As filed with the Securities and Exchange Commission on March 19, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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DOMINO'S, INC.
(Exact name of registrant as specified in its charter)
Delaware 5812 38-3025165
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction Classification Code Number) Identification Number)
of incorporation or
organization)
---------------
30 Frank Lloyd Wright Drive
Ann Arbor, Michigan 48106
(734) 930-3030
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
---------------
Harry J. Silverman
Domino's, Inc.
30 Frank Lloyd Wright Drive
Ann Arbor, Michigan 48106
(734) 930-3030
(Address, including zip code, and telephone number,
including area code, of agent for service)
---------------
copy to:
Mary E. Weber, Esq.
Ropes & Gray
One International Place
Boston, Massachusetts 02110
(617) 951-7000
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act Registration Statement number of the earlier effective
Registration Statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. [_]
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Proposed Proposed
Maximum Maximum
Title of each Class of Amount Offering Aggregate Amount of
Securities to be to be Price Offering Registration
Registered Registered Per Unit(1) Price Fee
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10 3/8% Series B Senior
Subordinated Notes due
2009 ................ $275,000,000 100% $275,000,000 $76,450.00
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Guarantees of 10 3/8%
Series B Senior
Subordinated
Notes due 2009(2)... N/A N/A N/A N/A
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(1) Estimated solely for the purpose of calculating the Registration Fee in
accordance with Rule 457(f)(2) under the Securities Act of 1933, as
amended, based upon the book value of the Notes as of March 19, 1999.
(2) The Guarantee by each of Domino's Pizza, Inc., Domino's Franchise Holding
Co., Metro Detroit Pizza, Inc., Domino's Pizza International, Inc.,
Domino's Pizza International Payroll Services, Inc. and Domino's Pizza-
Government Services Division, Inc. of the principal and interest on the
Notes is also being registered hereby. No separate consideration will be
received for the Guarantees. Pursuant to Rule 457(n) under the Securities
Act of 1933, as amended, no separate Registration Fee is payable with
respect to the Guarantees.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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CONTINUED FROM PREVIOUS PAGE
DOMINO'S PIZZA, INC.
(Exact name of registrant as specified in its charter)
Michigan 5812 38-1741243
(Primary Standard (I.R.S. Employer
(State or other Industrial Identification Number)
jurisdiction Classification Code
of incorporation or Number)
organization)
DOMINO'S FRANCHISE HOLDING CO.
(Exact name of registrant as specified in its charter)
Michigan 5812 38-3401169
(Primary Standard (I.R.S. Employer
(State or other Industrial Identification Number)
jurisdiction Classification Code
of incorporation or Number)
organization)
METRO DETROIT PIZZA, INC.
(Exact name of registrant as specified in its charter)
Michigan 5812 38-3068735
(Primary Standard (I.R.S. Employer
(State or other Industrial Identification Number)
jurisdiction Classification Code
of incorporation or Number)
organization)
DOMINO'S PIZZA INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 5812 52-1291464
(Primary Standard (I.R.S. Employer
(State or other Industrial Identification Number)
jurisdiction Classification Code
of incorporation or Number)
organization)
DOMINO'S PIZZA INTERNATIONAL PAYROLL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Florida 5812 38-2978908
(Primary Standard (I.R.S. Employer
(State or other Industrial Identification Number)
jurisdiction Classification Code
of incorporation or Number)
organization)
DOMINO'S PIZZA--GOVERNMENT SERVICES DIVISION, INC.
(Exact name of registrant as specified in its charter)
Texas 5812 38-3105323
(State or other (Primary Standard (I.R.S. Employer
jurisdiction Industrial Identification Number)
of incorporation or Classification Code
organization) Number)
PROSPECTUS [LOGO]
Domino's, Inc.
Offer to Exchange All Outstanding
10 3/8% Senior Subordinated Notes Due 2009
($275,000,000 Aggregate Principal Amount Outstanding)
for
10 3/8% Series B Senior Subordinated Notes Due 2009
We are offering to exchange $1,000 principal amount of our 10 3/8% Series B
Senior Subordinated Notes due 2009 (the "Exchange Notes") for each $1,000
principal amount of our outstanding 10 3/8% Senior Subordinated Notes due 2009
(the "Notes"). We are making this offer on the terms and conditions set forth
in this Prospectus and the accompanying Letter of Transmittal. The Exchange
Notes have been registered under the Securities Act of 1933, as amended, while
the Notes have not been registered. An aggregate principal amount of
$275,000,000 of the Notes is outstanding. The form and terms of the Exchange
Notes and the Notes are identical in all material respects, except for certain
transfer restrictions and registration rights relating to the Notes.
We will accept for exchange any and all outstanding Notes validly tendered and
not withdrawn prior to 5:00 p.m., New York City time, on , 1999, unless we
decide to extend the time for tendering the Notes. You may withdraw the tender
of your Notes at any time prior to such date and time. Although our offer is
subject to certain customary conditions, it is not conditioned upon any minimum
principal amount of Notes being tendered for exchange.
Neither we nor our subsidiary guarantors will receive any proceeds from the
issuance of the Exchange Notes. We will pay all the expenses incurred by us or
our subsidiary guarantors in connection with the offer and issuance of the
Exchange Notes.
See "Risk Factors" beginning on page 15 for a discussion of certain matters
that should be considered in connection with our offer and an investment in the
Exchange Notes.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of our offer or the Exchange Notes or
determined that this Prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
The date of this Prospectus is , 1999
This offer is not being made to, and we will not accept surrenders for exchange
from, holders of the outstanding Notes in any jurisdiction in which this offer
or its acceptance would not comply with the securities or blue sky laws of such
jurisdiction.
All resales must be made in compliance with state securities or "blue sky"
laws. Such compliance may require that the Exchange Notes be registered or
qualified in a state or that the resales be made by or through a licensed
broker-dealer, unless exemptions from these requirements are available. The
Company assumes no responsibility with regard to compliance with these
requirements.
This Prospectus and the accompanying Letter of Transmittal contain important
information. You should carefully read this Prospectus and the Letter of
Transmittal before deciding whether to tender your Notes.
This Prospectus incorporates important business and financial information about
us and our subsidiary guarantors that is not included in or delivered with this
Prospectus. We will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon written or oral request of any such person,
a copy of any and all of such information. Requests for such copies should be
directed to the Chief Financial Officer, Domino's, Inc., 30 Frank Lloyd Wright
Drive, Ann Arbor, Michigan 48106 (Telephone Number (734) 930-3030). You should
request any such information at least five days in advance of the date on which
you expect to make your decision with respect to this offer. In any event, you
must request such information prior to , 1999.
TRADEMARKS
The Domino's(R) trademark referred to in this Prospectus is federally
registered in the United States under applicable intellectual property laws and
the Domino's HeatWave(TM) trademark referred to in this Prospectus is subject
to a pending application for registration. These trademarks are the property of
Domino's or its parent or subsidiaries. Other registered trademarks used in
this Prospectus are the property of their respective owners.
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INDUSTRY DATA
In this Prospectus, we rely on and refer to information regarding the pizza
market and its segments and our competitors from the 1997 NPD Food Service
Information Group's Crest Survey, market research reports, analyst reports and
other publicly available information. Information regarding brand recognition
and market perception is from the Brand Equity Study we commissioned in 1998.
Although we believe this information is reliable, we cannot guarantee the
accuracy and completeness of the information and have not independently
verified it.
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FORWARD-LOOKING STATEMENTS
This Prospectus includes various forward-looking statements about Domino's that
are subject to risks and uncertainties. Forward-looking statements include
information concerning future results of operations, cost savings and business
strategy. Also, statements that contain words such as "believes," "expects,"
"anticipates," "intends," "estimated" or similar expressions are forward-
looking statements. We have based these forward-looking statements on our
current expectations and projections about future events. While we believe
these expectations and projections are reasonable, such forward-looking
statements are inherently subject to risks, uncertainties and assumptions about
us, including, among other things:
.Our ability to grow and implement cost-saving strategies;
.Increases in our operating costs, including commodity costs and the
minimum wage;
.Our ability to compete domestically and internationally;
.Our ability to retain or replace our executive officers and other key
members of management;
.Our ability to pay principal and interest on our substantial debt;
.Our ability to borrow in the future;
. Our ability and the ability of our franchisees, suppliers and vendors to
implement an effective Year 2000 readiness program;
.Adverse legislation or regulation;
.Our ability to sustain or increase historical revenues and profit margins;
and
.Continuation of certain trends and general economic conditions in our
industry.
Accordingly, actual results may differ materially from those expressed or
implied by such forward-looking statements contained in this Prospectus. We
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this Prospectus might not occur.
i
AVAILABLE INFORMATION
We and our subsidiary guarantors have filed a Registration Statement on Form S-
4 under the Securities Act with respect to the Exchange Notes. This Prospectus,
which forms a part of the Registration Statement, does not contain all of the
information included in the Registration Statement. Certain parts of this
Registration Statement are omitted in accordance with the rules and regulations
of the Securities and Exchange Commission. For further information with respect
to us, our subsidiary guarantors and the Exchange Notes, we refer you to the
Registration Statement. You should be aware that statements made in this
Prospectus as to the contents of any agreement or other document filed as an
exhibit to the Registration Statement are not necessarily complete. We refer
you to the copy of such documents filed as exhibits to the Registration
Statement. Each such statement is qualified in all respects by such reference.
We are not currently subject to the periodic reporting and other informational
requirements of the Securities Exchange Act of 1934, as amended. We have agreed
that, whether or not we are required to do so by the rules and regulations of
the Commission, for so long as any of the Exchange Notes remain outstanding, we
will furnish to the holders of the Exchange Notes and, if permitted, will file
with the Commission (i) all quarterly and annual financial information that
would be required to be contained in a filing with the Commission on Forms 10-Q
and 10-K if we were required to file such forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and,
with respect to the annual information only, a report thereon by our certified
independent accountants, and (ii) all reports that would be required to be
filed with the Commission on Form 8-K if we were required to file such reports,
in each case within the time periods specified in the rules and regulations of
the Commission.
Any reports or documents we file with the Commission, including the
Registration Statement, may be inspected and copied at the Public Reference
Section of the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Regional Offices of the Commission at 7 World Trade
Center, 13th Floor, New York, New York 10048 and Citicorp Center, 14th Floor,
500 West Madison Street, Chicago, Illinois 60661. Copies of such reports or
other documents may be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. In
addition, the Commission maintains a Web site that contains reports and other
information that is filed through the Commission's Electronic Data Gathering
Analysis and Retrieval System. The Web site can be accessed at
http://www.sec.gov.
A-1
Summary
The following summary contains basic information about Domino's, Inc. and this
offer. It may not contain all the information that may be important to you. You
should read this entire Prospectus, including the financial data and related
notes, and the documents to which we have referred you before making an
investment decision. The terms "the Company," "Domino's," "we," "our," and
"us," as used in this Prospectus refer to Domino's, Inc. and its subsidiaries
as a combined entity, except where it is clear that such terms mean only
Domino's, Inc. The terms "the Parent" and "TISM" refer to our parent TISM, Inc.
All references to "system-wide" sales in this Prospectus mean the net retail
sales of our corporate-owned and franchise stores. Unless otherwise indicated,
all information set forth in this Prospectus is as of January 3, 1999. Our
fiscal year generally consists of thirteen four-week periods ending on the
Sunday closest to December 31. Fiscal year 1998 included 53 weeks and ended on
January 3, 1999. Investors should carefully consider the information set forth
under "Risk Factors." In addition, certain statements include forward-looking
information which involve risks and uncertainties. See "Forward-Looking
Statements" on page (i).
Company Overview
Domino's is the leading pizza delivery company in the United States. We operate
through a world-wide network of over 6,200 franchise and corporate-owned stores
which generated system-wide sales of $3.2 billion for the fiscal year ended
January 3, 1999. System-wide sales by our domestic franchise and corporate-
owned stores accounted for approximately 30% of the United States pizza
delivery market in 1997. This market leadership position was nearly one and a
half times the market share of our nearest competitor.
Domino's offers 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 and bread sticks. Our original pizza is made from fresh
dough produced in our regional distribution centers. We prepare every pizza
using real mozzarella 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 enables us to consistently and efficiently
produce high quality pizza.
Over the 38 years since our founding, we have developed a simple, cost-
efficient model. In addition to offering a limited menu, our stores are
designed for delivery and do not offer eat-in service. As a result, our stores
require relatively small (1,000-1,200 square feet), low rent locations and
limited capital expenditures. Our simple operating model helps to ensure
consistent, quality product and to reduce store expenses and capital
commitments.
The Domino's brand is widely recognized and identified by consumers in the
United States as the leader in pizza delivery. We have built this successful
brand image and recognition through extensive national and local television,
print and direct mail campaigns. Over the past four years, Domino's and its
franchisees have invested an estimated $750 million on national, cooperative
and local advertising in the United States. The Domino's brand name 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).
Domino's operates through three business segments:
.Domestic Stores, consisting of:
.Corporate, which operates our domestic network of 642 corporate-owned
stores;
.Franchise, which oversees our domestic network of 3,847 franchise
stores;
. Distribution, which operates our eighteen regional distribution centers
and one equipment distribution center that sell food, equipment and
supplies to our domestic corporate-owned and franchise stores and
equipment to international stores; and
. International, which oversees our network of 1,730 franchise stores in
64 international and off-shore markets, including Alaska, Hawaii, Puerto
Rico, the U.S. Virgin Islands and Guam, and distributes food to stores
in Alaska, Hawaii and Canada.
Our principal executive offices are located at 30 Frank Lloyd Wright Drive, Ann
Arbor, MI 48106 (Telephone: 734-930-3030).
1
Industry Overview
The United States pizza market had sales of approximately $20.5 billion in
1997. This market has three segments: eat-in, carry-out and delivery. We focus
on the delivery segment, which accounted for approximately $5.9 billion or 29%
of the total United States pizza market in 1997. Pizza delivery has been the
fastest growing segment of this market, with compound annual growth of 8.2%
between 1995 and 1997, as compared to 4.1% for the eat-in segment and 4.3% for
the carry-out segment over the same period.
Domestic pizza delivery sales have not only grown quickly, but have also shown
stable growth. From 1988 through 1997, pizza delivery sales in the United
States grew at a compound annual rate of 6.2%. Even in the recessionary period
during 1990 and 1991, pizza delivery sales in the United States continued to
grow at an annual compound rate of 2.5%.
We believe that growth and stability in the pizza delivery market will persist
as a result of several continuing demographic factors. In particular, we
believe that longer work schedules and the 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 pizza's value, consistency and timeliness of
delivery.
Domino's is the market leader in pizza delivery, with system-wide sales by our
corporate-owned and domestic franchise stores constituting 30% of the United
States pizza delivery market in 1997. Three national chains, Pizza Hut, Papa
John's and, to a lesser extent, Little Caesar's, compete directly with us in
the delivery business. In 1997, these national chain competitors had a combined
36% share of the domestic pizza delivery market. The remainder of the pizza
delivery market is highly fragmented, with regional and local competitors
representing approximately 34% of the delivery market in 1997. We believe that
many of these competitors lack the scale, brand recognition, resources and
efficiency to compete effectively with larger chains. We view fragmented
competition in the pizza delivery market as an opportunity for
continued growth.
Competitive Strengths
Leading Market Position. Domino's is the leading pizza delivery company in the
United States. System-wide sales by our corporate-owned and domestic franchise
stores accounted for approximately 30% of the United States pizza delivery
market in 1997. This market leadership position represented nearly one and a
half times the market share of our nearest competitor. Through our world-wide
network of over 6,200 franchise and corporate-owned stores, we deliver
consistent, high quality pizza to consumers across the contiguous United States
and in 64 international and off-shore markets, including Alaska, Hawaii, Puerto
Rico, the U.S. Virgin Islands and Guam. Our leadership position and geographic
presence provide significant cost and marketing advantages relative to smaller
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 four years,
Domino's and its franchisees have invested an estimated $750 million on
national, cooperative and local advertising in the United States. The strength
of our brand is reflected in its selection as 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). We continue to reinforce the strength of our brand
name recognition with extensive advertising through national and local
television, print and direct mail. Our strong brand name in pizza delivery
provides significant marketing strength.
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. Our
limited menu, efficient food production process and extensive employee training
program 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 eat-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.
Limited Capital Requirements. We have limited capital expenditure and working
capital requirements. Our capital expenditures are minimal because we focus on
delivery and because our franchisees fund all capital expenditures for their
stores. Since our stores do not offer eat-in service, they do not require
expensive locations, are relatively small
2
(1,000-1,200 square feet) and are inexpensive to build and furnish as compared
to other fast food establishments. A new Domino's store typically requires only
$125,000 to $175,000 in initial capital and minimal annual maintenance, far
less than typical establishments of many of our major competitors. Because over
85% 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 approximately 98% of our royalties from domestic franchisees
within three weeks of when the royalty is generated and achieve more than 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 our strong relationships with
franchisees are a critical component of our success. We support our franchisees
by providing the training, infrastructure and financial incentives that have
resulted in very low failure rates. 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 fast food industry. The
average payback on a new franchise store investment is less than three years.
Our strong cooperation with our franchisees is demonstrated by an over 96%
voluntary participation rate in our U.S. distribution system and strong
franchisee participation in co-operative advertising programs. Because we
experience a contract renewal rate of over 99% and currently maintain a list of
over 120 pending or approved new franchise applications, we believe our
franchise system will continue to be a stable and growing component of our
business.
Efficient National Distribution System. We operate a nationwide network of
eighteen regional distribution centers. Each is generally located within a 300-
mile radius of the stores it serves. Our distribution system takes advantage of
volume purchasing of food and supplies, and provides consistency and
efficiencies of scale in food production. We serve all corporate-owned stores
and over 96% of our domestic franchise stores with an on-time accuracy rate of
over 98%. Our low-cost distribution system allows our store managers to focus
on food production and customer service.
Experienced Management Team. Domino's is managed by an experienced team that
averages nearly 13 years of service with the Company. Domino's founder, Thomas
Monaghan, recruited and promoted this team in the mid-1990s. This team
possesses strong leadership skills in marketing, corporate, franchise,
international, distribution, and finance and has driven our strong financial
performance over the past four years. In connection with the recapitalization
of our parent corporation, TISM, Inc., by Bain Capital, Inc., Thomas Monaghan
retired as Chief Executive Officer and now serves as a director of TISM and
Domino's.
Business Strategy
Our business strategy has been to grow revenues and profitability by focusing
on prompt delivery of high quality product, operational excellence and brand
recognition through strong promotional advertising. This strategy has resulted
in our leading market position and 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:
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 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 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
corporate-owned and domestic franchise stores accounted for approximately 30%
of the United States pizza delivery market in 1997. This market leadership
position represented nearly one and a half times the market share of our
nearest competitor. Our market leadership position and strong brand give us
significant marketing strength relative to our smaller 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 pizza delivery leader.
Implement Cost Reduction Opportunities. Historically, the profitability of a
typical corporate-owned store has lagged the profitability of a typical
franchise store. We are implementing the following cost reduction programs to
increase the profitability of our corporate-owned stores:
3
. Corporate Store Rationalization. We sold to franchisees or closed 142 of
our under-performing corporate-owned stores prior to December 31, 1998.
. Corporate Store Labor Reductions. We are reducing the labor costs at our
corporate-owned stores by improving shift schedules, adjusting incentive
programs and minimizing overtime.
. Distribution Profit Sharing. At the beginning of fiscal year 1999,
corporate-owned stores began participating in the profit sharing program
of our Distribution division. This profit sharing plan was recently
amended to increase our rebates to participating stores from
approximately 45% to approximately 50% of their regional distribution
center's pre-tax profits. Although corporate-owned stores had the right
to participate in the program, historically only domestic franchise
stores participated.
Expand Store Base. We plan to continue expanding our base of traditional
domestic stores, increase our network of international stores and enter new
markets with non-traditional stores. From 1995 to 1998, we increased our
domestic store base by approximately 1.9% per year. We plan to grow our
traditional domestic store base primarily by franchising new stores to existing
franchisees. We also believe that a significant opportunity exists to open new
franchise stores in under-penetrated international markets. We have also
successfully tested a new venue concept for non-traditional stores called
Domino's Delivery Express which provide both delivery and carry-out services
from locations in convenience stores and are designed for lightly populated
markets.
Recent Developments
On December 21, 1998, investors, including funds associated with Bain Capital,
management and others, acquired a controlling interest in Domino's through a
series of transactions, including a merger of a special purpose corporation
organized by Bain Capital into TISM, Inc., the parent corporation of Domino's.
Specifically:
. Investors, including the Bain Capital funds, management and others,
invested $229.7 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.
. The prior stockholders of TISM 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. In the merger, these 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.
The recapitalization and related expenses were financed in part through the
sale of the equity securities and the retention of the common stock discussed
above. The remaining financing was obtained through:
. Borrowings under our new senior credit facilities in the aggregate
principal amount of $545 million, consisting of $445 million in term
loans and a revolving credit facility of up to $100 million, and
. The sale of the Notes.
In connection with the sale of the outstanding Notes, we agreed to register the
Exchange Notes under the Securities Act and offer them in exchange for the
Notes.
4
Sources and Uses
The following table sets forth the sources and uses of funds in connection with
the recapitalization as of December 21, 1998.
Dollars in Millions
Sources: ---------
Senior Credit Facilities
Revolving Credit Facility(1)....................................... $ 2.1
Term Loan Facilities(2)............................................ 445.0
Notes................................................................ 275.0
Equity Investment in TISM(3)......................................... 330.8
Rollover of Equity by Existing Stockholders.......................... 17.5
---------
Total Sources.................................................... $ 1,070.4
=========
Uses:
Redemption of Capital Stock of TISM(4)............................... $ 903.2
Repayment of Existing Liabilities(5)................................. 49.9
Rollover of Equity by Existing Stockholders.......................... 17.5
Noncompete Agreement................................................. 50.0
Transaction Fees and Expenses(6)..................................... 49.8
---------
Total Uses....................................................... $ 1,070.4
=========
- ---------
(1) As of March 16, 1999, we had $92.5 million available under our new
revolving credit facility.
(2) Includes a syndicated senior secured Tranche A term loan facility of $175
million, a syndicated senior secured Tranche B term loan facility of $135
million and a syndicated senior secured Tranche C term loan facility of
$135 million. See "Description of Senior Credit Facilities".
(3) Includes (i) investments in the aggregate amount of $229.7 million in the
common stock of TISM by funds associated with Bain Capital, Inc., Chase
Equity Associates, L.P., CIBC WG Argosy Merchant Fund 2, LLC, Caravelle
Investment Fund, LLC and J.P. Morgan Capital and management and (ii)
investments in the aggregate amount of $101.1 million in cumulative
preferred stock of TISM by funds associated with Bain Capital, Inc., Chase
Equity Associates, L.P., CIBC WG Argosy Merchant Fund 2, LLC, Caravelle
Investment Fund, LLC and J.P. Morgan Capital. The cumulative preferred
stock has a liquidation preference of $104.8 million.
(4) Excludes contingent notes of TISM issued to existing stockholders in the
merger which are payable in certain circumstances upon the sale or other
transfers to non-affiliates by the Bain Capital funds of more than fifty
percent (50%) of their initial common stock ownership in TISM.
(5) Includes the repayment of bank indebtedness as well as other obligations
paid in connection with the recapitalization.
(6) Includes commitment, placement, financial advisory and other fees, and
legal, accounting and other professional fees. See "Certain Relationships
and Related Transactions."
5
The Exchange Offer
The Exchange Offer relates to the exchange of up to $275,000,000 aggregate
principal amount of our outstanding 10 3/8% Senior Subordinated Notes due 2009
for an equal aggregate principal amount of our new 10 3/8% Series B Senior
Subordinated Notes due 2009. The Exchange Notes will be obligations of the
Company entitled to the benefits of the indenture governing the outstanding
Notes.
Registration Rights Agreement...... You are entitled to exchange your
outstanding Notes for registered notes
with terms that are identical in all
material respects. This offer is intended
to satisfy these rights. After this offer
is complete, you will no longer be
entitled to the benefits of the exchange
or registration rights granted under the
registration rights agreement which we
entered into as part of the offering of
the Notes.
The Exchange Offer................. We are offering to exchange $1,000
principal amount of 10 3/8% Series B
Senior Subordinated Notes due 2009 which
have been registered under the Securities
Act for each $1,000 principal amount of
our outstanding 10 3/8% Senior
Subordinated Notes due 2009 which were
issued on December 21, 1998 in a
transaction exempt from registration
under the Securities Act in accordance
with Rule 144A. Your outstanding Note
must be properly tendered and accepted in
order to be exchanged. All outstanding
Notes that are validly tendered and not
validly withdrawn will be exchanged.
As of this date, there are $275,000,000
in aggregate principal amount of our
Notes outstanding.
We will issue the Exchange Notes, which
have been registered under the Securities
Act, on or promptly after the expiration
of this offer.
Expiration Date.................... This offer will expire at 5:00 p.m., New
York City time, on , 1999, unless
we decide to extend the expiration date.
Conditions to the Offer............ This offer is subject to the condition
that it does not violate applicable law
or staff interpretations of the
Commission. If we determine that this
offer is not permitted by applicable
federal law, we may terminate the offer.
This offer is not conditioned upon any
minimum principal amount of our
outstanding Notes being tendered. The
holders of our outstanding Notes have
certain rights against us under the
registration rights agreement should we
fail to consummate this offer.
Resale of the Exchange Notes....... Based on an interpretation by the staff
of the Commission set forth in no-action
letters issued to third parties, we
believe that the Exchange Notes issued
pursuant to this offer in exchange for
our outstanding Notes may be offered for
resale, resold and otherwise transferred
by you without compliance with the
registration and prospectus delivery
provisions of the Securities Act,
provided that:
. you are acquiring the Exchange Notes
in the ordinary course of business;
6
. you are not participating, do not
intend to participate, and have no
arrangement or understanding with any
person to participate, in the
distribution of the Exchange Notes
issued to you pursuant to this offer;
. you are not a broker-dealer who
purchased your outstanding Notes
directly from us for resale pursuant
to Rule 144A or any other available
exemption under the Securities Act;
and
. you are not an "affiliate" of ours
within the meaning of Rule 405 under
the Securities Act.
If our belief is inaccurate and you
transfer any Exchange Note issued to you
in pursuant to this offer in violation of
the prospectus delivery provisions of the
Securities Act or without an exemption
from registration thereunder, you may
incur liability under the Securities Act.
We do not assume or indemnify you against
any such liability.
Each broker-dealer that is issued
Exchange Notes pursuant to this offer for
its own account in exchange for
outstanding Notes which were acquired by
such broker-dealer as a result of market-
making or other trading activities must
acknowledge that it will deliver a
prospectus meeting the requirements of
the Securities Act in connection with any
resale of such Exchange Notes. The Letter
of Transmittal states that a broker-
dealer who makes this acknowledgement and
delivers such a prospectus will not be
deemed to admit that it is an
"underwriter" within the meaning of the
Securities Act. A broker-dealer may use
this Prospectus for an offer to resell,
resale or other retransfer of the
Exchange Notes issued to it pursuant to
this offer. We have agreed that, for a
period of 180 days after the date this
offer is completed, we will make this
Prospectus and any amendment or
supplement to this Prospectus available
to any such broker-dealer for use in
connection with any such resales. We
believe that no registered holder of the
outstanding Notes is an affiliate of
Domino's within the meaning of Rule 405
under Securities Act.
This offer is not being made to, nor will
we accept surrenders for exchange from,
holders of outstanding Notes in any
jurisdiction in which this offer or its
acceptance would not comply with the
securities or blue sky laws of such
jurisdiction. Furthermore, persons who
acquire the Exchange Notes are
responsible for compliance with these
securities or blue sky laws regarding
resales. We assume no responsibility for
compliance with these requirements.
Accrued Interest on the Exchange
Notes and the Outstanding Notes...
Each Exchange Note will bear interest
from its issuance date. The holders of
Notes that are accepted for exchange will
receive, in cash, accrued interest on
such Notes to, but not including, the
issuance date of the Exchange Notes. Such
interest will be paid with the first
interest payment on the Exchange Notes.
Interest on the Notes accepted for
exchange will cease to accrue upon
issuance of the Exchange Notes.
7
Consequently, those holders who exchange
their outstanding Notes for Exchange
Notes will receive the same interest
payment on July 15, 1999 (the first
interest payment date with respect to the
outstanding Notes and the Exchange Notes
to be issued pursuant to this offer) that
they would have received had they not
accepted this offer.
Procedures for Tendering Notes..... If you wish to tender your Notes for
exchange pursuant to this offer, you must
transmit to IBJ Whitehall Bank & Trust
Company, as Exchange Agent, on or prior
to the Expiration Date either:
. a properly completed and duly
executed copy of the Letter of
Transmittal accompanying this
Prospectus, or a facsimile of such
Letter of Transmittal, together with
your outstanding Notes and any other
documentation required by such Letter
of Transmittal, at the address set
forth on the cover page of the Letter
of Transmittal; or
. if you are effecting delivery by
book-entry transfer, a computer-
generated message transmitted by
means of the Automated Tender Offer
Program System of the Depository
Trust Company in which you
acknowledge and agree to be bound by
the terms of the Letter of
Transmittal and which, when received
by the Exchange Agent, forms a part
of a confirmation of book-entry
transfer;
In addition, you must deliver to the
Exchange Agent on or prior to the
Expiration Date:
. if you are effecting delivery by
book-entry transfer, a timely
confirmation of book-entry transfer
of your outstanding Notes into the
account of the Exchange Agent at The
Depository Trust Company pursuant to
the procedures for book-entry
transfers described in this
Prospectus under the heading "The
Exchange Offer--Procedures for
Tendering;" or
. if necessary, the documents required
for compliance with the guaranteed
delivery procedures described in this
Prospectus under the heading "The
Exchange Offer--Guaranteed Delivery
Procedure".
By executing and delivering the
accompanying Letter of Transmittal or
effecting delivery by book-entry
transfer, you are representing to us
that, among other things, (i) the person
receiving the Exchange Notes pursuant to
this offer, whether or not such person is
the holder, is receiving them in the
ordinary course of business, (ii) neither
the holder nor any such other person has
an arrangement or understanding with any
person to participate in the distribution
of such Exchange Notes and that such
holder is not engaged in, and does not
intend to engage in, a distribution of
the Exchange Notes and (iii) neither the
holder nor any such other person is an
"affiliate" of ours within the meaning of
Rule 405 under the Securities Act.
8
Special Procedures for Beneficial If you are a beneficial owner of the
Owners............................ Notes and your name does not appear on a
security listing of the Depository Trust
Company as the holder of such Notes or if
you are a beneficial owner of Notes that
are registered in the name of a broker,
dealer, commercial bank, trust company or
other nominee and you wish to tender such
Notes in this offer, you should promptly
contact the person in whose name your
Notes are registered and instruct such
person to tender on your behalf. If you,
as a beneficial holder, wish to tender on
your own behalf you must, prior to
completing and executing the Letter of
Transmittal and delivering your
outstanding Notes, either make
appropriate arrangements to register
ownership of the outstanding Notes in
your name or obtain a properly completed
bond power from the registered holder.
The transfer of record ownership may take
considerable time.
Guaranteed Delivery Procedures..... If you wish to tender your outstanding
Notes and time will not permit the Letter
of Transmittal or any of the documents
required by the Letter of Transmittal to
reach the Exchange Agent by the
Expiration Date, or the procedure for
book-entry transfer cannot be completed
on time or certificates for your Notes
cannot be delivered on time, you may
tender your Notes pursuant to the
guaranteed delivery procedures described
in this Prospectus under the heading "The
Exchange Offer--Guaranteed Delivery
Procedures."
Shelf Registration Statement....... If any changes in law or of the
applicable interpretation of the staff of
the Commission do not permit us to effect
this offer or upon the request of any
holder of our outstanding Notes under
certain circumstances, we have agreed to
register the Notes on a shelf
registration statement and use our best
efforts to cause such shelf registration
statement to be declared effective by
the Commission. We have agreed to
maintain the effectiveness of the shelf
registration statement for, under certain
circumstances, at least two years from
the date of the original issuance of the
outstanding Notes to cover resales of
such Notes held by such holders.
Withdrawal Rights.................. You may withdraw the tender of your
outstanding Notes at any time prior to
5:00 p.m., New York City time, on the
Expiration Date.
Acceptance of Outstanding Notes
and Delivery of Exchange Notes....
Subject to certain conditions, we will
accept for exchange any and all
outstanding Notes which are properly
tendered and not validly withdrawn prior
to 5:00 p.m., New York City time, on the
Expiration Date. The Exchange Notes
issued pursuant to this offer will be
delivered promptly following the
Expiration Date.
Certain U.S. Federal Income Tax The exchange of your outstanding Notes
Consequences...................... for the Exchange Notes should not be a
taxable exchange for United States
federal income tax purposes. See "Certain
Federal Tax Considerations."
Use of Proceeds.................... We will not receive any proceeds from the
issuance of the Exchange Notes pursuant
to this offer. We will pay all of our and
our subsidiary guarantors' expenses
relating to this offer.
9
Exchange Agent..................... IBJ Whitehall Bank & Trust Company is
serving as Exchange Agent in connection
with this offer. The Exchange Agent can
be reached at One State Street, New York,
New York 10004. For more information with
respect to this offer, please contact the
Exchange Agent at (212) 858-2103 or send
your questions by facsimile to the
Exchange Agent at (212) 858-2611.
10
The Exchange Notes
General............................ The form and terms of the Exchange Notes
are identical in all material respects to
the form and terms of the outstanding
Notes except that (i) the Exchange Notes
will bear a Series B designation, (ii)
the Exchange Notes have been registered
under the Securities Act and, therefore,
will generally not bear legends
restricting their transfer and (iii) the
holders of Exchange Notes will not be
entitled to rights under the registration
rights agreement. The Exchange Notes will
evidence the same debt as the outstanding
Notes and will be entitled to the
benefits of the indenture under which the
Notes were issued.
Issuer............................. Domino's, Inc.
Securities Offered................. $275,000,000 in aggregate principal
amount of 10 3/8% Series B Senior
Subordinated Notes due 2009.
Maturity........................... January 15, 2009.
Interest........................... Annual fixed rate of 10 3/8%, payable
every six months, beginning July 15,
1999.
Subsidiary Guarantors.............. Each of our domestic subsidiaries will be
a guarantor of the Exchange Notes. Our
foreign subsidiaries are not guarantors
of the Exchange Notes. If we cannot make
payments on the Exchange Notes when they
are due, our guarantor subsidiaries must
make them instead.
Ranking............................ The Exchange Notes and the subsidiary
guarantees are senior subordinated debts.
They rank behind substantially all
current and future indebtedness of
Domino's and its guarantor subsidiaries,
except for trade payables and
indebtedness that expressly provides that
it is not senior to the Exchange Notes
and the subsidiary guarantees. They also
effectively rank behind all current and
future indebtedness of our foreign
subsidiaries. As of January 3, 1999, the
Exchange Notes and the subsidiary
guarantees would have been subordinated
to $446.7 million of senior debt.
Optional Redemption................ We may redeem some or all of the Exchange
Notes at any time after January 15, 2004,
at the redemption prices listed in the
section entitled "Description of Exchange
Notes" under the heading "Optional
Redemption."
Before January 15, 2002, we may redeem up
to 35% of the Exchange Notes with the
proceeds of certain offerings of equity
of Domino's or its parent corporation at
the price listed in the section entitled
"Description of Exchange Notes" under the
heading "Optional Redemption."
In addition, before January 15, 2004, if
we experience specific kinds of changes
in control, we may also redeem all, but
not part, of the Exchange Notes at the
redemption prices listed in the section
entitled "Description of Exchange Notes"
under the heading "Optional Redemption."
11
Mandatory Offer to Repurchase...... If we sell certain assets or experience
specific kinds of changes of control, we
must offer to repurchase the Exchange
Notes at the price listed in the section
entitled "Description of Exchange Notes."
Basic Covenants of Indenture....... We will issue the Exchange Notes under
the indenture with IBJ Whitehall Bank &
Trust Company. The indenture restricts,
among other things, our ability and the
ability of our subsidiaries to:
.borrow money;
. pay dividends on, redeem or
repurchase our capital stock;
.make investments;
.use assets as security in other
transactions; and
. sell certain assets or merge with or
into other companies.
These covenants are subject to important
exceptions and qualifications which are
described in the section entitled
"Description of Exchange Notes" under the
heading "Certain Covenants."
Risk Factors
See "Risk Factors" for a discussion of certain factors that should be
considered in connection with our offer and an investment in the Exchange
Notes.
12
Summary Historical and Pro Forma Consolidated Financial Data
Set forth below are summary historical and pro forma consolidated financial
data of Domino's, Inc. and subsidiaries at the dates and for the periods
indicated. The summary historical consolidated statements of income data for
the fiscal years ended December 29, 1996, December 28, 1997 and January 3, 1999
and the summary historical balance sheet data as of December 28, 1997 and
January 3, 1999 were derived from historical financial statements that were
audited by Arthur Andersen LLP, whose report appears elsewhere in this
Prospectus. The summary historical balance sheet data as of December 29, 1996
was derived from unaudited consolidated financial statements which, in the
opinion of management, include all adjustments necessary for a fair
presentation. The summary unaudited pro forma consolidated financial data set
forth below give effect in the manner described under "Unaudited Pro Forma
Consolidated Financial Data" and the notes thereto to the recapitalization as
if it occurred on December 29, 1997 in the case of the pro forma statements of
income data, and as of January 3, 1999 in the case of the unaudited pro forma
balance sheet data. The unaudited pro forma consolidated statements of income
do not purport to represent what our results of operations would have been if
the recapitalization had occurred as of the date indicated or what such results
will be for future periods. The information presented below should be read in
conjunction with, and is qualified by reference to, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Unaudited Pro
Forma Consolidated Financial Data," "Selected Historical Consolidated Financial
Data" and the audited consolidated financial statements and accompanying notes
thereto included elsewhere in this Prospectus.
---------------------------------------------
Pro
Fiscal Year(a) Forma(b)
--------------------------------- ---------
1996 1997 1998 1998
Dollars in Millions --------- --------- --------- ---------
System-wide Sales (unaudited):
Domestic....................... $ 2,110.3 $ 2,294.2 $ 2,506.0 $ 2,498.8
International.................. 524.5 633.9 717.7 717.7
--------- --------- --------- ---------
Total.......................... $ 2,634.8 $ 2,928.1 $ 3,223.7 $ 3,216.5
========= ========= ========= =========
Statement of Income Data:
Corporate stores............... $ 336.6 $ 376.8 $ 409.4 $ 369.7
Domestic franchise royalties... 93.4 102.4 112.3 113.6
Domestic distribution.......... 494.2 513.1 599.1 599.1
International.................. 45.7 52.5 56.0 56.0
--------- --------- --------- ---------
Revenues....................... 969.9 1,044.8 1,176.8 1,138.4
Cost of sales.................. 717.2 757.6 858.4 826.1
--------- --------- --------- ---------
Gross profit................... 252.7 287.2 318.4 312.3
General and administrative..... 196.2 222.2 248.1 237.4
--------- --------- --------- ---------
Income from operations......... 56.5 65.0 70.3 74.9
Interest income................ (0.4) (0.4) (0.7) (0.7)
Interest expense............... 6.3 3.9 7.0 72.6
--------- --------- --------- ---------
Income before provision
(benefit) for income taxes.... 50.6 61.5 64.0 3.0
Provision (benefit) for income
taxes(c)...................... 30.9 0.4 (12.9) 1.2
--------- --------- --------- ---------
Net income..................... $ 19.7 $ 61.1 $ 76.9 $ 1.8
========= ========= ========= =========
Other Financial Data
(unaudited):
EBITDA(d)...................... $ 72.3 $ 83.1 $ 95.0 $ 130.6
Depreciation and other non-cash
items......................... 15.8 18.1 24.7 55.7
Capital expenditures........... 19.9 45.4 50.0 50.0
Ratio of earnings to fixed
charges(e).................... 4.3x 5.7x 4.9x 1.0x
Ratio of Pro Forma EBITDA to
cash interest expense......... -- -- -- 2.0x
Store Operating Data
(unaudited):
Same Store Sales Growth:
Corporate.................... 2.6% 4.5% 4.0% --
Franchise.................... 7.6 7.3 4.6 --
International(f)............. 5.2 11.1 3.4 3.4%
Stores (end of period):
Corporate.................... 704 767 642 642
Franchise.................... 3,612 3,664 3,847 3,847
International................ 1,250 1,520 1,730 1,730
Balance Sheet Data (unaudited):
Total assets................... $ 155.5 $ 213.0 $ 387.9 $ 387.9
Long-term debt................. 46.2 36.4 720.5 720.5
Total debt..................... 70.1 44.4 728.1 728.1
Stockholder's equity (deficit). (34.9) 26.1 (483.8) (483.8)
See Notes to Summary Historical Consolidated Financial Data
13
Notes to Summary Historical and Pro Forma Consolidated Financial Data
(a) Our fiscal year generally consists of thirteen four-week periods and ends
on the Sunday closest to December 31. The 1996 fiscal year ended December
29, 1996; the 1997 fiscal year ended December 28, 1997; and the 1998 fiscal
year, which consisted of fifty-three weeks, ended January 3, 1999.
(b) See "Unaudited Pro Forma Consolidated Financial Data."
(c) Subsequent to December 1996, the Company elected to be an "S" Corporation
for federal income tax purposes. The Company reverted to "C" Corporation
status on 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--$18
million; fiscal year ended January 3, 1999--$18.9 million.
(d) EBITDA represents earnings before interest, taxes, depreciation,
amortization, and loss on sale of assets (net). EBITDA is presented because
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 Historical EBITDA to Pro
Forma EBITDA (see Notes to "Unaudited Pro Forma Consolidated Statement of
Income" for additional detail):
---------------
Year Ended
January 3, 1999
---------------
Dollars in Millions
Historical EBITDA............................................... $ 95.0
Related party transactions...................................... 20.9
Store rationalization program................................... 4.0
Recapitalization-related non-recurring charges ................. 12.6
Shareholder advisory fee........................................ (1.9)
--------
Pro Forma EBITDA................................................ $ 130.6
========
(e) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of earnings before income taxes, plus fixed charges. Fixed
charges consist of interest expense, including amortization of financing
costs and the portion of operating rental expense which management believes
is representative of the interest component of rent expense.
(f) Based on constant dollar. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
14
Risk Factors
You should carefully consider the following factors in addition to the other
information set forth in this Prospectus before making an investment in the
Exchange Notes.
Our substantial indebtedness could adversely affect our financial health and
severely limit our ability to plan for or respond to changes in our business.
In addition, we are permitted to incur substantially more debt in the future,
which could aggravate the risks described below.
To finance the recapitalization, we have incurred a significant amount of
indebtedness, including the Notes. As of January 3, 1999, our consolidated
indebtedness was $728.1 million, of which $446.7 million was senior
indebtedness. After giving pro forma effect to the recapitalization as if it
had been completed on December 29, 1997, our ratio of earnings to fixed charges
for the fiscal year ended January 3, 1999 would have been 1.0. Further, the
terms of the indenture permit us to incur substantial indebtedness in the
future, including up to an additional $98.3 million under our new revolving
credit facility.
Our ability to make payments on and to refinance our indebtedness, including
the Exchange Notes, will depend on our ability to generate cash in the future.
This, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control. Based on our current level of operations and anticipated cost savings
and operating improvements, we believe our cash flow from operations and
available borrowings under our new revolving credit facility will be adequate
to meet our liquidity needs over the next several years.
We cannot assure you, however, that our business will generate sufficient cash
flow from operations, that currently anticipated cost savings and operating
improvements will be realized on schedule, in the amounts projected or at all,
or that future borrowings will be available to us under our new revolving
credit facility in amounts sufficient to enable us to pay our indebtedness,
including the Exchange Notes, or to fund our other liquidity needs. If we
cannot generate sufficient cash flow from operations to make scheduled payments
on the Exchange Notes in the future, we may need to refinance all or a portion
of our indebtedness, including the Exchange Notes, on or before maturity, sell
assets, delay capital expenditures, or seek additional equity. We cannot assure
you that we will be able to refinance any of our indebtedness, including the
Exchange Notes, on commercially reasonable terms or at all or that any other
action can be effected on satisfactory terms, if at all.
