
in 2000, from $603.4 million in 1999.
This increase is due primarily to an increase in food volumes related to
increased domestic franchise same store sales and increased domestic franchise
store counts, offset in part by a market decrease in cheese prices and an
increased demand for lower-priced fresh dough.
International
- -------------
Revenues from international operations increased 8.6% to $63.4 million in 2000,
from $58.4 million in 1999.
This increase is due primarily to an increase in the average number of
international franchise stores open during 2000 and an increase in same store
sales. On a constant dollar basis, same store sales increased 3.7% in 2000
compared to 1999. The number of international stores was 2,159 as of December
31, 2000, as compared to 1,930 as of January 2, 2000. The average number of
international stores open during 2000 increased by 243 stores compared to 1999.
13
Operating Expenses
- ------------------
Cost of sales increased 0.9% to $862.2 million in 2000, from $854.2 million in
1999. Gross profit increased 0.5% to $303.9 million in 2000, from $302.5 million
in 1999.
This increase in gross profit is due primarily to an increase in total revenues
and lower food costs in part due to an increased demand for higher-margin fresh
dough. This increase was offset in part by increases in Company-owned store
labor and delivery expenses.
General and administrative expenses decreased 12.6% to $191.6 million in 2000,
from $219.3 million in 1999. As a percentage of total revenues, general and
administrative expenses decreased 2.6% to 16.4% in 2000, from 19.0% in 1999.
These decreases are due primarily to a decrease in covenant not-to-compete
amortization expense and, to a lesser extent, savings realized from our
corporate restructuring in late 1999 and a decrease in professional fees.
Covenant not-to-compete amortization expense, primarily related to the covenant
obtained as part of the recapitalization, decreased $21.9 million to $11.2
million in 2000, from $33.1 million in 1999. This decrease is due to the use of
an accelerated amortization method over the covenant's three-year term.
Provision (Benefit) for Income Taxes
- ------------------------------------
Provision (benefit) for income taxes increased $15.7 million to $16.1 million in
2000, from $0.4 million in 1999. This increase is due primarily to a significant
increase in pre-tax income in 2000 compared to 1999.
1999 Compared to 1998
Revenues
- --------
General. Total revenues decreased 1.7% to $1.157 billion in 1999, from $1.177
billion in 1998. This decrease in total revenues is due primarily to the 1998
store rationalization program and the one additional week in fiscal 1998 as
compared to fiscal 1999, offset in part by increased domestic franchise and
domestic distribution revenues.
Domestic Stores
- ---------------
Corporate Stores. Revenues from corporate store operations decreased 7.7% to
$378.1 million in 1999, from $409.4 million in 1998.
This decrease is due primarily to a reduction in the average number of
Company-owned stores open during 1999, due primarily to the 1998 store
rationalization program, offset in part by an increase in same store sales. The
Company closed or sold to franchisees 142 under-performing Company owned-stores
during the fourth quarter of 1998 under the 1998 store rationalization program.
Same store sales for Company-owned stores increased 1.7% in 1999 compared to
1998. The number of Company-owned stores was 656 as of January 2, 2000, as
compared to 642 as of January 3, 1999. The average number of Company-owned
stores open during 1999 decreased by 91 stores compared to 1998.
Domestic Franchise. Revenues from domestic franchise operations increased 4.0%
to $116.7 million in 1999, from $112.2 million in 1998.
This increase is due primarily to an increase in the average number of domestic
franchise stores open during 1999, in part resulting from the 1998 store
rationalization program, and an increase in same store sales. Same store sales
for domestic franchise stores increased 2.9% in 1999 compared to 1998. The
number of domestic franchise stores was 3,973 as of January 2, 2000, as compared
to 3,847 as of January 3, 1999. The average number of domestic franchise stores
open during 1999 increased by 151 stores compared to 1998.
Domestic Distribution
- ---------------------
Revenues from domestic distribution operations increased 0.7% to $603.4 million
in 1999, from $599.1 million in 1998.
14
This increase is due primarily to an increase in food volumes related to
increased domestic franchise same store sales and increased domestic franchise
store counts, offset in part by a $7.0 million decrease in equipment sales
during 1999 and an increased demand for lower-priced fresh dough. During the
first half of 1998, equipment and supply sales to franchisees were at high
levels due primarily to the roll-out of the Domino's HeatWave hot bag systems.
International
- -------------
Revenues from international operations increased 4.2% to $58.4 million in 1999,
from $56.0 million in 1998.
This increase is due primarily to an increase in the average number of
international franchise stores open during 1999, the addition of three
Company-owned stores in France and an increase in same store sales. On a
constant dollar basis, same store sales increased 3.6% in 1999 compared to 1998.
The number of international stores was 1,930 as of January 2, 2000, as compared
to 1,730 at January 3, 1999. The average number of international stores open
during 1999 increased by 182 stores compared to 1998.
Operating Expenses
- ------------------
Cost of sales decreased 4.1% to $854.2 million in 1999, from $890.8 million in
1998. Gross profit increased 5.8% to $302.5 in 1999, from $286.0 in 1998.
This increase in gross profit is due primarily to reductions in Company-owned
store food, labor and insurance costs that resulted mainly from the elimination
of under-performing stores through the 1998 store rationalization program as
well as improved shift scheduling, minimized overtime, reduced insurance
premiums and favorable product mix and pricing. In addition, the cost of sales
component of depreciation and amortization expense decreased due to the
modification of estimated useful lives for several fixed asset categories
effective in the first quarter of 1999.
General and administrative expenses increased 1.6% to $219.3 million in 1999,
from $215.7 million in 1998. As a percentage of total revenues, general and
administrative expenses increased 0.7% to 19.0% in 1999, from 18.3% in 1998.
These increases are due primarily to a $5.0 million litigation settlement
expense incurred in 1999 and increased covenant not-to-compete amortization
expense of $32.5 million resulting from a covenant not-to-compete obtained as
part of the recapitalization. These increases were substantially offset by
decreases in related party expenses of $21.0 million, comprised primarily of
lease payments and charitable contributions, the elimination of a field office
as part of our 1998 store rationalization program and costs associated with the
additional week included in fiscal 1998.
Restructuring
- -------------
In 1999, the Company recognized approximately $7.6 million in restructuring
charges comprised of staff reduction costs of $6.3 million and exit cost
liabilities of $1.3 million. The staff reduction costs were incurred in
connection with the reduction of 90 corporate and administrative employees. The
exit costs were recorded in connection with the planned closure and relocation
of certain Company-owned stores.
Interest Expense
- ----------------
Interest expense increased approximately $67.0 million to $74.1 million in 1999,
from $7.1 million in 1998. This increase is due primarily to increased interest
costs due to significantly increased indebtedness incurred as part of the
recapitalization and amortization of related deferred financing costs.
Provision (Benefit) for Income Taxes
- ------------------------------------
Provision (benefit) for income taxes increased $13.3 million to a provision of
$0.4 million in 1999, from a benefit of $12.9 million in 1998. As part of the
recapitalization, TISM and its qualifying subsidiaries (including Domino's)
converted from "S" Corporation status to "C" Corporation status for federal
income tax reporting purposes in December 1998 and established a $27.9 million
deferred tax asset, which was partially offset by the establishment of tax
reserves. The Company did not provide for Federal income taxes on income earned
during the 1998 "S" Corporation period. Additionally, in May 1999, a state court
upheld a favorable lower court tax ruling with respect to an issue that, if
decided unfavorably, could have resulted in significant additional tax cost to
the Company. As a result, during the second fiscal quarter of 1999, the Company
reversed related state tax reserves and deferred federal tax benefits that were
associated with this issue.
15
Liquidity and Capital Resources
- -------------------------------
We had negative working capital of $12.7 million and cash of $25.1 million at
December 31, 2000. Historically, we have operated with minimal positive working
capital or negative working capital primarily because our receivable collection
periods and inventory turn rates are faster than the normal payment terms on our
current liabilities. In addition, our sales are not typically seasonal, which
further limits our working capital requirements. Our primary sources of
liquidity are cash flows from operations and availability of borrowings under
our revolving credit facility. We expect to fund planned capital expenditures
and debt commitments from these sources.
As of December 31, 2000, we had $686.1 million of long-term debt, of which $21.5
million was classified as a current liability. There were no borrowings under
our $100 million revolving credit facility and letters of credit issued under
the revolving credit facility were $14.2 million. The borrowings under the
revolving credit facility are available to fund our working capital
requirements, capital expenditures and other general corporate purposes.
Cash provided by operating activities was $57.6 million and $63.3 million for
2000 and 1999, respectively. The $5.7 million decrease is due primarily to a
$18.0 million net change in operating assets and liabilities and a $18.1 million
decrease in depreciation and amortization. These decreases in cash provided by
operating activities were partially offset by an increase in net income of $23.1
million and a $4.9 million decrease in deferred income taxes.