Our substantial indebtedness could have other important consequences to you.
For example, it could:
.make it more difficult for us to satisfy our obligations with respect to
the Exchange Notes;
.increase our vulnerability to general adverse economic and industry
conditions;
. require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow for other purposes;
. limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate, thereby placing us at a
competitive disadvantage compared to our competitors that may have less
debt;
. limit, by the financial and other restrictive covenants in the Exchange
Notes and the outstanding Notes, together with those in the senior
credit facilities, among other things, our ability to borrow additional
funds; and
. have a material adverse effect on us if we fail to comply with the
covenants in the Exchange Notes, the outstanding Notes and senior credit
facilities, because such failure could result in an event of default
which, if not cured or waived, could result in a substantial amount of
our indebtedness becoming immediately due and payable.
See "Description of Senior Credit Facilities" and "Description of Exchange
Notes."
Your right to receive payments on the Exchange Notes will be junior to our
existing indebtedness and possibly all of our future borrowings. The guarantees
of the Exchange Notes will also be junior to all of our and our subsidiary
guarantors' existing indebtedness and possibly to all of our and their future
borrowings.
The Exchange Notes and the subsidiary guarantees rank behind substantially all
of our and our subsidiary guarantors' existing indebtedness and all of our and
their future borrowings, except for trade payables, any future indebtedness
that
15
expressly provides that it ranks equal with, or is subordinated in right of
payment to, the Exchange Notes and the subsidiary guarantees, and any Notes
that are not exchanged which will rank equal with the Exchange Notes. As a
result, upon any distribution to our creditors or the creditors of our
subsidiary guarantors in a bankruptcy, liquidation or reorganization or similar
proceeding relating to us or our subsidiaries or our or their property, the
holders of our and our subsidiary guarantors' senior debt will be entitled to
be paid in full in cash before any payment may be made with respect to the
Exchange Notes or the subsidiary guarantees. As of January 3, 1999, the
Exchange Notes and the subsidiary guarantees would have been subordinated to
approximately $446.7 million of senior debt. Up to $98.3 million was available
for borrowing as additional senior debt under our new revolving credit
facility. All payments on the Exchange Notes and the guarantees will be blocked
in the event of a payment default on our or our subsidiary guarantors' senior
debt and may be blocked for up to 179 of 360 consecutive days in the event of
certain non-payment defaults on such senior debt.
In the event of a bankruptcy, liquidation or reorganization or similar
proceeding relating to us or our subsidiary guarantors, the holders of the
Exchange Notes will participate with trade creditors and all other holders of
subordinated indebtedness of us and of our subsidiary guarantors in the assets
remaining after we and the subsidiary guarantors have paid all of the senior
debt. Because the indenture requires that amounts otherwise payable to holders
of the Exchange Notes in a bankruptcy or similar proceeding be paid to holders
of senior debt instead, holders of the Exchange Notes may receive less,
ratably, than holders of trade payables in any such proceeding. In any of these
cases, we and our subsidiary guarantors may not have sufficient assets or funds
to pay all of our creditors and holders of Exchange Notes may receive less,
ratably, than the holders of senior debt.
Our foreign subsidiaries will not guarantee the Exchange Notes. In the event of
a bankruptcy, liquidation or reorganization of any of our non-guarantor
subsidiaries, holders of their indebtedness and their trade creditors will be
entitled to payment of their claims from the assets of those subsidiaries
before any assets are made available for distribution to us. The non-guarantor
subsidiaries generated less than 1% of our consolidated revenues for the fiscal
year ended January 3, 1999 and held less than 1% of our consolidated assets as
of January 3, 1999.
The Exchange Notes will not be secured by any of our assets or those of our
subsidiaries. We have granted a security interest to the senior credit
facilities lenders in all of the capital stock of our domestic subsidiaries and
in 65% of the capital stock of our foreign subsidiaries, as well as in all of
our tangible and intangible assets and those of our domestic subsidiaries. If
we become insolvent or are liquidated, or if the senior credit facilities
lenders accelerate payment under any of the senior credit facilities, they will
have a prior claim with respect to these assets.
The pizza delivery market is highly competitive, and increased competition
could adversely affect our operating results.
We believe we compete on the basis of product quality, delivery time, service
and price. We compete in the United States against three national chains, Pizza
Hut, Papa John's and, to a lesser extent, Little Caesar's, along with regional
and local concerns. Although we believe we are well positioned to compete
because of our leading market position, focus and expertise in the pizza
delivery business and strong national brand name recognition, we could
experience increased competition from existing or new companies and loss of
market share, which could have an adverse effect on our operating results.
We also compete on a broader scale with other international, national, regional
and local restaurants and quick-service eating establishments. No reasonable
estimate can be made of the number of competitors on this scale. The overall
food service industry and the quick service eating establishment segment are
intensely competitive with respect to food quality, price, service, convenience
and concept, and are 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 quick
service eating establishment segment not only for customers, but also for
management and hourly personnel, suitable real estate sites and qualified
franchisees.
We do not have written contracts with most of our suppliers, and as a result
they could seek to significantly increase prices or fail to deliver as
required.
We have historically had long-lasting relationships with our suppliers. More
than half of our major suppliers have been with us for over 14 years. As a
result, we typically rely on oral rather than written contracts with our
suppliers. In the case of cheese, where we have only one supplier, we have a
written agreement. Although we have not experienced significant problems with
our suppliers, there can be no assurance that our suppliers will not implement
significant price increases or that suppliers will meet our requirements in a
timely fashion, if at all. The occurrence of any of the foregoing could have a
material adverse effect on our operating results.
16
Increases in food, labor and other costs could adversely affect our
profitability and operating results.
An increase in our operating costs could adversely affect our profitability.
Factors such as inflation, increased food costs, increased labor and employee
benefit costs and the availability of qualified management and hourly employees
may adversely affect our operating costs. Most of the factors affecting costs
are beyond our control. Most products used in our pizza, particularly cheese,
are subject to price fluctuations, seasonality, weather, demand and other
factors. Labor costs are primarily a function of minimum wage and availability
of labor. Cheese and labor costs of a typical store represent 9.0% and 30.2% of
store sales, although we only bear such costs at our corporate-owned stores.
If we fail to successfully implement our growth strategy, our ability to
increase our revenues and operating profit could be adversely affected.
We have grown rapidly in recent periods. We intend to continue our growth
strategy primarily by increasing the number of our domestic and international
stores. We and our franchisees face many challenges in opening new stores,
including, among others:
. selection and availability of suitable store locations;
. negotiation of acceptable lease or financing terms;
. securing of required domestic or foreign governmental permits and
approvals; and
. employment and training of qualified personnel.
The opening of additional franchises also depends, in part, upon the
availability of prospective franchisees who meet our criteria. Our failure to
add a significant number of new stores would adversely effect our ability to
increase revenue and operating income. In addition, although we have
successfully tested the Delivery Express concept, we have not yet opened a
significant number of Delivery Express stores and cannot predict with certainty
the success of the concept on a widespread basis.
Our international operations subject us to additional risks which may differ in
each country in which we do business.
Our financial condition and results of operation may be adversely affected when
global markets in which our franchised stores compete are affected by changes
in political, economic or other factors. These factors over which neither we
nor our franchisees have control may include changes in exchange rates,
inflation rates, recessionary or expansive trends, tax changes, legal and
regulatory changes or other external factors. We are currently planning to
expand our international operations which may increase the effect of these
factors.
A third party has filed a patent infringement claim against us relating to the
Domino's HeatWave Hot Bag.
On September 10, 1998, Vesture Corporation and R.G. Barry Corporation, its
corporate parent, brought suit in the United States District Court for the
Middle District of North Carolina against Domino's and Phase Change
Laboratories, Inc., the exclusive supplier of the heat retention cores inside
the Domino's HeatWave Hot Bag, our pizza delivery warming device. The
plaintiffs asserted that the heat retention cores inside the Domino's HeatWave
Hot Bag infringe a patent owned by Vesture. Our agreement with Phase Change
Laboratories gives us exclusive marketing, sales, use and distribution rights
in the pizza delivery market to the heat retention cores inside the Domino's
HeatWave Hot Bag. In addition to damages, the plaintiffs are seeking an
injunction to enjoin the manufacture, sale or use of the heat retention cores
inside the Domino's HeatWave Hot Bag. Although we intend to vigorously defend
against the claim, we cannot predict the ultimate outcome of the claim.
Our relationships with franchisees are regulated at the federal and state
levels.
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 any particular area. Our store operations are also subject to
federal and state laws governing such matters as wages, working conditions,
citizenship requirements and overtime. Some states have set minimum wage
requirements higher than the federal level.
17
We are also subject to the rules and regulations of the Federal Trade
Commission and various state laws regulating the offer and sale of franchises.
The FTC and various state laws require us to furnish to prospective franchisees
a franchise offering circular containing prescribed information. A number of
states in which we are currently franchising or may consider franchising
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 of these states based upon our 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 provide for federal
regulation of the franchisor-franchisee relationship in certain respects. 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 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 subject to tariffs and
regulations on imported commodities and equipment and laws regulating foreign
investment.
Our business depends on retention of our current senior executives and key
personnel and the success of a new chief executive officer.
Our success will continue to depend to a significant extent on our executive
team and other key management personnel. We have entered into employment
agreements with certain of our executive officers. There can be no assurance
that we will be able to retain our executive officers and key personnel or
attract additional qualified management. In connection with the completion of
the recapitalization, Mr. Monaghan, our founder and chief executive officer,
retired and became a director. Although we are currently recruiting a new chief
executive officer, we can not assure you of the success of a new chief
executive officer.
The ability of the Company to take major corporate actions is limited by the
TISM stockholders agreement.
In connection with the recapitalization, all of the stockholders of TISM
entered into a stockholders agreement which provides, among other things, that
the approval of the holders of a majority of the voting stock of TISM subject
to the stockholders agreement will be required for TISM or its subsidiaries,
including the Company, to take various specified actions, including among
others, major corporate transactions such as a sale or initial public offering,
acquisitions and divestitures, financings, recapitalizations and mergers, as
well as other actions such as hiring and firing senior managers, setting
management compensation and establishing capital and operating budgets and
business plans. Pursuant to the stockholders agreement and the Articles of
Incorporation of TISM, the Bain Capital funds will have the power to block any
such transaction or action and to elect up to half of the Board of Directors of
TISM. The Bain Capital funds may have different interests as equity holders
than those of holders of the Exchange Notes. See "Certain Relationships and
Related Transactions."
Our business may be adversely affected if our critical computer systems, or
those of our suppliers and vendors, do not properly handle date information in
Year 2000.
Upon completion of the implementation of certain new computer systems by
September 30, 1999, we believe that all of our critical internal information
systems will operate correctly with regard to the import, export, and
processing of date information, including correct handling of leap years, in
connection with the change in the calendar year from 1999 to 2000. We also plan
to inventory and address other less critical equipment and machinery, such as
facility equipment, that may contain embedded technology with Year 2000
compliance problems. We expect to complete this effort no later than June 30,
1999. We also have material relationships with franchisees, suppliers and
vendors that may not have adequately addressed the Year 2000 issue with respect
to their equipment or information systems. Although we are attempting to assess
the extent of their compliance efforts, we have not received any written
assurances and, accordingly, cannot determine the risk to our business. In the
event that we are unable to complete planned upgrades or implement replacements
systems prior to December 31, 1999 or in the event our franchisees, suppliers
and vendors do not adequately address the Year 2000 issue before such date, we
may experience significant disruption or delays in our operations, which in
turn could have a material adverse effect on our business.
We may not have the ability to raise the funds necessary to finance the change
of control offer required by our indenture.
Upon the occurrence of certain specific kinds of change of control events, we
must offer to repurchase all outstanding Exchange Notes. It is possible,
however, that we will not have sufficient funds at the time of the change of
control to make
18
the required repurchase of the Exchange Notes or that restrictions in our
senior credit facilities will not allow such repurchases. In addition, certain
important corporate events, such as leveraged recapitalizations that would
increase the level of our indebtedness, would not constitute a change of
control under the indenture. See "Repurchase at the Option of Holders" under
the heading "Description of Exchange Notes."
The occurrence of certain of the events that would constitute a change of
control under the indenture would constitute a default under the senior credit
facilities. Our senior indebtedness and the senior indebtedness of our
subsidiaries may also contain prohibitions of certain events that would
constitute a change of control. Moreover, the exercise by the holders of the
Exchange Notes of their right to require us to repurchase the Exchange Notes
could cause a default under such senior indebtedness, even if the change of
control itself does not, due to the financial effect on us of such repurchase.
The terms of the senior credit facilities will, and other senior debt may,
prohibit the prepayment of the Notes by us prior to their scheduled maturity.
Consequently, if we are not able to prepay the indebtedness under the senior
credit facilities and any other senior indebtedness containing similar
restrictions, we will be unable to fulfill our repurchase obligations if
holders of the Notes exercise their repurchase rights following a change of
control, thereby resulting in a default under the indenture.
Under federal and state laws, the Exchange Notes and the guarantees might,
under special circumstances, be voided and the holders of the Exchange Notes
might be required to return any payments received from us or our subsidiary
guarantors.
Under the federal bankruptcy law and comparable provisions of state fraudulent
transfer laws, the Exchange Notes and the subsidiary guarantees could be
voided, or claims in respect of the Exchange Notes or the subsidiary guarantees
could be subordinated to all other debts of us or any subsidiary guarantor if,
among other things, Domino's or any of its subsidiary guarantors, at the time
the indebtedness evidenced by the Notes or the guarantee was incurred:
. received less than reasonably equivalent value or fair consideration for
the incurrence of such indebtedness;
. was insolvent or rendered insolvent by reason of such incurrence;
. was engaged in a business or transaction for which we or such
guarantor's remaining assets constituted unreasonably small capital; or
. intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they mature.
In addition, any payment by Domino's or a subsidiary guarantor pursuant to the
Exchange Notes or any subsidiary guarantee could be voided and required to be
returned to Domino's or such subsidiary guarantor or to a fund for the benefit
of the creditors of Domino's or such subsidiary guarantor.
The measures of insolvency for purposes of these fraudulent transfer laws will
vary depending upon the law applied in any proceeding to determine whether a
fraudulent transfer has occurred. Generally, however, we or a subsidiary
guarantor would be considered insolvent if:
. the sum of our or such subsidiary guarantor's debts, including
contingent liabilities, were greater than the fair saleable value of all
of our or such subsidiary's assets;
. the present fair saleable value of our or such subsidiary guarantor's
assets were less than the amount that would be required to pay our or
such subsidiary guarantor's probable liability on existing debts,
including contingent liabilities, as they become absolute and mature; or
. we or any subsidiary guarantor could not pay debts as they become due.
Based on historical financial information, recent operating history and other
factors, neither Domino's nor any of its subsidiary guarantors believes that,
after giving effect to the indebtedness incurred in connection with the
recapitalization, it was insolvent, had unreasonably small capital for the
business in which it is engaged or had incurred debts beyond its ability to pay
such debts as they mature. There can be no assurance, however, as to what
standard a court would apply in making such determinations or that a court
would agree with Domino's or its subsidiary guarantors' conclusions in this
regard.
We cannot assure you that an active trading market for the Exchange Notes will
develop.
The Exchange Notes are new securities for which there currently is no market.
Although J.P. Morgan & Co. and Goldman, Sachs & Co., the initial purchasers of
the outstanding Notes, have informed us that they intend to make a market in
the
19
Exchange Notes, they are not obligated to do so and any such market making may
be discontinued at any time without notice. Accordingly, there can be no
assurance as to the development or liquidity of any market for the Exchange
Notes. The Exchange Notes are expected to be eligible for trading by qualified
buyers in the PORTAL market. We do not intend to apply for listing of the
Exchange Notes on any securities exchange or for quotation through The Nasdaq
National Market.
In addition, the liquidity of, and trading market for, the Exchange Notes also
may be adversely affected by general declines in the market for similar
securities. Such a decline may adversely affect such liquidity and trading
markets independent of our financial performance and prospects.
Your ability to resell your Notes will remain restricted if you fail to
exchange them in this offer.
Untendered outstanding Notes that are not exchanged for the registered Exchange
Notes pursuant to this offer will remain restricted securities, subject to the
following restrictions on transfer:
. the Notes may be resold only if registered pursuant to the Securities
Act or if an exemption from registration is available;
. the Notes will bear a legend restricting transfer in the absence of
registration or an exemption; and
. a holder of the Notes who wants to sell or otherwise dispose of all or
any part of its Notes under an exemption from registration under the
Securities Act, if requested by us, must deliver to us an opinion of
independent counsel experienced in Securities Act matters, reasonably
satisfactory in form and substance to us, that such exemption is
available.
20
Recent Developments
On December 21, 1998, investors, including funds associated with Bain Capital,
management and others, acquired a controlling interest in Domino's through a
series of transactions, including a merger of a special purpose corporation
organized by Bain Capital into TISM, Inc., the parent corporation of Domino's.
Specifically:
. Investors, including the Bain Capital funds, management and others,
invested $229.7 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.
. The prior stockholders of TISM 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. In the merger, these 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.
The recapitalization and related expenses were financed in part through the
sale of the equity securities and retention of the common stock discussed
above. The remaining financing was obtained through:
. Borrowings under our new senior credit facilities in the aggregate
principal amount of $545 million, consisting of $445 million in term
loans and a revolving credit facility of up to $100 million, and
. The sale of the Notes.
In connection with the sale of the outstanding Notes, we agreed to register the
Exchange Notes under the Securities Act and offer them in exchange for
the Notes.
21
Use of Proceeds
There will be no proceeds from the issuance of the Exchange Notes.
The gross proceeds of $330.8 million from the investment in the common stock
and cumulative preferred stock of TISM, $275 million from the sale of the
outstanding Notes and borrowings under the senior credit facilities were used
to complete the merger, repay certain existing indebtedness, pay $50 million in
connection with a non-compete agreement with Thomas S. Monaghan and pay
approximately $49.8 million in fees and expenses related to the
recapitalization.
22
Capitalization
The following table sets forth cash and cash equivalents and capitalization of
Domino's as of January 3, 1999. The information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the audited consolidated financial statements and
accompanying notes thereto appearing elsewhere in this Prospectus.
---------------
Dollars in Thousands January 3, 1999
Cash and cash equivalents....................................... $ 115
============
Long-term debt (including current portion)
Revolving Credit Facility(a).................................. 1,700
Senior Term A................................................. 175,000
Senior Term B................................................. 135,000
Senior Term C................................................. 135,000
Notes......................................................... 275,000
Existing debt and other obligations........................... 6,426
============
Total long-term debt (including current portion)............ 728,126
------------
Stockholder's deficit........................................... (483,775)
------------
Total capitalization............................................ $ 244,351
============
- ---------
(a) The revolving credit facility has total availability of $100 million, with
$1.7 million drawn at January 3, 1999 and letters of credit issued for a
total of $10.8 million.
23
Unaudited Pro Forma Consolidated Financial Data
The unaudited pro forma consolidated financial data are based on the historical
consolidated financial statements of Domino's and its subsidiaries and
adjustments described in the accompanying notes. See Notes to "Unaudited Pro
Forma Consolidated Balance Sheet."
The following unaudited pro forma consolidated statement of income for the
fiscal year ended January 3, 1999 gives effect to the recapitalization as if it
had occurred on December 29, 1997. See "Recent Developments." The pro forma
adjustments are based upon available data and certain assumptions that our
management believes are reasonable. The unaudited pro forma consolidated
statement of income does not purport to represent what our results of
operations would have been if the recapitalization had occurred as of the date
indicated or what such results will be for any future periods. The unaudited
pro forma consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" and the consolidated financial statements and notes thereto included
elsewhere in this Prospectus.
24
Unaudited Pro Forma Consolidated Statement of Income
For the Fiscal Year Ended January 3, 1999(a)
--------------------------------------------------------
Reorganization, Adjustments
Acquisitions and for the
Historical Divestitures Transactions Pro Forma
Dollars in Thousands ---------- ---------------- ------------ ---------
Revenues:
Corporate stores........ $ 409,413 $ (39,750)(c) $ -- $369,663
Domestic franchise
royalties.............. 112,222 (367)(b) -- 113,582
1,727 (c)
Domestic distribution... 599,121 -- -- 599,121
International........... 56,022 -- -- 56,022
--------- ----------- --------- ---------
Revenues................ 1,176,778 (38,390) -- 1,138,388
Cost of sales........... 858,411 (141)(b) -- 826,129
(32,141)(c)
--------- ----------- --------- ---------
Gross profit............ 318,367 (6,108) -- 312,259
General and
administrative......... 248,098 (21,089)(b) 1,923 (d) 237,341
(11,032)(c) 32,051 (e)
(12,610)(f)
--------- ----------- --------- ---------
Income from operations.. 70,269 26,013 (21,364) 74,918
Interest income......... (730) -- -- (730)
Interest expense........ 7,051 -- 65,518 (g) 72,569
--------- ----------- --------- ---------
Income before provision
(benefit) for income
taxes.................. 63,948 26,013 (86,882) 3,079
Provision (benefit) for
income taxes........... (12,928) 48,913 (h) (34,753)(h) 1,232
--------- ----------- --------- ---------
Net income.............. $ 76,876 $ (22,900) $(52,129) $ 1,847
========= =========== ========= =========
Other Data:
Pro Forma EBITDA(i).............................................. $130,629
Depreciation and other non-cash items............................ 55,711
Capital expenditures............................................. 49,976
Ratio of Pro Forma EBITDA to cash interest expense............... 2.0x
Ratio of earnings to fixed charges(j)............................ 1.0x
See Notes to Unaudited Pro Forma Consolidated Statement of Income
25
Notes to Unaudited Pro Forma Consolidated Statement of Income
Fiscal Year ended January 3, 1999
(a) Our fiscal year ended January 3, 1999 and consisted of fifty-three weeks.
(b) Reflects the elimination of income and expenses related to the following
transactions between related parties and reflects the accounting on an
ongoing basis.
Domino's Farms Office Park (DFOP)--In connection with the recapitalization,
the Company entered into a five-year lease agreement with DFOP for
warehouse and office space occupied by the Company (approximately 185,000
feet). Historically, the Company leased the entire complex (approximately
520,000 square feet) from DFOP and subleased unused space to third parties.
This adjustment reflects the exclusion of general and administrative
expenses related to DFOP which historically were borne by us and are now
being replaced by the lease agreement.
Mater Christi Foundation--Reflects the elimination of discretionary
charitable contributions made at the direction of the former principal
stockholder of TISM to the Mater Christi Foundation, a charitable
organization founded and managed by the former principal stockholder of
TISM which will not be part of the ongoing operations, in addition to
certain expenses incurred by us on behalf of the Foundation. The Company is
under no obligation and does not intend to establish a similar foundation.
CEO Retirement--Reflects the net effect of the retirement of the Company's
former chief executive officer ($3,396), who was also the principal
stockholder of TISM from the Company's inception through the completion of
the recapitalization, and the estimated base compensation for a new chief
executive officer ($600).
Domino's Farms Land Development Limited Partnership (DFLD)--Reflects the
elimination of equity income and rent expense related to the Company's
investment in DFLD. The DFLD investment was distributed to the former
principal stockholder of TISM in December 1998 and accordingly, will not be
part of the ongoing operations of the Company. DFLD owns various properties
in Ann Arbor, Michigan and the surrounding area. Historically, the Company
leased various parcels of land from DFLD even though such properties were
non-income producing.
Advisory Boards--Reflects the elimination of the estimated net effect of
the termination of the Company's finance and marketing advisory boards
($229) and the estimated costs necessary to compensate a new board of
directors ($50).
Food Distribution Center Acquisitions--Reflects the elimination of
historical rent expense associated with two distribution centers that were
purchased by the Company in August 1998 from the former principal
stockholder of TISM and members of his family. This adjustment also records
depreciation expense to reflect the costs of owning the purchased
distribution center facilities.
The following table summarizes the impact on income from operations of the
elimination of transactions between related parties:
----------
Year Ended
January 3,
1999
----------
Dollars in Thousands
DFOP.............................................................. $ 8,551
Mater Christi Foundation.......................................... 8,204
CEO Retirement.................................................... 2,796
DFLD.............................................................. 992
Advisory Boards................................................... 179
Food Distribution Center Acquisitions............................. 141
----------
Impact on income from operations (includes depreciation).......... 20,863
Depreciation impact included in above adjustments................. 109
----------
Impact excluding depreciation..................................... $ 20,972
==========
26
Notes to Unaudited Pro Forma Consolidated Statement of Income
Fiscal Year ended January 3, 1999
(c) In anticipation of the recapitalization, management instituted the
following formal program:
Store Rationalization Program--Reflects the elimination of net sales, cost
of goods sold and general and administrative expenses related to the store
rationalization program introduced in July, 1998. These adjustments reflect
the impact of the store rationalization program as if it were fully
implemented on December 29, 1997. The store rationalization program
involved the sale of 103 corporate-owned stores to franchisees and the
closure of 39 additional corporate-owned stores. As of January 3, 1999, the
entire program had been completed. The impact of the sale of corporate-
owned stores to franchisees will result in ongoing royalties at the
standard franchise rate from the new franchisees where previously
corporate-owned store revenues and the related costs of operations were
recorded.
The following table summarizes the impact on income from operations of the
store rationalization program:
----------
January 3,
1999
Dollars in Thousands ----------
Impact on income from operations (includes depreciation)......... $ 5,150
Depreciation impact included in the above adjustment............. (1,142)
----------
Impact excluding depreciation.................................... $ 4,008
==========
(d) Reflects the net adjustment necessary to reflect the $2,000 shareholder
advisory fee for consulting and financial services provided to the Company.
See "Certain Relationships and Related Transactions--Management Services
Agreement."
(e) Reflects the amortization expense associated with the non-compete agreement
entered into between TISM and the former principal stockholder of TISM in
conjunction with the recapitalization. The covenant not to compete payment
of $50,000 is being amortized using an accelerated method over the term of
the agreement of three years.
(f) Represents the reduction in general and administrative expenses as a result
of the following non-recurring charges recorded in connection with the
recapitalization: (i) $12.1 million of incentive compensation granted to
certain executives in connection with the recapitalization and (ii) $0.5
million of principal stockholder expenses.
(g) The increase in pro forma interest expense as a result of the
recapitalization is as follows:
----------
January 3,
1999
Dollars in Thousands ----------
Elimination of historical interest expense..................... $ (7,051)
----------
Interest on new borrowings
Cash interest expense at a weighted average interest rate of
9.21% (1)..................................................... 66,476
Amortization of deferred financing costs (2)................... 6,093
----------
Total interest from the debt requirements of the
recapitalization.............................................. 72,569
----------
Net increase in interest expense............................... $ 65,518
==========
---------
(1) A 0.125% increase or decrease in the assumed weighted average interest
rate on the senior credit facilities would change pro forma interest
expense by $559 for the fiscal year ended January 3, 1999.
(2) Represents annual amortization expense utilizing the effective interest
rate method over the terms of the respective borrowings.
27
Notes to Unaudited Pro Forma Consolidated Statement of Income
Fiscal Year ended January 3, 1999
(h) Represents the income tax adjustment required to result in a pro forma
income tax provision based on: (i) the Company's historical tax provision
using historical amounts, (ii) the tax effects of the reversion to "C"
Corporation status and (iii) the tax effects of the pro forma adjustments
described above at an estimated 40% effective tax rate.
(i) EBITDA represents earnings before interest, taxes, depreciation,
amortization and loss on sale of assets (net). EBITDA is presented because
the Company believes 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 Historical EBITDA to Pro
Forma EBITDA:
---------------
Year Ended
January 3, 1999
---------------
Dollars in Thousands
Historical EBITDA............................................... $ 94,962
Related-party transactions...................................... 20,972
Store rationalization program................................... 4,008
Non-recurring charges........................................... 12,610
Shareholder advisory fee........................................ (1,923)
--------
Pro Forma EBITDA................................................ $130,629
========
(j) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of earnings before income taxes, plus fixed charges. Fixed
charges consist of interest expense, including amortization of financing
costs and the portion of operating rental expense which management believes
is representative of the interest component of rent expense.
28
Selected Historical Consolidated Financial Data
Set forth below are selected historical consolidated financial data of
Domino's, Inc. and subsidiaries at the dates and for the periods indicated. The
selected historical consolidated statements of income data of Domino's, Inc.
and subsidiaries for the fiscal years ended December 29, 1996, December 28,
1997 and January 3, 1999 and the selected historical balance sheet data as of
December 28, 1997 and January 3, 1999 were derived from the historical
consolidated financial statements of Domino's, Inc. and subsidiaries that were
audited by Arthur Andersen LLP, whose report appears elsewhere in this
Prospectus. The selected historical consolidated financial data of Domino's,
Inc. and subsidiaries as of and for the fiscal years ended January 1, 1995 and
December 31, 1995 and the historical balance sheet data as of December 29, 1996
are 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 selected historical consolidated
financial data set forth below should be read in conjunction with, and is
qualified by reference to, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the audited consolidated financial
statements and accompanying notes thereto included elsewhere in this
Prospectus.
-----------------------------------
Fiscal Year(a)
-----------------------------------------------------------
1994 1995 1996 1997 1998
Dollars in Thousands ---------- ---------- ---------- ---------- -----------
(unaudited)
System-wide Sales (unau-
dited):
Domestic................ $1,910,465 $1,952,398 $2,110,324 $2,294,224 $ 2,505,991
International........... 383,758 441,108 524,496 633,857 717,694
---------- ---------- ---------- ---------- -----------
Total................... $2,294,223 $2,393,506 $2,634,820 $2,928,081 $ 3,223,685
========== ========== ========== ========== ===========
Statement of Income Da-
ta:
Corporate stores........ $ 326,890 $ 324,181 $ 336,585 $ 376,837 $ 409,413
Domestic franchise roy-
alties................. 80,333 85,495 93,404 102,360 112,222
Domestic distribution... 423,406 452,151 494,173 513,097 599,121
International........... 44,124 43,392 45,775 52,496 56,022
---------- ---------- ---------- ---------- -----------
Revenues................ 874,753 905,219 969,937 1,044,790 1,176,778
Cost of sales........... 666,066 677,644 717,214 757,604 858,411
---------- ---------- ---------- ---------- -----------
Gross profit............ 208,687 227,575 252,723 287,186 318,367
General and administra-
tive................... 184,325 177,771 196,222 222,182 248,098
---------- ---------- ---------- ---------- -----------
Income from operations.. 24,362 49,804 56,501 65,004 70,269
Interest income......... (999) (606) (411) (447) (730)
Interest expense........ 15,851 13,166 6,301 3,980 7,051
---------- ---------- ---------- ---------- -----------
Income before provision
(benefit) for income
taxes, minority
interest and
extraordinary loss..... 9,510 37,244 50,611 61,471 63,948
Provision (benefit) for
income taxes(b)........ 6,713 9,353 30,884 366 (12,928)
Minority interest in net
loss of subsidiary..... (6) -- -- -- --
---------- ---------- ---------- ---------- -----------
Income before extraordi-
nary loss.............. 2,803 27,891 19,727 61,105 76,876
Extraordinary loss due
to refinancing of debt,
net of applicable in-
come taxes............. 2,661 2,576 -- -- --
---------- ---------- ---------- ---------- -----------
Net income.............. $ 142 $ 25,315 $ 19,727 $ 61,105 $ 76,876
========== ========== ========== ========== ===========
Other Financial Data
(unaudited):
EBITDA(c)............... $ 45,187 $ 67,367 $ 72,340 $ 83,140 $ 94,962
Net cash provided by op-
erating activities..... 27,795 37,012 53,225 73,081 64,343
Depreciation and other
non-cash items......... 20,825 17,563 15,839 18,136 24,693
Capital expenditures.... 13,979 14,770 19,887 45,412 49,976
Ratio of earnings to
fixed charges(d)....... 1.4x 2.6x 4.3x 5.7x 4.9x
Balance Sheet Data (un-
audited):
Total assets............ $ 169,772 $ 164,041 $ 155,454 $ 212,978 $ 387,891
Long-term debt.......... 114,529 84,146 46,224 36,438 720,480
Total debt.............. 141,836 110,018 70,067 44,408 728,126
Stockholder's equity
(deficit).............. (79,571) (54,199) (34,868) 26,118 (483,775)
See Notes to Selected Historical Consolidated Financial Data
29
Notes to Selected Historical Consolidated Financial Data
(a) Domino's, Inc.'s fiscal year generally consists of thirteen four-week
periods and ends on the Sunday closest to December 31. The 1994 fiscal year
ended January 1, 1995; the 1995 fiscal year ended December 31, 1995; the
1996 fiscal year ended December 29, 1996; the 1997 fiscal year ended
December 28, 1997; and the 1998 fiscal year, which consisted of fifty-three
weeks, ended January 3, 1999.
(b) Subsequent to December 1996, the Company elected to be an "S" Corporation
for federal income tax purposes. The Company reverted to "C" Corporation
status on 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 -- $18
million; fiscal year ended January 3, 1999 -- $18.9 million.
(c) EBITDA represents earnings before interest, taxes, depreciation,
amortization and loss on sale of assets (net). EBITDA is presented because
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
------------------------------------------
1994 1995 1996 1997 1998
Dollars in Thousands ------- ------- ------- ------- -------
Income from operations.......... $24,362 $49,804 $56,501 $65,004 $70,269
Loss on sale of assets (net).... 2,083 104 353 1,197 1,570
Depreciation and amortization... 18,742 17,459 15,486 16,939 23,123
------- ------- ------- ------- -------
EBITDA.......................... 45,187 67,367 72,340 83,140 94,962
======= ======= ======= ======= =======
(d) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent income before income tax plus fixed charges. Fixed
charges consist of interest expense, including amortization of financing
costs and the portion of operating rental expense which management believes
is representative of the interest component of rent expense.
30
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis of the financial condition and results of
operations relates substantially to periods prior to completion of the
recapitalization. As a result of the recapitalization, the Company entered into
financing arrangements and, accordingly, has a different capital structure.
Accordingly, the results of operations for periods subsequent to the
consummation of the recapitalization will not necessarily be comparable to
prior periods. See "Recent Developments," "Capitalization," "Description of
Senior Credit Facilities," "Selected Historical Consolidated Financial Data,"
"Unaudited Pro Forma Consolidated Financial Data," and the audited consolidated
financial statements and notes thereto included elsewhere in this Prospectus.
Overview
Domino's is the leading pizza delivery company in the United States. We operate
through a world-wide network of over 6,200 franchise and corporate-owned
stores. Our Distribution division's eighteen regional food distribution centers
and one equipment distribution center supply food, store equipment and supplies
to corporate-owned and domestic franchise stores and equipment to international
stores.
Year Ended January 3, 1999 Compared to Year Ended December 28, 1997
Revenues
General. Revenues include sales by corporate-owned stores, royalty fees from
domestic and international franchises and sales by our Distribution
commissaries to domestic and international franchises. Total revenues increased
$132.0 million, or 12.6%, to $1,176.8 million for the year ended January 3,
1999 from $1,044.8 million for the year ended December 28, 1997. The increase
in total revenues is principally attributed to increases in domestic and
international same store sales, a net increase in the average number of
domestic and international stores and one additional week in the year ended
January 3, 1999 as compared to the year ended December 28, 1997.
Corporate. Revenues from Corporate Store operations increased $32.6 million, or
8.7%, to $409.4 million for the year ended January 3, 1999 from $376.8 million
for the year ended December 28, 1997. The increase is principally attributed to
a 4.0% increase in same store sales as well as a slight increase in the average
number of corporate-owned stores. Ending corporate-owned stores, however,
decreased by 125 to 642 as of January 3, 1999 from 767 as of December 28, 1997
as a result of significant store rationalization program activity that occurred
between September 1998 and December 1998.
Franchise. Revenues from Domestic Franchise operations are derived primarily
from royalty income. Revenues from Franchise operations increased $9.8 million,
or 9.6%, to $112.2 million for the year ended January 3, 1999 from $102.4
million for the year ended December 28, 1997. This increase in revenues
resulted mainly from a 4.6 % increase in same store sales and an increase in
the average number of franchise stores. Ending franchise stores increased by
183 to 3,847 as of January 3, 1999 from 3,664 as of December 28, 1997.
Distribution. Revenues from Domestic Distribution operations are derived
primarily from the sale of food, equipment and supplies to domestic franchise
stores and, to a lesser extent, the sale of equipment to international stores,
and excludes sales to corporate-owned stores. Revenues from Distribution
operations increased $86.0 million, or 16.8%, to $599.1 million for the year
ended January 3, 1999 from $513.1 million for the year ended December 28, 1997.
The increase in revenues is principally due to the increase in franchise stores
sales noted above, an increase in cheese prices, and an increase in equipment
and supply sales to franchisees to roll out the Domino's HeatWave Hot Bag
technology in Spring 1998, partially offset by increases in Distribution's
profit sharing, profit capitation and volume discount programs which are netted
against revenues.
International. Revenues from International operations, which are derived mainly
from food sales to international franchises, master franchise agreement
royalties and, to a lesser extent, franchise and development fees, increased
$3.5 million, or 6.7%, to $56.0 million for the year ended January 3, 1999 from
$52.5 million for the year ended December 28, 1997. The increase was partially
driven by a 12.6% increase in international franchise royalty revenues that was
caused by an increase in the ending number of international franchise stores to
1,730 at January 3, 1999 from 1,520 at December 28, 1997, partially offset by a
decrease in average store sales caused by unfavorable changes in foreign
currency exchange rates, primarily in Asian markets and Mexico. On a constant
dollar basis, same store sales for the year ended January 3, 1999 increased
3.4% from the year ended December 28, 1997. Sales of commissary products to
international franchisees increased $1.1 million, or 3.3%, to $34.2 million for
the year ended January 3, 1999 from $33.1 million for the year ended December
28, 1997.
31
Gross Profit. Gross profit increased $31.2 million, or 10.9%, to $318.4 million
for the year ended January 3, 1999 from $287.2 million for the year ended
December 28, 1997. This increase was driven primarily by the increase in
revenues. As a percentage of revenues, gross profit decreased 0.4% to 27.1% for
the year ended January 3, 1999 from 27.5% for the year ended December 28, 1997.
This decrease resulted primarily from lower margin distribution revenues
growing faster than revenues of other divisions and higher Corporate operations
costs due to increases in the price of cheese and the minimum wage, partially
offset by a $6.7 million credit to insurance expense due to a reduction in the
actuarial calculation of our required insurance reserves.
General and Administrative. General and administrative expenses consists
primarily of regional support offices, corporate administrative functions,
corporate store and distribution facility management costs and advertising and
promotional expenses. General and administrative expenses increased $25.9
million, or 11.7%, to $248.1 million for the year ended January 3, 1999 from
$222.2 million for the year ended December 28, 1997. This increase is due
primarily to incentive compensation to certain executives in connection with
the recapitalization and an increase in costs that coincide with increased
business volume, including administrative and corporate store manager
compensation, computer expenses, advertising and professional service fees,
partially offset by a decrease in bad debt expenses. As a percentage of net
revenues, general and administrative expenses decreased to 21.1% for the year
ended January 3, 1999 compared to 21.3% for the year ended December 28, 1997,
due primarily to economies of scale created by an increase in overall business
volume and the decrease in bad debt expenses, partially offset by the
recapitalization incentive compensation.
Interest Expense. Interest expense increased $3.1 million, or 77.5%, to $7.1
million for the year ended January 3, 1999 from $4 million for the year ended
December 28, 1997 primarily as a result of a December 1998 increase in debt to
fund the recapitalization.
Provision (Benefit) for Income Taxes. The provision (benefit) for income taxes
decreased to a benefit of $12.9 million for the year ended January 3, 1999 from
a provision of $0.4 million for the year ended December 28, 1997 driven
primarily by establishment of a $27.9 million deferred tax asset upon the
conversion of the Company to "C" Corporation status from "S" Corporation status
for federal income tax reporting purposes partially offset by the establishment
of tax reserves.
Net Income. Net income increased $15.8 million, or 25.9%, to $76.9 million for
the year ended January 3, 1999 from $61.1 million for the year ended December
28, 1997. This increase was due primarily to the factors described above.
Year Ended December 28, 1997 Compared to Year Ended December 29, 1996
Revenues.
General. Total revenues increased $74.9 million, or 7.7%, to $1,044.8 million
for the year ended December 28, 1997 from $969.9 for the year ended December
29, 1996.
Corporate. Revenues from Corporate Store operations increased $40.2 million, or
11.9%, to $376.8 million for the year ended December 28, 1997 from $336.6
million for the year ended December 29, 1996. The increase is principally
attributed to a 4.5% increase in same store sales as well as an increase in the
average number of corporate-owned stores. Ending corporate-owned stores
increased by 63 to 767 as of December 28, 1997 from 704 as of December 29,
1996.
Franchise. Revenues from Domestic Franchise operations increased $9 million, or
9.6%, to $102.4 million for the year ended December 28, 1997 from $93.4 million
for the year ended December 29, 1996. The increase in revenues resulted mainly
from a 7.3% increase in same store sales and an increase in the average number
of franchise stores. Ending franchise stores increased by 52 to 3,664 as of
December 28, 1997 from 3,612 as of December 29, 1996.
Distribution. Revenues from Domestic Distribution operations increased $18.9
million, or 3.8%, to $513.1 million for the year ended December 28, 1997 from
$494.2 million for the year December 29, 1996. The increase in revenues is
principally attributed to the increase in franchise store sales noted above and
an increase in equipment and supply sales to franchisees, partially offset by a
decrease in cheese prices during the year ended December 28, 1997 and increases
in profit sharing, profit capitation and volume discount programs which are
netted against revenues.
International. Revenues from International operations increased $6.7 million,
or 14.6%, to $52.5 million for the year ended December 28, 1997 from $45.8
million for the year ended December 29, 1996. The increase was partially driven
by a 16.6% increase in international franchise royalty revenues that was caused
by an increase in the ending number of international franchise stores to 1,520
at December 28, 1997 from 1,250 at December 29, 1996, partially offset by a
32
decrease in average store sales caused by unfavorable changes in foreign
currency exchange rates, primarily in Japan and Mexico, and a slight decrease
in the overall effective royalty rate due to discounted royalties programs
intended to stimulate franchise store growth. On a constant dollar basis, same
store sales for the year ended December 28, 1997 increased 11.1% from the year
ended December 29, 1996. Sales of commissary products to international
franchisees increased $4.8 million, or 17%, to $33.1 million for the year ended
December 28, 1997 from $28.3 million for the year December 29, 1996.
Gross Profit. Gross profit increased $34.5 million, or 13.7%, to $287.2 million
for the year ended December 28, 1997 from $252.7 million for the year ended
December 29, 1996. This increase was driven primarily by the increase in
revenues. As a percentage of net revenues, gross profit increased 1.4% to 27.5%
for the year ended December 28, 1997 from 26.1% for the year ended December 29,
1996. This increase resulted primarily from decreases in insurance costs and
the price of cheese and lower margin distribution revenues growing at a slower
rate than revenues of other divisions, partially offset by an increase in the
minimum wage.
General and Administrative Expense. General and administrative expenses
increased $26.0 million, or 13.3%, to $222.2 million for the year ended
December 28, 1997 from $196.2 million for the year ended December 29, 1996.
This increase was due primarily to cost increases that coincide with increased
business volume, including administrative and corporate store manager
compensation, advertising and promotional expenses, travel, awards and
incentives, research and development and professional service fees. As a
percentage of net revenues, general and administrative expenses increased to
21.3% for the year ended December 28, 1997 compared to 20.2% for the year ended
December 29, 1996, due primarily to (i) an increase in Corporate and Franchise
revenues as a percentage of total revenues which demonstrate relatively higher
general and administrative expenses as a percentage of revenues than our other
divisions, (ii) increased litigation costs and (iii) an increase in charitable
contributions.
Interest Expense. Interest expense decreased $2.3 million, or 36.5%, to $4
million for the year ended December 28, 1997 from $6.3 million for the year
ended December 29, 1996 as a result of decreased average debt levels.