Cash used in investing activities was $34.8 million and $26.4 million for 2000
and 1999, respectively. The $8.4 million increase is due primarily to a $10.0
million increase in purchases of property, plant and equipment. The main
components of this increase are as follows: (i) a $6.1 million increase related
to Company-owned store relocations, re-imagings and other upgrades; (ii) a $2.4
million increase related to distribution center activity; and (iii) a $1.1
million net increase in information systems spending including a $3.1 million
increase in spending on our next generation store systems project. The Company
also experienced a $3.0 million decrease in cash provided by notes receivable
repayments. These increases in cash used in investing activities were partially
offset by a $3.3 million increase in cash provided by proceeds from sales of
property, plant and equipment, including $3.1 million relating to the sale of 8
Company-owned stores to a franchisee.
Cash used in financing activities was $28.0 million and $6.9 million for 2000
and 1999, respectively. The $21.1 million increase is due primarily to an $18.0
million increase in payments made under our senior credit facility and a $10.0
million extinguishment of senior subordinated notes during 2000. These increases
in cash used in financing activities were partially offset by a $2.5 million
increase in capital contributions and a $2.6 million decrease in distributions
to TISM during 2000.
Based upon the current level of operations and anticipated growth, we believe
that the cash generated from operations and amounts available under the
revolving credit facility will be adequate to meet our anticipated debt service
requirements, capital expenditures and working capital needs for the next
several years. There can be no assurance, however, that our business will
generate sufficient cash flow from operations or that future borrowings will be
available under the senior credit facilities or otherwise to enable us to
service our indebtedness, including the senior credit facilities and the Senior
Subordinated Notes, to redeem or refinance TISM's, our Parent company,
Cumulative Preferred Stock when required or to make anticipated capital
expenditures. Our future operating performance and our ability to service or
refinance the Senior Subordinated Notes and to service, extend or refinance the
senior credit facilities will be subject to future economic conditions and to
financial, business and other factors, many of which are beyond our control.
Impact of Inflation
We believe that our results of operation are not materially impacted
upon moderate changes in the inflation rate. Inflation and changing prices did
not have a material impact on our operations in 2000, 1999 or 1998. Severe
increases in inflation, however, could affect the global and United States
economy and could have an adverse impact on our business, financial condition
and results of operation.
16
FORWARD LOOKING STATEMENTS
--------------------------
This Form 10-K contains forward looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 (the "Act"), including
information within Management's Discussion and Analysis of Financial Condition
and Results of Operation. The following cautionary statements are being made
pursuant to the provisions of the Act and with the intention of obtaining the
benefits of the "safe harbor" provisions of the Act. Although we believe that
our expectations are based on reasonable assumptions, actual results may differ
materially from those in the forward looking statements as a result of various
factors, including but not limited to, the following:
. Our ability to grow and implement cost-saving strategies
. Increases in our operating costs, including cheese, fuel and other
commodity costs and the minimum wage
. Our ability to compete domestically and internationally in our intensely
competitive industry
. Our ability to retain or replace our executive officers and other key
members of management and our ability to adequately staff our stores and
distribution centers with qualified personnel
. Our ability to pay principal and interest on our substantial debt
. Our ability to borrow in the future
. Our ability to find and/or retain suitable real estate for our stores and
distribution centers
. Adverse legislation or regulation
. Changes in consumer taste, demographic trends and traffic patterns
. Our ability to sustain or increase historical revenues and profit margins
. Continuation of certain trends and general economic conditions in the
industry
. Adequacy of insurance coverage
We do not undertake to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market Risk
- -----------
The Company is exposed to market risks primarily from interest rate changes on
our variable rate debt and foreign currency fluctuations relating to
international revenues. Management actively monitors these exposures. As a
policy, the Company does not engage in speculative transactions nor does it hold
or issue financial instruments for trading purposes.
Interest Rate Swaps
- -------------------
The Company may enter into interest rate swaps or similar instruments with the
objective of reducing our volatility in borrowing costs. In 1999, we entered
into two interest rate swap agreements (the 1999 Swap Agreements) to effectively
convert the Eurodollar interest rate component on a portion of our variable rate
debt to a fixed rate of 5.12% through December 2001. As of December 31, 2000,
the total notional amount of the 1999 Swap Agreements was $173.0 million.
Interest Rate Risk
- ------------------
The Company's variable interest expense is sensitive to changes in the general
level of interest rates. As of December 31, 2000, a portion of the Company's
debt is borrowed at Eurodollar rates plus a blended margin rate of approximately
3.2%. At December 31, 2000, the weighted average interest rate on our $247.9
million of variable interest debt was approximately 9.8%. The fair value of the
Company's debt approximates its carrying value.
The Company had total interest expense of approximately $75.2 million for the
year ended December 31, 2000. The estimated increase in interest expense from a
hypothetical 200 basis point adverse change in applicable variable interest
rates would be approximately $5.1 million.
Foreign Currency Forward Contracts
- ----------------------------------
The Company may enter into forward exchange contracts or similar instruments
with the objective of reducing fluctuations in cash flows associated with
changes in the related foreign currency rates. As of December 31, 2000, we had
no outstanding forward exchange contracts. No significant gains or losses
relating to forward exchange contracts have been recognized during fiscal 2000.
Accounting for Derivative Instruments and Hedging Activities
- ------------------------------------------------------------
The Financial Accounting Standards Board has issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities", and two related Statements
which require that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The Company adopted these Statements on January 1, 2001. Adoption of these
Statements resulted in the recognition of an approximately $2.7 million
derivative asset relating to the fair value of the Company's 1999 Swap
Agreements which the Company has designated as cash flow hedges.
18
Item 8. Financial Statements and Supplementary Data.
Report of Independent Public Accountants
To Domino's, Inc.:
We have audited the accompanying consolidated balance sheets of Domino's, Inc.
(a Delaware corporation) and subsidiaries as of December 31, 2000 and January 2,
2000, and the related consolidated statements of income, comprehensive income,
stockholder's equity (deficit) and cash flows for each of the three years in the
period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Domino's, Inc. and subsidiaries
as of December 31, 2000 and January 2, 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000 in conformity with accounting principles generally accepted in the
United States.
Detroit, Michigan, /s/ ARTHUR ANDERSEN LLP
January 30, 2001.
19
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands, except share and per share amounts)
December 31, January 2,
ASSETS 2000 2000
------ ------------ ----------
CURRENT ASSETS:
Cash $ 25,136 $ 30,278
Accounts receivable, net of reserves of $3,561 in 2000 and $2,444 in 1999 48,682 40,902
Notes receivable, net of reserves of $783 in 2000 and $288 in 1999 3,833 5,172
Inventories 19,086 18,624
Prepaid expenses and other 6,580 14,890
Deferred income taxes 9,290 10,498
-------- --------
Total current assets 112,607 120,364
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings 14,917 14,246
Leasehold and other improvements 55,100 54,538
Equipment 114,456 117,018
Construction in progress 7,366 3,548
-------- --------
191,839 189,350
Accumulated depreciation and amortization 106,526 116,287
-------- --------
Property, plant and equipment, net 85,313 73,063
-------- --------
OTHER ASSETS:
Investments in marketable securities, restricted 3,962 3,187
Notes receivable, less current portion, net of
reserves of $2,358 in 2000 and $3,249 in 1999 12,066 10,380
Deferred income taxes 71,253 73,038
Deferred financing costs, net of accumulated
amortization of $12,326 in 2000 and $6,327 in 1999 30,626 37,208
Goodwill, net of accumulated amortization of
$10,107 in 2000 and $9,217 in 1999 14,944 16,034
Covenants not-to-compete, net of accumulated
amortization of $54,223 in 2000 and $43,152 in 1999 5,851 16,970
Capitalized software, net of accumulated amortization
of $20,102 in 2000 and $14,332 in 1999 27,388 26,113
Other assets, net of accumulated amortization and
reserves of $6,245 in 2000 and $6,555 in 1999 5,619 4,773
-------- --------
Total other assets 171,709 187,703
-------- --------
Total assets $369,629 $381,130
======== ========
The accompanying notes are an integral part of these
consolidated balance sheets.