Net Income. Net income increased $41.4 million, or 210.2%, to $61.1 million for
the year ended December 28, 1997 from $19.7 million for the year ended December
29, 1996. This increase was due primarily to the factors described above and a
$30.5 million decrease in our provision for income taxes to $0.4 million for
the year ended December 28, 1997 from $30.9 million for the year ended December
29, 1996, due mainly to our "S" Corporation election effective December 30,
1996. Also due to our "S" Corporation election, we recorded an $8.2 million
charge to provision for income taxes in 1996 to fully reserve against our
remaining deferred tax asset.
Liquidity and Capital Resources
Historical
Historically, we have required limited levels of working capital to fund
growth. As of January 3, 1999, our working capital balance was negative. In
addition, our sales are not typically seasonal, which further limits our
working capital requirements.
Net cash provided by operating activities was $64.3 million, $73.1 million and
$53.2 million for the years ended January 3, 1999, December 28, 1997 and
December 29, 1996, respectively. The decrease in cash flows from operations for
the year ended January 3, 1999 was primarily due to the impact of a $27.6
million benefit for deferred federal income taxes, partially offset by an
increase in net income. The improvement in cash flows from operating activities
for the year ended December 28, 1997 was primarily attributable to an increase
in net income, partially offset by a net increase in working capital that
resulted from a $10.2 million increase in the Domino's HeatWave Hot Bag
inventories in anticipation of the domestic roll-out of that product to
franchisees in early 1998.
Net cash used in investing activities consists primarily of capital
expenditures and investments in marketable securities, partially offset by
proceeds from asset sales and collections on notes receivable from franchisees.
Net cash used in investing activities was $38.8 million, $46.5 million and
$15.0 million for the years ended January 3, 1999, December 28, 1997 and
December 29, 1996, respectively. The decrease in cash used in investing
activities for the year ended January 3, 1999 is primarily attributable to
increased proceeds from asset sales that resulted from our store
rationalization program and liquidation of our investments in marketable
securities that had been placed in trusts to fund our executive and managerial
deferred compensation plans, which were terminated in December 1998, partially
offset by an increase in
33
capital expenditures. The increase in cash used in investing activities for the
year ended December 28, 1997 was primarily attributable to an increase in
capital expenditures.
Capital expenditures were $50.0 million, $45.4 million and $19.9 million for
the years ended January 3, 1999, December 28, 1997 and December 29, 1996,
respectively. The higher capital expenditures for the years ended January 3,
1999 and December 28, 1997 as compared to the year ended December 29, 1996 were
primarily attributable to significant acquisitions of franchise stores and
commissary businesses, spending related to the Domino's 2000 reimaging and
relocation program and purchase and development costs associated with our new
financial and supply chain systems. Capital expenditures for the year ended
January 3, 1999 included $10.5 million of development costs for our financial
and supply chain systems, $10.1 million for the Domino's 2000 reimaging and
relocation program, $4.2 million for the acquisition of distribution centers in
Georgia and Northern California and $2.6 million to implement the Domino's
HeatWave Hot Bags in corporate-owned stores. Capital expenditures for the year
ended December 28, 1997 included $13.8 million for acquisitions of franchise
store and commissary businesses, primarily in the Salt Lake City, Utah and
Arlington, Texas areas, $8.8 million for the Domino's 2000 reimaging and
relocation program and $3.3 million for purchase and development of our
financial and supply chain systems modules. Capital expenditures for the year
ended December 29, 1996 included $3.5 million for the Domino's 2000 reimaging
and relocation program and $4.4 million for acquisitions of franchise store and
commissary businesses.
Net cash used in financing activities was $25.6 million, $26.5 million and
$40.4 million for the years ended January 3, 1999, December 28, 1997 and
December 29, 1996, respectively. Net cash used in financing activities for the
year ended January 3, 1999 included borrowings of $722.1 million to provide
funding for transactions pursuant to the recapitalization, which primarily
included $629.8 million of shareholder distributions pursuant to the
recapitalization, retirement of $39.9 million of debt under our previous credit
facilities and payment of $43.3 million of deferred financing costs. Also
included in cash used in financing activities for the year ended January 3,
1999 was $36.2 million in distributions to pay our stockholders' "S"
Corporation income taxes for both the year ended December 28, 1997 and a
portion of the year ended January 3, 1999. Net cash used in financing
activities for the years ended December 28, 1997 and December 29, 1996 was
comprised mainly of net repayment of long-term debt.
After the Recapitalization
Following the recapitalization, our primary sources of liquidity continue to be
cash flow from operations and borrowings under our new revolving credit
facility. We expect that ongoing requirements for debt service and capital
expenditures will be funded from these sources.
We incurred substantial indebtedness in connection with the recapitalization.
As of January 3, 1999, we had $728.1 million of indebtedness outstanding as
compared to $46.3 million of indebtedness outstanding immediately prior to the
recapitalization. In addition, we have a stockholders' deficit of $483.8
million as of January 3, 1999, as compared to stockholders' equity of $41.8
million immediately prior to the recapitalization. Our significant debt service
obligations following the recapitalization could, under certain circumstances,
have material consequences to our security holders, including holders of the
Exchange Notes. See "Risk Factors."
Concurrent with the recapitalization, we issued the Notes and entered into the
senior credit facilities. The term loan facilities provide for multiple tranche
term loans in the aggregate principal amount of $445 million. The revolving
credit facility provides revolving loans in an aggregate amount of up to $100
million. Upon closing of the recapitalization, we borrowed the full amount
available under the term loan facility and approximately $2.1 million under the
revolving credit facility. As of January 3, 1999, borrowings under the
revolving credit facility were $1.7 million and letters of credit issued
thereunder were $10.8 million. The borrowings under the revolving credit
facility will be available to fund our working capital requirements, capital
expenditures and other general corporate purposes. Amortization on the term
loans begins on December 31, 1999. The Tranche A facility matures in quarterly
installments from March 31, 2000 through 2004. The Tranche B facility matures
in quarterly installments from December 31, 1999 through 2006. The Tranche C
facility matures in quarterly installments from December 31, 1999 through 2007.
See "Description of Senior Credit Facilities."
We recently implemented a store reimaging and relocation campaign called
Domino's 2000. The reimaging program involves a variety of store improvements
including upgrading store interiors, adding new signage to draw attention to
the store and providing contemporary uniforms for our employees. We believe
that the per store capital expenditures for the reimaging campaign will not
exceed an average of $30,000. The cost of relocating a corporate store is not
expected to exceed an average of $160,000 per store. Domino's will incur these
capital expenditures on a discretionary basis and only with respect to its
corporate-owned stores. Capital expenditures are expected to be funded from
internally generated cash flows and by borrowings under our revolving credit
facility.
34
Effective February 1, 1999, we terminated the Distribution profit capitation
program. Under this program, our Distribution division had rebated to
participating franchisees all Distribution pre-tax profits in excess of 2% of
gross revenues from sales to corporate-owned and domestic franchise stores. In
addition, at the beginning of fiscal year 1999 corporate-owned stores began
participating in the profit sharing program of our Distribution division. This
profit sharing plan was recently amended to increase rebates to participating
stores from approximately 45% to approximately 50% of their regional
distribution center's pre-tax profits. Although corporate-owned stores had the
right to participate in the program, historically only domestic franchise
stores participated. We agreed that the aggregate funds available for rebate to
participating franchisees in 1999 under the profit sharing plan would be at
least $1 million more than the aggregate payments made to franchisees under the
profit sharing and profit capitation programs in fiscal year 1998. We agreed to
pay any deficiency to participating franchisees on a pro rata basis.
Based upon the current level of operations and anticipated growth, we believe
that cash generated from operations and amounts available under the revolving
credit facility will be adequate to meet our anticipated debt services
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 Notes,
to redeem or refinance the Cumulative Preferred Stock when required or to make
anticipated capital expenditures. Our future operating performance and our
ability to service or refinance the Notes, to service, extend or refinance the
senior credit facilities and to redeem or refinance the Cumulative Preferred
Stock 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 operations are not dependent upon moderate
changes in the inflation rate. Inflation and changing prices did not have a
material impact on our operations in 1996, 1997 and 1998. Severe increases in
inflation, however, could affect the global and United States economy and could
have an impact on our business, financial condition and results of operations.
Year 2000 Readiness Disclosure
We have recently either replaced or upgraded a majority of our core information
systems, including the franchise royalties system, franchise legal system,
information warehouse system and ULTRA store system which is the point-of-sale
and operating system for corporate-owned stores. In addition, we are in the
process of implementing a full suite of financial and distribution supply chain
systems, which we expect will be completed no later than September 30, 1999.
Upon completion of this project, we believe that all of our critical internal
information systems will operate correctly with regard to the import, export,
and processing of date information, including correct handling of leap years,
in connection with the change in the calendar year from 1999 to 2000. Each of
these upgrades were part of our budgeted expenses for upgrading our computer
infrastructure and were not primarily part of an attempt to address the Year
2000 issue. We have, however, complemented our system upgrades with an internal
compliance team responsible for testing all of our information systems for Year
2000 compliance.
We are also planning to inventory and address other less critical equipment and
machinery, such as facility equipment, that may contain embedded technology
with Year 2000 compliance problems. We expect to complete this effort no later
than June 30, 1999. We also have material relationships with franchisees,
suppliers and vendors and other significant entities, such as public utilities,
that may not have adequately addressed the Year 2000 issue with respect to
their equipment or information systems. Although we are attempting to assess
the extent of their compliance efforts, we have not received any written
assurances and, accordingly, can not determine the risk to our business.
For the fiscal year ended January 3, 1999, we spent approximately $256,000
addressing the Year 2000 issue. For the year ending January 2, 2000, we
estimate spending approximately $520,000 addressing the Year 2000 issue. These
amounts do not reflect the cost of our internal compliance team or the cost of
planned replacement systems, such as the financial and distribution supply
chain system software, which may have a positive impact on resolving the Year
2000 Issue. We do not expect that additional costs required to address the Year
2000 issue will have a significant impact on our business or operating results.
In the event, however, that we are unable to complete planned upgrades or
implement replacements systems prior to December 31, 1999 or in the event our
franchisees, suppliers and vendors do not adequately address the Year 2000
issue before such date, we may experience significant disruption or delays in
our operations, which in turn could have a material adverse effect on our
business.
35
Changes in Accounting Principles
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
requires financial and descriptive information about an enterprise's reportable
operating segments. Operating segments are components of an enterprise about
which separate financial information is available and evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and in
assessing performance. As required, we adopted this statement in the fiscal
year ended January 3, 1999. This adoption did not affect our results of
operations or financial position but did affect the disclosure of segment
information.
FASB has also issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. This statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. We have not determined the reporting
impact, if any, of the adoption of this statement.
36
Business
General
Domino's is the leading pizza delivery company in the United States. We operate
through a world-wide network of over 6,200 franchise and corporate-owned stores
which generated system-wide sales of $3.2 billion for the fiscal year ended
January 3, 1999. System-wide sales by our domestic franchise and corporate-
owned stores accounted for approximately 30% of the United States pizza
delivery market in 1997. This market leadership position was nearly one and a
half times the market share of our nearest competitor.
Domino's offers 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 and bread sticks. Our original pizza is made from fresh
dough produced in our regional distribution centers. We prepare every pizza
using real mozzarella 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 enables us to consistently and efficiently
produce high quality pizza.
Over the 38 years since our founding, we have developed a simple, cost-
efficient model. In addition to offering a limited menu, our stores are
designed for delivery and do not offer eat-in service. As a result, our stores
require relatively small (1,000-1,200 square feet), low rent locations and
limited capital expenditures. Our simple operating model helps to ensure
consistent, quality product and to reduce store expenses and capital
commitments.
The Domino's brand is widely recognized and identified by consumers in the
United States as the leader in pizza delivery. We have built this successful
brand image and recognition through extensive national and local television,
print and direct mail campaigns. Over the past four years, Domino's and its
franchisees have invested an estimated $750 million on national, cooperative
and local advertising in the United States. The Domino's brand name 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).
Domino's operates through three business segments:
.Domestic Stores, consisting of:
.Corporate, which operates our domestic network of 642 corporate-owned
stores;
.Franchise, which oversees our domestic network of 3,847 franchise
stores;
. Distribution, which operates our eighteen regional distribution centers
and one equipment distribution center that sell food, equipment and
supplies to our domestic corporate-owned and franchise stores and
equipment to international stores; and
. International, which oversees our network of 1,730 franchise stores in
64 international and off-shore markets, including Alaska, Hawaii, Puerto
Rico, the U.S. Virgin Islands and Guam, and distributes food to stores
in Alaska, Hawaii and Canada.
Industry Overview
The United States pizza market had sales of approximately $20.5 billion in
1997. This market has three segments: eat-in, carry-out and delivery. We focus
on the delivery segment, which accounted for approximately $5.9 billion or 29%
of the total United States pizza market in 1997. Pizza delivery has been the
fastest growing segment of this market, with compound annual growth of 8.2%
between 1995 and 1997, as compared to 4.1% for the eat-in segment and 4.3% for
the carry-out segment over the same period.
Domestic pizza delivery sales have not only grown quickly, but have also shown
stable growth. From 1988 through 1997, pizza delivery sales in the United
States grew at a compound annual rate of 6.2%. Even in the recessionary period
during 1990 and 1991, pizza delivery sales in the United States continued to
grow at an annual compound rate of 2.5%.
We believe that growth and stability in the pizza delivery market will persist
as a result of several continuing demographic factors. In particular, we
believe that longer work schedules and the 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 pizza's value, consistency and timeliness of
delivery.
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Competitive Strengths
Leading Market Position. Domino's is the leading pizza delivery company in the
United States. System-wide sales by our corporate-owned and domestic franchise
stores accounted for approximately 30% of the United States pizza delivery
market in 1997. This market leadership position represented nearly one and a
half times the market share of our nearest competitor. Through our world-wide
network of over 6,200 franchise and corporate-owned stores, we deliver
consistent, high quality pizza to consumers across the contiguous United States
and in 64 international and off-shore markets, including Alaska, Hawaii, Puerto
Rico, the U.S. Virgin Islands and Guam. Our leadership position and geographic
presence provide significant cost and marketing advantages relative to smaller
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 four years,
Domino's and its franchisees have invested an estimated $750 million on
national, cooperative and local advertising in the United States. The strength
of our brand is reflected in its selection as 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). We continue to reinforce the strength of our brand
name recognition with extensive advertising through national and local
television, print and direct mail. Our strong brand name in pizza delivery
provides significant marketing strength.
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. Our
limited menu, efficient food production process and extensive employee training
program 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 eat-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.
Limited Capital Requirements. We have limited capital expenditure and working
capital requirements. Our capital expenditures are minimal because we focus on
delivery and because our franchisees fund all capital expenditures for their
stores. Since our stores do not offer eat-in service, they do not require
expensive locations, are relatively small (1,000-1,200 square feet) and are
inexpensive to build and furnish as compared to other fast food establishments.
A new Domino's store typically requires only $125,000 to $175,000 in initial
capital and minimal annual maintenance, far less than typical establishments of
many of our major competitors. Because over 85% 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 approximately
98% of our royalties from domestic franchisees within three weeks of when the
royalty is generated and achieve more than 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 our strong relationships with
franchisees are a critical component of our success. We support our franchisees
by providing the training, infrastructure and financial incentives that have
resulted in very low failure rates. 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 fast food industry. The
average payback on a new franchise store investment is less than three years.
Our strong cooperation with our franchisees is demonstrated by an over 96%
voluntary participation rate in our U.S. distribution system and strong
franchisee participation in co-operative advertising programs. Because we
experience a contract renewal rate of over 99% and currently maintain a list of
over 120 pending or approved new franchise applications, we believe our
franchise system will continue to be a stable and growing component of our
business.
Efficient National Distribution System. We operate a nationwide network of
eighteen regional distribution centers. Each is generally located within a 300-
mile radius of the stores it serves. Our distribution system takes advantage of
volume purchasing of food and supplies, and provides consistency and
efficiencies of scale in food production. We serve all corporate-owned stores
and over 96% of our domestic franchise stores with an on-time accuracy rate of
over 98%. Our low-cost distribution system allows our store managers to focus
on food production and customer service.
Experienced Management Team. Domino's is managed by an experienced team that
averages nearly 13 years of service with the Company. Domino's founder, Thomas
Monaghan, recruited and promoted this team in the mid-1990s. This team
possesses strong leadership skills in marketing, corporate, franchise,
international, distribution, and finance and has driven our strong financial
performance over the past four years. In connection with the recapitalization
of our parent company, TISM, Inc., by Bain Capital, Inc., Thomas Monaghan
retired as Chief Executive Officer and now serves as a director of TISM and
Domino's.
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Business Strategy
Our business strategy has been to grow revenues and profitability by focusing
on prompt delivery of high quality product, operational excellence and brand
recognition through strong promotional advertising. This strategy has resulted
in our leading market position and 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:
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 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 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
corporate-owned and domestic franchise stores accounted for approximately 30%
of the United States pizza delivery market in 1997. This market leadership
position represented nearly one and a half times the market share of our
nearest competitor. Our market leadership position and strong brand give us
significant marketing strength relative to our smaller 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 pizza delivery leader.
Implement Cost Reduction Opportunities. Historically, the profitability of a
typical corporate-owned store has lagged the profitability of a typical
franchise store. We are implementing the following cost reduction programs to
increase the profitability of our corporate-owned stores:
. Corporate Store Rationalization. We sold to franchisees or closed 142 of
our under-performing corporate-owned stores prior to December 31, 1998.
. Corporate Store Labor Reductions. We are reducing the labor costs at our
corporate-owned stores by improving shift schedules, adjusting incentive
programs and minimizing overtime.
. Distribution Profit Sharing. At the beginning of fiscal year 1999,
corporate-owned stores began participating in the profit sharing program
of our Distribution division. This profit sharing plan was recently
amended to increase our rebates to participating stores from
approximately 45% to approximately 50% of their regional distribution
center's pre-tax profits. Although corporate-owned stores had the right
to participate in the program, historically only domestic franchise
stores participated.
Expand Store Base. We plan to continue expanding our base of traditional
domestic stores, increase our network of international stores and enter new
markets with non-traditional stores. From 1995 to 1998, we increased our
domestic store base by approximately 1.9% per year. We plan to grow our
traditional domestic store base primarily by franchising new stores to existing
franchisees. We also believe that a significant opportunity exists to open new
franchise stores in under-penetrated international markets. We have also
successfully tested a new venue concept for non-traditional stores called
Domino's Delivery Express which provide both delivery and carry-out services
from locations in convenience stores and are designed for lightly populated
markets.
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 certain competitive advantages, including production-
oriented store design, efficient and consistent operational processes,
strategic location to minimize delivery time, favorable store economics and a
focused menu. We have also identified a number of cost reduction opportunities
to enhance profitability at our corporate-owned stores.
Production-Oriented Store Design. Our typical store is small, occupying
approximately 1,000 to 1,200 square feet, and is designed with a focus on
efficient and timely production of consistent, high-quality pizza for delivery.
Our stores are production facilities and, accordingly, do not have an eat-in
section.
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Efficient Processes. Each store executes an operational process which includes
order taking, pizza preparation, cooking (via automated, conveyor-driven
ovens), boxing, and delivery. The entire pizza production process is designed
for completion in less than ten minutes to allow sufficient time for safe
delivery 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 Store Locations. We locate our stores strategically to facilitate
quality delivery service to our customers. The majority of our stores are
located in urban areas, suburban areas adjacent to large or mid-size cities, or
on or near college campuses or military bases. The majority of our stores serve
from 5,000 to 15,000 addresses. In order to facilitate expansion into smaller
markets, we have recently developed Delivery Express outlets, which provide
both delivery and carry-out from internal locations at convenience stores and
are designed for markets that are lightly populated.
Favorable Store Economics. Because our stores do not offer eat-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. A
new Domino's store typically requires only $125,000 to $175,000 in initial
capital, far less than typical establishments of many of our major competitors.
Our stores also benefit from lower maintenance costs as store assets are long-
lived 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 expediting delivery and
avoiding unnecessary errors in the order process. The menu has three simple
components: pizza size, pizza type and pizza toppings. Most stores carry two
sizes of traditional Hand-Tossed, Deep Dish and Thin Crust pizza. The typical
store also offers bread sticks, cheesy bread and buffalo wings. We believe that
our focused menu creates a strong identity among consumers, improves operating
efficiency and maintains food quality and consistency.
Cost Reduction Opportunities. Our management has identified a number of cost
reduction opportunities to enhance the profitability of our corporate-owned
stores. Traditionally, the profitability of our typical corporate-owned store
has lagged that of a typical franchise store. We are currently implementing our
corporate store rationalization program, corporate store labor reduction plan,
and Distribution profit sharing program for corporate stores.
Divisional Overview
General. We operate through four main divisions: (i) Corporate, which operates
our network of 642 corporate-owned stores; (ii) Franchise, which oversees our
domestic network of 3,847 franchise stores; (iii) Distribution, whose eighteen
regional food distribution centers and one equipment distribution center supply
food, store equipment and supplies to corporate-owned and domestic franchise
stores and equipment to international stores; and (iv) International, which
oversees our network of 1,730 international franchise stores in 64
international and off-shore markets including Alaska, Hawaii, Puerto Rico, the
U.S. Virgin Islands and Guam, and includes distribution operations for Alaska,
Hawaii and Canada.
Corporate. Our network of corporate-owned stores plays an important strategic
role in our predominately franchised system. In particular, we utilize our
corporate-owned stores as a forum for training new store managers and
prospective franchisees, and as a test site for new products and store
operational improvements. We also believe that our corporate-owned stores add
economies of scale for advertising, marketing and other fixed costs
traditionally borne by franchisees. Corporate is divided into three geographic
regions and is managed through fifteen field offices in the contiguous United
States.
Franchise. Our domestic franchisees own and operate a network of 3,847 stores
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 and, to a much lesser extent, fees for store openings and
transfers.
Our domestic franchises are 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 strategy
services for the franchisees. We maintain a close relationship and direct link
with the franchise stores through regional franchise executive 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 one equipment distribution center and
eighteen regional food distribution centers located throughout the United
States that order, receive, store and deliver uniform, high-quality pizza-
related supplies to
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both domestic franchise and corporate-owned stores. Each regional food
distribution center serves an average of 250 stores, generally located within a
300-mile radius.
Distribution services all of the corporate-owned stores and over 96% of the
domestic franchise stores, even though we give our domestic franchisees the
option of satisfying their food and equipment needs through approved
independent suppliers. Distribution supplies products ranging from fresh dough
and basic food items to pizza boxes and cleaning supplies. Distribution drivers
also unload supplies and stock store shelves after hours, thereby minimizing
disruption of store operations during the day. We believe that franchisees
choose to obtain supplies from us because we provide the most efficient and
cost-effective alternative.
At the beginning of fiscal year 1999, Distribution implemented new profit
sharing arrangements with our corporate stores and nearly all of our eligible
franchisees. We believe these arrangements strengthen our ties with these
franchisees, secure a stable source of revenue and provide incentives for
franchisees to work closely with us to reduce costs. These profit sharing
arrangements provide corporate stores and participating franchisees with
approximately 50% of their regional distribution center's pre-tax profits.
Previously, Distribution had a profit capitation program whereby our
Distribution division rebated all Distribution pre-tax profits in excess of 2%
of gross revenues from sales to corporate-owned and domestic franchise stores
to participating franchisees.
Distribution's information systems are an integral part of its superior
customer service. Distribution employs routing strategies to reduce the
frequency of late 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 have achieved on-time delivery rates
of over 98%. Our food distribution centers currently achieve inventory turns in
excess of 50 per year.
International. International oversees our network of over 1,730 stores in 64
international and off-shore markets, including Alaska, Hawaii, Puerto Rico, the
U.S. Virgin Islands and Guam. We have over 100 franchise stores in each of
Mexico, Canada, Japan, Australia, the United Kingdom, and Taiwan. The principal
sources of revenues from international operations are royalty payments by
franchisees, food sales to franchisees, and fees from master franchise
agreements and store openings.
We grant international franchises through master franchise agreements to well-
capitalized entities who have knowledge of the local market. These master
franchise agreements generally grant the franchisee exclusive rights to develop
or sub-franchise stores in a particular geographic area and contain growth
clauses requiring franchisees to open a minimum number of stores within a
specified period. We also seek to expand internationally by selectively
converting regional and local competitors' stores to Domino's franchises and
have completed such conversions successfully in Australia and the United
Kingdom.
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. The franchise
program consists of a network of domestic and international franchise stores.
As of January 3, 1999, there were 1,308 franchisees operating 3,847 franchise
stores in the contiguous United States and 440 franchisees operating 1,730
stores in 64 international and off-shore markets, including Alaska, Hawaii,
Puerto Rico, the U.S. Virgin Islands and Guam.
Franchisee Selection. We maintain the strength of our franchise store base by
seeking franchisees who are willing to commit themselves full-time to operating
franchise stores and by applying rigorous standards to prospective franchisees.
Specifically, we require all 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 franchise 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 brand.
Standard Domestic Franchise Agreements. 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. We are currently experiencing franchise renewal rates in excess of 99%.
Under the current standard franchise agreement,
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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, subject in certain instances to lower rates
based on area development agreements, sales initiatives and new store
incentives. The current standard franchise agreement permits us to
electronically debit the franchisee's bank account for the payment of royalty
fees and advertising contributions. We have the contractual right, subject to
state law, to terminate a franchise agreement for a variety of reasons,
including a franchisee's failure to make payments when due or failure to adhere
to specified policies and standards.
Standard International Franchise Agreements. We enter into master franchise
agreements with our international franchisees under which the master franchisee
may open and operate a franchise or 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 required to pay an initial, one-time franchisee
fee, as well as a store franchise fee upon the opening of each store. These
fees vary by contract. In addition, the master franchisee is required to pay a
continuing royalty fee as a percentage of sales, which also varies.
Franchisee 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, income, age and traffic. We
provide design plans, fixtures and equipment for most franchisee locations at
competitive prices.
Franchisee Loan Programs. We have an established financing program to assist
domestic franchisees in opening stores. We generally provide financing of up to
$100,000 for the purpose of opening new stores to domestic franchisees who are
creditworthy and have a minimum of $10,000 of working capital. The franchisees
may use the funds to purchase equipment, supplies, store fixtures or leasehold
improvements, with the condition that store fixtures and leasehold improvements
cannot exceed $35,000. We have also historically financed the sale of corporate
stores to domestic franchisees and the implementation of new products and
programs, such as the Domino's HeatWave Hot Bag. At January 3, 1999, loans
outstanding under the franchisee loan programs totaled $20.4 million.
Franchise Training and Support. We consider training of our store managers and
employees to be a critical component of our success. We require all domestic
franchisees to complete initial and ongoing training programs that we provide.
In addition, under the current standard domestic franchise agreement, domestic
franchisees are required to implement training programs for their store
employees. We assist our franchisees by providing training services for store
managers and employees, including CD-ROM based training materials,
comprehensive operations manuals and franchise development classes.
Franchise Operations. We maintain strict control over franchise operations to
protect our brand name 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, fixtures, furnishings, decor and signs. Each franchisee has full
discretion to determine the 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 2000 Campaign
We recently implemented a reimaging and relocation campaign called Domino's
2000. This new strategy is aimed at increasing store sales through greater
brand awareness. The reimaging program involves a variety of store
improvements, including upgrading store interiors, adding new signage to draw
attention to the store and providing contemporary uniforms for its employees.
We believe that the per store capital expenditures for the reimaging campaign
will not exceed an average of $30,000. The relocation program is also designed
to increase store sales by choosing store sites that are in more accessible
locations. The cost of relocating a corporate store is not expected to exceed
an average of $160,000 per store. We will incur these capital expenditures on a
discretionary basis and only with respect to our corporate-owned stores.
Marketing Operations
We coordinate the domestic advertising and marketing efforts at the national
and cooperative market levels. We require corporate and domestic franchise
stores to contribute 3% of their net sales to fund national marketing and
advertising campaigns. The national advertising fund is used primarily to
purchase television advertising, but also supports market research, field
communications, commercial production, talent payments and other activities
supporting the brand. We can require stores to contribute a minimum of 1% of
net sales to cooperative media campaigns. Store contributions to cooperative
media campaigns currently average 2.4% of net sales in our top 40 markets.
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Our management estimates that corporate 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 given area and community involvement through school and civic
organizations. The National Print Program offers subsidized print materials as
an incentive for franchisees to use the marketing material that we recommend,
helping ensure that our national advertising strategy is reflected at the local
level.
By communicating common themes at the national, cooperative and local market
levels, we create a consistent marketing message to our customers. Over the
past four years, we estimate that we and our domestic franchisees have invested
over $750 million in system-wide advertising at the national, cooperative and
local levels.
We also create business plans for new or improved products, price promotions,
and tie-in events with leading brands. For example, we recently entered into a
partnership with General Mills, Inc. whereby coupons for Domino's pizza were
distributed on the back of Cheerios brand cereal packages. We estimate that at
least 20% of the coupon redemptions from this campaign came from new customers.
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 14 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, except where we maintain only one supplier for a
product, such as cheese. 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 enables us to
maximize leverage with our suppliers. Second, in four of our five key product
categories (which include cheese, meats, dough and parbaked shells, boxes and
sauce), we generally retain active purchasing relationships with at least three
suppliers. This purchasing strategy allows us to shift purchases among
suppliers based on quality, price and timeliness of delivery. For the year
ended January 3, 1999, no single supplier represented more than 10% of cost of
sales, except for our cheese supplier which accounted for 25.7% of cost of
sales.
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. Our commissary and distribution facilities are
licensed and subject to regulation by federal, state and local health and fire
codes. The operation of our trucks is subject to Department of Transportation
regulations. From time to time, we and our franchisees also encounter issues
relating to the presence of pollutants or hazardous substances at owned or
leased property. We do not believe that any such issues will result in a
material impact to our business.
We are subject to the rules and regulations of the FTC and various state laws
regulating the offer and sale of franchises. The FTC and various state laws
require that we furnish to prospective franchisees a franchise offering
circular containing prescribed information. A number of states in which we are
currently franchising or may consider franchising 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 of these states based upon our 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 in certain respects. 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.
Our store operations and our relationships with franchisees are subject to the
federal and state antitrust laws. Our store operations are also subject to
federal and state laws governing such matters as wages, working conditions,
citizenship requirements and overtime. Some states have set minimum wage
requirements higher than the federal level.
Internationally, our franchise stores are subject to national and local laws
and regulations which 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 subject to tariffs and
regulations on imported commodities and equipment and laws regulating foreign
investment.
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Trademarks
Domino's has several trademarks and service marks and believes that many of
these marks have significant value and are 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 our
registered or unregistered trademarks.
Facilities
We own the facilities at fourteen corporate stores and five commissary
facilities. We also own and lease store facilities to seven domestic
franchisees. There are no mortgages on any of these facilities other than
mortgages on the commissary facilities granted in connection with our new
senior credit facilities. All other corporate-owned stores and facilities are
leased, typically with five-year leases with one or two five-year renewal
options. The franchise stores are leased directly by the franchisee and we are
generally not a party to the leases, except with respect to the seven
facilities that we own and lease to the franchisees.
We lease approximately 185,000 square feet for our executive offices, world
headquarters and Michigan Distribution Center located in Ann Arbor, Michigan
under an operating lease with Domino's Farms Office Park Limited Partnership
for a term of five years commencing December 21, 1998, with options to renew
for two five-year terms. We believe that this lease is on terms no less
favorable than are obtainable from unrelated third parties.
Employees
As of January 3, 1999, we had approximately 14,200 employees, excluding
employees of franchise-operated stores. Approximately 10,200 of this total are
store employees that work part-time and are employed on an hourly basis. None
of our domestic employees are represented by unions. We have not experienced
any labor problems resulting in a work stoppage and we believe we have good
relations with our employees.
Insurance
Through December 19, 1998, we self-insured our commercial general liability,
automobile liability, and workers' compensation liability exposures up to
levels ranging from $500,000 to $1 million per occurrence, and maintained
excess and umbrella insurance coverage above those levels up to amounts ranging
from $60 million to $105 million per annum on our commercial general liability
and automobile liability policies and up to statutory limits on our workers'
compensation policies. Effective December 20, 1998, we acquired first-dollar
insurance coverage for all of the above exposures, with total coverage of $105
million per occurrence on our commercial general liability and automobile
liability policies and up to statutory limits on our workers' compensation
policies. We also maintain commercial property liability insurance. These
policies provide a variety of coverages and are subject to various limitations,
exclusions and deductibles. There can be no assurance that such liability
limitations will be adequate, that insurance premiums for such coverage will
not increase or that in the future we will be able to obtain insurance at
acceptable rates, if at all. Any such inadequacy of or inability to obtain
insurance coverage could have a material adverse effect on our business,
financial condition and results of operations.
Legal Proceedings
We are party to various legal actions arising in the ordinary course of our
business. These legal actions cover a broad variety of claims spanning our
entire business. The following is a brief description of the more significant
categories of legal actions brought against us.
Franchising. We franchise a substantial number of stores to independent
business people operating under arrangements with our Corporate or
International divisions. Disputes with our franchisees occasionally arise in
the ordinary course of the franchise relationship relating to a broad range of
subjects including, without limitation, quality and service contentions
regarding grants or termination of franchises, franchisee claims for additional
franchises or rewrites of franchise agreements, antitrust violations and
delinquent payments.
Employees. We employ thousands of persons at our corporate-owned stores,
distribution facilities and corporate headquarters. In addition, thousands of
persons, from time to time, seek employment with us in various capacities.
Disputes occasionally arise in the ordinary course of business regarding
hiring, firing, working conditions and promotion practices.
Automobile Accidents. We are and have been a party to a number of suits
relating to automobile accidents involving our own or one of our franchisees'
delivery drivers. The plaintiffs in these suits have sought and may seek both
compensatory and punitive damages, the latter of which may, and in the past has
been, significant in amount.
44
Intellectual Property. On September 10, 1998, Vesture Corporation and R.G.
Barry Corporation, its corporate parent, brought suit in the United States
District Court for the Middle District of North Carolina against Domino's and
Phase Change Laboratories, Inc., the exclusive supplier of the heat retention
cores inside the Domino's HeatWave Hot Bag, our pizza delivery warming device.
The plaintiffs asserted that the heat retention cores inside the Domino's
HeatWave Hot Bag infringe a patent owned by Vesture. Our agreement with Phase
Change Laboratories gives us exclusive marketing, sales, use and distribution
rights in the pizza delivery market to the heat retention cores inside the
Domino's HeatWave Hot Bag. In addition to damages, the plaintiffs are seeking
an injunction to enjoin the manufacture, sale or use of the heat retention
cores inside the Domino's HeatWave Hot Bag. On November 4, 1998, we filed our
answer, denying the material allegations of the plaintiffs. In addition, we
asserted a counterclaim against Vesture Corporation and R.G. Barry Corporation
seeking a declaratory judgment that we have not infringed Vesture Corporation's
patent and further that Vesture Corporation's patent is invalid and
unenforceable. We also brought a cross-claim against Phase Change Laboratories
for indemnification and for breach of warranty. Phase Change Laboratories filed
its answer and its counterclaim for a declaratory judgment on November 5, 1998.
Although we intend to vigorously defend against the claim, we cannot predict
the ultimate outcome of the claim.
45
Management
Directors and Executive Officers
The following table sets forth certain information regarding each person who is
a director or executive officer of TISM, Inc., Domino's, Inc. and each of our
subsidiary guarantors.
- --------------------------------------------------------------------------------
Name Age Position
- ------------------------------------------------------------------------------------------------------
Thomas S. Monaghan 61 Director of TISM, Inc. and Domino's, Inc.
Harry J. Silverman 40 Chief Financial Officer, Executive Vice President, Finance and Administration
and Director of Domino's Pizza, Inc.; Vice President of TISM, Inc. and
Domino's, Inc.; President and Director of each of the guarantor subsidiaries
other than Domino's Pizza, Inc.
Cheryl A. Bachelder 42 Executive Vice President, Marketing and Product Development of
Domino's Pizza, Inc.
Patrick Kelly 46 Executive Vice President, Corporate of Domino's Pizza, Inc.
Stuart K. Mathis 43 Executive Vice President, Franchise of Domino's Pizza, Inc.
Gary M. McCausland 47 Executive Vice President, International of Domino's Pizza, Inc.
Michael D. Soignet 39 Executive Vice President, Distribution of Domino's Pizza, Inc.
Mark E. Nunnelly 40 Director of TISM, Inc. and Domino's, Inc.
Robert F. White 43 Director of TISM, Inc. and Domino's, Inc.
Jonas L. Steinman 33 Director of TISM, Inc. and Domino's, Inc.
Thomas S. Monaghan founded Domino's Pizza, Inc. in 1960 and served as its
President and Chief Executive Officer through July, 1989 and from December 6,
1991 to December 21, 1998. Mr. Monaghan now serves as a Director of TISM, Inc.
and Domino's, Inc. Mr. Monaghan has served as a Director of TISM, Inc. since
1960 and as a Director of Domino's, Inc. since February, 1999.
Harry J. Silverman has been Chief Financial Officer and Executive Vice
President of Finance and Administration for Domino's Pizza, Inc. since 1993.
Mr. Silverman has served as Vice President of TISM, Inc. and Domino's Inc., as
President and Director of each of the guarantor subsidiaries other than
Domino's Pizza, Inc. and as a Director of Domino's Pizza, Inc. since December,
1998. Mr. Silverman joined Domino's Pizza, Inc. in 1985 as Controller for the
Chicago Regional Office. Mr. Silverman was named National Operations Controller
in 1988 and later Vice President of Finance for Domino's Pizza, Inc. Prior to
joining the Company, Mr. Silverman was employed by Grant Thornton.
Cheryl A. Bachelder joined Domino's Pizza, Inc. in May, 1995 as Executive Vice
President of Marketing and Product Development, overseeing all marketing,
public relations, product development and quality assurance programs. Prior to
that time, Ms. Bachelder served as President of Bachelder & Associates, a
management consulting firm founded by Ms. Bachelder in 1992. From 1984 to 1992,
Ms. Bachelder served in various positions with the Nabisco Foods Group of RJR
Nabisco, Inc., including Vice President and General Manager of the LifeSavers
Division from 1991 to 1992. From 1981 to 1984, Ms. Bachelder worked in brand
management at the PaperMate Division of The Gillette Company. From 1978 to
1981, Ms. Bachelder held training and brand management posts at the Procter &
Gamble Company.
Patrick Kelly has served as Executive Vice President of Corporate of Domino's
Pizza, Inc. since November, 1994. Mr. Kelly joined Domino's Pizza, Inc. in 1978
as a manager trainee and has held various positions with the Company since that
time, including Vice President of Corporate and Franchise for the United States
Western and Eastern Regions, Vice President of International and Vice President
of Corporate in the Northern Region.
Stuart K. Mathis joined Domino's Pizza, Inc. in 1985 as Controller for the
Northeastern Regional Office. Mr. Mathis has served as Executive Vice President
of Franchise since August, 1992. Prior to that time, Mr. Mathis held various
positions in Domino's, including Vice President of Field Administration. From
1983 to 1985, Mr. Mathis was Controller for Six Flags Over Mid-America in St.
Louis.
Gary M. McCausland has been Executive Vice President of International of
Domino's Pizza, Inc. since December, 1991, overseeing all store operations and
development outside the contiguous United States. Mr. McCausland previously
served as Vice President of Finance and Administration for International and
Corporate Controller. Prior to joining Domino's, he held a number of
international management positions with Unisys Corp., including Director of
Finance to its subsidiary in the United Kingdom. Mr. McCausland, a Certified
Public Accountant, also served six years with Price Waterhouse LLP.
46
Michael D. Soignet has been Executive Vice President of Distribution of
Domino's Pizza, Inc., overseeing United States and international commissary
operations and the Equipment & Supply Division of the Company since 1993. Mr.
Soignet joined the Company in 1981 and since then has held various positions,
including Distribution Center General Manager, Assistant to the DNC General
Manager, Region Manager, Distribution Vice President, and most recently Vice
President of Distribution Operations until his appointment to the executive
team in 1993.
Mark E. Nunnelly has served as a Director of TISM, Inc. since December 21, 1998
and as a Director of Domino's, Inc. since February, 1999. Mr. Nunnelly has been
a Managing Director of Bain Capital since 1990. Prior to that time, Mr.
Nunnelly was a partner at Bain & Company, where he managed several
relationships in the manufacturing sector, and was employed by Procter & Gamble
Company Inc. in product management. Mr. Nunnelly serves on the Board of
Directors of several companies, including Stream International, Inc., The
Learning Company and DoubleClick, Inc.
Robert F. White has served as a Director of TISM, Inc. since December 21, 1998
and as a Director of Domino's, Inc. since February, 1999. Mr. White joined Bain
Capital at its inception in 1984. He has been a Managing Director since 1985.
Mr. White has served as the Chief Financial Officer and a founder of
MediVision, a medical services company founded and financed by Bain Capital.
Prior to joining Bain Capital, Mr. White was a Manager at Bain & Company and a
Senior Accountant with Price Waterhouse LLP. Mr. White serves on the Board of
Directors of Stream International, Inc., totes/Isotoner Inc., and Brookstone,
Inc.
Jonas L. Steinman has served as a Director of TISM, Inc. since December 21,
1998 and as a Director of Domino's, Inc. since February, 1999. Mr. Steinman has
been a principal of Chase Capital Partners since 1995 and was an associate at
Chase Capital Partners from 1993 to 1995. Prior to joining Chase Capital
Partners, Mr. Steinman was employed by Anthem Partners, Booz, Allen & Hamilton
and Drexel Burnham Lambert. Mr. Steinman currently serves on the Board of
Directors of Sealy Corporation, C.A. Muer Corporation, Cove Healthcare,
UtiliMed, Inc., USHealthWorks, Inc. and WPP Holdings, Inc.
All directors of TISM, Inc. and Domino's serve until a successor is duly
elected and qualified or until the earlier of his or her death, resignation or
removal. There are no family relationships between any of the directors or
executive officers of TISM, Inc. or Domino's, Inc. The executive officers of
TISM, Inc. and Domino's, Inc. are elected by and serve at the discretion of
their respective Boards of Directors. See "Certain Relationships and Related
Transactions" for information on the stockholders agreement which governs
composition of the Board of Directors of TISM, Inc.
47
Executive Compensation
The following table sets forth information concerning the compensation for the
fiscal year ended January 3, 1999 of Thomas S. Monaghan, the Chief Executive
Officer and President of TISM through December 21, 1998, and the four other
most highly compensated executive officers of TISM and its consolidated
subsidiaries (collectively, the "Named Executive Officers").
Summary Compensation Table
--------------------------------------------------------------------
Long Term
Compensation
------------
Annual Compensation
---------------------------------------
Number of
Securities
Other Annual Underlying All Other
Name and Position Salary Bonus(1) Compensation(2) Options(3) Compensation(4)
- ----------------- ---------- ---------- --------------- ------------ ---------------
Thomas S. Monaghan(5)... $3,334,615 $ -- $2,594 -- $ 5,000
Chief Executive Officer
and President
Stuart K. Mathis........ 366,588 1,776,597 1,169 116,710 56,333
Executive Vice
President, Franchise
Michael D. Soignet...... 246,496 1,832,497 912 111,111 59,276
Executive Vice
President,
Distribution
Harry J. Silverman...... 268,578 3,076,538 866 111,111 55,656
Chief Financial
Officer, Executive
Vice President,
Finance and
Administration
Cheryl A. Bachelder..... 287,300 1,805,657 1,103 -- 49,173
Executive Vice
President, Marketing
and Product
Development
- ---------
(1) These amounts include bonuses of $1,637,697 for each of Ms. Bachelder and
Messrs. Mathis and Soignet under bonus agreements entered into with each
such person and $2,851,078 under a bonus agreement entered into with
Mr. Silverman. Ms. Bachelder received her entire bonus at the closing of
the recapitalization. A portion of each other bonus was paid in cash at the
closing of the recapitalization, and the receipt of the remaining portion
of each other bonus was deferred under the Senior Executive Deferred Bonus
Plan. See "Senior Executive Deferred Bonus Plan."