20
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Continued)
(In thousands, except share and per share amounts)
December 31, January 2,
LIABILITIES AND STOCKHOLDER'S DEFICIT 2000 2000
------------------------------------- ------------ ----------
CURRENT LIABILITIES:
Current portion of long-term debt $ 21,482 $ 21,438
Accounts payable 38,335 35,108
Accrued interest 12,922 13,643
Insurance reserves 6,793 7,152
Accrued compensation 17,977 18,068
Accrued income taxes 2,778 804
Accrued restructuring 744 3,020
Other accrued liabilities 24,281 26,875
--------- ---------
Total current liabilities 125,312 126,108
--------- ---------
LONG-TERM LIABILITIES:
Long-term debt, less current portion 664,592 696,132
Insurance reserves 9,633 15,485
Other accrued liabilities 24,899 22,371
--------- ---------
Total long-term liabilities 699,124 733,988
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S DEFICIT:
Common stock, par value $0.01 per share; 3,000
shares authorized; 10 shares issued and outstanding - -
Additional paid-in capital 120,202 120,202
Retained deficit (574,657) (599,292)
Accumulated other comprehensive income (352) 124
--------- ---------
Total stockholder's deficit (454,807) (478,966)
--------- ---------
Total liabilities and stockholder's deficit $ 369,629 $ 381,130
========= =========
The accompanying notes are an integral part of these
consolidated balance sheets.
21
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(In thousands)
For the Years Ended
-------------------------------------------------
December 31, January 2, January 3,
2000 2000 1999
------------ ---------- ----------
REVENUES:
Corporate stores $ 377,971 $ 378,081 $ 409,413
Domestic franchise royalties 120,608 116,715 112,222
Domestic distribution 604,096 603,441 599,121
International 63,405 58,402 56,022
---------- ---------- ----------
Total revenues 1,166,080 1,156,639 1,176,778
---------- ---------- ----------
OPERATING EXPENSES:
Cost of sales 862,161 854,151 890,784
General and administrative 191,565 219,277 215,725
Restructuring - 7,583 -
---------- ---------- ----------
Total operating expenses 1,053,726 1,081,011 1,106,509
---------- ---------- ----------
INCOME FROM OPERATIONS 112,354 75,628 70,269
INTEREST INCOME 3,961 992 730
INTEREST EXPENSE (75,217) (74,116) (7,051)
---------- ---------- ----------
INCOME BEFORE PROVISION (BENEFIT) FOR
INCOME TAXES AND EXTRAORDINARY ITEM 41,098 2,504 63,948
PROVISION (BENEFIT) FOR INCOME TAXES 16,073 419 (12,928)
---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 25,025 2,085 76,876
GAIN ON DEBT EXTINGUISHMENT, NET OF TAX
PROVISION OF $111 181 - -
---------- ---------- ----------
NET INCOME $ 25,206 $ 2,085 $ 76,876
========== ========== ==========
The accompanying notes are an integral part of these consolidated statements.
22
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
(In thousands)
For the Years Ended
---------------------------------------------
December 31, January 2, January 3,
2000 2000 1999
------------ ---------- ----------
NET INCOME $25,206 $2,085 $76,876
------- ------ -------
OTHER COMPREHENSIVE INCOME, BEFORE TAX:
Currency translation adjustment (147) 98 (44)
Unrealized gain on investments in marketable securities - 518 -
Reclassification adjustment for gains
included in net income (548) - (497)
------- ------ -------
(695) 616 (541)
TAX ATTRIBUTES OF ITEMS IN OTHER
COMPREHENSIVE INCOME 219 (189) 30
------- ------ -------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX (476) 427 (511)
------- ------ -------
COMPREHENSIVE INCOME $24,730 $2,512 $76,365
======= ====== =======
The accompanying notes are an integral part of these consolidated statements.
23
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
---------------------------------------------------------
(In thousands)
Accumulated Other
Comprehensive Income
------------------------------
Unrealized
Gain on
Additional Retained Currency Investments
Common Paid-in Earnings Translation in Marketable
Stock Capital (Deficit) Adjustment Securities
------ ---------- --------- ----------- -------------
BALANCE AT DECEMBER 28, 1997 $ - $ - $ 25,910 $(259) $ 467
Net income - - 76,876 - -
Capital contributions from Parent - 50,430 - - -
Distributions to Parent - - (690,688) - -
Currency translation adjustment - - - (44) -
Reclassification adjustment for
gains included in net income - - - - (467)
Recognition of deferred income taxes
as part of Recapitalization - - 54,000 - -
Reclassification of S Corporation
undistributed earnings upon
conversion to C Corporation - 64,307 (64,307) - -
------ -------- --------- ----- -----
BALANCE AT JANUARY 3, 1999 - 114,737 (598,209) (303) -
Net income - - 2,085 - -
Capital contributions from Parent - 5,465 - - -
Distribution to Parent - - (3,168) - -
Currency translation adjustment - - - 98 -
Unrealized gain on investments
in marketable securities - - - - 329
------ -------- --------- ----- -----
BALANCE AT JANUARY 2, 2000 - 120,202 (599,292) (205) 329
Net income - - 25,206 - -
Distributions to Parent - - (571) - -
Currency translation adjustment - - - (147) -
Reclassification adjustment for
gains included in net income - - - - (329)
------ -------- --------- ----- -----
BALANCE AT DECEMBER 31, 2000 $ - $120,202 $(574,657) $(352) $ -
====== ======== ========= ===== =====
The accompanying notes are an integral part of these consolidated statements.
24
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
For the Years Ended
------------------------------------
December 31, January 2, January 3,
2000 2000 1999
------------ ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 25,206 $ 2,085 $ 76,876
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation and amortization 33,604 51,743 23,123
Provision (benefit) for losses on accounts and notes receivable 2,201 1,971 (3,212)
(Gain) loss on sale of property, plant and equipment 1,338 (316) 1,570
Provision (benefit) for deferred income taxes 2,993 (1,949) (27,587)
Amortization of deferred financing costs 6,582 6,093 388
Changes in operating assets and liabilities-
Decrease (increase) in accounts receivable (10,095) 6,123 (6,254)
Decrease in inventories and prepaid expenses and other 3,846 957 4,531
Increase (decrease) in accounts payable and accrued liabilities (1,862) 1,006 7,989
Decrease in insurance reserves (6,211) (4,445) (12,693)
-------- -------- ---------
Net cash provided by operating activities 57,602 63,268 64,731
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (37,903) (27,882) (48,359)
Proceeds from sale of property, plant and equipment 5,034 1,769 5,587
Purchases of franchise operations (5,072) (4,565) (1,534)
Repayments of notes receivable 5,334 8,307 414
(Purchases) sales of investments in marketable securities (1,104) (2,858) 5,130
Other (1,040) (1,127) (386)
-------- -------- ---------
Net cash used in investing activities (34,751) (26,356) (39,148)
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt - - 722,056
Capital contributions from Parent 4,000 1,465 -
Repayments of long-term debt (31,475) (5,188) (38,338)
Cash paid for financing costs - - (43,280)
Distributions to Parent (571) (3,168) (666,020)
-------- -------- ---------
Net cash used in financing activities (28,046) (6,891) (25,582)
-------- -------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 53 142 9
-------- -------- ---------
INCREASE (DECREASE) IN CASH (5,142) 30,163 10
CASH, AT BEGINNING OF PERIOD 30,278 115 105
-------- -------- ---------
CASH, AT END OF PERIOD $ 25,136 $ 30,278 $ 115
======== ======== =========
The accompanying notes are an integral part of these consolidated statements.
25
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts
of Domino's, Inc. (Domino's), a Delaware corporation, and its wholly-
owned subsidiaries (collectively, the Company). All significant
intercompany accounts and transactions have been eliminated. Domino's
is a wholly-owned subsidiary of TISM, Inc. (the Parent).
Description of Business
-----------------------
The Company is primarily engaged in the following business activities:
(1) retail sales of food through Company-owned stores in the
contiguous U.S., (2) sale of food and equipment to Company-owned and
franchised stores through Company-owned distribution centers, and (3)
receipt of royalties and fees relating to support of domestic and
international franchised stores.
Parent's Recapitalization
-------------------------
On December 21, 1998, the Parent effected a merger with TM Transitory
Merger Corporation (TMTMC) in a leveraged recapitalization
transaction whereby TMTMC was merged with and into the Parent with
the Parent being the surviving entity (the Recapitalization). TMTMC
had no operations and was formed solely for the purpose of effecting
the Recapitalization. As part of the Recapitalization, the Company
incurred significant debt and distributed significantly all of the
proceeds to the Parent, which used those proceeds, along with
proceeds from the Parent's issuance of two classes of common stock
and one class of preferred stock, to fund the purchase of 93% of the
outstanding common stock of the Parent from a Company and Parent
Director and certain members of his family.
During 1999, the Company distributed an additional $3.2 million to the
Parent, which used the proceeds to satisfy a Recapitalization-related
obligation to a Company and Parent Director and certain members of
his family.