(2) These amounts include reimbursements during the fiscal year for the payment
of taxes related to insurance premiums paid on behalf of the Named
Executive Officers.
(3) The options are options granted in connection with the recapitalization to
purchase shares of common stock of TISM, Inc., except Mr. Mathis' options
also include options to purchase 2,064 shares of cumulative preferred stock
of TISM, Inc.
(4) These amounts represent matching funds contributed by us pursuant to our
pre-recapitalization deferred compensation plan and 401(k) plan and term
life insurance premiums paid by the Company for the benefit of the Named
Executive Officers.
(5)Mr. Monaghan served as Chief Executive Officer through December 21, 1998.
48
Option Grants in Last Fiscal Year
The table below sets forth information for the Named Executive Officers with
respect to grants of stock options of TISM during the fiscal year ended January
3, 1999.
Option Grants in Fiscal Year 1998
------------------------------------------------------------------
Potential Realizable
Value at Assumed
Annual Rates
of Stock Price
Appreciation
Individual Grants for Option Term(5)
--------------------------------- ---------------------
Number of
Securities % of Total Exercise
Underlying Options to Price Expiration
Name Options Employees ($/share) Date 5%($) 10%($)
- ---- ---------- ---------- --------- ---------- ---------- ----------
Thomas S. Monaghan...... -- -- -- -- -- --
Chief Executive Officer
and President
Stuart K. Mathis........ 103,181(1) 16% $ .50 12/21/08 $ 32,445 $ 82,545
Executive Vice
President, Franchise 11,465(2) 2% 40.50 12/21/09 329,848 860,448
2,064(3) 100%(4) 101.33 12/21/09
Michael D. Soignet...... 100,000(1) 16% .50 12/21/08 31,000 80,000
Executive Vice
President,
Distribution 11,111(2) 2% 40.50 12/21/09 319,663 833,881
Harry J. Silverman...... 100,000(1) 16% .50 12/21/08 31,000 80,000
Chief Financial
Officer, Executive
Vice 11,111(2) 2% 40.50 12/21/09 319,663 833,881
President, Finance and
Administration
Cheryl A. Bachelder..... -- -- -- -- -- --
Executive Vice
President, Marketing
and Product
Development
- ---------
(1) These represent options to purchase shares of Class A Common Stock of TISM.
(2)These represent options to purchase shares of Class L Common Stock of TISM.
(3)These represent options to purchase cumulative preferred stock of TISM.
(4) This represents the percentage of total options granted to employees to
purchase cumulative preferred stock, while the other percentages in the
column represent the percentage of total options granted to purchase shares
of Class A and Class L Common Stock.
(5) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
term assuming the specified compound rates of appreciation (5% and 10%) on
the market value of the common stock or cumulative preferred stock, as the
case may be, on the date of option grant over the term of the options.
These numbers are calculated based on rules promulgated by the Securities
and Exchange Commission and do not reflect our estimate of future stock
price growth. Actual gains, if any, on stock option exercises are dependent
on the timing of such exercise and the future performance of the common
stock or cumulative preferred stock, as the case may be. There can be no
assurance that the rates of appreciation assumed in this table can be
achieved or that the amounts reflected will be received by the individuals.
49
Fiscal Year-End Option Values
The table below sets forth certain information concerning the number and value
of unexercised stock options of TISM held by each of the Named Executive
Officers as of January 3, 1999.
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal Year In-the-Money Options at
End Fiscal Year End(1)
------------------------- -------------------------
Exercisable Unexercisable Exercisable Unexercisable
Name (#) (#) ($) ($)
- ---- ----------- ------------- ----------- -------------
Thomas S. Monaghan.......... -- -- -- --
Stuart K. Mathis(2)......... 116,710 -- 0 --
Michael D. Soignet.......... 111,111 -- 0 --
Harry J. Silverman.......... 111,111 -- 0 --
Cheryl A. Bachelder......... -- -- -- --
- ---------
(1) There was no public trading market for the common stock and cumulative
preferred stock of TISM as of January 3, 1999. Accordingly, these values
have been calculated on the basis of the fair market value of such
securities on January 3, 1999, less the applicable exercise price.
(2)Includes options to purchase 2,064 shares of cumulative preferred stock of
TISM.
Consulting Agreement with Thomas S. Monaghan
In connection with the closing of the recapitalization, Mr. Monaghan entered
into a Consulting Agreement with Domino's Pizza, Inc. The Consulting Agreement
has a term of ten years, is terminable by either Domino's Pizza, Inc. or
Mr. Monaghan upon thirty days prior written notice, and may be extended or
renewed by written agreement. Under the Consulting Agreement, Mr. Monaghan may
be required to make himself available to Domino's Pizza, Inc. on a limited
basis. Mr. Monaghan will receive a retainer of $1 million for the first twelve
months of the agreement and $0.5 million per year for the remainder of the term
of the agreement. If we terminate the agreement for any reason, we are required
to remit to Mr. Monaghan a lump sum payment within thirty days of the
termination of the agreement in the full amount of the retainer payable for the
remainder of the term of the Consulting Agreement. As a consultant, Mr.
Monaghan is entitled to reimbursement of travel and other expenses incurred in
performance of his duties but is not entitled to participate in any of our
employee benefit plans or other benefits or conditions of employment available
to our employees.
Deferred Compensation Plan
Domino's Pizza, Inc. has adopted a Deferred Compensation Plan for the benefit
of certain of its executive and managerial employees, including the Named
Executive Officers. Under the Deferred Compensation Plan, eligible employees
are permitted to defer up to 40% of their compensation. Domino's Pizza, Inc. is
required to match 30% of the amount deferred by a participant under the plan
with respect to the first 15%, 20% or 25% of the participant's compensation,
depending on the employee. Domino's may be obligated to make a supplemental
contribution, in addition to the matching contribution, of up to 20% of the
first 15%, 20% or 25% of the deferred amounts. The amounts under the plan are
required to be paid out upon termination of employment or a change in control
of Domino's Pizza, Inc.
Senior Executive Deferred Bonus Plan
Prior to the recapitalization, Domino's Pizza, Inc. entered into bonus
agreements with certain members of management, including the Named Executive
Officers. The bonus agreements, as amended, provided for bonus payments, a
portion of which were payable in cash upon the closing of the recapitalization
and a portion of which were deferred under the Senior Executive Deferred Bonus
Plan. Domino's Pizza, Inc. adopted a Senior Executive Deferred Bonus Plan,
effective December 21, 1998, which established deferred bonus accounts for the
benefit of executives, including the Named Executive Officers (except for Ms.
Bachelder). Domino's Pizza, Inc. must pay the deferred amounts in each account
to the respective executive upon the earlier of (i) a change of control, (ii) a
qualified public offering, (iii) the cancellation or forfeiture of stock
options held by such executive or (iv) ten years and 180 days after December
21, 1998. If the board of directors of Domino's Pizza, Inc. terminates the
plan, it may pay the amounts in the deferred bonus accounts to the
participating executives at that time or make the payments as if the plan had
continued to be in effect.
Severance Agreements
On August 4, 1998, Domino's Pizza, Inc. entered into severance agreements with
certain members of management, including the Named Executive Officers. Under
the agreements with the Named Executive Officers, Domino's Pizza, Inc. will pay
certain severance benefits to such executives who are terminated without cause
or due to death or disability or who
50
terminate employment for good reason within two years after the closing of the
recapitalization or who resign at or within 30 days after the first anniversary
of the closing of the recapitalization. The severance benefits include a
severance payment that equals three times the employee's base severance amount
if employment terminates prior to December 21, 1999 or two times such base
severance amount if the employee's employment terminates after December 21,
1999 but prior to December 21, 2000. In addition, Domino's Pizza, Inc. is
required to make monthly payments for a maximum of three years, depending upon
when the employee is terminated, to the terminated executive in an amount
sufficient for the executive to purchase health insurance benefits equivalent
to those benefits provided to the executive by Domino's Pizza, Inc. at the time
of termination. In consideration of the benefits provided under the severance
agreements, the executives agreed to certain non-competition, non-solicitation
and confidentiality provisions.
Compensation of Directors
TISM and Domino's reimburse members of the board of directors for any out-of-
pocket expenses incurred by them in connection with services provided in such
capacity. In addition, TISM and Domino's may compensate independent members of
the board of directors for services provided in such capacity.
51
Principal Stockholders
All of Domino's issued and outstanding common stock is owned by TISM. The
issued and outstanding capital stock of TISM consists of (i) 49,436,819 shares
of Class A Common Stock, of which 9,641,874 shares are of Class A-1 Common
Stock, par value $0.001 per share, 9,866,633 shares are Class A-2 Common Stock,
par value $0.001 per share, and 29,928,312 shares are Class A-3 Common Stock,
par value $0.001 per share, (ii) 5,492,981 shares of Class L Common Stock, par
value $0.001 per share, and (iii) 997,936 shares of 11.5% Cumulative Preferred
Stock. The three classes of Class A Common Stock have different rights with
respect to the election of members of the Board of Directors. The shares of
Class A-1 Common Stock entitle the holder to one vote per share on all matters
to be voted upon by the stockholders of TISM. The shares of Class A-2 Common
Stock and Class A-3 Common Stock are non-voting. The Class L Common Stock is
identical to the Class A Common Stock except that the Class L Common Stock is
nonvoting and is entitled to a preference over the Class A Common Stock, with
respect to any distribution by TISM to holders of its capital stock, equal to
the original cost of such share plus an amount which accrues at a rate of 12%
per annum, compounded quarterly. The Class L Common Stock is convertible upon
an initial public offering, or certain other dispositions, of TISM into Class A
Common Stock upon a vote of the board of directors of TISM. The Cumulative
Preferred Stock has no voting rights except as required by law.
The following table sets forth certain information as of January 3, 1999
regarding the approximate beneficial ownership of: (i) each person known to
TISM to own more than five percent of the outstanding voting securities of TISM
and (ii) the voting securities of TISM held by each Director of TISM, each
Named Executive Officer and all of such Directors and Named Executive Officers
as a group. Unless otherwise noted, to our knowledge, each of such stockholders
has sole voting and investment power as to the shares shown. Unless otherwise
indicated, the address of each Director and Named Executive Officer is 30 Frank
Lloyd Wright Drive, Ann Arbor, MI 48106.
-----------------
Percentage of Outstanding
Name and Address Voting Securities
-----------------
Principal Stockholders:
Bain Capital Funds(1)................................ 49.0%
c/o Bain Capital, Inc.
Two Copley Place
Boston, Massachusetts 02116
Directors and Named Executive Officers:
Thomas S. Monaghan+*(2).............................. 36.3%
Mark E. Nunnelly+(3)................................. 49.0%
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Harry J. Silverman*.................................. -
Cheryl A. Bachelder*................................. -
Michael D. Soignet*.................................. -
Stuart K. Mathis*.................................... -
Robert F. White+(4).................................. 49.0%
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Jonas L. Steinman+(5)................................ 4.9%
c/o Chase Capital Partners
380 Madison Avenue, 12th Floor
New York, NY 10017
All Directors and Named Executive
Officers as a Group (8 Persons)..................... 90.2%
- ---------
+ Director
* Named Executive Officer
(1) Includes shares of Class A-1 Common Stock owned by Bain Capital Fund VI,
L.P., ("Fund VI"); Bain Capital VI Coinvestment Fund, L.P. ("Coinvest
Fund"); Sankaty High Yield Asset Partners, L.P. ("Sankaty"); Brookside
Capital Partners Fund, L.P. ("Brookside"); PEP Investments PTY Ltd.
("PTY"); BCIP Associates II ("BCIP II"); BCIP Trust
52
Associates II, L.P. ("BCIP Trust II"); BCIP Associates II-B ("BCIP II-B");
BCIP Trust Associates II-B, L.P. ("BCIP Trust II-B"); and BCIP Associates
II-C ("BCIP II-C" and collectively with BCIP II, BCIP Trust II, BCIP II-B
and BCIP Trust II-B, the "BCIPs" and the BCIPs, Fund VI, Coinvest Fund,
Sankaty, Brookside and PTY, collectively, the "Bain Capital funds.")
(2) Includes shares of Class A-1 Common Stock owned by Mrs. Monaghan.
(3) Mr. Nunnelly is a limited partner of Bain Capital Partners VI, L.P., the
sole general partner of Fund VI and the Coinvest Fund, and a Managing
Director of Bain Capital Investors VI, Inc., the sole general partner of
Bain Capital Partners VI, L.P. In addition, Bain Capital, Inc., of which
Mr. Nunnelly is a Managing Director, is the managing general partner of
all of the BCIPs and Mr. Nunnelly (or an affiliated entity) is also a
general partner of BCIP II, BCIP II-C and BCIP Trust II. Accordingly, Mr.
Nunnelly may be deemed to beneficially own all of the shares owned by the
Bain Capital funds, and the share ownership chart reflects such possible
beneficial ownership. Mr. Nunnelly disclaims beneficial ownership of any
shares owned by the Bain Capital funds in which he does not have a
pecuniary interest.
(4) Mr. White is a limited partner of Bain Capital Partners VI, L.P., the sole
general partner of Fund VI and the Coinvest Fund and a Managing Director
of Bain Capital Investors VI, Inc., the sole general partner of Bain
Capital Partners VI, L.P. In addition, Bain Capital, Inc., of which Mr.
White is a Managing Director, is the managing general partner of all the
BCIPs and Mr. White (or an affiliated entity) is a general partner of BCIP
II, BCIP II-C and BCIP Trust II. Accordingly, Mr. White may be deemed to
beneficially own all of the shares owned by the Bain Capital funds, and
the share ownership chart reflects such possible beneficial ownership. Mr.
White disclaims beneficial ownership of any shares owned by the Bain
Capital funds in which he does not have a pecuniary interest.
(5) Mr. Steinman is a principal of Chase Capital Partners, the general partner
of Chase Equity Associates, L.P. Accordingly, Mr. Steinman may be deemed
to beneficially own shares beneficially owned by Chase Capital Partners.
Mr. Steinman disclaims beneficial ownership of any such shares in which he
does not have a pecuniary interest.
53
Certain Relationships and Related Transactions
Because this is a summary, it does not contain all of the information that may
be important to you. You should read the complete documents before making an
investment decision.
Stockholders Agreement
In connection with the recapitalization, TISM, certain of its subsidiaries,
including the Company, and all of the equity holders of TISM (including the
Bain Capital funds), entered into a stockholders agreement that, among other
things, provides for tag-along rights, drag-along rights, registration rights,
restrictions on the transfer of shares held by parties to the stockholders
agreement and certain preemptive rights for certain stockholders. Under the
terms of the stockholders agreement, the approval of the Bain Capital funds
will be required for TISM, its subsidiaries, including the Company, and its
stockholders to take various specified actions, including major corporate
transactions such as a sale or initial public offering, acquisitions,
divestitures, financings, recapitalizations and mergers, as well as other
actions such as hiring and firing senior managers, setting management
compensation and establishing capital and operating budgets and business plans.
Pursuant to the stockholders agreement and TISM's Articles of Incorporation,
the Bain Capital funds have the power to elect up to half of the Board of
Directors of TISM. The stockholders agreement includes customary
indemnification provisions in favor of controlling persons against liabilities
under the Securities Act.
Management Agreement
In connection with the recapitalization, TISM and certain of its direct and
indirect subsidiaries entered into a management agreement with Bain Capital
Partners VI, L.P. pursuant to which it provides financial, management and
operation consulting services. In exchange for such services, Bain Capital
Partners VI, L.P. is entitled to an annual management fee of $2 million plus
the reasonable and out-of-pocket expenses of Bain Capital Partners VI, L.P. and
its affiliates. In addition, in exchange for assisting the Company in
negotiating the senior financing for any recapitalization, acquisition or other
similar transaction, Bain Capital Partners VI, L.P. is entitled to a
transaction fee equal to 1% of the gross purchase price, including assumed
liabilities, for such transaction, irrespective of whether such senior
financing is actually committed or drawn upon. In connection with the
recapitalization, Bain Capital Partners VI, L.P. received a fee of $11.75
million. The management agreement will continue in full force and effect for as
long as Bain Capital Partners VI, L.P. continues to provide such services. The
management agreement, however, may be terminated (i) by mutual consent of the
parties, (ii) by either party following a material breach of the management
agreement by the other party and the failure of such other party to cure the
breach within thirty days of written notice of such breach or (iii) by Bain
Capital Partners VI, L.P. upon sixty days written notice. The management
agreement includes customary indemnification provisions in favor of Bain
Capital Partners VI, L.P. and its affiliates.
Lease Agreement
In connection with the recapitalization, Domino's entered into a new lease
agreement with Domino's Farms Office Park Limited Partnership with respect to
its executive offices, world headquarters and Michigan distribution center. The
lease provides for lease payments of $4.3 million in the first year, increasing
annually to approximately $4.7 million in the fifth year. Thomas Monaghan, who
is a director of TISM and Domino's, is the ultimate general partner of Domino's
Farms Office Park Limited Partnership.
Purchases by Affiliates
One or more of the Bain Capital funds have purchased $30 million in aggregate
principal amount of the Tranche B and Tranche C senior credit facilities at a
discount of 2%, $20 million in aggregate principal amount of the Notes at a
discount of 3% and $70.2 million of the Cumulative Preferred Stock of TISM at
the liquidation preference less a discount of 3.5%..
54
Description of Senior Credit Facilities
Domino's, Inc. and Domino's Franchise Holding Co. (collectively, the
"Borrowers") have entered into an agreement with various banks and financial
institutions, including Morgan Guaranty Trust Company, an affiliate of one of
the Initial Purchasers, as a bank lender and as agent for the bank lenders'
syndicate thereto, providing for the senior credit facilities, which consist of
(i) the Tranche A facility of $175 million in term loans; (ii) the Tranche B
facility of $135 million in term loans; (iii) the Tranche C facility of $135
million in term loans; and (iv) the revolving credit facility of up to $100
million in revolving credit loans and letters of credit.
The proceeds of the loans made under the senior credit facilities are to be
used (i) to finance a portion of the recapitalization and related transaction
expenses, (ii) to refinance approximately $49.9 million of outstanding
indebtedness and other liabilities and (iii) for general corporate purposes
including working capital.
The Borrowers are jointly and severally obligated with respect to all amounts
owing under the senior credit facilities. In addition, the senior credit
facilities are (i) guaranteed by TISM, (ii) jointly and severally guaranteed by
each of our domestic subsidiaries and (iii) secured by a first priority lien on
certain real property and substantially all of the tangible and intangible
personal property of the Borrowers and their domestic subsidiaries and by a
pledge of all of the capital stock of the Borrowers and their domestic
subsidiaries and a pledge of 65% of the capital stock of our foreign
subsidiaries. Our future domestic subsidiaries will guarantee the senior credit
facilities and secure that guarantee with certain of their real property and
substantially all of their tangible and intangible personal property.
The senior credit facilities require the Borrowers to meet certain financial
tests, including without limitation, maximum leverage ratio, minimum interest
coverage and minimum levels of EBITDA. In addition, the senior credit
facilities contain certain negative covenants limiting, among other things,
additional liens, indebtedness, capital expenditures, transactions with
affiliates, mergers and consolidations, liquidations and dissolutions, sales of
assets, dividends, investments, loans and advances, prepayments and
modifications of debt instruments and other matters customarily restricted in
such agreements. The senior credit facilities contain customary events of
default, including without limitation, payment defaults, breaches of
representations and warranties, covenant defaults, certain events of bankruptcy
and insolvency, failure of any guaranty or security document supporting the
senior credit facilities to be in full force and effect and change of control
of TISM or either of the Borrowers.
The Tranche A facility matures in quarterly installments from March 31, 2000
through 2004. The Tranche B facility matures in quarterly installments from
December 31, 1999 through 2006. The Tranche C facility matures in quarterly
installments from December 31, 1999 through 2007. The revolving credit facility
terminates in 2004.
The borrowings under the senior credit facilities bear interest at a floating
rate and may be maintained as base rate loans or as Eurodollar loans. Base rate
loans bear interest at the base rate (defined as the higher of (x) the
applicable prime lending rate of Morgan Guaranty or (y) the Federal Reserve
reported overnight funds rate plus 1/2 of 1%), plus the applicable margin (as
defined in the senior credit facilities). Eurodollar loans bear interest at the
Eurodollar rate (as described in the senior credit facilities) plus the
applicable margin.
The applicable margin with respect to the revolving credit facility and the
Tranche A facility will vary from time to time in accordance with the terms
thereof and an agreed upon pricing grid based on our leverage ratio. The
initial applicable margin with respect to the revolving credit facility and the
Tranche A facility is (i) 2.0%, in the case of base rate loans and (ii) 3.0% in
the case of Eurodollar loans. The applicable margin with respect to the Tranche
B facility is (i) 2.50% in the case of base rate loans and (ii) 3.50% in the
case of Eurodollar loans. The applicable margin with respect to the Tranche C
facility is (i) 2.75% in the case of base rate loans and (ii) 3.75% in the case
of Eurodollar loans.
With respect to letters of credit (which are to be issued as a part of the
revolving loan commitment) the revolver lenders are entitled to receive a
commission equal to the applicable margin which applies from time to time to
Eurodollar loans under the revolving credit facility. In addition, the issuing
bank is entitled to receive a fronting fee of 0.25% per annum plus its other
standard and customary processing charges. Such commission and fronting fees
are payable quarterly in arrears based on the aggregate undrawn amount of each
letter of credit issued from time to time under the revolver.
An initial commitment fee of 0.50% applies to the unused portion of the
revolving loan commitments. This commitment fee is subject to decrease and will
vary from time to time in accordance with an agreed upon pricing grid based
upon our leverage ratio.
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The senior credit facilities prescribe that certain amounts must be used to
prepay the term loan facilities and reduce commitments under the revolving
credit facility including (a) 100% of the net proceeds of any issuance of
indebtedness after the closing date by TISM and its subsidiaries, subject to
certain exceptions for permitted debt; (b) 50% of the net proceeds of any
issuance of equity by TISM and its subsidiaries, subject to certain exceptions;
(c) 100% of the net proceeds of any sale or other disposition by TISM and its
subsidiaries of any assets, subject to certain exceptions if the aggregate
amount of such net proceeds does not exceed a figure to be agreed upon with the
senior lenders and such proceeds are reinvested in similar replacement assets;
(d) 75% of excess cash flow (as defined in the senior credit facilities) for
each fiscal year commencing with the fiscal year ending January 2, 2000,
provided, that the foregoing percentage will be reduced to 50% upon
satisfaction of certain financial ratios; and (e) 100% of the net proceeds of
casualty insurance, condemnation awards or other recoveries, subject to certain
negotiated exceptions. Voluntary prepayments of the senior credit facilities
are permitted at any time.
In general, mandatory prepayments described above will be applied, first to
prepay the term loan facilities and second, to reduce commitments under the
revolving credit facility (if the amount of revolving loans then outstanding
exceeds the commitments as so reduced, then that excess amount must be
prepaid). Prepayments of the term loan facilities, optional or mandatory, will
be applied pro rata to the Tranche A facility, the Tranche B facility and the
Tranche C facility, and ratably to the respective installments thereof.
56
Description of Exchange Notes
You can find the definitions of certain terms used in this description under
the subheading "Certain Definitions." In this description, the word "Company"
refers only to Domino's, Inc. and not to any of its subsidiaries.
The Company will issue the Exchange Notes pursuant to the Indenture (the
"Indenture") dated December 21, 1998 by and among itself, the Guarantors and
IBJ Whitehall Bank & Trust Company, as trustee (the "Trustee"). The terms of
the Exchange Notes include those stated in the Indenture and those made part of
the Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act").
The form and terms of the Exchange Notes are identical in all material respects
to the form and terms of the outstanding Notes except that (i) the Exchange
Notes will bear a Series B designation, (ii) the Exchange Notes have been
registered under the Securities Act and, therefore, will generally not bear
legends restricting their transfer and (iii) the holders of the Exchange Notes
will not be entitled to certain rights under the Registration Rights Agreement
dated as of December 21, 1998 by and among us, our subsidiary guarantors, J.P.
Morgan Securities, Inc. and Goldman, Sachs & Co., including the provision
providing for liquidated damages in certain circumstances relating to the
timing of this offer. The Exchange Notes will evidence the same debt as the
outstanding Notes and will be entitled to the benefits of the Indenture. The
Exchange Notes will be pari passu with the outstanding Notes if all of such
outstanding Notes are not exchanged pursuant to this offer.
The following description is a summary of the material provisions of the
Indenture, which is filed as an exhibit to the Registration Statement of which
this Prospectus forms a part. The description does not restate the Indenture in
its entirety. We urge you to read the Indenture because it, and not this
description, defines your rights as holders of the Exchange Notes. Copies of
the Indenture are available as set forth below under the subheading "Additional
Information."
Brief Description of the Exchange Notes and the Subsidiary Guarantees
The Exchange Notes. These Exchange Notes:
.are general unsecured obligations of the Company;
.are subordinated in right of payment to all existing and future Senior
Debt of the Company; and
.are senior in right of payment to any future junior subordinated
Indebtedness of the Company.
The Subsidiary Guarantees. These Exchange Notes are guaranteed by each domestic
subsidiary of the Company.
These Subsidiary Guarantees:
.are general unsecured obligations of each Guarantor;
.are subordinated in right of payment to all existing and future Senior
Debt of each Guarantor; and
.are senior in right of payment to any future junior subordinated
Indebtedness of each Guarantor.
As of January 3, 1999 the Company and the Guarantors had total Senior Debt of
approximately $446.7 million. As indicated above and as discussed in detail
below under the subheading "Subordination," payments on the Exchange Notes and
under the Subsidiary Guarantees will be subordinated to the prior payment in
full in cash or Cash Equivalents (other than cash equivalents of the type
referred to in clauses (3) and (4) of the definition thereof) of all Senior
Debt. The Indenture will permit us and the Guarantors to incur additional
Senior Debt.
Not all of our "Restricted Subsidiaries" will guarantee these Exchange Notes
since our Foreign Subsidiaries will not be Guarantors. In the event of a
bankruptcy, liquidation or reorganization of any of these non-guarantor
subsidiaries, these non-guarantor subsidiaries will pay the holders of their
debt and their trade creditors before they will be able to distribute any of
their assets to us. The non-guarantor subsidiaries generated less than 1% of
our consolidated revenues for the fiscal year ended January 3, 1999 and held
less than 1% of our consolidated assets as of January 3, 1999.
As of the date of the Indenture, all of our subsidiaries were "Restricted
Subsidiaries." However, under the circumstances described below under the
subheading "Certain Covenants--Designation of Restricted and Unrestricted
Subsidiaries," we will be permitted to designate certain of our subsidiaries as
"Unrestricted Subsidiaries." Unrestricted Subsidiaries will not be subject to
many of the restrictive covenants in the Indenture. Unrestricted Subsidiaries
will not guarantee these Exchange Notes.
57
Principal, Maturity and Interest
The Exchange Notes will be limited in aggregate principal amount to $400.0
million, of which $275.0 million are expected to be issued in this offer. The
Company will issue the Exchange Notes in denominations of $1,000 and integral
multiples of $1,000. The Exchange Notes will mature on January 15, 2009.
Interest on these Exchange Notes will accrue at the rate of 10 3/8% per annum
and will be payable semi-annually in arrears on January 15 and July 15,
commencing on July 15, 1999. The Company will make each interest payment to the
Holders of record of these Exchange Notes on the immediately preceding January
1 and July 1.
Each Exchange Note will bear interest from its issuance date. The holders of
Notes that are accepted for exchange will receive, in cash, accrued interest on
such Notes to, but not including, the issuance date of the Exchange Notes. Such
interest will be paid with the first interest payment on the Exchange Notes.
Interest on the Notes accepted for exchange will cease to accrue upon issuance
of the Exchange Notes.
Methods of Receiving Payments on the Exchange Notes
If a Holder has given wire transfer instructions to the Company, the Company
will make all principal, premium and interest and Liquidated Damages, if any,
payments on those Exchange Notes in accordance with those instructions. All
other payments on these Exchange Notes will be made at the office or agency of
the Paying Agent and Registrar within the City and State of New York unless the
Company elects to make interest payments by check mailed to the Holders at
their address set forth in the register of Holders.
Paying Agent and Registrar for the Notes
The Trustee will initially act as Paying Agent and Registrar. The Company may
change the Paying Agent or Registrar without prior notice to the Holders of the
Exchange Notes, and the Company or any of its Subsidiaries may act as Paying
Agent or Registrar.
Transfer and Exchange
A Holder may transfer or exchange Exchange Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or exchange
any Exchange Note selected for redemption. Also, the Company is not required to
transfer or exchange any Exchange Note for a period of 15 days before a
selection of Exchange Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
Subsidiary Guarantees
The Guarantors will jointly and severally guarantee, on a senior subordinated
basis, the Company's obligations under the Exchange Notes. Each Subsidiary
Guarantee will be subordinated to the prior payment in full in cash or Cash
Equivalents (other than cash equivalents of the type referred to in clauses (3)
and (4) of the definition thereof) of all Senior Debt of that Guarantor. The
subordination provisions applicable to the Subsidiary Guarantees will be
substantially similar to the subordination provisions applicable to the
Exchange Notes as set forth below under "Subordination." The obligations of
each Guarantor under its Subsidiary Guarantee will be limited as necessary to
seek to prevent that Subsidiary Guarantee from constituting a fraudulent
conveyance under applicable law.
A Guarantor may not sell or otherwise dispose of all or substantially all of
its assets, or consolidate with or merge with or into (whether or not such
Guarantor is the surviving Person), another Person unless:
(1) immediately after giving effect to that transaction, no Default or
Event of Default exists; and
(2) either:
(a) the Person acquiring the property in any such sale or disposition or
the Person formed by or surviving any such consolidation or merger
assumes all the obligations of that Guarantor pursuant to a supplemental
indenture satisfactory to the Trustee; or
(b) the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the Indenture.
58
The Subsidiary Guarantee of a Guarantor will be released:
(1) in connection with any sale or other disposition of all or
substantially all of the assets of that Guarantor (including by way of
merger or consolidation), if the disposition is to the Company or another
Guarantor or if the Company applies the Net Proceeds of that sale or other
disposition in accordance with the applicable provisions of the Indenture;
or
(2) in connection with any sale of all of the capital stock of a Guarantor,
if the Company applies the Net Proceeds of that sale in accordance with the
applicable provisions of the Indenture;
(3) if the Company designates any Restricted Subsidiary that is a Guarantor
as an Unrestricted Subsidiary; or
(4) upon the release or discharge of all guarantees of such Guarantor, and
all pledges of property or assets of such Guarantor securing, all other
Indebtedness of the Company and the other Guarantors.
See "Repurchase at the Option of Holders--Asset Sales."
Subordination
The payment of principal, premium, interest, Liquidated Damages, if any, and
any other Obligations on, or relating to, these Exchange Notes will be
subordinated to the prior payment in full in cash or Cash Equivalents (other
than cash equivalents of the type referred to in clauses (3) and (4) of the
definition thereof) of all Senior Debt of the Company.
The holders of Senior Debt will be entitled to receive payment in full in cash
or Cash Equivalents (other than cash equivalents of the type referred to in
clauses (3) and (4) of the definition thereof) of all Obligations due in
respect of Senior Debt (including interest after the commencement of any such
proceeding at the rate specified in the applicable Senior Debt, whether or not
such interest is an allowable claim) before the Holders of the Exchange Notes
will be entitled to receive any payment or distribution of any kind or
character with respect to any Obligations on, or relating to, the Exchange
Notes (except that Holders of the Exchange Notes may receive and retain
Permitted Junior Securities and payments made from the trust described under
"Legal Defeasance and Covenant Defeasance" so long as the deposit of amounts
therein satisfied the relevant conditions specified in the Indenture at the
time of such deposit), in the event of any distribution to creditors of the
Company:
(1) in a liquidation or dissolution of the Company;
(2) in a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to the Company or its property;
(3) in an assignment for the benefit of creditors; or
(4) in any marshalling of the Company's assets and liabilities.
The Company also may not make any payment or distribution of any kind or
character with respect to any Obligations on, or with respect to, the Exchange
Notes or acquire any of the Exchange Notes for cash or property or otherwise
(except in Permitted Junior Securities or from the trust described under "--
Legal Defeasance and Covenant Defeasance") if:
(1) a payment default on Designated Senior Debt occurs and is continuing;
or
(2) any other default occurs and is continuing on Designated Senior Debt
that permits holders of such Designated Senior Debt to accelerate its
maturity and the Trustee receives a notice of such default (a "Payment
Blockage Notice") from the holders or the Representative of any Designated
Senior Debt.
Payments on the Exchange Notes may and shall be resumed:
(1) in the case of a payment default, upon the date on which such default
is cured or waived; and
(2) in case of a nonpayment default, the earlier of (x) the date on which
all nonpayment defaults are cured or waived, (y) 179 days after the date of
delivery of the applicable Payment Blockage Notice or (z) the Trustee
receives notice from the Representative for such Designated Senior Debt
rescinding the Payment Blockage Notice, unless the maturity of any
Designated Senior Debt has been accelerated.
No new Payment Blockage Notice may be delivered unless and until 360 days have
elapsed since the effectiveness of the immediately prior Payment Blockage
Notice.
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No nonpayment default that existed or was continuing on the date of delivery of
any Payment Blockage Notice to the Trustee shall be, or be made, the basis for
a subsequent Payment Blockage Notice unless such default shall have been cured
or waived for a period of not less than 90 consecutive days.
The Company must promptly notify holders of Senior Debt if payment of the
Exchange Notes is accelerated because of an Event of Default.
As a result of the subordination provisions described above, in the event of a
bankruptcy, liquidation or reorganization of the Company, Holders of these
Exchange Notes may recover less ratably than creditors of the Company who are
holders of Senior Debt.
Optional Redemption
Before January 15, 2002, the Company may on any one or more occasions redeem up
to 35% of the aggregate principal amount of the Exchange Notes originally
issued under the Indenture at a redemption price of 110.375% of the principal
amount thereof, plus accrued and unpaid interest thereon, if any, to the
redemption date, with the net cash proceeds of one or more Equity Offerings;
provided that:
(1) at least 65% of the aggregate principal amount of the Exchange Notes
issued under the Indenture remains outstanding immediately after the
occurrence of such redemption (excluding the Exchange Notes held by the
Company and its Subsidiaries); and
(2) the redemption must occur within 120 days of the date of the closing of
the Equity Offering.
Before January 15, 2004, the Company may also redeem these Exchange Notes, as a
whole but not in part, upon the occurrence of a Change of Control, upon not
less than 30 nor more than 60 days' prior notice (but in no event may any such
redemption occur more than 90 days after the occurrence of such Change of
Control), at a redemption price equal to 100% of the principal amount thereof
plus the Applicable Premium as of, and accrued and unpaid interest thereon, if
any, to, the date of redemption (the "Redemption Date").
Except pursuant to the preceding paragraphs, the Exchange Notes will not be
redeemable at the Company's option prior to January 15, 2004.
On or after January 15, 2004, the Company may redeem all or a part of these
Exchange Notes upon not less than 30 nor more than 60 days' notice, at the
redemption prices (expressed as percentages of principal amount) set forth
below plus accrued and unpaid interest thereon, if any, to the applicable
redemption date, if redeemed during the twelve-month period beginning on
January 15 of the years indicated below:
Year Percentage
---- ----------
2004.............................. 105.1875%
2005.............................. 103.4583%
2006.............................. 101.7292%
2007 and thereafter............... 100.0000%
Mandatory Redemption
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Exchange Notes.
Repurchase at the Option of Holders
Change of Control
If a Change of Control occurs, each Holder of Exchange Notes will have the
right to require the Company to repurchase all or any part (equal to $1,000 or
an integral multiple thereof) of that Holder's Exchange Notes pursuant to the
Change of Control Offer. In the Change of Control Offer, the Company will offer
a Change of Control Payment in cash equal to 101% of the aggregate principal
amount of Exchange Notes repurchased plus accrued and unpaid interest thereon,
if any, to the date of purchase (the "Change of Control Payment"). Within 30
days following any Change of Control, the Company will mail a notice to each
Holder describing the transaction or transactions that constitute the Change of
Control and offering to repurchase Notes on the purchase date specified in such
notice (which must be no earlier than 30 days nor later than 45 days from the
date such notice is mailed, other than as required by law (the "Change of
Control Payment Date")), pursuant
60
to the procedures required by the Indenture and described in such notice. The
Company will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent such
laws and regulations are applicable in connection with the repurchase of the
Exchange Notes as a result of a Change of Control. The Company will publicly
announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
The Indenture will provide that, prior to the mailing of the notice referred to
above, but in any event within 30 days following any Change of Control, the
Company covenants to:
(1) repay in full and terminate all commitments under Indebtedness under
the Senior Credit Facilities and all other Senior Debt the terms of which
require repayment upon a Change of Control or offer to repay in full and
terminate all commitments under all Indebtedness under the Senior Credit
Facilities and all other such Senior Debt and to repay the Indebtedness
owed to each lender which has accepted such offer; or
(2) obtain the requisite consents under the Senior Credit Facilities and
all other such Senior Debt to permit the repurchase of the Exchange Notes
as provided below.
The Company shall first comply with the covenant in the immediately preceding
sentence before it shall be required to repurchase Exchange Notes pursuant to
the provisions described below. The Company's failure to comply with the
covenant described in the immediately preceding sentence may (with notice and
lapse of time) constitute an Event of Default described in clause (3) but shall
not constitute an Event of Default described in clause (2), under "Events of
Default" below.
On the Change of Control Payment Date, the Company will, to the extent lawful:
(1) accept for payment all Exchange Notes or portions thereof properly
tendered pursuant to the Change of Control Offer;
(2) deposit with the Paying Agent an amount equal to the Change of Control
Payment in respect of all Exchange Notes or portions thereof so tendered;
and
(3) deliver or cause to be delivered to the Trustee the Notes so accepted
together with an Officers' Certificate stating the aggregate principal
amount of Exchange Notes or portions thereof being purchased by the
Company.
The Paying Agent will promptly mail to each Holder of Exchange Notes so
tendered the Change of Control Payment for such Exchange Notes, and the Trustee
will promptly authenticate and mail (or cause to be transferred by book entry)
to each Holder a new Exchange Note equal in principal amount to any unpurchased
portion of the Exchange Notes surrendered, if any; provided that each such new
Exchange Note will be in a principal amount of $1,000 or an integral multiple
thereof.
The provisions described above that require the Company to make a Change of
Control Offer following a Change of Control will be applicable regardless of
whether or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the Holders of the Exchange Notes to require
that the Company repurchase or redeem the Exchange Notes in the event of a
takeover, recapitalization or similar transaction.
The Company's outstanding Senior Debt currently prohibits the Company from
purchasing any Exchange Notes, and also provides that certain change of control
events with respect to the Company would constitute a default under the
agreements governing the Senior Debt. Any future credit agreements or other
agreements relating to Senior Debt to which the Company becomes a party may
contain similar restrictions and provisions. In the event a Change of Control
occurs at a time when the Company is prohibited from purchasing Exchange Notes,
the Company could seek the consent of its senior lenders to the purchase of
Exchange Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing Exchange Notes.
In such case, the Company's failure to purchase tendered Exchange Notes would
constitute an Event of Default under the Indenture which would, in turn,
constitute a default under such Senior Debt. In such circumstances, the
subordination provisions in the Indenture would likely restrict payments to the
Holders of Exchange Notes.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the
61
Indenture applicable to a Change of Control Offer made by the Company and
purchases all Exchange Notes validly tendered and not withdrawn under such
Change of Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Restricted Subsidiaries taken as a whole.
Although there is a limited body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a Holder of Exchange Notes to
require the Company to repurchase such Exchange Notes as a result of a sale,
lease, transfer, conveyance or other disposition of less than all of the assets
of the Company and its Restricted Subsidiaries taken as a whole to another
Person or group may be uncertain.
Asset Sales
The Company will not, and will not permit any of its Restricted Subsidiaries
to, consummate an Asset Sale unless:
(1) the Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair
market value of the assets or Equity Interests issued or sold or otherwise
disposed of;
(2) such fair market value is determined by the Company's Board of
Directors and evidenced by a resolution of the Board of Directors set forth
in an Officers' Certificate delivered to the Trustee; and
(3) at least 75% of the consideration therefor received by the Company or
such Restricted Subsidiary is in the form of cash or Cash Equivalents. For
purposes of this provision, each of the following shall be deemed to be
cash:
(a) any liabilities (as shown on the Company's or such Restricted
Subsidiary's most recent balance sheet), of the Company or any
Restricted Subsidiary (other than contingent liabilities and liabilities
that are by their terms subordinated to the Exchange Notes or any
Subsidiary Guarantee) that are assumed by the transferee of any such
assets pursuant to a customary novation agreement that releases the
Company or such Restricted Subsidiary from further liability;
(b) any securities, notes or other obligations received by the Company
or any such Restricted Subsidiary from such transferee that are
contemporaneously (subject to ordinary settlement periods) converted by
the Company or such Restricted Subsidiary into cash (to the extent of
the cash received in that conversion); and
(c) any Designated Noncash Consideration received by the Company or any
of its Restricted Subsidiaries in such Asset Sale having an aggregate
fair market value, taken together with all other Designated Noncash
Consideration received since the date of the Indenture pursuant to this
clause (c) that is at that time outstanding, not to exceed 10% of Total
Assets at the time of the receipt of such Designated Noncash
Consideration (with the fair market value of each item of Designated
Noncash Consideration being measured at the time received and without
giving effect to subsequent changes in value).
Within 365 days after the receipt of any Net Proceeds from an Asset Sale, the
Company may apply such Net Proceeds at its option:
(1) to repay Senior Debt (and to correspondingly reduce commitments if the
Senior Debt repaid is revolving credit borrowings);
(2) to acquire all or substantially all of the assets of, or a majority of
the Voting Stock of, another Permitted Business;
(3) to make a capital expenditure; and/or
(4) to acquire assets that are used or useable in a Permitted Business.
Pending the final application of any such Net Proceeds, the Company may
temporarily reduce revolving credit borrowings or otherwise invest such Net
Proceeds in any manner that is not prohibited by the Indenture.
Any Net Proceeds from Asset Sales that are not applied or invested as provided
in the preceding paragraph will constitute Excess Proceeds. When the aggregate
amount of Excess Proceeds exceeds $10.0 million, the Company will make an Asset
Sale Offer to all Holders of Exchange Notes and all holders of other
Indebtedness that is pari passu with the Exchange Notes containing provisions
similar to those set forth in the Indenture with respect to offers to purchase
or redeem with the proceeds of sales of assets to purchase the maximum
principal amount of Exchange Notes and such other pari passu Indebtedness that
may be purchased out of the Excess Proceeds. The offer price in any Asset Sale
Offer will be equal to 100% of the principal amount plus accrued and unpaid
interest thereon, if any, to the date of purchase, and will be payable in cash.
If any Excess Proceeds remain after consummation of an Asset Sale Offer, the
Company may use such
62
Excess Proceeds for any purpose not otherwise prohibited by the Indenture. If
the aggregate principal amount of Exchange Notes and such other pari passu
Indebtedness tendered into such Asset Sale Offer exceeds the amount of Excess
Proceeds, the Trustee shall select the Exchange Notes and such other pari passu
Indebtedness to be purchased on a pro rata basis. Upon completion of each Asset
Sale Offer, the amount of Excess Proceeds shall be reset at zero.
Selection and Notice
If less than all of the Exchange Notes are to be redeemed at any time, the
Trustee will select Exchange Notes for redemption as follows:
(1) if the Exchange Notes are listed, in compliance with the requirements
of the principal national securities exchange on which the Exchange Notes
are listed; or
(2) if the Exchange Notes are not so listed, on a pro rata basis, by lot or
by such method as the Trustee shall deem fair and appropriate.
No Exchange Notes of $1,000 or less shall be redeemed in part. Notices of
redemption shall be mailed by first class mail at least 30 but not more than 60
days before the redemption date to each Holder of Exchange Notes to be redeemed
at its registered address. Notices of redemption may not be conditional.
If any Exchange Note is to be redeemed in part only, the notice of redemption
that relates to that Exchange Note shall state the portion of the principal
amount thereof to be redeemed. A new Exchange Note in principal amount equal to
the unredeemed portion of the original Exchange Note will be issued in the name
of the Holder thereof upon cancellation of the original Exchange Note. Exchange
Notes called for redemption become due on the date fixed for redemption. On and
after the redemption date, interest ceases to accrue on Exchange Notes or
portions of them called for redemption.
Certain Covenants
Restricted Payments
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or distribution
on account of the Company's Equity Interests (including, without
limitation, any payment in connection with any merger or consolidation
involving the Company or any of its Restricted Subsidiaries) or to the
direct or indirect holders of the Company's Equity Interests in their
capacity as such (other than dividends or distributions payable in Equity
Interests (other than Disqualified Stock) of the Company);
(2) purchase, redeem or otherwise acquire or retire for value (including,
without limitation, in connection with any merger or consolidation
involving the Company) any Equity Interests of the Company or any direct or
indirect parent of the Company (other than any such Equity Interests owned
by the Company or any Restricted Subsidiary of the Company);
(3) make any payment on or with respect to, or purchase, redeem, defease or
otherwise acquire or retire for value any Indebtedness that is subordinated
to the Exchange Notes or the Subsidiary Guarantees, except a payment of
interest or principal at the Stated Maturity thereof; or
(4) make any Restricted Investment (all such payments and other actions set
forth in clauses (1) through (4) above being collectively referred to as
"Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default shall have occurred and be continuing or
would occur as a consequence thereof; and
(2) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described below under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock;" and
(3) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the date of the Indenture (excluding Restricted Payments
permitted by clauses (2), (3), (5), (6), (7) and (8) of the next succeeding
paragraph), is less than the sum, without duplication, of
63
(a) 50% of the Consolidated Net Income of the Company for the period (taken
as one accounting period) from the beginning of the first fiscal quarter
commencing after the date of the Indenture to the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such Consolidated
Net Income for such period is a deficit, less 100% of such deficit), plus
(b) 100% of the aggregate net cash proceeds received by the Company (other
than from a Restricted Subsidiary) since the date of the Indenture as a
contribution to its common equity capital or from the issue or sale of
Equity Interests of the Company (other than Disqualified Stock) or from the
issue or sale of convertible or exchangeable Disqualified Stock or
convertible or exchangeable debt securities of the Company that have been
converted into or exchanged for such Equity Interests (other than Equity
Interests (or Disqualified Stock or debt securities) sold to a Subsidiary
of the Company), plus
(c) to the extent that any Restricted Investment that was made after the
date of the Indenture is sold for cash or otherwise liquidated or repaid
for cash, the lesser of (i) the cash return of capital with respect to such
Restricted Investment (less the cost of disposition, if any) and (ii) the
initial amount of such Restricted Investment.
The preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would have
complied with the provisions of the Indenture;
(2) the redemption, repurchase, retirement, defeasance or other acquisition
of any subordinated Indebtedness of the Company or any Guarantor or of any
Equity Interests of the Company or any Restricted Subsidiary in exchange
for, or out of the net cash proceeds of the substantially concurrent sale
(other than to a Subsidiary of the Company) of, Equity Interests of the
Company (other than Disqualified Stock); provided that the amount of any
such net cash proceeds that are utilized for any such redemption,
repurchase, retirement, defeasance or other acquisition shall be excluded
from clause (3) (b) of the preceding paragraph;
(3) the defeasance, redemption, repurchase or other acquisition of
subordinated Indebtedness of the Company or any Guarantor with the net cash
proceeds from an incurrence of Permitted Refinancing Indebtedness;
(4) payments to any direct or indirect parent corporation of the Company
for the purpose of permitting, and in an amount equal to the amount
required to permit, such direct or indirect parent corporation of the
Company to redeem or repurchase such direct or indirect parent corporation
of the Company's common equity or options in respect thereof, in each case
in connection with the repurchase provisions of employee stock option or
stock purchase agreements or other agreements to compensate management
employees; provided that all such redemptions or repurchases pursuant to
this clause (4) shall not exceed $17.5 million in the aggregate since the
date of the Indenture (which amount shall be increased (A) by the amount of
any net cash proceeds received from the sale since the date of the
Indenture of Equity Interests (other than Disqualified Stock) to members of
the Company's management team that have not otherwise been applied to the
payment of Restricted Payments pursuant to the terms of clause (3)(b) of
the preceding paragraph and (B) by the cash proceeds of any "key-man" life
insurance policies that are used to make such redemptions or repurchases);
and provided, further, that the cancellation of Indebtedness owing to the
Company from members of management of the Company or any of its Restricted
Subsidiaries in connection with such a repurchase of Capital Stock of any
direct or indirect parent corporation of the Company will not be deemed to
constitute a Restricted Payment under the Indenture;
(5) the making of distributions, loans or advances to any direct or
indirect parent corporation of the Company in an amount not to exceed $1.5
million per annum in order to permit such direct or indirect parent
corporation of the Company to pay the ordinary operating expenses of such
direct or indirect parent corporation of the Company (including, without
limitation, directors' fees, indemnification obligations, professional fees
and expenses);
(6) payments to any direct or indirect parent corporation of the Company in
respect of (A) federal income taxes for the tax periods for which a federal
consolidated return is filed by such direct or indirect parent corporation
of the Company for a consolidated group of which such direct or indirect
parent corporation of the Company is the parent and the Company and its
Subsidiaries are members, in an amount not to exceed the hypothetical
federal income taxes that the Company would have paid if the Company and
its Restricted Subsidiaries filed a separate consolidated return with the
Company as the parent, taking into account carryovers and carrybacks of tax
attributes (including net operating losses) that would have been allowed if
such separate consolidated return had been filed, (B) state income tax for
the tax periods for which a state combined, consolidated or unitary return
is filed by such direct or indirect parent corporation of the Company for a
combined, consolidated or unitary group of which such direct or indirect
parent corporation of the Company is the parent and the Company and its
Subsidiaries are members, in an amount not
64
to exceed the hypothetical state income taxes that the Company would have
paid if the Company and its Restricted Subsidiaries had filed a separate
combined, consolidated or unitary return taking into account carryovers and
carrybacks of tax attributes (including net operating losses) that would
have been allowed if such separate combined return had been filed and (C)
capital stock, net worth, or other similar taxes (but for the avoidance of
doubt, excluding any taxes based on net or gross income) payable by such
direct or indirect parent corporation of the Company based on or
attributable to its investment in or ownership of the Company and its
Restricted Subsidiaries; provided, however, that in no event shall any such
tax payment pursuant to this clause (6) exceed the amount of federal (or
state, as the case may be) income tax that is, at the time the Company
makes such tax payments, actually due and payable by such direct or
indirect parent corporation of the Company to the relevant taxing
authorities or to become due and payable within 30 days of such payment by
the Company; provided, further, that for purposes of this clause (6),
payments made by an Unrestricted Subsidiary to a Restricted Subsidiary or
the Company which are in turn distributed by such Restricted Subsidiary or
the Company to any direct or indirect parent corporation of the Company
shall be disregarded;
(7) if no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof, the declaration and payment of
dividends to holders of any class or series of Designated Preferred Stock
(other than Disqualified Stock) of the Company or any Restricted Subsidiary
issued after the date of the Indenture; provided that, at the time of such
issuance, the Company, after giving effect to such issuance on a pro forma
basis, would have had a Fixed Charge Coverage Ratio of at least 2.0 to 1.0
for the most recent Four-Quarter Period;
(8) distributions made by the Company on the Issue Date that are utilized
solely to consummate the Recapitalization and distributions made subsequent
to the Issue Date in order to make payments pursuant to the Merger
Agreement, as in effect on the Issue Date and as amended or modified from
time to time so long as any such amendment or modification is, in the good
faith judgment of the Board of Directors of the Company, not more
disadvantageous to the Holders of Exchange Notes in any material respects
than the Merger Agreement as in effect on the Issue Date;
(9) the repurchase, redemption or other acquisition or retirement for value
of subordinated Indebtedness or the [Cumulative Preferred Stock] with
Excess Proceeds to the extent such Excess Proceeds are permitted to be used
for general corporate purposes under the covenant entitled "Asset Sales;"
and
(10) if no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof and the Company would be
permitted to incur at least $1.00 of additional Indebtedness (other than
Permitted Debt) in compliance with the covenant described below under the
caption "--Incurrence of Indebtedness and Issuance of Preferred Stock,"
other Restricted Payments in an aggregate amount not to exceed $15.0
million since the date of the Indenture.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
The fair market value of any assets or securities that are required to be
valued by this covenant shall be determined by the Board of Directors whose
resolution with respect thereto shall be delivered to the Trustee. The Board of
Directors' determination must be based upon an opinion or appraisal issued by
an accounting, appraisal or investment banking firm of national standing if the
fair market value exceeds $10.0 million. Not later than the date of making any
Restricted Payment, the Company shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by this "Restricted Payments"
covenant were computed, together with a copy of any fairness opinion or
appraisal required by the Indenture.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create, incur, issue, assume, guarantee or
otherwise become directly or indirectly liable, contingently or otherwise, with
respect to (collectively, "incur") any Indebtedness (including Acquired Debt),
and the Company will not issue any Disqualified Stock and will not permit any
of its Restricted Subsidiaries to issue any shares of preferred stock;
provided, however, that the Company and any Guarantor may incur Indebtedness
(including Acquired Debt) or issue Disqualified Stock, and any Guarantor may
issue preferred stock, if in each case the Fixed Charge Coverage Ratio for the
Company's most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on which such
additional Indebtedness is incurred or such Disqualified Stock or preferred
stock is issued would have been at least 2.0 to 1.0, determined on a pro forma
basis (including a pro forma application of the net proceeds therefrom and as
otherwise provided in accordance with the provisions contained in the
definition of "Fixed Charge Coverage Ratio"), as if the
65
additional Indebtedness had been incurred, or the Disqualified Stock or
preferred stock had been issued, as the case may be, at the beginning of such
four-quarter period.
The first paragraph of this covenant will not prohibit the incurrence of any of
the following items of Indebtedness (collectively, "Permitted Debt"):
(1) the incurrence by the Company and any Guarantor of Indebtedness
pursuant to the Senior Credit Facilities in an aggregate principal amount
at any time outstanding (with letters of credit being deemed to have a
principal amount equal to the maximum potential liability of the Company
and its Subsidiaries thereunder) not to exceed $545.0 million less the
aggregate amount of all Net Proceeds of Asset Sales applied by the Company
or any of its Restricted Subsidiaries to permanently repay Indebtedness
under the Senior Credit Facilities pursuant to the covenant described above
under the caption "--Asset Sales;" provided that the amount of Indebtedness
permitted to be incurred pursuant to the Senior Credit Facilities in
accordance with this clause (1) shall be in addition to any Indebtedness
permitted to be incurred pursuant to the Senior Credit Facilities in
reliance on, and in accordance with, clauses (4) and (14) below;
(2) the incurrence by the Company and its Restricted Subsidiaries of the
Existing Indebtedness;
(3) the incurrence by the Company and the Guarantors of Indebtedness
represented by the outstanding Notes issued on the date of the Indenture,
the Subsidiary Guarantees of such outstanding Notes, these Exchange Notes
issued in exchange for such outstanding Notes and the Subsidiary Guarantees
thereof;
(4) the incurrence by the Company or any of its Restricted Subsidiaries of
Indebtedness (including Capitalized Lease Obligations) to finance the
purchase, lease or improvement of property (real or personal) or equipment
(whether through the direct purchase of assets or the Capital Stock of any
Person owning such assets) within 180 days after such purchase, lease or
improvement in an aggregate principal amount outstanding (which amount may,
but need not, be incurred in whole or in part under the Senior Credit
Facilities) not to exceed the greater of (a) $30.0 million or (b) 7.5% of
Total Assets at the time of any incurrence thereof, including any Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred pursuant to this clause (4);
(5) the incurrence by the Company or any of its Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to refund, refinance or replace, Indebtedness (other than
intercompany Indebtedness) that was permitted by the Indenture to be
incurred under the first paragraph of this covenant or clauses (2), (3),
(4) or (14) of this paragraph;
(6) the incurrence by the Company or any of its Restricted Subsidiaries of
intercompany Indebtedness between or among the Company and any of its
Restricted Subsidiaries; provided, however, that:
(a) if the Company or any Guarantor is the obligor on such Indebtedness
and the obligee is not the Company or any Guarantor, such Indebtedness
must be expressly subordinated to the prior payment in full in cash of
all Obligations with respect to the Exchange Notes, in the case of the
Company, or the Subsidiary Guarantee of such Guarantor, in the case of a
Guarantor; and
(b) (i) any subsequent issuance or transfer of Equity Interests that
results in any such Indebtedness being held by a Person other than the
Company or a Restricted Subsidiary thereof and (ii) any sale or other
transfer of any such Indebtedness to a Person that is not either the
Company or a Restricted Subsidiary thereof; shall be deemed, in each
case, to constitute an incurrence of such Indebtedness by the Company or
such Restricted Subsidiary, as the case may be, that was not permitted
by this clause (6);
(7) the incurrence by the Company or any of its Restricted Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or hedging
(i) interest rate risk with respect to any floating or fixed rate
Indebtedness that is permitted by the terms of the Indenture to be
outstanding or (ii) the value of foreign currencies purchased or received
by the Company in the ordinary course of business;
(8) the guarantee by the Company or any of the Guarantors of Indebtedness
of the Company or a Guarantor that was permitted to be incurred by another
provision of this covenant;
(9) the incurrence of Indebtedness and/or the issuance of preferred stock
by Foreign Subsidiaries of the Company, which together with the aggregate
principal amount of Indebtedness incurred pursuant to this clause (9) and
the aggregate liquidation value of all preferred stock issued pursuant to
this clause (9), does not exceed $20.0 million at any one time outstanding;
provided that such amount shall increase to $40.0 million upon the
consummation of an Initial Public Offering;
66
(10) the accrual of interest, accretion or amortization of original issue
discount, the payment of interest on any Indebtedness in the form of
additional Indebtedness with the same terms, and the payment of dividends
on Disqualified Stock in the form of additional shares of the same class of
Disqualified Stock; provided, in each such case, that the amount thereof is
included in Fixed Charges of the Company as accrued;
(11) Indebtedness incurred by the Company or any of its Restricted
Subsidiaries constituting reimbursement obligations with respect to letters
of credit issued in the ordinary course of business including, without
limitation, in respect of workers' compensation claims or self insurance,
or other Indebtedness with respect to reimbursement type obligations
regarding workers' compensation claims;
(12) Indebtedness arising from agreements of the Company or a Restricted
Subsidiary of the Company providing for indemnification, adjustment of
purchase price, earn out or other similar obligations, in each case,
incurred or assumed in connection with the disposition of any business,
assets or a Restricted Subsidiary of the Company, other than guarantees of
Indebtedness incurred by any Person acquiring all or any portion of such
business, assets or Restricted Subsidiary for the purpose of financing such
acquisition; provided that the maximum assumable liability in respect of
all such Indebtedness shall at no time exceed the gross proceeds actually
received by the Company and its Restricted Subsidiaries in connection with
such disposition;
(13) obligations in respect of performance and surety bonds and completion
guarantees provided by the Company or any Restricted Subsidiary of the
Company in the ordinary course of business; and
(14) the incurrence by the Company or any of its Restricted Subsidiaries of
additional Indebtedness, and/or the issuance by any Guarantor of preferred
stock, in an aggregate principal amount (or accreted value, as applicable)
or aggregate liquidation value, as applicable, at any time outstanding
(which amount may, but need not, be incurred in whole or in part under the
Senior Credit Facilities), including all Permitted Refinancing Indebtedness
incurred to refund, refinance or replace any Indebtedness incurred or
preferred stock issued pursuant to this clause (14), not to exceed $40.0
million at any one time outstanding; provided that such amount shall
increase to $60.0 million upon the consummation of an Initial Public
Offering.
For purposes of determining compliance with this "Incurrence of Indebtedness
and Issuance of Preferred Stock" covenant, in the event that an item of
proposed Indebtedness meets the criteria of more than one of the categories of
Permitted Debt described in clauses (1) through (14) above, or is entitled to
be incurred pursuant to the first paragraph of this covenant, the Company will
be permitted to classify such item of Indebtedness on the date of its
incurrence in any manner that complies with this covenant. All borrowings
outstanding on the date of the Indenture under the Senior Credit Facilities
will be deemed to have been borrowed pursuant to clause (1) of the definition
of Permitted Debt.
No Senior Subordinated Debt
The Company will not incur, create, issue, assume, guarantee or otherwise
become liable for any Indebtedness that is subordinate or junior in right of
payment to any Indebtedness of the Company and senior in any respect in right
of payment to the Exchange Notes. No Guarantor will incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that is
subordinate or junior in right of payment to any Indebtedness of such Guarantor
and senior in any respect in right of payment to such Guarantor's Subsidiary
Guarantee.
Liens
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create, incur, assume or suffer to exist any Lien
of any kind securing Indebtedness, or trade payables on any asset now owned or
hereafter acquired, except Permitted Liens, unless all payments due under the
Indenture and the Exchange Notes are secured on an equal and ratable basis with
the Indebtedness so secured until such time as such is no longer secured by a
Lien; provided that if such Indebtedness is by its terms expressly subordinated
to the Exchange Notes or any Subsidiary Guarantee, the Lien securing such
Indebtedness shall be subordinate and junior to the Lien securing the Exchange
Notes and the Subsidiary Guarantees with the same relative priority as such
subordinate or junior Indebtedness shall have with respect to the Exchange
Notes and the Subsidiary Guarantees.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create or permit to exist or become effective any
encumbrance or restriction on the ability of any Restricted Subsidiary to:
67
(1) pay dividends or make any other distributions on its Capital Stock to
the Company or any of the Company's Restricted Subsidiaries, or with
respect to any other interest or participation in, or measured by, its
profits, or pay any indebtedness owed to the Company or any of the
Company's Restricted Subsidiaries;
(2) make loans or advances to the Company or any of the Company's
Restricted Subsidiaries; or
(3) transfer any of its properties or assets to the Company or any of the
Company's Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) Existing Indebtedness as in effect on the date of the Indenture;
(2) the Indenture and the Exchange Notes;
(3) the Senior Credit Facilities;
(4) applicable law;
(5) any instrument governing Indebtedness or Capital Stock of a Person
acquired by the Company or any of its Restricted Subsidiaries as in effect
at the time of such acquisition (except to the extent such Indebtedness was
incurred in connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person, or the property
or assets of the Person, so acquired, provided that, in the case of
Indebtedness, such Indebtedness was permitted by the terms of the Indenture
to be incurred;
(6) non-assignment provisions in leases, licenses or similar agreements
entered into in the ordinary course of business and consistent with past
practices;
(7) purchase money obligations for property acquired in the ordinary course
of business that impose restrictions on the property so acquired of the
nature described in clause (3) of the preceding paragraph;
(8) any agreement for the sale or other disposition of a Restricted
Subsidiary that restricts distributions by such Restricted Subsidiary
pending its sale or other disposition;
(9) Permitted Refinancing Indebtedness, provided that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are not materially more restrictive, in the good faith
judgment of the Board of Directors of the Company, taken as a whole, than
those contained in the agreements governing the Indebtedness being
refinanced;
(10) restrictions on the transfer of assets subject to any Lien permitted
under the Indenture imposed by the holder of such Lien;
(11) Liens securing Indebtedness otherwise permitted to be incurred
pursuant to the provisions of the covenant described above under the
caption "--Liens" that limit the right of the Company or any of its
Restricted Subsidiaries to dispose of the assets subject to such Lien;
(12) provisions with respect to the disposition or distribution of assets
or property in joint venture agreements and other similar agreements
entered into in the ordinary course of business;
(13) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business;
(14) any agreement or instrument governing Indebtedness or preferred stock
(whether or not outstanding) of Foreign Subsidiaries of the Company that
was permitted by the Indenture to be incurred;
(15) Indebtedness incurred after the Issue Date in accordance with the
terms of the Indenture; provided that the restrictions contained in the
agreements governing such new Indebtedness are, in the good faith judgment
of the Board of Directors of the Company, not materially less favorable,
taken as a whole, to the Holders of the Notes than those contained in the
agreements governing Indebtedness on the Issue Date; and
(16) any encumbrances or restrictions imposed by any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings of the contracts, instruments or obligations
referred to in clauses (1) through (15) above; provided that such
amendments, modifications restatements, renewals, increases, supplements,
refundings, replacements or refinancings are, in the good faith judgment of
the Board of Directors of the Company, not materially more restrictive with
respect to such dividend and other payment restrictions than those
68
contained in the dividends or other payment restrictions prior to such
amendment, modification, restatement, renewal, increase, supplement,
refunding, replacement or refinancing.
Merger, Consolidation, or Sale of Assets
The Company may not, directly or indirectly: (1) consolidate or merge with or
into another Person (whether or not the Company is the surviving corporation);
or (2) sell, assign, transfer, convey or otherwise dispose of all or
substantially all of its properties or assets, in one or more related
transactions, to another Person; unless:
(1) either: (a) the Company is the surviving corporation; or (b) the Person
formed by or surviving any such consolidation or merger (if other than the
Company) or to which such sale, assignment, transfer, conveyance or other
disposition shall have been made is a corporation organized or existing
under the laws of the United States, any state thereof or the District of
Columbia;
(2) the Person formed by or surviving any such consolidation or merger (if
other than the Company) or the Person to which such sale, assignment,
transfer, conveyance or other disposition shall have been made assumes all
the obligations of the Company under the Notes, the Indenture and the
Registration Rights Agreement pursuant to agreements reasonably
satisfactory to the Trustee;
(3) immediately after such transaction no Default or Event of Default
exists; and
(4) the Company or the Person formed by or surviving any such consolidation
or merger (if other than the Company) will, on the date of such transaction
after giving pro forma effect thereto and any related financing
transactions as if the same had occurred at the beginning of the applicable
four-quarter period, be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in
the first paragraph of the covenant described above under the caption "--
Incurrence of Indebtedness and Issuance of Preferred Stock."
In addition, the Company may not, directly or indirectly, lease all or
substantially all of its properties or assets, in one or more related
transactions, to any other Person. This "Merger, Consolidation, or Sale of
Assets" covenant will not apply to a sale, assignment, transfer, conveyance or
other disposition of assets between or among the Company and any of its Wholly
Owned Restricted Subsidiaries.
Transactions with Affiliates
The Company will not, and will not permit any of its Restricted Subsidiaries
to, make any payment to, or sell, lease, transfer or otherwise dispose of any
of its properties or assets to, or purchase any property or assets from, or
enter into or make or amend any transaction, contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any
Affiliate (each, an "Affiliate Transaction"), unless:
(1) such Affiliate Transaction is on terms that are no less favorable to
the Company or the relevant Restricted Subsidiary than those that would
have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with an unrelated Person; and
(2) the Company delivers to the Trustee:
(a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$5.0 million, a resolution of the Board of Directors set forth in an
Officers' Certificate certifying that such Affiliate Transaction
complies with this covenant and that such Affiliate Transaction has been
approved by a majority of the disinterested members of the Board of
Directors; and
(b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$10.0 million, an opinion as to the fairness to the Holders of such
Affiliate Transaction from a financial point of view issued by an
accounting, appraisal or investment banking firm of national standing.
The following items shall not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) reasonable fees and compensation paid to and indemnity provided on
behalf of, officers, directors, employee or consultants of the Company or
any Subsidiary as determined in good faith by the Board of Directors of the
Company or senior management;
(2) transactions between or among the Company and/or its Restricted
Subsidiaries;
69
(3) any agreement or instrument as in effect as of the date of the
Indenture or any amendment or replacement thereto or any transaction
contemplated thereby (including pursuant to any amendment or replacement
thereto) so long as any such amendment or replacement agreement or
instrument is, in the good faith judgment of the Board of Directors of the
Company, not more disadvantageous to the Holders of Exchange Notes in any
material respect than the original agreement or instrument as in effect on
the date of the Indenture;
(4) the payment of customary management, consulting and advisory fees and
related expenses to the Principals and their Affiliates made pursuant to
any financial advisory, financing, underwriting or placement agreement or
in respect of other investment banking activities, including, without
limitation, in connection with acquisitions or divestitures which are
approved by the Board of Directors of the Company or such Restricted
Subsidiary in good faith;
(5) payments or loans to employees or consultants that are approved by the
Board of Directors of the Company in good faith;
(6) the existence of, or the performance by the Company or any of its
Restricted Subsidiaries of its obligations under the terms of, any
stockholders agreement (including any registration rights agreement or
purchase agreement related thereto) to which it is a party as of the date
of the Indenture and any similar agreements which it may enter into
thereafter; provided, however, that the existence of, or the performance by
the Company or any of its Restricted Subsidiaries of obligations under, any
future amendment to any such existing agreement or under any similar
agreement entered into after the date of the Indenture shall only be
permitted by this clause (6) to the extent that the terms of any such
amendment or new agreement are not disadvantageous to the Holders of
Exchange Notes in any material respect;
(7) transactions with customers, clients, suppliers, joint venture partners
or purchasers or sellers of goods or services, in each case in the ordinary
course of business (including, without limitation, pursuant to joint
venture agreements) and otherwise in compliance with the terms of the
Indenture which are fair to the Company or its Restricted Subsidiaries, in
the reasonable determination of the Board of Directors of the Company or
the senior management thereof, or are on terms at least as favorable as
might reasonably have been obtained at such time from an unaffiliated
party; and
(8) Restricted Payments that are permitted by the provisions of the
Indenture described above under the caption "--Restricted Payments."
Designation of Restricted and Unrestricted Subsidiaries
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if that designation would not cause a Default. If a
Restricted Subsidiary is designated as an Unrestricted Subsidiary, all
outstanding Investments owned by the Company and its Restricted Subsidiaries in
the Subsidiary so designated will be deemed to be an Investment made as of the
time of such designation and will reduce the amount available for Restricted
Payments under clause (3)(b) [?] of the first paragraph of the covenant
described above under the caption "--Restricted Payments" or Permitted
Investments, as applicable. All such outstanding Investments will be valued at
their fair market value at the time of such designation. That designation will
only be permitted if such Restricted Payment would be permitted at that time
and if such Restricted Subsidiary otherwise meets the definition of an
Unrestricted Subsidiary. The Board of Directors may redesignate any
Unrestricted Subsidiary to be a Restricted Subsidiary if the redesignation
would not cause a Default.
Limitations on Issuances of Guarantees of Indebtedness
The Company will not permit any Restricted Subsidiary that is not a Guarantor,
directly or indirectly, to Guarantee or pledge any assets to secure the payment
of any other Indebtedness of the Company or any Guarantor (other than such
Restricted Subsidiary) unless such Restricted Subsidiary simultaneously
executes and delivers a supplemental indenture providing for the Guarantee of
the payment of the Exchange Notes by such Subsidiary, which Guarantee shall be
senior to or pari passu with such Restricted Subsidiary's Guarantee of or
pledge to secure such other Indebtedness, unless such other Indebtedness is
Senior Debt, in which case the Guarantee of the Exchange Notes shall be
subordinated to the Guarantee of such Senior Debt to the same extent as the
Exchange Notes are subordinated to such Senior Debt.
Notwithstanding the preceding paragraph, any Subsidiary Guarantee of the
Exchange Notes will provide by its terms that it will be automatically and
unconditionally released and discharged under the circumstances described above
under the caption "--Subsidiary Guarantees." The form of the Subsidiary
Guarantee is attached as an exhibit to the Indenture.
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Business Activities
The Company will not, and will not permit any Subsidiary to, engage in any
business other than Permitted Businesses.
Reports
Whether or not required by the Commission, so long as any Exchange Notes are
outstanding, the Company will furnish to the Holders of such Exchange Notes,
within the time periods specified in the Commission's rules and regulations:
(1) all quarterly and annual financial information that would be required
to be contained in a filing with the Commission on Forms 10-Q and 10-K if
the Company were required to file such Forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and, with respect to the annual information only, a report on the annual
financial statements by the Company's certified independent accountants;
and
(2) all current reports that would be required to be filed with the
Commission on Form 8-K if the Company were required to file such reports.
If the Company has designated any of its Subsidiaries as Unrestricted
Subsidiaries, then the quarterly and annual financial information required by
the preceding paragraph shall include a reasonably detailed presentation,
either on the face of the financial statements or in the footnotes thereto, and
in Management's Discussion and Analysis of Financial Condition and Results of
Operations, of the financial condition and results of operations of the Company
and its Restricted Subsidiaries separate from the financial condition and
results of operations of the Unrestricted Subsidiaries of the Company.
In addition, whether or not required by the Commission, the Company will file a
copy of all of the information and reports referred to in clauses (1) and (2)
above with the Commission for public availability within the time periods
specified in the Commission's rules and regulations (unless the Commission will
not accept such a filing) and make such information available to securities
analysts and prospective investors upon request. Moreover, the Company has
agreed, and any Guarantor will agree, that, for so long as any Exchange Notes
remain outstanding, it will furnish to the Holders and to securities analysts
and prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
Events of Default and Remedies
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on the Notes,
whether or not prohibited by the subordination provisions of the Indenture;
(2) default in payment when due of the principal of or premium, if any, on
the Exchange Notes, whether or not prohibited by the subordination
provisions of the Indenture;
(3) failure by the Company or any of its Restricted Subsidiaries for 30
days after specified notice from the Trustee or the Holders of at least 25%
of the outstanding principal amount of the Exchange Notes to comply with
any of the other agreements in the Indenture or the Exchange Notes;
(4) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any
of its Restricted Subsidiaries) whether such Indebtedness or guarantee now
exists, or is created after the date of the Indenture, if that default:
(a) is caused by a failure to pay principal at the final stated maturity
of such Indebtedness (a "Payment Default"); or
(b) results in the acceleration of such Indebtedness prior to its
express maturity,
and, in each case, the principal amount of any such Indebtedness, together
with the principal amount of any other such Indebtedness under which there
has been a Payment Default or the maturity of which has been so
accelerated, aggregates $15.0 million or more;
(5) failure by the Company or any of its Restricted Subsidiaries to pay
final judgments aggregating in excess of $15.0 million, which judgments are
not paid, discharged or stayed for a period of 60 consecutive days after
such judgments become final and non-appealable; and
(6) certain events of bankruptcy or insolvency with respect to the Company
or any of its Significant Restricted Subsidiaries.
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In the case of an Event of Default arising from certain events of bankruptcy or
insolvency with respect to the Company, all outstanding Exchange Notes will
become due and payable immediately without further action or notice. If any
other Event of Default specified in the Indenture occurs and is continuing, the
Trustee or the Holders of at least 25% in principal amount of outstanding
Exchange Notes may declare the principal of and accrued interest on the
Exchange Notes to be due any payable by notice in writing to the Company and
the Trustee specifying the respective Event of Default and that such notice is
a "notice of acceleration" (the "Acceleration Notice"), and the same (i) shall
become immediately due and payable or (ii) if there are any amounts outstanding
under the Senior Credit Facilities, shall become immediately due and payable
upon the first to occur of an acceleration under the Senior Credit Facilities
or five Business Days after receipt by the Company and the Representative under
the Senior Credit Facilities of such Acceleration Notice but only if such Event
of Default is then continuing.
Holders of the Exchange Notes may not enforce the Indenture or the Exchange
Notes except as provided in the Indenture. Subject to certain limitations,
Holders of a majority in principal amount of the then outstanding Exchange
Notes may direct the Trustee in its exercise of any trust or power. The Trustee
may withhold from Holders of the Exchange Notes notice of any continuing
Default or Event of Default (except a Default or Event of Default relating to
the payment of principal or interest) if it determines that withholding notice
is in their interest.
The Holders of a majority in aggregate principal amount of the Exchange Notes
then outstanding by notice to the Trustee may on behalf of the Holders of all
of the Exchange Notes waive any existing Default or Event of Default and its
consequences under the Indenture except a continuing Default or Event of
Default in the payment of interest on, or the principal of, the Exchange Notes.
In the case of any Event of Default occurring by reason of any willful action
or inaction taken or not taken by or on behalf of the Company with the
intention of avoiding payment of the premium that the Company would have had to
pay if the Company then had elected to redeem the Exchange Notes pursuant to
the optional redemption provisions of the Indenture, an equivalent premium
shall also become and be immediately due and payable to the extent permitted by
law upon the acceleration of the Exchange Notes. If an Event of Default occurs
prior to January 15, 2004, by reason of any willful action (or inaction) taken
(or not taken) by or on behalf of the Company with the intention of avoiding
the prohibition on redemption of the Exchange Notes prior to January 15, 2004,
then the premium specified in the Indenture shall also become immediately due
and payable to the extent permitted by law upon the acceleration of the
Exchange Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture. Upon becoming aware of any Default or
Event of Default, the Company is required to deliver to the Trustee a statement
specifying such Default or Event of Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of the Company, any
direct or indirect parent corporation of the Company or any Guarantor, as such,
shall have any liability for any obligations of the Company or the Guarantors
under the Exchange Notes, the Indenture, the Subsidiary Guarantees or for any
claim based on, in respect of, or by reason of, such obligations or their
creation. Each Holder of Exchange Notes by accepting an Exchange Note waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the Exchange Notes. The waiver may not be
effective to waive liabilities under the federal securities laws.
Legal Defeasance and Covenant Defeasance
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Exchange Notes and all
obligations of the Guarantors discharged with respect to their Subsidiary
Guarantees ("Legal Defeasance") except for:
(1) the rights of Holders of outstanding Exchange Notes to receive payments
in respect of the principal of, premium, if any, and interest on such
Exchange Notes when such payments are due from the trust referred to below;
(2) the Company's obligations with respect to the Exchange Notes concerning
issuing temporary Exchange Notes, registration of Exchange Notes,
mutilated, destroyed, lost or stolen Exchange Notes and the maintenance of
an office or agency for payment and money for security payments held in
trust;
(3) the rights, powers, trusts, duties and immunities of the Trustee, and
the Company's obligations in connection therewith; and
(4) the Legal Defeasance provisions of the Indenture.
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In addition, the Company may, at its option and at any time, elect to have the
obligations of the Company and the Guarantors released with respect to certain
covenants that are described in the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with those covenants shall not constitute a
Default or Event of Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (including non-payment of other indebtedness,
bankruptcy, receivership, rehabilitation and insolvency events described under
"Events of Default" and the limitations contained in clauses (3) and (4) of
"Merger, Consolidation, or Sale of Assets") will no longer constitute an Event
of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) the Company must irrevocably deposit with the Trustee, in trust, for
the benefit of the Holders of the Exchange Notes, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay the principal of, premium,
if any, and interest on the outstanding Exchange Notes on the stated
maturity or on the applicable redemption date, as the case may be, and the
Company must specify whether the Exchange Notes are being defeased to
maturity or to a particular redemption date;
(2) in the case of Legal Defeasance, the Company shall have delivered to
the Trustee an Opinion of Counsel reasonably acceptable to the Trustee
confirming that (a) the Company has received from, or there has been
published by, the Internal Revenue Service a ruling or (b) since the date
of the Indenture, there has been a change in the applicable federal income
tax law, in either case to the effect that, and based thereon such opinion
of counsel shall confirm that, the Holders of the outstanding Exchange
Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Legal Defeasance had not
occurred;
(3) in the case of Covenant Defeasance, the Company shall have delivered to
the Trustee an Opinion of Counsel reasonably acceptable to the Trustee
confirming that the Holders of the outstanding Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the
case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be continuing
either: (a) on the date of such deposit (other than a Default or Event of
Default resulting from the borrowing of funds to be applied to such
deposit); or (b) insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 91st day
after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under the Senior Credit
Facilities or any other material agreement or instrument (other than the
Indenture) to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound;
(6) the Company must have delivered to the Trustee an opinion of counsel to
the effect that after the 91st day following the deposit, the trust funds
will not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally;
(7) the Company must deliver to the Trustee an Officers' Certificate
stating that the deposit was not made by the Company with the intent of
preferring the Holders of Notes over the other creditors of the Company
with the intent of defeating, hindering, delaying or defrauding creditors
of the Company or others; and
(8) the Company must deliver to the Trustee an Officers' Certificate and an
opinion of counsel, each stating that all conditions precedent relating to
the Legal Defeasance or the Covenant Defeasance have been complied with.
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the Indenture and the
Exchange Notes may be amended or supplemented with the consent of the Holders
of at least a majority in principal amount of the Exchange Notes (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Exchange Notes), and any existing default
or compliance with any provision of the Indenture or the Exchange Notes may be
waived with the consent of the Holders of a majority in principal amount of the
then outstanding Exchange Notes (including, without limitation, consents
obtained in connection with a purchase of, or tender offer or exchange offer
for, Exchange Notes).
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Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Exchange Notes held by a non-consenting Holder):
(1) reduce the principal amount of Exchange Notes whose Holders must
consent to an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any Exchange
Note or alter the provisions with respect to the redemption of the Exchange
Notes (other than provisions relating to the covenants described above
under the caption "Repurchase at the Option of Holders");
(3) reduce the rate of or change the time for payment of interest on any
Exchange Note;
(4) waive a Default or Event of Default in the payment of principal of or
premium, if any, or interest on the Exchange Notes (except a rescission of
acceleration of the Exchange Notes by the Holders of at least a majority in
aggregate principal amount of the Exchange Notes and a waiver of the
payment default that resulted from such acceleration);
(5) make any Exchange Note payable in money other than that stated in the
Exchange Notes;
(6) make any change in the provisions of the Indenture relating to waivers
of past Defaults or the rights of Holders of Exchange Notes to receive
payments of principal of or premium, if any, or interest on the Exchange
Notes;
(7) waive a redemption payment with respect to any Exchange Note (other
than a payment required by one of the covenants described above under the
caption "Repurchase at the Option of Holders"); or
(8) make any change in the preceding amendment and waiver provisions.
In addition, any amendment to, or waiver of, the provisions of the Indenture
relating to subordination that adversely affects the rights of the Holders of
the Exchange Notes will require the consent of the Holders of at least 75% in
aggregate principal amount of Exchange Notes then outstanding.
Notwithstanding the preceding, without the consent of any Holder of Exchange
Notes, the Company, or any Guarantor, with respect to its Subsidiary Guarantee
or the Indenture, and the Trustee may amend or supplement the Indenture or the
Exchange Notes or any Subsidiary Guarantee:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated Exchange Notes in addition to or in place
of certificated Exchange Notes;
(3) to provide for the assumption of the Company's, or any Guarantor's,
obligations to Holders of Exchange Notes in the case of a merger or
consolidation or sale of all or substantially all of the Company's, or such
Guarantor's, as the case may be, assets;
(4) to make any change that would provide any additional rights or benefits
to the Holders of Exchange Notes, including providing for additional
Subsidiary Guarantees, or that does not adversely affect the legal rights
under the Indenture of any such Holder; or
(5) to comply with requirements of the Commission in order to effect or
maintain the qualification of the Indenture under the Trust Indenture Act.
Concerning the Trustee
If the Trustee becomes a creditor of the Company or any Guarantor, the
Indenture limits its right to obtain payment of claims in certain cases, or to
realize on certain property received in respect of any such claim as security
or otherwise. The Trustee will be permitted to engage in other transactions;
however, if it acquires any conflicting interest it must eliminate such
conflict within 90 days, apply to the Commission for permission to continue or
resign.
The Holders of a majority in principal amount of the then outstanding Exchange
Notes will have the right to direct the time, method and place of conducting
any proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur and be continuing, the Trustee will be required, in the exercise of
its power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the Trustee will be under no obligation to
exercise any of its rights or powers under the Indenture at the request of any
Holder of Exchange Notes, unless such Holder shall have offered to the Trustee
security and indemnity satisfactory to it against any loss, liability or
expense.
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Additional Information
Anyone who receives this Prospectus may obtain a copy of the Indenture without
charge by writing to Domino's Inc., 30 Frank Lloyd Wright Drive, P.O. Box 997,
Ann Arbor, Michigan 48106-0997, Attention: Chief Financial Officer.
Book-Entry, Delivery and Form
The certificates representing the Exchange Notes will be issued in fully
registered form, without coupons. Except as described below, the Exchange Notes
will be deposited with, or on behalf of, The Depository Trust Company ("DTC"),
in New York, New York, and registered in the name of DTC or its nominee in the
form of one or more global certificates (the "Global Notes") or will remain in
the custody of the Trustee pursuant to a FAST Balance Certificate Agreement
between DTC and the Trustee.
Except as set forth below, the Global Notes may be transferred, in whole and
not in part, only to DTC or another nominee of DTC or to a successor of DTC or
its nominee. Except in the limited circumstances described below, owners of
beneficial interests in the Global Notes will not be entitled to receive
physical delivery of Certificated Notes (as defined below). See "--Exchange of
Book-Entry Notes for Certificated Notes." In addition, transfers of beneficial
interests in the Global Notes will be subject to the applicable rules and
procedures of DTC and its direct or indirect participants (including, if
applicable, those of Euroclear and Cedel), which may change from time to time.
Initially, the Trustee will act as Paying Agent and Registrar. The Exchange
Notes may be presented for registration of transfer and exchange at the offices
of the Registrar.
Depository Procedures
The following description of the operations and procedures of DTC are provided
solely as a matter of convenience. These operations and procedures are solely
within the control of the settlement system of DTC and are subject to changes
by DTC from time to time. The Company takes no responsibility for these
operations and procedures and urges investors to contact DTC or its
participants directly to discuss these matters.
DTC is a limited-purpose trust company created to hold securities for its
participating organizations (collectively, the "Participants") and to
facilitate the clearance and settlement of transactions in those securities
between Participants through electronic book-entry changes in accounts of its
Participants. The Participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations. Access
to DTC's system is also available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants may beneficially
own securities held by or on behalf of DTC only through the Participants or the
Indirect Participants. The ownership interests in, and transfers of ownership
interests in, each security held by or on behalf of DTC are recorded on the
records of the Participants and Indirect Participants.
Pursuant to procedures established by DTC:
(1) upon deposit of the Global Notes, DTC will credit the accounts of
Participants designated by the Trustee with portions of the principal
amount of the Global Notes; and
(2) ownership of such interests in the Global Notes will be shown on, and
the transfer of ownership thereof will be effected only through, records
maintained by DTC (with respect to the Participants) or by the Participants
and the Indirect Participants (with respect to other owners of beneficial
interest in the Global Notes).
All interests in a Global Note may be subject to the procedures and
requirements of DTC. The laws of some states require that certain persons take
physical delivery in definitive form of securities that they own. Consequently,
the ability to transfer beneficial interests in a Global Note to such persons
will be limited to that extent. Because DTC can act only on behalf of
Participants, which in turn act on behalf of Indirect Participants and certain
banks, the ability of a person having beneficial interests in a Global Note to
pledge such interests to persons or entities that do not participate in the DTC
system, or otherwise take actions in respect of such interests, may be affected
by the lack of a physical certificate evidencing such interests.
Except as described below, owners of interest in the Global Notes will not have
Exchange Notes registered in their names, will not receive physical delivery of
Exchange Notes in certificated form and will not be considered the registered
owners or "Holders" thereof under the Indenture for any purpose.
75
Payments in respect of the principal of, and premium, if any, and interest on a
Global Note registered in the name of DTC or its nominee will be payable to DTC
in its capacity as the registered Holder under the Indenture. Under the terms
of the Indenture, the Company and the Trustee will treat the persons in whose
names the Exchange Notes, including the Global Notes, are registered as the
owners thereof for the purpose of receiving such payments and for any and all
other purposes whatsoever. Consequently, neither the Company, the Trustee nor
any agent of the Company or the Trustee has or will have any responsibility or
liability for:
(1) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interest in the Global Notes, or for maintaining, supervising or
reviewing any of DTC's records or any Participant's or Indirect
Participant's records relating to the beneficial ownership interests in the
Global Notes; or
(2) any other matter relating to the actions and practices of DTC or any of
its Participants or Indirect Participants.