As part of the Recapitalization, the Company entered into a $5.5
million, ten year consulting agreement with a Company and Parent
Director and former majority Parent stockholder. The Company paid
$500,000 and $1.0 million in 2000 and 1999, respectively, under this
agreement and will pay the remaining $4.0 million ratably over eight
years beginning in 2001. The $5.5 million was recorded as a charge to
retained earnings (deficit) as a component of purchase price for the
common stock.
Prior to December 1998, Domino's was an indirectly wholly-owned
subsidiary of Domino's Pizza LLC (formerly known as Domino's Pizza,
Inc.) (DPLLC). During December 1998 and before the Recapitalization,
DPLLC distributed its ownership interest in Domino's to the Parent.
The Parent then contributed its ownership interest in DPLLC, which
had been a wholly-owned subsidiary of the Parent, to Domino's,
effectively converting Domino's from a subsidiary of DPLLC into
DPLLC's parent.
26
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
The accompanying consolidated financial statements and these Notes to
Consolidated Financial Statements include the results of operations
of DPLLC and its wholly-owned subsidiaries (including Domino's) for
the periods prior to the Recapitalization.
Domino's amended its charter in December 1998 to increase the total
number of authorized shares of common stock from 1,000 to 3,000 and
decreased the par value of these shares from $1.00 per share to $0.01
per share.
Fiscal Year
-----------
The Company's fiscal year ends on the Sunday closest to December 31.
The 2000 fiscal year ended December 31, 2000; the 1999 fiscal year
ended January 2, 2000; and the 1998 fiscal year ended January 3,
1999. Each of the fiscal years consists of fifty-two weeks except for
fiscal year 1998 which consists of fifty-three weeks.
Inventories
-----------
Inventories are valued at the lower of cost (on a first-in, first-out
basis) or market.
Inventories at December 31, 2000 and January 2, 2000 are comprised of
the following (in thousands):
2000 1999
------- -------
Equipment and supplies $ 4,551 $ 5,659
Food 15,781 14,641
------- -------
20,332 20,300
Less- Reserves 1,246 1,676
------- -------
Inventories $19,086 $18,624
======= =======
Notes Receivable
----------------
During the normal course of business, the Company may provide financing
to franchisees (i) to stimulate franchise store growth, (ii) to
finance the sale of Company-owned stores to franchisees, or (iii) to
facilitate new equipment rollouts. Substantially all of the related
notes receivable require monthly payments of principal and interest,
or monthly payments of interest only, generally ranging from 10% to
12%, with balloon payments of the remaining principal due one to ten
years from the original issuance date. Such notes are generally
secured by the assets sold. In financing these transactions, the
Company derives benefits other than interest income. Given the nature
of these borrower/lender relationships, the Company, in essence,
makes its own market in these notes. The carrying amounts of these
notes approximate fair value.
27
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
During 1998, the Company modified certain criteria used to determine
the allowance for bad debts for notes receivable. As a result of this
change, the Company recognized a non-recurring benefit of
approximately $3.7 million during 1998. This benefit is included in
general and administrative expense.
Property, Plant and Equipment
-----------------------------
Additions to property, plant and equipment are recorded at cost.
Depreciation for financial reporting purposes is provided using the
straight-line method over the estimated useful lives of the related
assets. During 1998, asset lives were generally three to seven years
for equipment, twenty years for buildings and improvements and five
years or the term of the lease including renewal options, whichever
is shorter, for leasehold and other improvements.
The Company initiated a review of the estimated useful lives for
depreciating or amortizing property, plant and equipment and
goodwill, respectively. The review included consideration of the
estimated lives of stores as determined primarily through
quantitative analysis and analysis of the historical longevity of
operating assets used in operations. The Company concluded the review
in the first quarter of 1999.
Based on this review, the Company modified the useful lives for several
asset categories. For equipment, estimated useful lives were extended
for certain assets from seven years to either ten or twelve years and
were shortened for other assets, primarily computer equipment, from
either five or seven years to three years. For leasehold
improvements, estimated useful lives were extended from five years to
ten years. For goodwill, which primarily arises from purchases of
stores from franchisees, estimated useful lives were shortened in
certain circumstances to ten years.
These changes in useful lives are being applied on a prospective basis
to existing assets and will be applied to assets acquired in the
future. These changes in accounting estimates have been effected as
of the beginning of 1999, resulting in increases in income from
operations and net income as follows (in thousands):
2000 1999
------- -------
Net impact of changes in useful lives $ 4,466 $ 5,616
Non-recurring charge to eliminate assets which
had no remaining useful lives - (1,025)
------- -------
Increase in income from operations 4,466 4,591
Income tax effect (1,786) (1,676)
------- -------
Increase in net income $ 2,680 $ 2,915
======= =======
Depreciation expense was approximately $14.1 million, $11.9 million and
$16.6 million in 2000, 1999 and 1998, respectively.