DTC's current practice, upon receipt of any payment in respect of securities
such as the Exchange Notes (including principal and interest), is to credit the
accounts of the relevant Participants with the payment on the payment date, in
amounts proportionate to their respective holdings in the principal amount of
beneficial interest in the relevant security as shown on the records of DTC
unless DTC has reason to believe it will not receive payment on such payment
date.
Payments by the Participants and the Indirect Participants to the beneficial
owners of Exchange Notes will be governed by standing instructions and
customary practices and will be the responsibility of the Participants or the
Indirect Participants and will not be the responsibility of DTC, the Trustee or
the Company. Neither the Company nor the Trustee will be liable for any delay
by DTC or any of its Participants in identifying the beneficial owners of the
Exchange Notes, and the Company and the Trustee may conclusively rely on and
will be protected in relying on instructions from DTC or its nominee for all
purposes.
DTC will take any action permitted to be taken by a Holder of Exchange Notes
only at the direction of one or more Participants to whose account DTC has
credited the interests in the Global Notes and only in respect of such portion
of the aggregate principal amount of the Exchange Notes as to which such
Participant or Participants has or have given such direction. However, if there
is an Event of Default under the Exchange Notes, DTC reserves the right to
exchange the Global Notes for Exchange Notes in certificated form, and to
distribute such Exchange Notes to its Participants.
Exchange of Book-Entry Notes for Certificated Notes
A Global Note is exchangeable for definitive Exchange Notes in registered
certificated form ("Certificated Notes") if:
(1) DTC:
(a) notifies the Company that it is unwilling or unable to continue as
depositary for the Global Notes and the Company thereupon fails to
appoint a successor depositary; or
(b) has ceased to be a clearing agency registered under the Exchange
Act;
(2) the Company, at its option, notifies the Trustee in writing that it
elects to cause the issuance of the Certificated Notes; or
(3) there shall have occurred and be continuing a Default or Event of
Default with respect to the Exchange Notes.
In addition, beneficial interests in a Global Note may be exchanged for
Certificated Notes upon request but only upon prior written notice given to the
Trustee by or on behalf of DTC in accordance with the Indenture. In all cases,
Certificated Notes delivered in exchange for any Global Note or beneficial
interests therein will be registered in the names, and issued in any approved
denominations, requested by or on behalf of DTC in accordance with its
customary procedures.
Same Day Settlement and Payment
The Indenture requires that payments in respect of the Exchange Notes
represented by the Global Notes (including principal, premium, if any, and
interest) be made by wire transfer of immediately available funds to the
accounts specified by the Global Note Holder. With respect to Exchange Notes in
certificated form, the Company will make all payments of principal, premium, if
any, and interest by wire transfer of immediately available funds to the
accounts specified by the Holders thereof or, if no such account is specified,
by mailing a check to each such Holder's registered address. The Exchange Notes
represented by the Global Notes are expected to be eligible to trade in the
PORTAL market and to trade
76
in DTC's Same-Day Funds Settlement System, and any permitted secondary market
trading activity in such Exchange Notes will, therefore, be required by DTC to
be settled in immediately available funds. The Company expects that secondary
trading in any Certificated Notes will also be settled in immediately available
funds.
Certain Definitions
Set forth below are certain defined terms used in the Indenture. Reference is
made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time such other Person
is merged with or into or became a Subsidiary of such specified Person,
whether or not such Indebtedness is incurred in connection with, or in
contemplation of, such other Person merging with or into, or becoming a
Subsidiary of, such specified Person; and
(2) Indebtedness secured by a Lien encumbering any asset acquired by such
specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control,"
as used with respect to any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise. For purposes of this definition, the terms
"controlling," "controlled by" and "under common control with" shall have
correlative meanings.
"Applicable Premium" means, with respect to any Note on any Redemption Date,
the greater of (i) 1.0% of the principal amount of such Exchange Note or (ii)
the excess of (A) the present value at such Redemption Date of (1) the
redemption price of such Exchange Note at January 15, 2004 (such redemption
price being set forth in the table above), plus (2) all required interest
payments due on such Exchange Note through January 15, 2004 (excluding accrued
but unpaid interest), computed using a discount rate equal to the Treasury Rate
at such Redemption Date plus 50 basis points over (B) the principal amount of
such Exchange Note, if greater.
"Asset Acquisition" means (a) an Investment by the Company or any Restricted
Subsidiary of the Company in any other Person if, as a result of such
Investment, such Person shall become a Restricted Subsidiary of the Company, or
shall be merged with or into the Company or any Restricted Subsidiary of the
Company, or (b) the acquisition by the Company or any Restricted Subsidiary of
the Company of all or substantially all of the assets of any other Person or
any division or line of business of any other Person.
"Asset Sale" means:
(1) the sale, lease, conveyance or other disposition of any assets or
rights (including, without limitation, by way of a sale and leaseback),
other than sales or leases in the ordinary course of business; provided
that the sale, conveyance or other disposition of all or substantially all
of the assets of the Company and its Restricted Subsidiaries taken as a
whole will be governed by the provisions of the Indenture described above
under the caption "--Change of Control" and/or the provisions described
above under the caption "--Merger, Consolidation or Sale of Assets" and not
by the provisions of the Asset Sale covenant; and
(2) the issuance of Equity Interests by any of the Company's Restricted
Subsidiaries or the sale of Equity Interests in any of its Subsidiaries.
Notwithstanding the preceding, the following items shall not be deemed to be
Asset Sales:
(1) any single transaction or series of related transactions that: (a)
involves assets having a fair market value of less than $1.0 million; or
(b) results in net proceeds to the Company and its Subsidiaries of less
than $1.0 million;
(2) disposals or replacements of obsolete equipment in the ordinary course
of business;
(3) the sale, lease conveyance, disposition or other transfer by the
Company or any Restricted Subsidiary of assets or property or Equity
Interests of any Restricted Subsidiary to one or more Restricted
Subsidiaries in connection with Investments permitted by the covenant
described under the caption "--Restricted Payments;"
(4) a transfer of assets between or among the Company and its Wholly Owned
Restricted Subsidiaries,
77
(5) an issuance of Equity Interests by a Wholly Owned Restricted Subsidiary
to the Company or to another Wholly Owned Restricted Subsidiary; and
(6) a Restricted Payment that is permitted by the covenant described above
under the caption "--Restricted Payments."
"Beneficial Owner" has the meaning assigned to such term in Rule 13d-3 and Rule
13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person" (as such term is used in Section 13(d)(3)
of the Exchange Act), such "person" shall be deemed to have beneficial
ownership of all securities that such "person" has the right to acquire,
whether such right is currently exercisable or is exercisable only upon the
occurrence of a subsequent condition.
"Capital Lease Obligation" means, at the time any determination thereof is to
be made, the amount of the liability in respect of a capital lease that would
at that time be required to be capitalized on a balance sheet in accordance
with GAAP.
"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated)
of corporate stock;
(3) in the case of a partnership or limited liability company, partnership
or membership interests (whether general or limited); and
(4) any other interest or participation that confers on a Person the right
to receive a share of the profits and losses of, or distributions of assets
of, the issuing Person.
"Cash Equivalents" means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured by the
United States government or any agency or instrumentality thereof (provided
that the full faith and credit of the United States is pledged in support
thereof) having maturities of not more than twelve months from the date of
acquisition;
(3) certificates of deposit and eurodollar time deposits with maturities of
six months or less from the date of acquisition, bankers' acceptances with
maturities not exceeding twelve months and overnight bank deposits, in each
case, with any lender party to the Senior Credit Facilities or, with any
commercial bank having capital and surplus in excess of $500 million and a
Thompson Bank Watch Rating of "B" or better;
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and (3) above
entered into with any financial institution meeting the qualifications
specified in clause (3) above;
(5) commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's Corporation and in each case
maturing within twelve months after the date of acquisition; and
(6) money market funds substantially all of the assets of which constitute
Cash Equivalents of the kinds described in clauses (1) through (5) of this
definition.
"Change of Control" means the occurrence of any of the following:
(1) the sale, lease, transfer, conveyance or other disposition (other than
by way of merger or consolidation), in one or a series of related
transactions, of all or substantially all of the assets of the Company and
its Restricted Subsidiaries taken as a whole to any "person" (as such term
is used in Section 13(d)(3) of the Exchange Act) other than a Principal;
(2) the adoption of a plan relating to the liquidation or dissolution of
the Company;
(3) the consummation of any transaction (including, without limitation, any
merger or consolidation) the result of which is that any "person" (as
defined above), other than the Principals or any Permitted Group, becomes
the
78
Beneficial Owner, directly or indirectly, of more than 50% of the Voting
Stock of the Company, measured by voting power rather than number of
shares;
(4) the first day on which a majority of the members of the Board of
Directors of the Company are not Continuing Directors; or
(5) the Company consolidates with, or merges with or into, any Person, or
any Person consolidates with, or merges with or into, the Company, in any
such event pursuant to a transaction in which any of the outstanding Voting
Stock of the Company is converted into or exchanged for cash, securities or
other property, other than any such transaction where the Voting Stock of
the Company outstanding immediately prior to such transaction is converted
into or exchanged for Voting Stock (other than Disqualified Stock) of the
surviving or transferee Person constituting a majority of the outstanding
shares of such Voting Stock of such surviving or transferee Person
(immediately after giving effect to such issuance).
"Consolidated Cash Flow" means, with respect to any Person for any period, the
Consolidated Net Income of such Person for such period plus:
(1) provision for taxes based on income or profits of such Person and its
Restricted Subsidiaries for such period, to the extent that such provision
for taxes was deducted in computing such Consolidated Net Income; plus
(2) consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued and whether or not
capitalized (including, without limitation, amortization of debt issuance
costs, original issue discount, non-cash interest payments, the interest
component of any deferred payment obligations, the interest component of
all payments associated with Capital Lease Obligations, commissions,
discounts and other fees and charges incurred in respect of letter of
credit or bankers' acceptance financings, and net payments, if any,
pursuant to Hedging Obligations), to the extent that any such expense was
deducted in computing such Consolidated Net Income; plus
(3) depreciation, amortization (including amortization of goodwill and
other intangibles but excluding amortization of prepaid cash expenses that
were paid in a prior period) and other non-cash expenses (excluding any
such non-cash expense to the extent that it represents an accrual of or
reserve for cash expenses in any future period or amortization of a prepaid
cash expense that was paid in a prior period) of such Person and its
Restricted Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash expenses were deducted in
computing such Consolidated Net Income; plus
(4) the costs and expenses of the Company and its Subsidiaries incurred in
connection with the Transactions to the extent that such costs and expenses
were deducted in computing Consolidated Net Income, in each case, on a
consolidated basis and determined in accordance with GAAP; minus
(5) non-cash items increasing such Consolidated Net Income for such period,
other than (i) items that were accrued in the ordinary course of business
and (ii) the reversal of reserves in the ordinary course of business, in
each case, on a consolidated basis and determined in accordance with GAAP.
Notwithstanding the preceding, the provision for taxes based on the income or
profits of, and the depreciation and amortization and other non-cash charges
of, a Restricted Subsidiary of the Company shall be added to Consolidated Net
Income to compute Consolidated Cash Flow of the Company only to the extent that
a corresponding amount would be permitted at the date of determination to be
dividended to the Company by such Restricted Subsidiary without prior approval
(that has not been obtained), pursuant to the terms of its charter and all
agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to that Restricted Subsidiary or its
stockholders.
"Consolidated Net Income" of the Company means, for any period, the aggregate
net income (or loss) of the Company and its Restricted Subsidiaries for such
period on a consolidated basis, determined in accordance with GAAP, provided
that there shall be excluded therefrom:
(1) gains and losses from Asset Sales (without regard to the $1.0 million
limitation set forth in the definition thereof) and the related tax effects
according to GAAP;
(2) gains and losses due solely to fluctuations in currency values and the
related tax effects according to GAAP;
(3) items classified as extraordinary, unusual or nonrecurring gains and
losses (including, without limitation, severance, relocation and other
restructuring costs), and the related tax effects according to GAAP;
79
(4) the net income (or loss) of any Person acquired in a pooling of
interests transaction accrued prior to the date it becomes a Restricted
Subsidiary of the Company or is merged or consolidated with the Company or
any Restricted Subsidiary of the Company;
(5) the net income of any Restricted Subsidiary of the Company to the
extent that the declaration of dividends or similar distributions by that
Restricted Subsidiary of the Company of that income is restricted by
contract, operation, operation of law or otherwise;
(6) the net loss of any Person, other than a Restricted Subsidiary of the
Company;
(7) the net income of any Person, that is not a Restricted Subsidiary of
the Company, except to the extent of cash dividends or distributions paid
to the Company or a Restricted Subsidiary of the Company by such Person;
and
(8) one time non-cash compensation charges, including any arising from
existing stock options resulting from any merger or recapitalization
transaction.
"Consulting Agreement" means that certain consulting agreement by and between
Domino's Pizza, Inc. and Thomas S. Monaghan, dated as of the Issue Date, as in
effect on the Issue Date.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of the Company who:
(1) was a member of such Board of Directors on the date of the Indenture;
or
(2) was nominated for election or elected to such Board of Directors with
the approval of a majority of the Continuing Directors who were members of
such Board at the time of such nomination or election.
"Cumulative Preferred Stock" means the 11.5% Cumulative Preferred Stock of
TISM, Inc.
"Default" means any event that is, or with the passage of time or the giving of
notice or both would be, an Event of Default.
"Designated Noncash Consideration" means any non-cash consideration received by
the Company or one of its Restricted Subsidiaries in connection with an Asset
Sale that is designated as Designated Noncash Consideration pursuant to an
Officers' Certificate executed by the principal executive officer and the
principal financial officer of the Company or such Restricted Subsidiary. Such
Officers' Certificate shall state the basis of such valuation, which shall be a
report of a nationally recognized investment banking firm with respect to the
receipt in one or a series of related transactions of Designated Noncash
Consideration with a fair market value in excess of $10.0 million. A particular
item of Designated Noncash Consideration shall no longer be considered to be
outstanding when it has been sold for cash or redeemed or paid in full in the
case of non-cash consideration in the form of promissory notes or equity.
"Designated Preferred Stock" means preferred stock that is designated as
Designated Preferred Stock, pursuant to an Officers' Certificate executed by
the principal executive officer and the principal financial officer of the
Company, on the issuance date thereof, the cash proceeds of which are excluded
from the calculation set forth in clause (3)(b) of the second paragraph of the
covenant entitled "Restricted Payments."
"Designated Senior Debt" means:
(1) any Indebtedness under or in respect of the Senior Credit Facilities;
and
(2) any other Senior Debt permitted under the Indenture the principal
amount of which is $25 million or more and that has been designated by the
Company in the instrument or agreement relating to the same as "Designated
Senior Debt."
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder thereof), or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable at the option of the holder
thereof, in whole or in part, on or prior to the date that is 91 days after the
date on which the Notes mature. Notwithstanding the preceding sentence, any
Capital Stock that would constitute Disqualified Stock solely because the
holders thereof have the right to require the Company to repurchase such
Capital Stock upon the occurrence of a change of control or an asset sale shall
not constitute Disqualified Stock if the terms of such Capital Stock provide
that the Company may not repurchase or redeem any such Capital Stock pursuant
to such provisions unless such repurchase or redemption complies with the
covenant described above under the caption "Certain Covenants--Restricted
Payments."
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"Domestic Subsidiary" means, with respect to the Company, any Restricted
Subsidiary of the Company that was formed under the laws of the United States
of America or that guarantees or otherwise provides direct credit support for
any Indebtedness of the Company.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means any offering of Qualified Capital Stock of any direct
or indirect parent corporation of the Company or the Company; provided that, in
the event of any Equity Offering by any direct or indirect parent corporation
of the Company, such direct or indirect parent corporation of the Company
contributes to the common equity capital of the Company (other than as
Disqualified Stock) the portion of the net cash proceeds of such Equity
Offering necessary to pay the aggregate redemption price (plus accrued interest
to the redemption date) of the Exchange Notes to be redeemed pursuant to the
first paragraph under the subheading "Optional Redemption."
"Existing Indebtedness" means Indebtedness of the Company and its Subsidiaries
(other than Indebtedness under the Senior Credit Facilities) in existence on
the date of the Indenture, until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of:
(1) the consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued, including, without
limitation, original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations other than any such
interest component in respect of obligations under the Consulting
Agreement, the interest component of all payments associated with Capital
Lease Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings,
and net payments, if any, pursuant to Hedging Obligations, but excluding
amortization or write-off of debt issuance costs; plus
(2) the consolidated interest expense of such Person and its Restricted
Subsidiaries that was capitalized during such period; plus
(3) any interest expense on Indebtedness of another Person that is
Guaranteed by such Person or one of its Restricted Subsidiaries or secured
by a Lien on assets of such Person or one of its Restricted Subsidiaries,
whether or not such Guarantee or Lien is called upon; plus
(4) the product of (a) all dividend payments, whether or not in cash, on
any series of preferred stock of such Person or any of its Restricted
Subsidiaries, other than dividend payments on Equity Interests to the
extent paid in Equity Interests of the Company (other than Disqualified
Stock) or to the Company or a Restricted Subsidiary of the Company, times
(b) a fraction, the numerator of which is one and the denominator of which
is one minus the then current combined federal, state and local statutory
tax rate of such Person, expressed as a decimal, in each case, on a
consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means, with respect to any Person as of any date,
the ratio of the Consolidated Cash Flow of such Person during the most recent
four full fiscal quarters for which internal financial statements are available
(the "Four-Quarter Period") ending on or prior to such date (the "Transaction
Date") to the Fixed Charges of such Person for the Four-Quarter Period.
In addition to and without limitation of the preceding paragraph, for purposes
of this definition, Consolidated Cash Flow and Fixed Charges shall be
calculated after giving effect on a pro forma basis for the period of such
calculation to:
(1) the incurrence of any Indebtedness or the issuance of any preferred
stock of such Person or any of its Restricted Subsidiaries (and the
application of the proceeds thereof) and any repayment of other
Indebtedness or redemption of other preferred stock occurring during the
Four-Quarter Period or at any time subsequent to the last day of the Four-
Quarter Period and on or prior to the Transaction Date, as if such
incurrence, repayment, issuance or redemption, as the case may be (and the
application of the proceeds thereof), occurred on the first day of the
Four-Quarter Period; and
(2) any Asset Sales or Asset Acquisitions (including, without limitation,
any Asset Acquisition giving rise to the need to make such calculation as a
result of such Person or one of its Restricted Subsidiaries (including any
Person who becomes a Restricted Subsidiary as a result of the Asset
Acquisition) incurring, assuming or otherwise being liable for Acquired
Debt and also including any Consolidated Cash Flow (including any Pro Forma
Cost Savings) occurring
81
during the Four-Quarter Period or at any time subsequent to the last day of
the Four-Quarter Period and on or prior to the Transaction Date, as if such
Asset Sale or Asset Acquisition (including the incurrence, assumption or
liability for any such Indebtedness or Acquired Debt) occurred on the first
day of the Four-Quarter Period.
If such Person or any of its Restricted Subsidiaries directly or indirectly
Guarantees Indebtedness of a third Person, the preceding sentence shall give
effect to the incurrence of such guaranteed Indebtedness as if such Person or
any Restricted Subsidiary of such Person had directly incurred or otherwise
assumed such guaranteed Indebtedness. Furthermore, in calculating Fixed Charges
for purposes of determining the denominator (but not the numerator) of this
Fixed Charge Coverage Ratio:
(1) interest on outstanding Indebtedness determined on a fluctuating basis
as of the Transaction Date and which will continue to be so determined
thereafter shall be deemed to have accrued at a fixed rate per annum equal
to the rate of interest on such Indebtedness in effect on the Transaction
Date;
(2) if interest on any Indebtedness actually incurred on the Transaction
Date may optionally be determined at an interest rate based upon a factor
of a prime or similar rate, a eurocurrency interbank offered rate, or other
rates, then the interest rate in effect on the Transaction Date will be
deemed to have been in effect during the Four-Quarter Period; and
(3) notwithstanding clause (1) above, interest on Indebtedness determined
on a fluctuating basis, to the extent such interest is covered by
agreements relating to Hedging Obligations, shall be deemed to accrue at
the rate per annum resulting after giving effect to the operation of such
agreements.
"Foreign Subsidiary" means any Subsidiary of the Company that is not a Domestic
Subsidiary.
"GAAP" means generally accepted accounting principles set forth in the opinions
and pronouncements of the Accounting Principles Board of the American Institute
of Certified Public Accountants and statements and pronouncements of the
Financial Accounting Standards Board or in such other statements by such other
entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Issue Date.
"Guarantee" means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any Indebtedness.
"Guarantors" means each of:
(1) each domestic Subsidiary of the Company on the Issue Date; and
(2) any other Restricted Subsidiary that executes a Subsidiary Guarantee in
accordance with the provisions of the Indenture;
and their respective successors and assigns.
"Hedging Obligations" means, with respect to any Person, the net obligations of
such Person under:
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements; and
(2) other agreements or arrangements designed to protect such Person
against fluctuations in interest rates or the value of foreign currencies.
"Indebtedness" means, with respect to any specified Person, any indebtedness of
such Person, whether or not contingent, in respect of:
(1) borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or letters
of credit (or reimbursement agreements in respect thereof);
(3) banker's acceptances;
(4) representing Capital Lease Obligations;
82
(5) the balance deferred and unpaid of the purchase price of any property,
except any such balance that constitutes an accrued expense or trade
payable; or
(6) the net amount owing under Hedging Obligations,
if and to the extent any of the preceding items (other than letters of credit
and Hedging Obligations) would appear as a liability upon a balance sheet of
the specified Person prepared in accordance with GAAP. In addition, the term
"Indebtedness" includes all Indebtedness of others secured by a Lien on any
asset of the specified Person (whether or not such Indebtedness is assumed by
the specified Person) and, to the extent not otherwise included, the Guarantee
by such Person of any Indebtedness of any other Person.
The amount of any Indebtedness outstanding as of any date shall be:
(1) the accreted value thereof, in the case of any Indebtedness issued with
original issue discount; and
(2) the principal amount thereof, in the case of any other Indebtedness.
"Initial Public Offering" means the first underwritten public offering of
Qualified Capital Stock by any direct or indirect parent corporation of the
Company or by the Company pursuant to a registration statement filed with the
Commission in accordance with the Securities Act for aggregate net cash
proceeds of at least $65.0 million; provided that in the event the Initial
Public Offering is consummated by any direct or indirect parent corporation of
the Company, such direct or indirect parent corporation of the Company
contributes to the common equity capital of the Company at least $65.0 million
of the net cash proceeds of the Initial Public Offering.
"Investments" means, with respect to any Person, all investments by such Person
in other Persons (including Affiliates) in the forms of direct or indirect
loans (including guarantees of Indebtedness or other obligations), advances or
capital contributions (excluding commission, travel and similar advances to
officers and employees made in the ordinary course of business), purchases or
other acquisitions for consideration of Indebtedness, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP. If the Company
or any Subsidiary of the Company sells or otherwise disposes of any Equity
Interests of any direct or indirect Subsidiary of the Company such that, after
giving effect to any such sale or disposition, such Person is no longer a
Subsidiary of the Company, the Company shall be deemed to have made an
Investment on the date of any such sale or disposition equal to the fair market
value of the Equity Interests of such Subsidiary not sold or disposed of in an
amount determined as provided in the final paragraph of the covenant described
above under the caption "Certain Covenants--Restricted Payments."
"Issue Date" means the closing date for the sale and original issuance of the
outstanding Notes under the Indenture.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law, including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction.
"Marketable Securities" means publicly traded debt or equity securities that
are listed for trading on a national securities exchange and that were issued
by a corporation whose debt securities are rated in one of the three highest
rating categories by either S&P or Moody's.
"Moody's" means Moody's Investors Service, Inc.
"Net Proceeds" means the aggregate cash proceeds received by the Company or any
of its Restricted Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any non-
cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale, including, without limitation, legal, accounting
and investment banking fees, and sales commissions, and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof, in
each case after taking into account any available tax credits or deductions and
any tax sharing arrangements and amounts required to be applied to the
repayment of Indebtedness, other than debt under the Senior Credit Facilities,
secured by a Lien on the asset or assets that were the subject of such Asset
Sale.
83
"Non-Recourse Debt" means Indebtedness:
(1) as to which neither the Company nor any of its Restricted Subsidiaries
(a) provides credit support of any kind (including any undertaking,
agreement or instrument that would constitute Indebtedness), (b) is
directly or indirectly liable as a guarantor or otherwise, or (c)
constitutes the lender;
(2) no default with respect to which (including any rights that the holders
thereof may have to take enforcement action against an Unrestricted
Subsidiary) would permit upon notice, lapse of time or both any holder of
any other Indebtedness (other than the Notes) of the Company or any of its
Restricted Subsidiaries to declare a default on such other Indebtedness or
cause the payment thereof to be accelerated or payable prior to its stated
maturity; and
(3) as to which the lenders have been notified in writing that they will
not have any recourse to the stock or assets of the Company or any of its
Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees, indemnifications,
expenses, reimbursements, damages and other liabilities payable under the
documentation governing any Indebtedness.
"Permitted Business" means the business conducted by the Company and its
Restricted Subsidiaries on the Issue Date and businesses which derive a
majority of their revenues from products and activities reasonably related
thereto.
"Permitted Group" means any group of investors if deemed to be a "person" (as
such term is used in Section 13(d)(3) of the Exchange Act) by virtue of the
Stockholders Agreement, as the same may be amended, modified or supplemented
from time to time, provided that (i) the Principals are party to such
Stockholders Agreement, (ii) the persons party to the Stockholders Agreement as
so amended, supplemented or modified from time to time that were not parties,
and are not Affiliates of persons who were parties, to the Stockholders
Agreement on the Issue Date, together with their respective Affiliates
(collectively the "New Investors") are not the direct or indirect Beneficial
Owners (determined without reference to the Stockholders Agreement) of more
than 50% of the Voting Stock owned by all parties to the Stockholders Agreement
as so amended, supplemented of modified and (iii) the New Investors,
individually or in the aggregate, do not, directly or indirectly, have the
right, pursuant to the Stockholders Agreement (as so amended, supplemented or
modified) or otherwise to designate more than one-half of the directors of the
Board of Directors of the Company or any direct or indirect parent entity of
the Company.
"Permitted Investments" means:
(1) any Investment in the Company or in a Restricted Subsidiary of the
Company that is a Guarantor or a Foreign Subsidiary;
(2) any Investment in Cash Equivalents;
(3) any Investment by the Company or any Restricted Subsidiary of the
Company in a Person, if as a result of such Investment:
(a) such Person becomes a Restricted Subsidiary of the Company that is a
Guarantor or a Foreign Subsidiary; or
(b) such Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is
liquidated into, the Company or a Restricted Subsidiary of the Company
that is a Guarantor or a Foreign Subsidiary;
(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption "Repurchase
at the Option of Holders--Asset Sales;"
(5) investments existing on the date of the Indenture;
(6) loans and advances to employees and officers of the Company and its
Restricted Subsidiaries in the ordinary course of business;
(7) any acquisition of assets to the extent acquired in exchange for the
issuance of Equity Interests (other than Disqualified Stock) of the
Company;
(8) Investments in securities of trade creditors or customers received in
compromise of obligations of such persons incurred in the ordinary course
of business, including pursuant to any plan of reorganization or similar
arrangement upon the bankruptcy or insolvency of such trade creditors or
customers;
84
(9) Investments in a Permitted Business in an aggregate amount at any time
outstanding not to exceed $10.0 million; and
(10) other Investments in any Person having an aggregate fair market value
(measured on the date each such Investment was made and without giving
effect to subsequent changes in value), when taken together with all other
Investments made pursuant to this clause (10) that are at the time
outstanding, not to exceed the greater of (a) $35.0 million or (b) 10% of
Total Assets.
"Permitted Junior Securities" means debt or equity securities of the Company or
any successor corporation issued pursuant to a plan of reorganization or
readjustment of the Company that are subordinated to the payment of all then
outstanding Senior Debt of the Company at least to the same extent that the
Notes are subordinated to the payment of all Senior Debt of the Company on the
date of the Indenture, so long as:
(1) the effect of the use of this defined term in the subordination
provisions contained in Article 10 of the Indenture is not to cause the
Notes to be treated as part of:
(a) the same class of claims as the Senior Debt of the Company; or
(b) any class or claims pari passu with, or senior to, the Senior Debt
of the Company for any payment or distribution in any case or proceeding
or similar event relating to the liquidation, insolvency, bankruptcy,
dissolution, winding up or reorganization of the Company; and
(2) to the extent that any Senior Debt of the Company outstanding on the
date of consummation of any such plan of reorganization or readjustment is
not paid in full in cash on such date, either:
(a) the holders of any such Senior Debt not so paid in full in cash have
consented to the terms of such plan of reorganization or readjustment;
or
(b) such holders receive securities which constitute Senior Debt of the
Company (which are guaranteed pursuant to guarantees constituting Senior
Debt of each Guarantor) and which have been determined by the relevant
court to constitute satisfaction in full in money or money's worth of
any Senior Debt of the Company (and any related Senior Debt of the
Guarantors) not paid in full in cash.
"Permitted Liens" means:
(1) Liens on assets of the Company and any Guarantor securing Indebtedness
and other Obligations under the Senior Credit Facilities that were
permitted by the terms of the Indenture to be incurred;
(2) Liens in favor of the Company or the Guarantors;
(3) Liens on property of a Person existing at the time such Person is
merged with or into or consolidated with the Company or any Subsidiary of
the Company; provided that such Liens were in existence prior to the
contemplation of such merger or consolidation and do not extend to any
assets other than those of the Person merged into or consolidated with the
Company or the Subsidiary;
(4) Liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other
types of social security, including any Lien securing letters of credit
issued in the ordinary course of business consistent with past practice in
connection therewith, or to secure the performance of tenders, statutory
obligations, surety and appeal bonds, bids, leases, government contracts,
performance and return-of-money bonds and other similar obligations
(exclusive of obligations for the payment of borrowed money);
(5) judgment Liens not giving rise to an Event of Default;
(6) easements, rights-of-way, zoning restrictions and other similar charges
or encumbrances in respect of real property not interfering in any material
respect with the ordinary conduct of the business of the Company or any of
its Restricted Subsidiaries;
(7) any interest or title of a lessor under any Capitalized Lease
Obligation;
(8) Liens upon specific items of inventory or other goods and proceeds of
any Person securing such Person's obligations in respect of bankers'
acceptance issued or created for the account of such Person to facilitate
the purchase, shipment, or storage of such inventory or other goods;
(9) Lien securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof;
85
(10) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the Company
or any of its Restricted Subsidiaries, including rights of offset and set-
off;
(11) leases or subleases granted to others that do not materially interfere
with the ordinary course of business of the Company and its Restricted
Subsidiaries;
(12) Liens arising from filing Uniform Commercial Code financing statements
regarding leases;
(13) Liens in favor of customs and revenue authorities arising as a matter
of law to secure payment of customer duties in connection with the
importation of goods;
(14) Liens on property existing at the time of acquisition thereof by the
Company or any Subsidiary of the Company, provided that such Liens were in
existence prior to the contemplation of such acquisition;
(15) Liens to secure the performance of statutory obligations and Liens
imposed by law, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of business;
(16) Liens securing Hedging Obligations which Hedging Obligations relate to
Indebtedness that is otherwise permitted under the Indenture;
(17) Liens to secure Indebtedness (including Capital Lease Obligations)
permitted by clause (4) of the second paragraph of the covenant entitled
"Incurrence of Indebtedness and Issuance of Preferred Stock" covering only
the assets acquired with such Indebtedness;
(18) Liens existing on the date of the Indenture, together with any Liens
securing Indebtedness incurred in reliance on clause (5) of the second
paragraph of the covenant entitled "Incurrence of Indebtedness and Issuance
of Preferred Stock" in order to refinance the Indebtedness secured by Liens
existing on the date of the Indenture; provided that the Liens securing the
refinancing Indebtedness shall not extend to property other than that
pledged under the Liens securing the Indebtedness being refinanced;
(19) Liens on assets of the Company and its Restricted Subsidiaries to
secure Senior Debt of the Company or such Restricted Subsidiary, as the
case may be, that was permitted by the Indenture to be incurred;
(20) Liens for taxes, assessments or governmental charges or claims that
are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded,
provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor;
(21) Liens incurred in the ordinary course of business of the Company or
any Restricted Subsidiary of the Company with respect to obligations that
do not exceed $10.0 million at any one time outstanding; and
(22) Liens securing Indebtedness of foreign Restricted Subsidiaries of the
Company incurred in accordance with the Indenture.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company or
any of its Restricted Subsidiaries issued in exchange for, or the net proceeds
of which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any of its Restricted Subsidiaries (other than
intercompany Indebtedness); provided that:
(1) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Indebtedness does not exceed the principal amount of
(or accreted value, if applicable), plus accrued interest on, the
Indebtedness so extended, refinanced, renewed, replaced, defeased or
refunded (plus the amount of reasonable costs and expenses incurred in
connection therewith);
(2) such Permitted Refinancing Indebtedness has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of,
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded;
(3) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the Notes, such
Permitted Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and is subordinated in right of payment to, the
Notes on terms at least as favorable to the Holders of Notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and
(4) such Indebtedness is incurred either by the Company or by the
Restricted Subsidiary who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
86
"Principals" means Bain Capital, Inc. and any of its Affiliates.
"Pro Forma Cost Savings" means, with respect to any period, the reduction in
costs and related adjustments that occurred during the Four-Quarter Period or
after the end of the Four-Quarter Period and on or prior to the Transaction
Date that were (i) directly attributable to an Asset Acquisition or Asset Sale
and calculated on a basis that is consistent with Regulation S-X under the
Securities Act as in effect and applied as of the Issue Date or (ii)
implemented by the business that was the subject of any such Asset Acquisition
or Asset Sale within six months of the date of the Asset Acquisition or Asset
Sale and that are supportable and quantifiable by the underlying accounting
records of such business, as if, in the case of each of clause (i) and (ii),
all such reductions in costs and related adjustments had been effected as of
the beginning of such period.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Stock.
"Representative" means the indenture trustee or other trustee, agent or
representative in respect of any Designated Senior Debt; provided that if, and
for so long as, any Designated Senior Debt lacks such a representative, then
the Representative for such Designated Senior Debt shall at all times
constitute the holders of a majority in outstanding principal amount of such
Designated Senior Debt in respect of any Designated Senior Debt.
"Restricted Investment" means an Investment other than a Permitted Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent Person
that is not an Unrestricted Subsidiary.
"S&P" means Standard & Poor's.
"Senior Credit Facilities" means one or more credit agreements from time to
time in effect, including that certain Credit Agreement, to be dated as of
December 21, 1998, by and among the Company and Morgan Guaranty Trust Company
of New York, as administrative agent, and the other lenders party thereto,
together with the related documents thereto (including, without limitation, any
guarantee agreements and security documents), in each case as such agreements
may be amended (including any amendment and restatement thereof), supplemented
or otherwise modified from time to time, including any agreement extending the
maturity of, refinancing, replacing or otherwise restructuring (including
increasing the amount of available borrowings thereunder (provided that such
increase in borrowings is permitted by the covenant entitled "Incurrence of
Indebtedness and Issuance of Preferred Stock") or adding Restricted
Subsidiaries of the Company as additional borrowers or guarantors thereunder)
all or any portion of the Indebtedness under such agreement or any successor or
replacement agreement and whether by the same or any other agent, lender or
group of lenders.
"Senior Debt" means:
(1) all Indebtedness outstanding under Senior Credit Facilities and all
Hedging Obligations (including guarantees thereof) with respect thereto of
the Company and the Guarantors, whether outstanding on the date of the
Indenture or thereafter incurred;
(2) any other Indebtedness incurred by the Company and the Guarantors,
unless the instrument under which such Indebtedness is incurred expressly
provides that it is on a parity with or subordinated in right of payment to
the Exchange Notes or the Subsidiary Guarantees, as the case may be; and
(3) all Obligations with respect to the items listed in the preceding
clauses (1) and (2) (including any interest accruing subsequent to the
filing of a petition of bankruptcy at the rate provided for in the
documentation with respect thereto, whether or not such interest is an
allowed claim under applicable law).
Notwithstanding anything to the contrary in the preceding, Senior Debt will not
include:
(1) any liability for federal, state, local or other taxes owed or owing by
the Company or the Guarantors;
(2) any Indebtedness of the Company or any Guarantor to any of its
Subsidiaries or other Affiliates;
(3) any trade payables;
(4) any Indebtedness that is incurred in violation of the Indenture (but
only to the extent so incurred);
(5) any Capitalized Lease Obligations; or
(6) notes payable to franchisee captive insurers.
87
"Significant Restricted Subsidiary" means any Restricted Subsidiary that would
be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation
S-X, promulgated pursuant to the Securities Act, as such Regulation is in
effect on the date hereof.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Stockholders Agreement" means that certain stockholders agreement that may be
entered into by and among the Principals, TISM and the other stockholders of
TISM referred to therein, as in effect from time to time.
"Subsidiary" means, with respect to any Person:
(1) any corporation, association or other business entity of which more
than 50% of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by such Person or one or more of the
other Subsidiaries of that Person (or a combination thereof); and
(2) any partnership (a) the sole general partner or the managing general
partner of which is such Person or a Subsidiary of such Person or (b) the
only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"Total Assets" means the total consolidated assets of the Company and its
Restricted Subsidiaries, as set forth on the Company's most recent consolidated
balance sheet.
"Treasury Rate" means, as of any Redemption Date, the yield to maturity as of
such Redemption Date of United States Treasury securities with a constant
maturity (as compiled and published in the most recent Federal Reserve
Statistical Release H.15 (519) that has become publicly available at least two
Business Days prior to such Redemption Date (or, if such Statistical Release is
no longer published, any publicly available source of similar market data))
most nearly equal to the period from such Redemption Date to January 15, 2004;
provided, however, that if the period from such Redemption Date to January 15,
2004 is less than one year, the weekly average yield on actually traded United
States Treasury securities adjusted to a constant maturity of one year shall be
used.
"Unrestricted Subsidiary" means any Subsidiary of the Company that is
designated by the Board of Directors as an Unrestricted Subsidiary pursuant to
a Board Resolution, but only to the extent that such Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or understanding
with the Company or any Restricted Subsidiary of the Company unless the
terms of any such agreement, contract, arrangement or understanding are no
less favorable to the Company or such Restricted Subsidiary than those that
might be obtained at the time from Persons who are not Affiliates of the
Company;
(3) is a Person with respect to which neither the Company nor any of its
Restricted Subsidiaries has any direct or indirect obligation (a) to
subscribe for additional Equity Interests or (b) to maintain or preserve
such Person's financial condition or to cause such Person to achieve any
specified levels of operating results; and
(4) has not guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of the Company or any of its Restricted
Subsidiaries.
Any designation of a Subsidiary of the Company as an Unrestricted Subsidiary
shall be evidenced to the Trustee by filing with the Trustee a certified copy
of the Board Resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the preceding
conditions and was permitted by the covenant described above under the caption
"Certain Covenants--Restricted Payments." If, at any time, any Unrestricted
Subsidiary would fail to meet the preceding requirements as an Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the Indenture and any Indebtedness of such Subsidiary shall be
deemed to be incurred by a Restricted Subsidiary of the Company as of such date
and, if such Indebtedness is not permitted to be incurred as of such date under
the covenant described under the caption "Incurrence of Indebtedness and
Issuance of Preferred Stock," the Company shall be in default of such covenant.
The Board of Directors of the Company may at any time designate any
Unrestricted
88
Subsidiary to be a Restricted Subsidiary; provided that such designation shall
be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the
Company of any outstanding Indebtedness of such Unrestricted Subsidiary and
such designation shall only be permitted if (1) such Indebtedness is permitted
under the covenant described under the caption "Certain Covenants--Incurrence
of Indebtedness and Issuance of Preferred Stock," calculated on a pro forma
basis as if such designation had occurred at the beginning of the four-quarter
reference period; and (2) no Default or Event of Default would be in existence
following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness at
any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying (a) the amount of each
then remaining installment, sinking fund, serial maturity or other required
payments of principal, including payment at final maturity, in respect
thereof, by (b) the number of years (calculated to the nearest one-twelfth)
that will elapse between such date and the making of such payment; by
(2) the then outstanding principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person and/or by one or more Wholly Owned Restricted
Subsidiaries of such Person.
89
The Exchange Offer
Purpose and Effect of the Exchange Offer
The Company originally sold the Notes to J.P. Morgan Securities, Inc. and
Goldman, Sachs & Co. (the "Initial Purchasers") pursuant to the Purchase
Agreement dated December 21, 1998. The Initial Purchasers subsequently resold
the Notes to qualified institutional buyers in reliance on Rule 144A under the
Securities Act and to a limited number of persons outside the United States
under Regulation S. As a condition to the Purchase Agreement, the Company
entered into a registration rights agreement with the Initial Purchasers in
which it agreed to:
(1) file a registration statement registering the Exchange Notes with the
Commission within 90 days after the original issuance of the Notes;
(2) use its best efforts to have the registration statement relating to the
Exchange Notes declared effective by the Commission within 150 days after
the original issuance of the Notes;
(3) unless the exchange offer would not be permitted by applicable law or
Commission policy, commence the offer and use its best efforts to issue
within 30 business days after the date on which the registration statement
relating to the Exchange Notes was declared effective by the Commission,
Exchange Notes in exchange for all Notes tendered prior to the Expiration
Date; and
(4) if obligated to file a shelf registration statement, use its best
efforts to file the shelf registration statement with the Commission within
90 days after such filing obligation arises, to cause the shelf
registration statement to be declared effective by the Commission within
150 days after such obligation arises and to use its best efforts to keep
effective the shelf registration statement for at least two years after the
original issuance of the Notes or such shorter period that will terminate
when all securities covered by the shelf registration statement have been
sold pursuant to the shelf registration statement.
The Company has agreed to keep its offer open for not less than 20 business
days (or longer if required by applicable law) after the date on which notice
of the offer is mailed to the holders of the Notes. The registration rights
agreement also requires the Company to include in the prospectus for the offer
certain information necessary to allow broker-dealers who hold Notes, other
than Notes purchased directly from the Company or an affiliate of the Company,
to exchange such Notes pursuant to the offer and to satisfy the prospectus
delivery requirements in connection with resales of the Exchange Notes received
by such broker-dealers in the offer.
This prospectus covers the offer and sale of the Exchange Notes pursuant to
this offer and the resale of Exchange Notes received in the offer by any
broker-dealer who held Notes, other than Notes purchased directly from the
Company or one of its affiliates.
For each Note surrendered to the Company pursuant to this offer, the holder of
such Note will receive an Exchange Note having a principal amount equal to that
of the surrendered Note. Interest on each Exchange Note will accrue from the
date of issuance of such Exchange Note. The holders of Notes that are accepted
for exchange will receive, in cash, accrued interest on such Notes to, but not
including, the issuance date of the Exchange Notes. Such interest will be paid
with the first interest payment on the Exchange Notes. Interest on the Notes
accepted for exchange will cease to accrue upon issuance of the Exchange Notes.
Under existing interpretations of the staff of the Commission contained in
several no-action letters to third parties, we believe the Exchange Notes would
in general be freely tradeable after the offer without further registration
under the Securities Act. Any purchaser of the Notes, however, who is either an
"affiliate" of the Company, a broker-dealer who purchased Notes directly from
the Company or an affiliate of the Company for resale, or who intends to
participate in the offer for the purpose of distributing the Exchange Notes (i)
will not be able to rely on the interpretation of the staff of the Commission,
(ii) will not be able to tender its Notes in the offer and (iii) must comply
with the registration and prospectus delivery requirements of the Securities
Act in connection with any sale or transfer of the Notes, unless such sale or
transfer is made pursuant to an exemption from such requirements.
The Company has agreed to file with the Commission a shelf registration
statement to cover resales of the Notes by Holders who satisfy certain
conditions relating to the provision of information in connection with the
shelf registration statement if:
(1) the Company is not required to file the registration statement for the
exchange offer or permitted to consummate the exchange offer because it is
not permitted by applicable law or Commission policy; or
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(2) any holder of Transfer Restricted Securities notifies the Company prior
to the 20th day following consummation of the exchange offer that:
(a) it is prohibited by law or Commission policy from participating in
such offer;
(b) that it may not resell the Exchange Notes acquired by it in the offer
to the public without delivering a prospectus and the prospectus
contained in the registration statement relating to the exchange offer is
not appropriate or available for such resales; or
(c) that it is a broker-dealer that purchased Notes directly from the
Company or an affiliate of the Company for resale.
For purposes of the foregoing, "Transfer Restricted Securities" means each
Note until the earliest to occur of:
(1) the date on which such Note has been exchanged by a person other than a
broker-dealer for an Exchange Note;
(2) following the exchange by a broker-dealer in this offer of a Note for
an Exchange Note, the date on which such Exchange Note is sold to a
purchaser who receives from such broker-dealer before the date of such sale
a copy of the prospectus contained in the registration statement relating
to the exchange offer;
(3) the date on which such Note has been effectively registered under the
Securities Act and disposed of in accordance with the shelf registration
statement; or
(4) the date on which such Note is distributed to the public pursuant to
Rule 144 under the Securities Act.
The Company will pay liquidated damages to each holder of Notes if:
(1) the Company fails to file any of the registration statements on or
before the date specified for such filing;
(2) any of such registration statements is not declared effective by the
Commission before the date specified for such effectiveness (the
"Effectiveness Target Date");
(3) the Company fails to consummate the exchange offer within 30 business
days of the Effectiveness Target Date with respect to the registration
statement relating to the exchange offer ;
(4) the shelf registration statement or the registration statement relating
to the exchange offer is declared effective but thereafter ceases to be
effective or usable in connection with resales of Transfer Restricted
Securities during the periods specified in the registration rights
agreement (each such event referred to in clauses (1) through (4) above a
"Registration Default").
The amount of liquidated damages will be $.05 per week per $1,000 in principal
amount of Notes held by each holder, with respect to the first 90-day period
immediately following the occurrence of the first Registration Default.
Liquidated damages will increase by $.05 per week per $1,000 principal amount
of Notes with respect to each subsequent 90-day period until all Registration
Defaults have been cured, up to a maximum amount of liquidated damages for all
Registration Defaults of $.50 per week per $1,000 principal amount of Notes.
All accrued liquidated damages will be paid by the Company on each interest
payment date in the manner provided for the payment of interest in the
indenture. Following the cure of all Registration Defaults, the accrual of
liquidated damages will cease.
Each holder of Notes (other than certain specified holders) who wishes to
exchange Notes for Exchange Notes in the exchange offer will be required to
make certain representations, including that (i) it is not an affiliate of the
Company (ii) any Exchange Notes to be received by it were acquired in the
ordinary course of its business and (iii) it has no arrangement with any
person to participate in the distribution of the Exchange Notes. If the holder
is a broker-dealer that will receive Exchange Notes for its own account in
exchange for Notes that were acquired as a result of market-making activities
or other trading activities, it will be required to acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes.
The Commission has taken the position that participating broker-dealers may
fulfill their prospectus delivery requirements with respect to the Exchange
Notes (other than a resale of an unsold allotment from the original sale of
the Notes) with a prospectus contained in the registration statement relating
to the exchange offer. Under the registration rights agreement, the Company is
required to allow broker-dealers to use the prospectus contained in the
registration statement relating to this offer in connection with the resale of
such Exchange Notes.
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The Company will, in the event of the filing of a shelf registration statement,
provide to each holder of Notes eligible to participate in such shelf
registration statement copies of the prospectus which is a part of the shelf
registration statement, notify each such holder when the shelf registration
statement for the Notes has become effective and take certain other actions as
are required to permit resales of the Notes. A holder of Notes that sells such
Notes pursuant to the shelf registration statement generally will be required
to be named as a selling securityholder in the related prospectus and to
deliver a prospectus to purchasers, will be subject to certain of the civil
liability provisions under the Securities Act in connection with such sales and
will be bound by the provisions of the registration rights agreement which are
applicable to such a holder, including certain indemnification obligations. In
addition, each such holder will be required to deliver information to be used
in connection with the shelf registration statement and to provide comments on
the shelf registration statement within the time periods set forth in the
registration rights agreement in order to have their Notes included in the
shelf registration statement and to benefit from the provisions regarding
liquidated damages.
Terms of the Exchange Offer
Upon the terms and subject to the conditions set forth in this prospectus and
the accompanying Letter of Transmittal, the Company will accept all Notes
validly tendered prior to 5:00 p.m., New York City time, on the Expiration
Date. The Company will issue $1,000 principal amount of Exchange Notes in
exchange for each $1,000 principal amount of outstanding Notes accepted in the
offer. Holders may tender some or all of their Notes pursuant to this offer in
integral multiples of $1,000.
The form and terms of the Exchange Notes are identical to the Notes except for
the following:
(1) the Exchange Notes bear a Series B designation and a different CUSIP
number from the Notes;
(2) the Exchange Notes have been registered under the Securities Act and,
therefore, will not bear legends restricting their transfer; and
(3) the holders of the Exchange Notes will not be entitled to certain
rights under the registration rights agreement, including the provisions
providing for an increase in the interest rate on the Notes in certain
circumstances relating to the timing of the offer, all of which rights will
terminate when this offer is terminated.
The Exchange Notes will evidence the same debt as the Notes and will be
entitled to the benefits of the indenture under which the Notes were issued. As
of the date of this prospectus, $275 million aggregate principal amount of the
Notes is outstanding. Solely for reasons of administration and no other reason,
the Company has fixed the close of business on , 1999 as the record
date for the exchange offer for purposes of determining the persons to whom
this prospectus and the Letter of Transmittal will be mailed initially. Only a
registered holder of Notes (or such holder's legal representative or attorney-
in-fact) as reflected on the records of the trustee under the governing
indenture may participate in the exchange offer. There will be no fixed record
date, however, for determining registered holders of the Notes entitled to
participate in the exchange offer.
The holders of Notes do not have any appraisal or dissenters' rights under the
General Corporation Law of Delaware or the indenture governing the Notes in
connection with the exchange offer. The Company intends to conduct the exchange
offer in accordance with the applicable requirements of the Exchange Act and
the rules and regulations of the Commission promulgated thereunder.
The Company shall be deemed to have accepted validly tendered Notes when, as
and if it has given oral or written notice thereof to the Exchange Agent. The
Exchange Agent will act as agent for the tendering holders for the purpose of
receiving the Exchange Notes from the Company.
If any tendered Notes are not accepted for exchange because of an invalid
tender, the occurrence of certain other events set forth in this prospectus or
otherwise, the certificates for any such unaccepted Notes will be returned,
without expense, to the tendering holder as promptly as practicable after the
Expiration Date.
Those holders who tender Notes in the exchange offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Notes. The
Company will pay all charges and expenses, other than certain applicable taxes,
in connection with the exchange offer. See "--Fees and Expenses."
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Expiration Dates; Extensions; Amendments
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on ,
1999 unless the Company, in its sole discretion, extends this offer, in which
case the term "Expiration Date" shall mean the latest date to which this offer
is extended. Notwithstanding the foregoing, the Company will not extend the
expiration date beyond , 1999.
The Company has no current plans to extend the exchange offer. In order to
extend the Expiration Date, the Company will notify the Exchange Agent of any
extension by oral or written notice and will make a public announcement of such
extension, in each case prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date.
The Company reserves the right, in its sole discretion, to (i) delay accepting
any Notes, (ii) extend this offer or (iii) terminate the offer if any of the
conditions set forth below under "--Conditions of the Exchange Offer" shall not
have been satisfied, in each case by giving oral or written notice of such
delay, extension or termination to the Exchange Agent, and to amend the terms
of this offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by a
public announcement thereof. If the exchange offer is amended in a manner
determined by the Company to constitute a material change, it will promptly
disclose such amendment by means of a prospectus supplement that will be
distributed to the registered holders of the Notes and the offer will be
extended for a period of five to ten business days, as required by law,
depending upon the significance of the amendment and the manner of disclosure
to the registered holders, assuming the exchange offer would otherwise expire
during such five to ten business day period.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, termination or amendment of its offer,
the Company shall not have an obligation to publish, advertise, or otherwise
communicate any such public announcement other than by making a timely release
thereof to the Dow Jones News Service.
Interest on the Exchange Notes
The Exchange Notes will bear interest from their date of issuance. Interest is
payable semiannually on January 15 and July 15 of each year commencing on July
15, 1999, at the rate of 10 3/8% per annum. The holders of Notes that are
accepted for exchange will receive, in cash, accrued interest on such Notes to,
but not including, the issuance date of the Exchange Notes. Such interest will
be paid with the first interest payment on the Exchange Notes. Consequently,
holders who exchange their Notes for Exchange Notes will receive the same
interest payment on July 15, 1999 (the first interest payment date with respect
to the Notes and the Exchange Notes) that they would have received had they not
accepted the exchange offer. Interest on the Notes accepted for exchange will
cease to accrue upon issuance of the Exchange Notes.
Procedures for Tendering
Only a registered holder of Notes may tender such Notes in this offer. To
effectively tender in the offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with the Notes
and any other required documents, to the Exchange Agent at the address set
forth below under "--Exchange Agent" for receipt prior to 5:00 p.m., New York
City time, on the Expiration Date. Delivery of the Notes also may be made by
book-entry transfer in accordance with the procedures described below. If you
are effecting delivery by book-entry transfer, (i) confirmation of such book-
entry transfer must be received by the Exchange Agent prior to the Expiration
Date and (ii) you must also transmit to the Exchange Agent on or prior to the
Expiration Date, a computer-generated message transmitted by means of the
Automated Tender Offer Program System of the Depository Trust Company in which
you acknowledge and agree to be bound by the terms of the Letter of Transmittal
and which, when received by the Exchange Agent, forms a part of the
confirmation of book-entry transfer.
By executing the Letter of Transmittal or effecting delivery by book-entry
transfer, each holder is making to the Company those representations set forth
under the heading "--Resale of the Exchange Notes."
The tender by a holder of Notes will constitute an agreement between such
holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
The method of delivery of outstanding Notes and the Letter of Transmittal and
all other required documents to the Exchange Agent is at the election and sole
risk of the holder. As an alternative to delivery by mail, holders may wish to
consider overnight or hand delivery service. In all cases, sufficient time
should be allowed to assure delivery to the
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Exchange Agent before the Expiration Date. No Letter of Transmittal or Notes
should be sent to the Company. Holders may request that their respective
brokers, dealers, commercial banks, trust companies or nominees effect the
above transactions for such holders.
Only a registered holder of Notes may tender such Notes in connection with this
offer. The term "holder" with respect to this offer means any person in whose
name Notes are registered on the books of the Company or any other person who
has obtained a properly completed bond power from the registered holder, or any
person whose Notes are held of record by DTC who desires to deliver such Notes
by book-entry transfer at DTC.
Any beneficial holder whose Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should promptly contact the person in whose name your Notes are
registered and instruct such registered holder to tender on your behalf. If, as
a beneficial owner, you wish to tender on your own behalf, you must, prior to
completing and executing the Letter of Transmittal and delivering your Notes,
either make appropriate arrangements to register ownership of the Notes in your
name or obtain a properly completed bond power from the registered holder. The
transfer of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (defined below) unless
the Notes tendered are tendered (i) by a registered holder who has not
completed the box entitled "Special Registration Instructions" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution. In the event that signatures on a Letter of
Transmittal or a notice of withdrawal, as the case may be, are required to be
guaranteed, such guarantee must be by a participant in a recognized signature
guarantee medallion program within the meaning of Rule 17Ad-15 under the
Exchange Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Notes listed therein, such Notes must be endorsed or accompanied
by a properly completed bond powers, signed by such registered holder as such
registered holder's name appears on such Notes with the signature thereon
guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and submit with the Letter of
Transmittal evidence satisfactory to the Company of their authority to so act.
The Company understands that the Exchange Agent will make a request, promptly
after the date of this prospectus, to establish accounts with respect to the
Notes at the book-entry transfer facility of DTC for the purpose of
facilitating this exchange offer, and subject to the establishment of these
accounts, any financial institution that is a participant in the book-entry
transfer facility system may make book-entry delivery of Notes by causing the
transfer of such Notes into the Exchange Agent's account with respect to the
Notes in accordance with DTC's procedures for such transfer. Although delivery
of the Notes may be effected through book-entry transfer into the Exchange
Agent's account at the book-entry transfer facility, unless the holder complies
with the procedures described in the following paragraph an appropriate Letter
of Transmittal properly completed and duly executed with any required signature
guarantee and all other required documents must in each case be transmitted to
and received or confirmed by the Exchange Agent at its address set forth below
before the Expiration Date, or the guaranteed delivery procedures described
below must be complied with. The delivery of documents to the book-entry
transfer facility does not constitute delivery to the Exchange Agent.
The Exchange Agent and DTC have confirmed that the exchange offer is eligible
for the Automated Tender Offer Program ("ATOP") of DTC. Accordingly, DTC
participants may electronically transmit their acceptance of this offer by
causing DTC to transfer Notes to the Exchange Agent in accordance with the
procedures for transfer established under ATOP. DTC will then send an Agent's
Message to the Exchange Agent. The term "Agent's Message" means a message
transmitted by DTC, which when received by the Exchange Agent forms part of the
confirmation of a book-entry transfer, and which states that DTC has received
an express acknowledgment from the participant in DTC tendering Notes which are
the subject of such book-entry confirmation that such participant has received
and agrees to be bound by the terms of the Letter of Transmittal and that the
Company may enforce such agreement against such participant. In the case of an
Agent's Message relating to guaranteed delivery, the term means a message
transmitted by DTC and received by the Exchange Agent which states that DTC has
received an express acknowledgment from the participant in DTC tendering Notes
that such participant has received and agrees to be bound by the Notice of
Guaranteed Delivery.
All questions as to the validity, form, eligibility (including time of receipt)
acceptance and withdrawal of the tendered Notes will be determined by the
Company in its sole discretion, which determinations will be final and binding.
The
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Company reserves the absolute right to reject any and all Notes not validly
tendered or any Notes the acceptance of which would, in the opinion of the
Company's counsel, be unlawful. The Company also reserves the absolute right to
waive any defects, irregularities or conditions of tender as to particular
Notes. The Company's interpretation of the terms and conditions of the exchange
offer, including the instructions in the Letter of Transmittal, will be final
and binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Notes must be cured within such time as the Company
shall determine. Although the Company intends to notify holders of defects or
irregularities with respect to the tenders of Notes, neither the Company, the
Exchange Agent nor any other person shall incur any liability for failure to
give such notification. Tenders of Notes will not be deemed to have been made
until such defects or irregularities have been cured or waived. Any Notes
received by the Exchange Agent that are not validly tendered and as to which
the defects or irregularities have not been cured or waived, or if Notes are
submitted in a principal amount greater than the principal amount of Notes
being tendered by such tendering holder, such unaccepted or non-exchanged Notes
will be returned by the Exchange Agent to the tendering holders (or, in the
case of Notes tendered by book-entry transfer into the Exchange Agent's account
at the book-entry transfer facility pursuant to the book-entry transfer
procedures described above, such unaccepted or non-exchanged Notes will be
credited to an account maintained with such book-entry transfer facility),
unless otherwise provided in the Letter of Transmittal designated for such
Notes, as soon as practicable following the Expiration Date.
Guaranteed Delivery Procedures
Those holders who wish to tender their Notes and (i) whose Notes are not
immediately available, or (ii) who cannot deliver their Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent before the
Expiration Date, or (iii) who cannot complete the procedures for book-entry
transfer before the Expiration Date, may effect a tender if:
(1) the tender is made through an Eligible Institution;
(2) before the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number or
numbers of such Notes and the principal amount of Notes tendered, stating
that the tender is being made thereby, and guaranteeing that, within five
business days after the Expiration Date, either (A) the Letter of
Transmittal, or facsimile thereof, together with the certificate(s)
representing the Notes and any other documents required by the Letter of
Transmittal, will be deposited by the Eligible Institution with the
Exchange Agent or (B) that a confirmation of book-entry transfer of such
Notes into the Exchange Agent's account at DTC, will be delivered to the
Exchange Agent; and
(3) either (A) such properly completed and executed Letter of Transmittal,
or facsimile thereof, together with the certificate(s) representing all
tendered Notes in proper form for transfer and all other documents required
by the Letter of Transmittal or (B) if applicable, confirmation of a book-
entry transfer into the Exchange Agent's account at DTC, are actually
received by the Exchange Agent within five business days after the
Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Notes according to the guaranteed
delivery procedures set forth above.
Withdrawal of Tenders
Except as otherwise provided herein, tenders of Notes may be withdrawn at any
time prior to 5:00 p.m., New York City time, on the Expiration Date.
To effectively withdraw a tender of Notes in the exchange offer, the Exchange
Agent must receive a telegram, telex, letter or facsimile transmission notice
of withdrawal at its address set forth herein prior to 5:00 p.m., New York City
time, on the Expiration Date. Any such notice of withdrawal must:
(1) specify the name of the person having deposited the Notes to be
withdrawn (the "Depositor");
(2) identify the Notes to be withdrawn, including the certificate number or
numbers and the aggregate principal amount of such Notes or, in the case of
Notes transferred by book-entry transfer, the name and number of the
account at DTC to be credited;
(3) be signed by the holder in the same manner as the original signature on
the Letter of Transmittal by which such Notes were tendered, including any
required signature guarantees, or be accompanied by documents of transfers
sufficient to permit the Trustee with respect to the Notes to register the
transfer of such Notes into the name of the person withdrawing the tender;
and
95
(4) specify the name in which any such Notes are to be registered, if
different from that of the Depositor.
All questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by the Company, and its
determination shall be final and binding on all parties. Any Notes so withdrawn
will be deemed not to have been validly tendered for purposes of the exchange
offer and no Exchange Notes will be issued with respect thereto unless the
Notes so withdrawn are validly retendered. Any Notes which have been tendered
but which are not accepted for exchange due to the rejection of the tender due
to uncured defects or the prior termination of the exchange offer, or which
have been validly withdrawn, will be returned to the holder thereof without
cost to such holder as soon as practicable after withdrawal, rejection of
tender or termination of the offer. Properly withdrawn Notes may be retendered
by following one of the procedures described above under "--Procedures for
Tendering" at any time prior to the Expiration Date.
Conditions of the Exchange Offer
The offer is subject to the condition that the offer, or the making of any
exchange by a holder, does not violate applicable law or any applicable
interpretation of the staff of the Commission. If there has been a change in
policy of the Commission such that in the reasonable opinion of counsel to the
Company there is a substantial question whether the offer is permitted by
applicable federal law, the Company has agreed to seek a no-action letter or
other favorable decision from the Commission allowing the Company to consummate
the offer.
If the Company determines that the offer is not permitted by applicable federal
law, it may terminate the offer. In connection such termination the Company may
(i) refuse to accept any Notes and return any Notes that have been tendered by
the holders thereof, (ii) extend the offer and retain all Notes tendered prior
to the Expiration Date, subject to the rights of such holders of tendered Notes
to withdraw their tendered Notes or (iii) waive such termination event with
respect to the offer and accept all properly tendered Notes that have not been
properly withdrawn. If such waiver constitutes a material change in the offer,
the Company will disclose such change by means of a supplement to this
prospectus that will be distributed to each registered holder of Notes, and the
Company will extend the offer for a period of five to ten business days,
depending upon the significance of the waiver, if the offer would otherwise
expire during such period.
Exchange Agent
IBJ Whitehall Bank & Trust Company, the Trustee under the indenture governing
the Notes, has been appointed as Exchange Agent for the offer. Questions and
requests for assistance, requests for additional copies of this prospectus or
the Letter of Transmittal and requests for the Notice of Guaranteed Delivery
should be directed to the Exchange Agent addressed as follows:
By Registered or Certified Mail or Hand
Delivery:
IBJ Whitehall Bank & Trust Company
One State Street
New York, NY 10004
Attention: Corporate Finance Trust Services
Facsimile Transmission:(212) 858-2952
Confirm by Telephone:(212) 858-2657
Any requests or deliveries to an address or facsimile number other than as
set forth above will not constitute a valid delivery.
Fees and Expenses
The expenses of soliciting tenders will be borne by the Company. The principal
solicitation for tenders is being made by mail. Additional solicitations,
however, may be made by officers and regular employees of the Company and its
affiliates in person, by telegraph or telephone.
The Company has not retained any dealer-manager in connection with the offer
and will not make any payments to brokers, dealers or other persons soliciting
acceptances of the offer. The Company will pay the Exchange Agent, however,
reasonable and customary fees for its services and will reimburse the Exchange
Agent for its reasonable out-of-pocket expenses in connection with the offer.
The cash expenses to be incurred in connection with the offer will be paid by
the Company. Such expenses include fees and expenses of the Exchange Agent and
the Trustee, accounting and legal fees and printing costs, among others.
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The Company will pay all transfer taxes, if any, applicable to the exchange of
the Notes pursuant to the offer. If, however, a transfer tax is imposed for any
reason other than the exchange of the Notes pursuant to the offer, then the
amount of any such transfer taxes, whether imposed on the registered holder or
any other persons, will be payable by the tendering holder. If satisfactory
evidence of payment of such taxes or exemption therefrom is not submitted with
the Letter of Transmittal, the amount of such transfer taxes will be billed
directly to such tendering holder.
Accounting Treatment
The Exchange Notes will be recorded at the same carrying value as the Notes,
which is face value, as reflected in the accounting records of the Company on
the date of exchange. Accordingly, the Company will not recognize any gain or
loss for accounting purposes. The expenses of the exchange offer will be
amortized over the term of the Exchange Notes.
Consequences of Failure to Exchange
The Notes that are not exchanged for Exchange Notes pursuant to this offer will
remain transfer restricted securities. Accordingly, such Notes may be resold
only as follows:
(1) to the Company, upon redemption thereof or otherwise;
(2) (A) so long as the Notes are eligible for resale pursuant to Rule 144A,
to a person inside the United States whom the seller reasonably believes is
a qualified institutional buyer within the meaning of Rule 144A under the
Securities Act in a transaction meeting the requirements of Rule 144A, (B)
in accordance with Rule 144 under the Securities Act, or (C) pursuant to
another exemption from the registration requirements of the Securities Act
and based upon an opinion of counsel reasonably acceptable to the Company;
(3) outside the United States to a foreign person in a transaction meeting
the requirements of Rule 904 under the Securities Act; or
(4) pursuant to an effective registration statement under the Securities
Act.
Resale of the Exchange Notes
Based on no-action letters issued by the staff of the Commission to third
parties, the Company believes the Exchange Notes issued pursuant to the offer
in exchange for the Notes may be offered for resale, resold and otherwise
transferred by any holder thereof (other than (i) a broker-dealer who purchased
such Notes directly from the Company for resale pursuant to Rule 144A or any
other available exemption under the Securities Act or (ii) a person that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided, however, that the holder is
acquiring the Exchange Notes in its ordinary course of business and is not
participating, and has no arrangement or understanding with any person to
participate, in the distribution of the Exchange Notes. In the event that the
Company's belief is inaccurate, holders of Exchange Notes who transfer Exchange
Notes in violation of the prospectus delivery provisions of the Securities Act
and without an exemption from registration thereunder may incur liability under
the Securities Act. The Company does not assume or indemnify holders against
such liability.
If, however, any holder acquires Exchange Notes in this offer for the purpose
of distributing or participating in a distribution of the Exchange Notes, such
holder cannot rely on the position of the staff of the Commission enunciated in
the referenced no-action letters or any similar interpretive letters, and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction, unless an exemption
from registration is otherwise available. Further, each participating broker-
dealer that receives Exchange Notes for its own account in exchange for Notes,
where such Notes were acquired by such participating broker-dealer as a result
of market-making activities or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of the Exchange
Notes. Although a broker-dealer may be an "underwriter" within the meaning of
the Securities Act, the Letter of Transmittal states that by so acknowledging
and by delivering a prospectus, a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act. This
prospectus, as it may amended or supplemented from time to time, may be used by
a broker-dealer in connection with resales of Exchange Notes received in
exchange for Notes.
As contemplated by these no-action letters and the registration rights
agreement, each holder tendering Notes in this offer is required to represent
to the Company in the Letter of Transmittal, that, among things:
(1) the person receiving the Exchange Notes pursuant to this offer, whether
or not such person is the holder, is receiving them in the ordinary course
of business;
97
(2) neither the holder nor any such other person has an arrangement or
understanding with any person to participate in the distribution of such
Exchange Notes and that such holder is not engaged in, and does not intend
to engage in, a distribution of Exchange Notes;
(3) neither the holder nor any such other person is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act;
(4) the holder acknowledges and agrees that (A) any person participating in
this offer for the purpose of distributing the Exchange Notes must comply
with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction with
respect to the Exchange Notes acquired by such person and cannot rely on
the position of the staff of the Commission set forth in no-action letters
that are discussed above and under the heading "--Purpose and Effect of the
Exchange Offer," and (B) any broker-dealer that receives Exchange Notes for
its own account in exchange for Notes pursuant to this offer must deliver a
prospectus in connection with any resale of such Exchange Notes, but by so
acknowledging, the holder shall not be deemed to admit that, by delivering
a prospectus, it is an "underwriter" within the meaning of the Securities
Act; and
(5) the holder understands that a secondary resale transaction described in
clause (4)(A) above should be covered by an effective registration
statement containing the selling securityholder information required by
Item 507 of Regulation S-K of the Commission.
Persons who acquire the Exchange Notes are responsible for compliance with the
state securities or blue sky laws regarding resales. The Company assumes no
responsibility for compliance with these requirements.
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Certain Federal Tax Considerations
Scope of Discussion
This general discussion of certain United States federal income and estate tax
consequences applies to you if you acquired outstanding Notes at original issue
for cash and you exchange those Notes for Exchange Notes in this offer. This
discussion only applies to you if you hold the Exchange Notes as a "capital
asset," generally, for investment, under Section 1221 of the Internal Revenue
Code of 1986, as amended (the "Code"). This summary, however, does not consider
state, local or foreign tax laws. In addition, it does not include all of the
rules which may affect the United States tax treatment of your investment in
the Exchange Notes. For example, special rules not discussed here may apply to
you if you are:
. a broker-dealer, a dealer in securities or a financial institution;
. an S corporation;
. an insurance company;
. a tax-exempt organization;
. subject to the alternative minimum tax provisions of the Code;
. holding the Exchange Notes as part of a hedge, straddle or other risk
reduction or constructive sale transaction; or
. a nonresident alien or foreign corporation subject to net-basis United
States federal income tax on income or gain derived from an Exchange
Note because such income or gain is effectively connected with the
conduct of a United States trade or business.
This discussion only represents our best attempt to describe certain federal
income tax consequences that may apply to you based on current United States
federal tax law. This discussion may in the end inaccurately describe the
federal income tax consequences which are applicable to you because the law may
change, possibly retroactively, and because the Internal Revenue Service
("IRS") or any court may disagree with this discussion.
This summary may not cover your particular circumstances because it does not
consider foreign, state or local tax rules, disregards certain federal tax
rules, and does not describe future changes in federal tax rules. Please
consult your tax advisor rather than relying on this general description.
United States Holders
If you are a "United States Holder," as defined below, this section applies to
you. Otherwise, the next section, "Non-United States Holders," applies to you.
Definition of United States Holder. You are a "United States Holder" if you
hold the Notes and you are:
. a citizen or resident of the United States, including an alien
individual who is a lawful permanent resident of the United States or
meets the "substantial presence" test under Section 7701(b) of the Code;
. a corporation or partnership created or organized in the United States
or under the laws of the United States or of any political subdivision;
. an estate the income of which is subject to United States federal income
tax regardless of its source; or
. a trust, if a United States court can exercise primary supervision over
the administration of the trust and one or more United States persons
can control all substantial decisions of the trust, or if the trust was
in existence on August 20, 1996 and has properly elected to continue to
be treated as a United States person.
Receipt of Exchange Notes. Because the economic terms of the Exchange Notes and
the Notes are identical, your exchange of Notes for Exchange Notes under this
offer will not constitute a taxable exchange of the Notes. Even if you received
Exchange Notes in exchange for Notes on which additional interest was paid
because of a registration default, the exchange should not be taxable because
the exchange would occur by operation of the Notes' original terms. As a
result:
. you should not recognize taxable gain or loss when you receive Exchange
Notes in exchange for Notes;
. your holding period in the Exchange Notes should include your holding
period in the Notes; and
99
. your basis in the Exchange Notes should equal your basis in the Notes.
Taxation of Stated Interest. You must generally pay federal income tax on the
interest on the Exchange Notes:
. when it accrues, if you use the accrual method of accounting for United
States federal income tax purposes; or
. when you receive it, if you use the cash method of accounting for United
States federal income tax purposes.
Redemption and Repurchase Rights. As described elsewhere in this Prospectus, we
may under certain circumstances be required to repurchase the Exchange Notes
and we have the option to redeem some or all of the Exchange Notes at certain
times under certain circumstances.
Based on our current expectations, the chance that we will repurchase or redeem
the Exchange Notes is remote. Accordingly, we intend to take the position that
the payments contingent on the repurchase or redemption of the Exchange Notes
do not, as of the issue date, cause the Exchange Notes to have original issue
discount ("OID") and do not affect the yield to maturity or the maturity date
of the Exchange Notes. You may not take a contrary position unless you disclose
your contrary position in the proper manner to the IRS.
You should consult your tax adviser with respect to the contingent payments
described above. If, contrary to our expectations, we repurchase or redeem the
notes, or if the IRS takes the position that the contingent payments described
were not remote as of the issue date, the amount and timing of interest income
you must include in taxable income may have to be redetermined.
Sale or Other Taxable Disposition of the Exchange Notes. You must recognize
taxable gain or loss on the sale, exchange, redemption, retirement or other
taxable disposition of an Exchange Note. The amount of your gain or loss equals
the difference between the amount you receive for the Exchange Note (in cash or
other property, valued at fair market value), minus the amount attributable to
accrued interest on the Exchange Note, minus your adjusted tax basis in the
Exchange Note. Your initial tax basis in an Exchange Note equals the price you
paid for the outstanding Note which you exchanged for the Exchange Note.
Your gain or loss will generally be a long-term capital gain or loss if your
holding period in the Exchange Note is more than one year. Otherwise, it will
be a short-term capital gain or loss. Payments attributable to accrued interest
which you have not yet included in income will be taxed as ordinary interest
income.
Backup Withholding. You may be subject to a 31% backup withholding tax when you
receive interest payments on the Exchange Note or proceeds upon the sale or
other disposition of an Exchange Note. Certain holders (including, among
others, corporations and certain tax-exempt organizations) are generally not
subject to backup withholding. In addition, the 31% backup withholding tax will
not apply to you if you provide your taxpayer identification number ("TIN") in
the prescribed manner unless:
. the IRS notifies us or our agent that the TIN you provided is incorrect;
. you fail to report interest and dividend payments that you receive on
your tax return and the IRS notifies us or our agent that withholding is
required; or
. you fail to certify under penalties of perjury that you are not subject
to backup withholding.
If the 31% backup withholding tax does apply to you, you may use the amounts
withheld as a refund or credit against your United States federal income tax
liability as long as you provide certain information to the IRS.
Non-United States Holders
Definition of Non-United States Holder. A "Non-United States Holder" is any
person other than a United States Holder. If you are subject to United States
federal income tax on a net basis on income or gain with respect to an Exchange
Note because such income or gain is effectively connected with the conduct of a
United States trade or business, this disclosure does not cover the United
States federal tax rules that apply to you.
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Interest.
Portfolio Interest Exemption. You will generally not have to pay United States
federal income tax on interest (or OID on the Exchange Notes, if any) paid on
the Exchange Notes because of the "portfolio interest exemption" if either:
. you represent that you are not a United States person for United States
federal income tax purposes and you provide the your name and address to
us or our paying agent on a properly executed IRS Form W-8 (or a
suitable substitute form) signed under penalties of perjury; or
. a securities clearing organization, bank, or other financial institution
that holds customers' securities in the ordinary course of its business
holds the Exchange Note on your behalf, certifies to us or our agent
under penalties of perjury that it has received IRS Form W-8 (or a
suitable substitute) from you or from another qualifying financial
institution intermediary, and provides a copy to us or our agent.
You will not, however, qualify for the portfolio interest exemption described
above if:
. you own, actually or constructively, 10% or more of the total combined
voting power of all classes of our capital stock;
. you are a controlled foreign corporation with respect to which we are a
"related person" within the meaning of Section 864(d)(4) of the Code; or
. you are a bank receiving interest described in Section 881(c)(3)(A) of
the Code.
Withholding Tax if the Interest Is Not Portfolio Interest. If you do not claim,
or do not qualify for, the benefit of the portfolio interest exemption, you may
be subject to 30% withholding tax on interest payments made on the Exchange
Notes. However, you may be able to claim the benefit of a reduced withholding
tax rate under an applicable income tax treaty. The required information for
claiming treaty benefits is generally submitted under current regulations on
Form 1001. Successor forms will require additional information, as discussed
below. See "Non-United States Holders--New Withholding Regulations."
Reporting. We may report annually to the IRS and to you the amount of interest
paid to, and the tax withheld, if any, with respect to you.
Sale or Other Disposition of the Exchange Notes. You will generally not be
subject to United States federal income tax or withholding tax on gain
recognized on a sale, exchange, redemption, retirement, or other disposition of
a Note. You may, however, be subject to tax on such gain if:
. you are an individual who was present in the United States for 183 days
or more in the taxable year of the disposition, in which case you may
have to pay a United States federal income tax of 30% (or a reduced
treaty rate) on such gain, and you may also be subject to withholding
tax; or
. you are an individual who is a former citizen or resident of the United
States, your loss of citizenship or residency occurred within the last
ten years (and, if you are a former resident, on or after February 6,
1995), and it had as one of its principal purposes the avoidance of
United States tax, in which case you may be taxed on the net gain
derived from the sale under the graduated United States federal income
tax rates that are applicable to United States citizens and resident
aliens, and you may be subject to withholding under certain
circumstances.
Even if you are an individual described in one of the two paragraphs above, you
should not recognize gain subject to United States federal income tax as a
result of exchanging Notes for Exchange Notes under this offer. See the more
complete discussion above under "United States Holders--Receipt of Exchange
Notes."
United States Federal Estate Taxes. If you qualify for the portfolio interest
exemption under the rules described above when you die, the Exchange Notes will
not be included in your estate for United States federal estate tax purposes.
Back-up Withholding and Information Reporting.
Payments From United States Office. If you receive payments of interest or
principal directly from us or through the United States office of a custodian,
nominee, agent or broker, there is a possibility that you will be subject to
both backup withholding at a rate of 31% and information reporting.
101
With respect to interest payments made on the Exchange Note, however, back-up
withholding and information reporting will not apply if you certify, generally
on a Form W-8 or substitute form, that you are not a United States person in
the manner described above. See "Non-United States Holders--Interest."
Moreover, with respect to proceeds received on the sale, exchange, redemption,
or other disposition of an Exchange Note, back-up withholding or information
reporting generally will not apply if you properly provide, generally on Form
W-8 or a substitute form, a statement that you are an "exempt foreign person"
for purposes of the broker reporting rules, and other required information. If
you are not subject to United States federal income or withholding tax on the
sale or other disposition of an Exchange Note, as described above under the
heading "Non-United States Holders--Sale or Other Disposition of Exchange
Notes," you will generally qualify as an "exempt foreign person" for purposes
of the broker reporting rules.
Payments From Foreign Office. If payments of principal and interest are made to
you outside the United States by or through the foreign office of your foreign
custodian, nominee or other agent, or if you receive the proceeds of the sale
of an Exchange Note through a foreign office of a "broker," as defined in the
pertinent United States Treasury Regulations, you will generally not be subject
to backup withholding or information reporting. You will, however, be subject
to backup withholding and information reporting if the foreign custodian,
nominee, agent or broker has actual knowledge or reason to know that the payee
is a United States person. You will also be subject to information reporting,
but not backup withholding, if the payment is made by a foreign office of a
custodian, nominee, agent or broker that is a United States person or a
controlled foreign corporation for United States federal income tax purposes,
or that derives 50% or more of its gross income from the conduct of a United
States trade or business for a specified three year period, unless the broker
has in its records documentary evidence that you are a Non-United States Holder
and certain other conditions are met.
Refunds. Any amounts withheld under the backup withholding rules may be
refunded or credited against the Non-United States Holder's United States
federal income tax liability, provided that the required information is
furnished to the IRS.
New Withholding Regulations. New regulations relating to withholding tax on
income paid to foreign persons (the "New Withholding Regulations") will
generally be effective for payments made after December 31, 1999, subject to
certain transition rules. The New Withholding Regulations modify and, in
general, unify the way in which you establish your status as a non-United
States "beneficial owner" eligible for withholding exemptions including the
portfolio interest exemption, a reduced treaty rate or an exemption from backup
withholding. For example, the new regulations will require new forms, which you
will generally have to provide earlier than you would have had to provide
replacements for expiring existing forms.
The New Withholding Regulations clarify withholding agents' reliance standards.
They also require additional certifications for claiming treaty benefits. For
example, you may be required to provide a TIN, and you may have to certify that
you "derive" the income with respect to which the treaty benefit is claimed
within the meaning of applicable regulations. The New Withholding Regulations
also provide somewhat different procedures for foreign intermediaries and flow-
through entities (such as foreign partnerships) to claim the benefit of
applicable exemptions on behalf of non-United States beneficial owners for
which or for whom they receive payments. The New Withholding Regulations also
amend the foreign broker office definition as it applies to partnerships.
The New Withholding Regulations are complex and this summary does not
completely describe them. Please consult your tax advisor to determine how the
New Withholding Regulations will affect your particular circumstances.
102
Plan of Distribution
Each broker-dealer that receives Exchange Notes for its own account pursuant to
this offer in exchange for outstanding Notes which were acquired by such
broker-dealer as a result of market-making or other trading activities must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. This Prospectus, as it may be amended or supplemented from
time to time, may be used by any such broker-dealer in connection with resales
of Exchange Notes received in exchange for outstanding Notes. We have agreed
that for a period of 180 days after this offer is completed, it will make this
Prospectus, as amended or supplemented, available to any such broker-dealer for
use in connection with any such resale. All resales must be made in compliance
with state securities or blue sky laws. We assume no responsibility with regard
to compliance with these requirements.
We will not receive any proceeds from any sales of the Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own account
pursuant to this offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to the purchaser or to or through brokers or dealers who
may receive compensation in the form of commissions or concessions from any
such broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells the Exchange Notes that were received by it for its
own account pursuant to this offer and any broker or dealer that participates
in a distribution of such Exchange Notes may be deemed to be an "underwriter"
within the meaning of the Securities Act and any profit on any such resale of
Exchange Notes and any commissions or concessions received by any such persons
may be deemed to be underwriting compensation under the Securities Act. The
Letter of Transmittal states that by acknowledging that it will deliver and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after this offer is completed, we will promptly send
additional copies of this Prospectus and any amendment or supplement to this
Prospectus to any broker-dealer that requests such documents in the Letter of
Transmittal.
We have been advised by J.P. Morgan Securities, Inc. and Goldman, Sachs & Co.,
the initial purchasers of the outstanding Notes, that following completion of
this offer they intend to make a market in the Exchange Notes. Such entities,
however, are under no obligation to do so and any market activities with
respect to the Exchange Notes may be discontinued at any time.
103
Legal Matters
Certain legal matters in connection with the issuance of the Exchange Notes
will be passed upon for the Company by Ropes & Gray, Boston, Massachusetts and
Honigman Miller Schwartz and Cohn, Detroit, Michigan.
Independent Public Accountants
The consolidated financial statements and schedule of Domino's Inc. and its
subsidiaries as of January 3, 1999 and December 28, 1997 and for each of the
three years in the period ended January 3, 1999 included in this Prospectus and
elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
104
Index to Consolidated Financial Statements
Page
----
Consolidated Financial Statements:
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets as of January 3, 1999 and December 28, 1997 . F-3
Consolidated Statements of Income for the years ended January 3, 1999,
December 28, 1997 and
December 29, 1996 ...................................................... F-4
Consolidated Statements of Comprehensive Income for the years ended
January 3, 1999, December 28, 1997 and December 29, 1996 ............... F-5
Consolidated Statements of Stockholder's Equity (Deficit) for the years
ended January 3, 1999, December 28, 1997 and December 29, 1996.......... F-6
Consolidated Statements of Cash Flows for the years ended January 3,
1999, December 28, 1997 and
December 29, 1996....................................................... F-7
Notes to Consolidated Financial Statements............................... F-8
Schedule II--Valuation and Qualifying Accounts........................... II-4
F-1
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 28, 1997 and January
3, 1999, 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 January 3, 1999. 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 generally accepted auditing
standards. 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 28, 1997 and January 3, 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended January 3, 1999 in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the accompanying
index is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Detroit, Michigan,
February 19, 1999.
F-2
Domino's, Inc. and Subsidiaries
Consolidated Balance Sheets
------------------------
December 28, January 3,
Dollars in thousands, except share and per share 1997 1999
amounts ------------ ----------
Assets
Current Assets:
Cash................................................. $ 105 $ 115
Accounts receivable, net of reserves of $3,978 in
1997 and $2,794 in 1998............................. 44,954 48,858
Notes receivable, net of reserves of $235 in 1997 and
$124 in 1998........................................ 3,201 8,271
Inventories........................................... 31,971 20,134
Prepaid expenses and other............................ 6,671 9,656
Deferred tax assets................................... -- 9,811
---------- ----------
Total current assets................................ 86,902 96,845
---------- ----------
Plant and Equipment, at cost:
Land, buildings and improvements..................... 12,709 14,605
Leasehold and other improvements..................... 56,187 52,248
Equipment............................................ 111,605 109,048
Vehicles............................................. 563 469
Construction in progress............................. 4,652 5,486
---------- ----------
185,716 181,856
Less--Accumulated depreciation....................... 131,553 116,890
---------- ----------
Plant and equipment, net............................ 54,163 64,966
---------- ----------
Other Assets:
Notes receivable, net of reserves of $5,473 in 1997
and $3,041 in 1998.................................. 11,688 18,461
Investments in marketable securities, restricted..... 5,597 --
Investment in related party limited partnership...... 16,233 --
Deferred tax assets.................................. -- 71,776
Deferred financing costs, net of accumulated amorti-
zation of $0 in 1997 and $234 in 1998............... 293 43,046
Goodwill, net of accumulated amortization of $6,128
in 1997 and $7,139 in 1998.......................... 17,356 14,179
Covenants not-to-compete, net of accumulated amorti-
zation of $9,781 in 1997 and $10,009 in 1998........ 2,189 50,058
Capitalized software, net of accumulated amortization
of $7,925 in 1997 and $9,932 in 1998................ 11,674 22,593
Other assets, net of accumulated amortization of
$6,186 in 1997 and $6,163 in 1998................... 6,883 5,967
---------- ----------
Total other assets.................................. 71,913 226,080
---------- ----------
$ 212,978 $ 387,891
========== ==========
Liabilities and Stockholder's Equity (Deficit)
Current Liabilities:
Current portion of long-term debt, including related
party debt of $417 in 1997.......................... $ 7,970 $ 7,646
Accounts payable..................................... 46,050 44,596
Insurance reserves................................... 10,202 9,633
Accrued compensation................................. 11,788 16,295
Accrued income taxes................................. 8,414 6,501
Other accrued liabilities............................ 27,431 30,398
---------- ----------
Total current liabilities........................... 111,855 115,069
---------- ----------
Long-term Liabilities:
Long-term debt, less current portion above........... 36,438 720,480
Insurance reserves................................... 27,256 15,132
Other accrued liabilities............................ 11,311 20,985
---------- ----------
Total long-term liabilities......................... 75,005 756,597
---------- ----------
Commitments and Contingencies
Stockholder's Equity (Deficit):
Common stock, par value $0.01 per share; 3,000 shares
authorized; 10 shares issued and outstanding........ -- --
Additional paid-in capital........................... -- 114,737
Retained earnings (deficit).......................... 25,910 (598,209)
Accumulated other comprehensive income............... 208 (303)
---------- ----------
Total stockholder's equity (deficit)................ 26,118 (483,775)
---------- ----------
$ 212,978 $ 387,891
========== ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
Domino's, Inc. and Subsidiaries
Consolidated Statements of Income
------------------------------------
For the Years Ended
------------------------------------
December 29, December 28, January 3,
1996 1997 1999
Dollars in thousands ------------ ------------ ----------
Revenues:
Corporate stores........................ $ 336,585 $ 376,837 $ 409,413
Domestic franchise royalties............ 93,404 102,360 112,222
Domestic distribution................... 494,173 513,097 599,121
International........................... 45,775 52,496 56,022
---------- ---------- ----------
Total revenues......................... 969,937 1,044,790 1,176,778
---------- ---------- ----------
Operating Expenses:
Cost of sales........................... 717,214 757,604 858,411
General and administrative.............. 196,222 222,182 248,098
---------- ---------- ----------
Total operating expenses............... 913,436 979,786 1,106,509
---------- ---------- ----------
Income from Operations 56,501 65,004 70,269
Interest Income.......................... 411 447 730
Interest Expense......................... 6,301 3,980 7,051
---------- ---------- ----------
Income Before Provision (benefit) for
Income Taxes............................ 50,611 61,471 63,948
Provision (benefit) for income taxes.... 30,884 366 (12,928)
---------- ---------- ----------
Net Income............................... $ 19,727 $ 61,105 $ 76,876
========== ========== ==========
The accompanying notes are an integral part of these consolidated statements.