28
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
Investments in Marketable Securities
------------------------------------
Investments in marketable securities include investments in mutual
funds made by eligible individuals under our deferred compensation
plan, which began in 1999 (Note 5). These investments are stated at
aggregate fair value, are restricted and have been placed in a "rabbi
trust" whereby the amounts are irrevocably set aside to fund the
Company's obligations under our deferred compensation plan.
Prior to 2000, the Company classified marketable securities as
available-for-sale. Unrealized gains as of January 2, 2000 were
$329,000, net of tax. Realized gains and losses are determined using
the specific identification method. Beginning in 2000, the Company
reclassified all investments in marketable securities as trading and
recognized the related unrealized gains during 2000.
Deferred Financing Costs
------------------------
Deferred financing costs include debt issuance costs primarily incurred
by the Company as part of the Recapitalization. Amortization is
provided using the effective interest rate method over the terms of
the respective debt instruments to which the costs relate and is
included in interest expense. Amortization of deferred financing
costs was approximately $6.0 million, $6.1 million and $388,000 in
2000, 1999 and 1998, respectively.
As part of the Recapitalization, the Company paid financing costs to
affiliates of the Parent stockholders of approximately $21.1 million.
Approximately $14.4 million of these expenditures were treated by the
Company as capitalizable deferred financing costs while approximately
$6.7 million of these expenditures were made on behalf of the Parent
and were treated as distributions to the Parent.
Goodwill and Covenants Not-to-Compete
-------------------------------------
Goodwill arising primarily from franchise acquisitions has been
recorded at cost and is being amortized using the straight-line
method over periods not exceeding ten years. Amortization of goodwill
was approximately $2.3 million, $2.1 million and $2.0 million in
2000, 1999 and 1998, respectively.
Covenants not-to-compete, primarily obtained as a part of the
Recapitalization, have been recorded at cost and are being amortized
using an accelerated method over a three year period for the covenant
not-to-compete with a Company and Parent Director and former majority
Parent stockholder. Other covenants not-to-compete are being
amortized using the straight-line method over periods not exceeding
ten years. Amortization of covenants not-to-compete was approximately
$11.2 million, $33.1 million and $2.2 million in 2000, 1999 and 1998,
respectively.
29
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
Capitalized Software
--------------------
Capitalized software is recorded at cost and includes purchased,
internally developed and externally developed software used in the
Company's operations. Amortization for financial reporting purposes
is provided using the straight-line method over the estimated useful
lives of the software, which range from two to seven years.
Amortization expense was approximately $5.9 million, $4.4 million and
$2.0 million in 2000, 1999 and 1998, respectively.
Other Assets
------------
Other assets primarily include equity investments in international
franchisees, deposits and other intangibles primarily arising from
franchise acquisitions. Amortization of other intangibles is provided
using the straight-line method over the estimated useful lives of the
amortizable assets. Amortization expense was approximately $94,000,
$241,000 and $376,000 in 2000, 1999 and 1998, respectively.
Other Accrued Liabilities
-------------------------
Current and long-term other accrued liabilities primarily include
accruals for sales, income and other taxes, legal matters, marketing
and advertising expenses, equipment warranty expenses, store
operating expenses, deferred revenues, deferred compensation and a
consulting fee payable to a Company and Parent Director and former
majority Parent stockholder.
Revenue Recognition
-------------------
Corporate store revenues are comprised of retail sales of food through
Company-owned stores located in the contiguous U.S. and are
recognized when the food is delivered to or carried out by customers.
Domestic franchise royalties are primarily comprised of royalties and
fees from franchisees with operations in the contiguous U.S. and are
recognized as revenue when earned.
Domestic distribution revenues are comprised of sales of food,
equipment and supplies to franchised stores located in the contiguous
U.S. and are recognized as revenue upon shipment of the related
products to franchisees.
International revenues are primarily comprised of sales of food and
royalties and fees from foreign, Alaskan and Hawaiian franchisees and
are recognized consistently with the policies applied for revenues
generated in the contiguous U.S.
30
DOMINO'S, INC. AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
Advertising Costs
-----------------
Advertising costs are expensed as incurred. Advertising expense