F-4
Domino's, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
------------------------------------
For the Years Ended
------------------------------------
December 29, December 28, January 3,
1996 1997 1999
Dollars in thousands ------------ ------------ ----------
Net Income............................... $ 19,727 $ 61,105 $ 76,876
Other Comprehensive Income, Before Tax:
Currency translation adjustment......... (124) (120) (44)
Unrealized gain (loss) on investments in
marketable securities.................. 57 439 (497)
---------- ---------- ----------
(67) 319 (541)
Tax Attributes of Items of Other
Comprehensive Income: (3) (26) 30
---------- ---------- ----------
Other Comprehensive Income, net of tax... (70) 293 (511)
---------- ---------- ----------
Comprehensive Income..................... $ 19,657 $ 61,398 $ 76,365
========== ========== ==========
The accompanying notes are an integral part of these consolidated statements.
F-5
Domino's, Inc. and Subsidiaries
Consolidated Statements of Stockholder's Equity (Deficit)
------------------------------------------------------------
Accumulated Other
Comprehensive Income
--------------------------
Unrealized
Gain (Loss)
Additional Retained Currency on Investments
Common Paid-in Earnings Translation in Marketable
Stock Capital (Deficit) Adjustment Securities
Dollars in thousands --------- ---------- --------- ----------- --------------
Balance at December 31,
1995................... $ -- $ -- $ (54,510) $ (15) $ --
Net income.............. -- -- 19,727 -- --
Currency translation
adjustment............. -- -- -- (124) --
Unrealized gain on
investments in
marketable securities.. -- -- -- -- 54
--------- --------- --------- --------- ---------
Balance at December 29,
1996................... -- -- (34,783) (139) 54
Net income.............. -- -- 61,105 -- --
Distributions to Parent. -- -- (412) -- --
Currency translation
adjustment............. -- -- -- (120) --
Unrealized gain on
investments in
marketable securities.. -- -- -- -- 413
--------- --------- --------- --------- ---------
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) --
Unrealized loss on
investments in
marketable securities.. -- -- -- -- (467)
Recognition of deferred
tax assets 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) $ --
========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated statements.
F-6
Domino's, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
-------------------------------------
For the Years Ended
-------------------------------------
December 29, December 28, January 3,
1996 1997 1999
------------ ------------ ---------
Dollars in Thousands
Cash Flows from Operating Activities:
Net income............................ $ 19,727 $ 61,105 $ 76,876
Adjustments to reconcile net income to
net cash provided by operating
activities--
Depreciation and amortization....... 15,486 16,939 23,123
Provision (benefit) for losses on
accounts and notes receivable...... 942 1,131 (3,212)
Loss on sale of plant and equipment. 353 1,197 1,570
Provision (benefit) for deferred
Federal income taxes............... 12,204 -- (27,587)
Changes in operating assets and
liabilities--
Increase in accounts receivable.... (4,297) (13,130) (6,254)
(Increase) decrease in inventories
and prepaid expenses and other.... (3,987) (15,512) 4,531
Increase in accounts payable and
accrued liabilities............... 19,495 26,156 7,989
Decrease in insurance reserves..... (6,698) (4,805) (12,693)
--------- --------- ---------
Net cash provided by operating
activities....................... 53,225 73,081 64,343
--------- --------- ---------
Cash Flows from Investing Activities:
(Increase) decrease in other assets... 3,125 (790) 2
Repayments of notes receivable........ 2,340 2,381 414
Proceeds from sale of plant and
equipment............................ 784 52 5,587
Purchases of franchise stores and
commissaries......................... (3,513) (13,692) (1,534)
Purchases of plant and equipment...... (15,472) (31,625) (48,359)
(Purchases) sales of investments in
marketable securities................ (2,248) (2,832) 5,130
--------- --------- ---------
Net cash used in investing
activities....................... (14,984) (46,506) (38,760)
--------- --------- ---------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term
debt................................. -- 35,800 722,056
Cash paid for financing costs......... -- (293) (43,280)
Distributions to Parent............... -- (412) (666,020)
Repayments of long-term debt.......... (40,402) (61,583) (38,338)
--------- --------- ---------
Net cash used in financing
activities....................... (40,402) (26,488) (25,582)
--------- --------- ---------
Effect of Exchange Rate Changes on
Cash.................................. (19) (214) 9
--------- --------- ---------
Increase (decrease) in Cash............ (2,180) (127) 10
Cash, at beginning of year............. 2,412 232 105
--------- --------- ---------
Cash, at end of year................... $ 232 $ 105 $ 115
========= ========= =========
The accompanying notes are an integral part of these consolidated statements.
F-7
Domino's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Domino's, Inc. (formerly known as Domino's Pizza International Payroll
Services, 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).
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
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 Director and certain members of his family.
As part of the Recapitalization, the Company entered into a consulting
agreement under which it is committed to pay a Company Director and former
majority Parent stockholder $1 million in fiscal 1999 and an additional $4.5
million over nine years beginning in fiscal 2000. The entire $5.5 million has
been recorded as a charge to retained earnings as a component of purchase price
for the common stock.
As part of the Recapitalization, certain Company executives received stock
options for the purchase of Parent common stock and preferred stock.
Prior to December 1998, Domino's was an indirectly wholly-owned subsidiary of
Domino's Pizza, Inc. (DPI). During December 1998 and before the
Recapitalization, DPI distributed its ownership interest in Domino's to the
Parent. The Parent then contributed its ownership interest in DPI, which had
been a wholly-owned subsidiary of the Parent, to Domino's, effectively
converting Domino's from a subsidiary of DPI into DPI's parent.
The accompanying consolidated financial statements and these Notes to
Consolidated Financial Statements include the results of operations of DPI 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. Shares of common
stock issued and outstanding were 10 for the years ended December 29, 1996,
December 28, 1997 and January 3, 1999.
Fiscal Year
The Company's fiscal year ends on the Sunday closest to December 31. The 1996
fiscal year ended December 29, 1996; the 1997 fiscal year ended December 28,
1997; 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.
F-8
Domino's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
Inventories
Inventories are valued at the lower of cost (on a first-in, first-out basis) or
market.
Inventories at December 28, 1997 and January 3, 1999 are comprised of the
following (In thousands):
--------------------
1997 1998
--------- ---------
Equipment and supplies for sale to stores................. $ 20,968 $ 9,947
Food inventory............................................ 11,840 12,039
--------- ---------
32,808 21,986
Less--Inventory reserves.................................. 837 1,852
--------- ---------
Inventories, net.......................................... $ 31,971 $ 20,134
========= =========
Notes Receivable
During the normal course of business, the Company often provides financing to
franchisees (i) to stimulate new franchise store growth, (ii) to finance the
sale of corporate stores to franchisees and (iii) to facilitate rapid 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 8% to 14%, 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.
During 1998, the Company modified certain criteria it uses to determine
allowance for bad debts for notes receivable. As a result of this change, the
Company recognized a benefit for losses on notes receivable of approximately
$3.7 million during fiscal 1998 which is reflected in the accompanying 1998
consolidated statement of income.
Plant and Equipment
Additions to 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. Such lives are generally
three to seven years for equipment, twenty years for buildings and
improvements, three years for vehicles and five years or the term of the lease
including renewal options, whichever is shorter, for leasehold and other
improvements. Depreciation expense was approximately $11,798,000, $13,358,000
and $16,593,000 in 1996, 1997 and 1998, respectively.
Investments in Marketable Securities
The Company accounts for its investments in marketable securities in accordance
with Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting
for Certain Investments in Debt and Equity Securities."
As of December 28, 1997, the Company had investments in marketable securities
of $5,597,000, comprised of both debt and equity securities. These investments
were classified as available-for-sale and were stated at aggregate fair value
in the accompanying 1997 consolidated balance sheet. Unrealized gains at
December 28, 1997 were $536,000 and unrealized losses were $69,000, both net of
tax. For purposes of determining realized gains and losses, the cost of
securities sold is based upon the specific identification method.
The Company had placed these investments in "rabbi trusts", whereby the amounts
were irrevocably set aside to fund the Company's obligations under its
nonqualified executive and managerial deferred compensation plans (Note 5).
These plans were terminated during 1998 and all related investments in
marketable securities were sold with the proceeds being paid to the
participants in the plans.
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 in
the accompanying consolidated statements of income.
F-9
Domino's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
As part of the Recapitalization, the Company paid financing costs to affiliates
of 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 twenty years. Amortization of goodwill was approximately $901,000,
$1,437,000 and $1,957,000 in 1996, 1997 and 1998, respectively.
Covenants not-to-compete, primarily obtained as a part of the Recapitalization
(Note 7), 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 Director and former majority Parent stockholder. Other covenants
not-to-compete are being amortized using the straight-line method over periods
not exceeding twenty years. Amortization of covenants not-to-compete was
approximately $668,000, $756,000 and $2,222,000 in 1996, 1997 and 1998,
respectively.
Management reviews the realizability of goodwill and covenants not-to-compete
annually by comparing the future cash flows expected to result from these
assets to the carrying amounts of the related assets.
Capitalized Software
The American Institute of Certified Public Accountants has issued Statement of
Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use", which requires entities to capitalize and
amortize certain costs and currently expense certain other costs incurred for
software developed or obtained for internal use. Adoption of this SOP did not
have a significant impact on the accompanying consolidated financial
statements.
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 $1,472,000, $823,000
and $1,978,000 in 1996, 1997 and 1998, respectively.
Other Assets
Other assets primarily include equity investments in international franchisees,
organizational costs, deposits and other intangibles primarily arising from
franchise acquisitions. Amortization of organizational costs and other
intangibles is provided using the straight-line method over the estimated
useful lives of the amortizable assets. Amortization expense was approximately
$647,000, $564,000 and $376,000 in 1996, 1997 and 1998, respectively.
Other Accrued Liabilities
Current and long-term other accrued liabilities primarily include accruals for
sales, income and other taxes, legal reserves, marketing and advertising
expenses, store operating expenses, deferred revenues, deferred compensation
and a consulting fee payable to a Company 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.
F-10
Domino's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was
approximately $38.1 million, $40.5 million and $41.2 million during 1996, 1997
and 1998, respectively, and is included in general and administrative expenses
in the accompanying consolidated statements of income.
Self-Insurance
The Company is partially self-insured for property and health insurance risks
and, for periods up to December 20, 1998, was partially self-insured for
workers' compensation, general liability and owned and non-owned auto programs.
The Company's health insurance program provides coverage for life, medical,
dental and accidental death and dismemberment (AD&D) claims. Self-insurance
limitations for medical and dental per a covered individual's lifetime were
$2.0 million in 1996, 1997 and 1998. The AD&D and life insurance components of
the health insurance program are fully insured by the Company through third-
party insurance carriers.
Effective July 1, 1995 through June 30, 1996, the self-insurance limitations
per occurrence for the workers' compensation, general liability and owned and
non-owned auto programs were $500,000, plus a one-time otherwise recoverable
amount of $500,000 in excess of $500,000 on the combined general liability,
owned and non-owned auto programs and an additional one-time otherwise
recoverable amount of $350,000 in excess of $1.0 million on the combined owned
and non-owned auto programs.
Effective July 1, 1996 through December 19, 1998, the self-insurance
limitations per occurrence for the workers' compensation, general liability and
owned and non-owned auto programs were $500,000, plus a one-time otherwise
recoverable amount of $500,000 in excess of $500,000 on the combined general
liability, owned and non-owned auto programs for each policy year, except for
the period from July 1, 1998 through December 19, 1998 for which there was no
otherwise recoverable amount.
Total excess insurance limits for all periods were $105.0 million per
occurrence under the workers' compensation, general liability and owned and
non-owned auto programs.
Self-insurance reserves are determined using actuarial estimates. These
estimates are based on historical information along with certain assumptions
about future events. Changes in assumptions for such things as medical costs
and legal actions, as well as changes in actual experience, could cause these
estimates to change in the near term. In management's opinion, the accrued
insurance reserves at January 3, 1999 are sufficient to cover potential
aggregate losses.
Paid claims under the Company's self-insurance programs were $23.3 million in
1996, $20.0 million in 1997 and $23.4 million in 1998. Total insurance expense
was approximately $25.3 million, $20.0 million and $15.9 million in 1996, 1997
and 1998, respectively, and is included in cost of sales in the accompanying
consolidated statements of income. During 1998, the Company reduced self-
insurance reserves by $6.7 million due to a reduction in the actuarial
calculations. This reduction in expense is reflected in the 1998 insurance
expense amount above.
As of January 3, 1999, the Company had deposits totaling approximately $1.0
million with the Company's third-party insurance claims administrator. This
amount is included in other assets in the accompanying consolidated balance
sheets.
During December 1998, the Company entered into a guaranteed cost, combined
casualty insurance program that is effective for the period December 20, 1998
to December 20, 2001. The new program covers insurance claims on a first dollar
basis for workers' compensation, general liability and owned and non-owned auto
liability. Total insurance limits under the new program are $106.0 million per
occurrence for general liability and owned and non-owned auto liability and up
to the applicable statutory limits for workers' compensation. Under this
program and as of January 3, 1999, the Company is required to make minimum
premium payments of approximately $9.6 million during the first year of the
policy period.
F-11
Domino's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
Foreign Currency Translation
The Company's foreign entities use their local currency or the U.S. dollar as
the functional currency, in accordance with the provisions of SFAS No. 52,
"Foreign Currency Translation." Where the functional currency is the local
currency, the Company translates net assets into U.S. dollars at yearend
exchange rates, while income and expense accounts are translated at average
exchange rates. Translation adjustments are included in accumulated other
comprehensive income in the accompanying consolidated statements of
stockholder's equity (deficit) and other foreign currency transaction gains and
losses are included in determining net income.
Financial Derivatives
Subsequent to January 3, 1999, the Company entered into two interest-rate swap
agreements (the 1999 Swap Agreements) to effectively convert the Eurodollar
component of the interest rate on a portion of the Company's debt under Term
Loans A, B and C (Note 2) to a fixed rate of 5.12% beginning in January 1999
and continuing through December 2001, in an effort to reduce the impact of
interest rate changes on income. The total notional amount under the 1999 Swap
Agreements is initially $179 million and decreasing over time to a total
notional amount of $167 million in December 2001.
As a result of generating royalty revenues from franchised operations in Japan,
the Company is exposed to the effect of exchange rate fluctuations between the
Japanese yen and U.S. dollar. During 1995, the Company entered into contracts
to sell 12,200,000 Japanese yen every two weeks, which expired in December
1996. During 1996, the Company entered into contracts to sell 36,000,000
Japanese yen every four weeks, which expired in December 1997. During 1997, the
Company entered into contracts to sell 35,000,000 Japanese yen every four
weeks, which expired in December 1998. During 1998, the Company entered into
contracts to sell 30,000,000 Japanese yen every four weeks, which will expire
in December 1999.
Using foreign currency forward contracts enables management to minimize the
effect of a fluctuating Japanese yen on its reported income. Gains and losses
with respect to these contracts are recognized in income at each balance sheet
date based on the exchange rate in effect at that time. No significant gains or
losses were recognized under these contracts during 1996, 1997 or 1998. The
carrying value of these contracts approximates fair value.
Supplemental Disclosures of Cash Flow Information
The Company paid interest of approximately $6.2 million, $3.9 million and $4.6
million during 1996, 1997 and 1998, respectively. Additionally, cash paid for
Federal income taxes was approximately $10.0 million in 1996 and approximately
$2.7 million in 1998. No cash was paid for Federal income taxes in 1997.
The Company made non-cash distributions to the Parent of approximately $16.6
million representing the Company's investment in a related party limited
partnership and approximately $2.6 million representing various leaseholds and
other assets. The Company also assumed a $5.5 million consulting agreement
liability from the Parent during 1998.
Comprehensive Income
The Financial Accounting Standards Board has issued SFAS No. 130, "Reporting
Comprehensive Income", which establishes standards for reporting comprehensive
income and its components in a full set of financial statements. Comprehensive
income is defined as the total of net income and all other non-owner changes in
equity. The Company adopted this Statement in 1997. Adoption of this Statement
only affects the presentation of the consolidated financial statements.
Segment Reporting
The Financial Accounting Standards Board has issued SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information", which supercedes SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise", replacing
the "industry segment" approach of reporting segment information with the
"management" approach. The "management" approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the reportable segments. The Company
adopted this Statement in 1998. Adoption of this Statement only affects the
presentation of these Notes to Consolidated Financial Statements.
F-12
Domino's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
Accounting for Derivative Instruments and Hedging Activities
The Financial Accounting Standards Board has issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities", which requires that an
entity recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. This Statement is effective
for fiscal years beginning after June 15, 1999. Management has not yet
quantified the impact, if any, of adopting this Statement.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain amounts from fiscal 1996 and 1997 have been reclassified to conform to
the fiscal 1998 presentation.
(2) Long-Term Debt
At December 28, 1997 and January 3, 1999, long-term debt consisted of the
following (In thousands):
---------------------
1997 1998
--------- ---------
Term Loan A (see below).................................. $ -- $ 175,000
Term Loan B (see below).................................. -- 135,000
Term Loan C (see below).................................. -- 135,000
Revolving credit facility (see below).................... -- 1,700
Notes payable to franchise insurance captive, interest
ranging up to prime plus 1.5%, due on demand, maturing
at varying amounts through September 1999............... 7,350 6,426
Senior subordinated notes, 10 3/8% (see below)........... -- 275,000
Revolving credit notes payable to banks (see below),
repaid during 1998...................................... 35,800 --
Notes payable to related party, repaid during 1998....... 417 --
Other notes, mortgages and long-term contracts payable,
repaid during 1998...................................... 841 --
--------- ---------
44,408 728,126
Less--Current portion.................................... 7,970 7,646
--------- ---------
$ 36,438 $ 720,480
========= =========
On November 24, 1997, DPI refinanced all obligations remaining under a
previously existing credit facility through a new credit agreement (the 1997
Agreement). The 1997 Agreement provided a $93 million six-year unsecured
revolving credit facility, of which up to $35 million was available for letter
of credit advances. On December 21, 1998, all outstanding borrowings and
accrued interest under the 1997 Agreement were repaid in full and the 1997
Agreement was terminated.
On December 21, 1998, Domino's and a subsidiary entered into a new credit
agreement (the 1998 Agreement) with a consortium of banks primarily to finance
a portion of the Recapitalization, to repay existing indebtedness under the
1997 Agreement and to provide available borrowings for use in the normal course
of business.
The 1998 Agreement provides the following credit facilities: three term loans
(Term Loan A, Term Loan B and Term Loan C) and a revolving credit facility (the
Revolver). The aggregate borrowings available under the 1998 Agreement are $545
million.
The 1998 Agreement provides for borrowings of $175 million under Term Loan A,
$135 million under Term Loan B and $135 million under Term Loan C. Under the
terms of the 1998 Agreement, the borrowings under Term Loans A, B and C bear
interest, payable at least quarterly, at either (i) the higher of (a) the
specified bank's prime rate (7.75% at January 3,
F-13
Domino's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
1999) and (b) 0.5% above the Federal Reserve reported overnight funds rate,
each plus an applicable margin of between 0.50% to 2.75% or (ii) the Eurodollar
rate (5.25% at January 3, 1999) plus an applicable margin of between 1.50% to
3.75%, with margins determined based upon the Company's ratio of indebtedness
to earnings before interest, taxes, depreciation and amortization (EBITDA), as
defined. At January 3, 1999, the Company's effective borrowing rates were
8.25%, 8.75% and 9.00% for Term Loans A, B and C, respectively. As of January
3, 1999, all borrowings under Term Loans A, B and C were under Eurodollar
contracts with interest periods of 90 days. Principal payments are required
under Term Loans A, B and C, commencing at varied dates and continuing
quarterly thereafter until maturity. The final scheduled principal payments on
the outstanding borrowings under Term Loans A, B and C are due in December
2004, December 2006 and December 2007, respectively.
The 1998 Agreement also provides for borrowings of up to $100 million under the
Revolver, of which up to $35.0 million is available for letter of credit
advances and $10.0 million is available for swing-line loans. Borrowings under
the Revolver (excluding the letters of credit and swing-line loans) bear
interest, payable at least quarterly, at either (i) the higher of (a) the
specified bank's prime rate (7.75% at January 3, 1999) and (b) 0.5% above the
Federal Reserve reported overnight funds rate, each plus an applicable margin
of between 0.50% to 2.00% or (ii) the Eurodollar rate (5.25% at January 3,
1999) plus an applicable margin of between 1.50% to 3.00%, with margins
determined based upon the Company's ratio of indebtedness to EBITDA, as
defined. Borrowings under the swing-line portion of the Revolver bear interest,
payable at least quarterly, at the higher of (a) the specified bank's prime
rate (7.75% at January 3, 1999) and (b) 0.5% above the Federal Reserve reported
overnight funds rate, each plus an applicable margin of between 0.50% to 2.00%
based upon the Company's ratio of indebtedness to EBITDA, as defined. At
January 3, 1999, the Company's effective borrowing rate on swing-line loans was
9.75%. The Company also pays a commitment fee on the unused portion of the
Revolver ranging from 0.25% to 0.50%, determined based upon the Company's ratio
of indebtedness to EBITDA, as defined. At January 3, 1999 the commitment fee
for such unused borrowings was 0.50%. The fee for letter of credit amounts
outstanding at January 3, 1999 was 3.25%. As of January 3, 1999 there were
$87.5 in available borrowings under the Revolver, with $10.8 million of letters
of credit and $1.7 million of swing-line borrowings outstanding. The Revolver
expires in December 2004.
The credit facilities included in the 1998 Agreement are (i) guaranteed by the
Parent, (ii) jointly and severally guaranteed by each of Domino's domestic
subsidiaries and (iii) secured by a first priority lien on substantially all of
the assets of the Company.
The 1998 Agreement contains certain financial and non-financial covenants that,
among other things, require the maintenance of minimum interest coverage ratios
and consolidated adjusted EBITDA and maximum leverage ratios, all as defined in
the 1998 Agreement, and restrict the Company's ability to pay dividends on or
redeem or repurchase the Company's capital stock, incur additional
indebtedness, issue preferred stock, make investments, use assets as security
in other transactions and sell certain assets or merge with or into other
companies.
On December 21, 1998, Domino's issued $275 million of 10 3/8% Senior
Subordinated Notes due 2009 (the Notes) requiring semi-annual interest payments
beginning July 15, 1999. Prior to January 15, 2002, the Company may redeem, at
a fixed price, up to 35% of the Notes with the proceeds of equity offerings, if
any, by the Parent or the Company. Before January 15, 2004, Domino's may redeem
all, but not part, of the Notes if a change in control occurs, as defined in
the Notes. Beginning January 15, 2004, Domino's may redeem some or all of the
Notes at fixed redemption prices, ranging from 105.1875% of par in 2004 to 100%
of par in 2007 and thereafter. In the event of a change of control, as defined
in the Notes, Domino's will be obligated to repurchase Notes tendered by the
holders at a fixed price. The Notes are guaranteed by each of Domino's domestic
subsidiaries (non-domestic subsidiaries do not represent a material amount of
revenues and assets) and are subordinated in right of payment to all existing
and future senior debt of the Company.
The indenture related to the Notes restricts Domino's and its restricted
subsidiaries from paying dividends or redeeming equity interests (including
those of the Parent), with certain specified exceptions, unless a minimum fixed
charge coverage ratio is met and such payments are limited to 50% of cumulative
net income of the Company from January 4, 1999 to the payment date plus the net
proceeds from any capital contributions or the sale of equity interests.
The carrying amounts of the Company's debt approximate fair value. The Company
received $30 million under Term Loans B and C from a stockholder of the Parent.
The Company also issued $20 million of the Notes to this stockholder.
F-14
Domino's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
As of January 3, 1999, maturities of long-term debt are as follows (In
thousands):
---------
1999................................................................. $ 7,646
2000................................................................. 12,220
2001................................................................. 15,165
2002................................................................. 35,017
2003................................................................. 50,068
Thereafter........................................................... 608,010
---------
$ 728,126
=========
(3) Commitments and Contingencies
Lease Commitments
The Company leases various equipment, store and commissary locations and its
corporate headquarters under operating leases with expiration dates through
2009. Rent expenses totaled approximately $26.0 million, $26.9 million and
$27.4 million during 1996, 1997 and 1998, respectively. As of January 3, 1999,
the future minimum rental commitments for all noncancellable leases, which
include approximately $22.3 million in commitments to related parties and is
net of approximately $3.1 million in future minimum rental commitments which
have been assigned to certain franchises, are as follows (In thousands):
-------
1999.................................................................... $17,269
2000.................................................................... 12,922
2001.................................................................... 10,910
2002.................................................................... 9,615
2003.................................................................... 7,716
Thereafter.............................................................. 8,554
-------
$66,986
=======
Legal Proceedings and Related Matters
The Company is a party to lawsuits, revenue agent reviews by taxing authorities
and legal proceedings, of which the majority involve workers' compensation,
employment practices liability, general liability, automobile and franchisee
claims arising in the ordinary course of business. In the opinion of the
Company's management, these matters, individually and in the aggregate, will
not have a material adverse effect on the financial condition and results of
operations of the Company, and the established reserves adequately provide for
the estimated resolution of such claims.
(4) Income Taxes
For fiscal year 1996, Domino's and its qualifying subsidiaries filed a
consolidated Federal C Corporation income tax return with the Parent. Under the
terms of a tax-sharing agreement with the Parent, the Company recorded its
Federal income tax provision and liability as if it filed its own consolidated
Federal income tax return. Domino's and its qualifying subsidiaries and the
Parent elected S Corporation status, effective December 30, 1996, whereby the
taxable income of the Company was included in the income tax returns of the
Parent's shareholders. Accordingly, the tax benefit of deferred tax deductions
would not accrue to the Company but rather to the Parent's shareholders. Due to
the S Corporation election, the Company's 1996 provision for income taxes
includes an additional $8.2 million to fully reserve its net deferred tax asset
as of December 29, 1996.
As a result of the Recapitalization, the Parent, Domino's and its qualifying
subsidiaries reverted to C Corporation status effective December 21, 1998 and
will file a consolidated Federal income tax return. The Company recorded its
Federal income tax provision and related liability for the last two weeks of
fiscal year 1998 as if it filed its own consolidated
F-15
Domino's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
Federal income tax return in accordance with a December 1998 tax-sharing
agreement. As such, the amounts classified as deferred tax assets in the
accompanying 1998 consolidated balance sheet are receivable from the Parent as
the ultimate taxpayer. The Company has recorded its net deferred tax asset
position on the effective date of C Corporation conversion. These amounts are
reflected in the accompanying 1998 consolidated balance sheet and statement of
income.
Just prior to the Recapitalization, certain Domino's subsidiaries sold certain
tangible and intangible assets to another Domino's subsidiary, which had
revoked its S Corporation election. The gain on this transaction, while not
reflected for financial reporting purposes, resulted in a Federal deferred tax
asset to the Company of $54 million due to the difference in book and tax
bases. This amount is reflected in deferred tax assets in the accompanying 1998
consolidated balance sheet and was credited directly to retained earnings in
accordance with EITF 94-10.
The differences between the United States Federal statutory income tax rate of
35% and the consolidated effective income tax rate for fiscal year 1996 and for
fiscal year 1998 (only two weeks of which was a C Corporation period) are
summarized as follows (In thousands):
------------------------
For the Years Ended
------------------------
December 29, January 3,
1996 1999
------------ ----------
Federal income tax expense based on the statutory
rate................................................ $ 17,714 $ 22,382
State and local taxes, net of related Federal income
taxes............................................... 1,979 1,594
Non-resident withholding and foreign income taxes.... 2,040 2,530
Non-deductible expenses.............................. 580 578
Other, net........................................... 2,556 (317)
Foreign tax and other tax credits.................... (2,169) (2,885)
Tax reserves......................................... -- 10,000
Federal deferred benefit recorded upon conversion to
C Corporation in 1998............................... -- (27,905)
Exclusion of income earned during S Corporation
period in 1998...................................... -- (18,900)
Change in valuation allowance........................ 8,184 --
---------- ----------
$ 30,884 $ (12,928)
========== ==========
The components of the 1996, 1997 and 1998 provision for income taxes are as
follows (In thousands):
--------------------------------
1996 1997 1998
--------- --------- ---------
Provision (benefit) for Federal income
taxes--
Current provision (benefit)................. $ 13,595 $ (7,419) $ 9,676
Deferred--
Deferred provision (benefit) .............. 4,020 -- (27,587)
Change in valuation allowance.............. 8,184 -- --
--------- --------- ---------
Total provision (benefit) for federal
income taxes............................. 25,799 (7,419) (17,911)
Provision for state and local income taxes... 3,045 5,719 2,453
Provision for non-resident withholding and
foreign taxes............................... 2,040 2,066 2,530
--------- --------- ---------
Provision (benefit) for income taxes......... $ 30,884 $ 366 $ (12,928)
========= ========= =========
During 1996, deferred income taxes arose from temporary differences in the
recognition of certain items for income tax and financial reporting purposes.
During 1997, the Company reversed certain tax reserves for Federal income tax
exposures it believed no longer exist. The amount of the reserves reversed was
approximately $7.4 million and is included in the accompanying 1997
consolidated statement of income.
F-16
Domino's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
During 1998, deferred income taxes arose primarily from the basis difference
created by the intercompany asset sale and the reversion to C Corporation
status referred to above.
Realization of the Company's deferred tax assets is dependent upon many
factors, including, but not limited to, the ability of the Company to generate
sufficient taxable income. Although realization of the Company's deferred tax
assets is not assured, management believes it is more likely than not that the
deferred tax assets will be realized. On an ongoing basis, management will
assess whether it remains more likely than not that the deferred tax assets
will be realized.
As of January 3, 1999, the components of the net deferred tax asset were as
follows (In thousands):
---------
Deferred Federal income tax assets--
Step-up of basis on subsidiaries sale of certain assets............. $ 52,374
Self-insurance reserves............................................. 8,447
Accruals and other reserves......................................... 8,096
Bad debt reserves................................................... 2,189
Depreciation, amortization and asset basis differences.............. 7,422
Deferred revenue.................................................... 1,595
Other............................................................... 3,501
---------
83,624
---------
Deferred Federal income tax liabilities--
Capitalized development costs....................................... 3,105
Other............................................................... 1,077
---------
4,182
---------
Net deferred Federal income tax asset................................ $ 79,442
=========
Net deferred state tax asset......................................... $ 2,145
=========
As of January 3, 1999, the classification of the net deferred tax asset is
summarized as follows: (In thousands):
-------------------------------
Current Long-term Total
--------- --------- ---------
Deferred tax assets............................ $ 10,830 $ 74,939 $ 85,769
Deferred tax liabilities....................... 1,019 3,163 4,182
--------- --------- ---------
Net deferred tax asset......................... $ 9,811 $ 71,776 $ 81,587
========= ========= =========
(5) Employee Benefits
The Company has a deferred salary reduction plan which qualifies under Internal
Revenue Code Section 401(k). All full-time salaried and certain hourly
employees of the Company who have completed one year of service and are at
least 21 years of age are eligible to participate in the plan. Such employees
may be able to participate in the plan after only 6 months of service if they
are employed in a position regularly scheduled to work at least 1,000 hours
annually. The plan requires the employer to match 50% of the first 6% of
employee contributions per participant. These matching contributions vest
immediately. The charges to operations for Company contributions to the plan
were $883,000, $1,183,000 and $2,449,000 for 1996, 1997 and 1998, respectively.
Through December 20, 1998, the Company also had a nonqualified executive
deferred compensation plan (the executive plan) available for certain
executives and other key employees and a nonqualified managerial deferred
compensation plan (the managerial plan) available for certain managerial
employees. Under the executive plan, certain eligible executives could defer up
to 25% of their annual compensation, and all other eligible participants could
defer up to 20% of their annual compensation. Under the managerial plan,
certain eligible employees could defer up to 15% of their annual
F-17
Domino's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
compensation. Both plans required a Company match of either 30% of employee
contributions per participant or the Company match percentage under the Company
401(k) plan, whichever was less, with additional Company contributions
permitted at the discretion of the Company. Both plans also required the
Company to credit each participant's account monthly at an annualized rate
equal to the prime rate of interest, as defined, plus 2%. The charges to
operations for Company contributions to these plans, including interest, were
$757,000, $1,326,000 and $1,883,000 in 1996, 1997 and 1998, respectively. The
liability under these plans of approximately $6.0 million is included in long-
term liabilities in the accompanying 1997 consolidated balance sheet. The
Company terminated both the executive plan and the managerial plan and paid out
the related liabilities on December 20, 1998.
Effective January 4, 1999, the Company established a nonqualified deferred
compensation plan available for the members of the Company's executive team,
certain other key executives and certain managerial employees. Under this plan,
the participants may defer up to 40% of their annual compensation. The plan
requires the Company to match 30% with respect to the first 15%, 20%, or 25% of
participant salary deferrals, depending on the employee. The plan requires the
Company to credit the participants' accounts following each pay period. The
Company may be required to make supplemental contributions to participants'
accounts depending on the earnings of the Company as defined in the plan. The
participants direct the investment of their deferred compensation within seven
mutual funds.
(6) Financial Instruments with Off-Balance Sheet Risk
The Company is party to stand-by letters of credit with off-balance sheet risk.
The Company's exposure to credit loss for stand-by letters of credit and
financial guarantees is represented by the contractual amount of these
instruments. The Company uses the same credit policies in making conditional
obligations as it does for on-balance sheet instruments. Total conditional
commitments under letters of credit as of January 3, 1999, net of $2.4 million
of a letter of credit for which the Company has recorded a liability on the
accompanying 1998 consolidated balance sheet, are $8.4 million.
(7) Related Party Transactions
Leases
The Company leases its corporate headquarters under a long-term operating lease
agreement with a partnership owned by a Company Director and former majority
Parent stockholder. The current lease, dated December 21, 1998, replaced a
previous lease agreement with the same partnership. The Company also leased two
commissary locations from partnerships owned by this Company Director and
former majority Parent stockholder and his family during 1996, 1997 and until
August 1998 when the Company purchased the commissaries and terminated the
respective leases. Total lease expense for the aforementioned leases was $14.4
million, $13.8 million and $13.6 million for 1996, 1997 and 1998, respectively,
the majority of which is included in general and administrative expenses in the
accompanying consolidated statements of income.
The Company was party to an agreement with an affiliated company which was
owned by a Company Director and former majority Parent stockholder and members
of his family, whereby the Company obtained a 50% limited partner interest in a
real estate partnership which owns certain land surrounding the Company's
corporate headquarters. The Company accounted for this investment using the
equity method, whereby the original investment was recorded at cost and was
adjusted by the Company's share of the partnership's undistributed earnings and
losses, based on a formula defined in the agreement. Under the terms of this
agreement, the Company leased certain of the land owned by the partnership.
Total lease expense was $1.2 million for 1996, $1.3 million for 1997 and $1.4
million for 1998. In December 1998, the Company distributed its investment in
the partnership to the Parent.
Aggregate future commitments under these leases are as follows (In thousands):
-------
1999.................................................................... $ 4,258
2000.................................................................... 4,371
2001.................................................................... 4,486
2002.................................................................... 4,606
2003.................................................................... 4,544
-------
$22,265
=======
F-18
Domino's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
Charitable Contributions
The Company made contributions of approximately $5.6 million, $6.8 million and
$7.7 million in 1996, 1997 and 1998, respectively, to a charitable foundation
founded and operated by a Company Director and former majority Parent
stockholder. These expenses are included in general and administrative expenses
in the accompanying consolidated statements of income.
Covenant Not-to-Compete
As part of the Recapitalization, the Parent entered into a covenant not-to-
compete with its former majority stockholder and current Company Director. The
Parent contributed this asset to the Company during 1998. The Company has
capitalized the $50 million paid in consideration for the covenant not-to-
compete and is amortizing this amount over the three-year term of the covenant
using an accelerated amortization method. Amortization expense for 1998 was
approximately $1,282,000. The net asset amount is included in covenants not-to-
compete in the accompanying 1998 consolidated balance sheet.
Management Agreement
As part of the Recapitalization, the Parent and its subsidiaries (collectively,
the Group) entered into a management agreement with an affiliate of a
stockholder of the Parent to provide the Group with certain management
services. The Company is committed to pay an amount not to exceed $2.0 million
per year on an ongoing basis for management services as defined in the
management agreement. The Company made a prepayment of $0.5 million in 1998
related to these ongoing managerial services for 1999. Furthermore, the Group
must allow the affiliate to participate in the negotiation and consummation of
future senior financing and pay the affiliate a fixed fee, as defined in the
management agreement.
(8) Segment Data
The Company has three reportable segments as determined by management using the
"management" approach as defined in SFAS No. 131: (1) Domestic Stores, (2)
Domestic Distribution and (3) International. The Company's operations are
organized by management on the combined bases of line of business and
geography. The Domestic Stores segment includes Company operations with respect
to all franchised and Company-owned Domino's Pizza stores throughout the
contiguous United States. The Domestic Distribution segment includes the
distribution of food, equipment and supplies to franchised and Company-owned
Domino's Pizza stores throughout the contiguous United States. The
International segment includes Company operations related to its franchising
business in foreign and non-contiguous United States markets and its food
distribution business in Canada, Puerto Rico, Alaska and Hawaii.
The accounting policies of the reportable segments are the same as those
described in Note 1. The Company evaluates the performance of its segments and
allocates resources to them based on EBITDA.
F-19
Domino's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
The tables below summarize the financial information concerning the Company's
reportable segments for fiscal years 1996, 1997 and 1998. Intersegment Revenues
are comprised of sales of food, equipment and supplies from the Domestic
Distribution segment to the Domestic Stores segment. Intersegment sales prices
are market based. The "Other" column as it relates to EBITDA information below
includes charitable contributions, a Company Director's and former majority
Parent Stockholder's salary and other corporate headquarter costs that
management does not allocate to any of the reportable segments. The "Other"
column as it relates to capital expenditures primarily includes capitalized
software and leasehold improvements that management does not allocate to any of
the reportable segments. All amounts presented below are in thousands.
--------------------------------------------------------------------------
Domestic Domestic Intersegment
Stores Distribution International Revenues Other Total
--------- ------------ ------------- ------------ ---------- ----------
Revenues--
1998................... $ 521,635 $ 716,802 $ 56,022 $ (117,681) $ -- $1,176,778
1997................... 479,197 617,057 52,496 (103,960) -- 1,044,790
1996................... 429,989 587,080 45,775 (92,907) -- 969,937
EBITDA--
1998................... 121,890 17,972 8,685 -- (53,585) 94,962
1997................... 106,831 15,496 8,617 -- (47,804) 83,140
1996................... 93,700 13,503 6,867 -- (41,730) 72,340
Capital Expenditures--
1998................... 21,795 6,825 249 -- 21,107 49,976
1997................... 26,474 7,322 511 -- 11,105 45,412
1996................... 11,898 1,616 291 -- 6,082 19,887
The following table reconciles Total EBITDA above to consolidated income before
provision (benefit) for income taxes:
----------------------------------
1996 1997 1998
---------- ---------- ----------
Total EBITDA............................... $ 72,340 $ 83,140 $ 94,962
Depreciation and amortization.............. (15,486) (16,939) (23,123)
Interest expense........................... (6,301) (3,980) (7,051)
Interest income............................ 411 447 730
Loss on sale of plant and equipment........ (353) (1,197) (1,570)
---------- ---------- ----------
Income before provision (benefit) for
income taxes.............................. $ 50,611 $ 61,471 $ 63,948
========== ========== ==========
The following table presents the Company's geographic identifiable asset
information for fiscal years 1996, 1997 and 1998 and a reconciliation to total
consolidated assets:
--------------------------------
1996 1997 1998
---------- ---------- ----------
Contiguous United States...................... $ 138,900 $ 184,482 $ 304,373
International................................. 9,290 10,932 17,879
Unallocated Assets............................ 7,264 17,564 65,639
---------- ---------- ----------
Total Consolidated Assets..................... $ 155,454 $ 212,978 $ 387,891
========== ========== ==========
Unallocated assets include assets that management does not attribute to either
the Contiguous United States or the International segments above and includes
marketable securities, deferred financing costs and capitalized software.
No customer accounted for more than 10% of total consolidated revenues in the
fiscal years ended 1996, 1997 and 1998.
F-20
Domino's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(9) Periodic Financial Data (Unaudited)
The Company's convention with respect to reporting periodic financial data is
such that each of the first three periods consists of twelve weeks while the
last period presented consists of sixteen or seventeen weeks depending on the
number of weeks in the fiscal year (See Note 1).
-----------------------------------------------
Sixteen
Twelve Weeks Ended Weeks Ended
March 23, June 15, September 7, December 28,
1997 1997 1997 1997
Dollars in thousands --------- --------- ------------ ------------
Total revenues................. $ 230,229 $ 235,934 $ 234,085 $ 344,542
========= ========= ========= =========
Income before provision for
income taxes.................. $ 13,928 $ 14,888 $ 12,650 $ 20,005
========= ========= ========= =========
Net income..................... $ 13,240 $ 13,993 $ 11,225 $ 22,647
========= ========= ========= =========
-----------------------------------------------
Seventeen
Twelve Weeks Ended Weeks Ended
March 22, June 14, September 6, January 3,
1998 1998 1998 1999
Dollars in thousands --------- --------- ------------ ------------
Total revenues................. $ 255,856 $ 262,302 $ 265,268 $ 393,352
========= ========= ========= =========
Income before provision
(benefit) for income taxes.... $ 13,801 $ 15,517 $ 15,289 $ 19,341
========= ========= ========= =========
Net income..................... $ 12,651 $ 14,381 $ 14,133 $ 35,711
========= ========= ========= =========
(10) Pro Forma Financial Data (Unaudited)
The following unaudited pro forma financial data is presented to illustrate the
estimated effects on net income if the Company had not elected S Corporation
status for fiscal year 1997 and substantially all of fiscal year 1998.
Management estimates that the provision for income taxes would have increased
and net income would have decreased by approximately $18.0 million in 1997 and
approximately $18.9 million in 1998 had the Company remained a C Corporation
for those periods.
----------------------------------
1997 1997 Pro
Company Forma 1997 Pro
Historical Adjustments Forma
Dollars in thousands ---------- ----------- ----------
Total revenues.............................. $1,044,790 $ -- $1,044,790
Income before provision for income taxes.... 61,471 -- 61,471
Provision for income taxes.................. 366 18,000 18,366
---------- --------- ----------
Net income.................................. $ 61,105 $ (18,000) $ 43,105
========== ========= ==========
Comprehensive income........................ $ 61,398 $ (18,144) $ 43,254
========== ========= ==========
----------------------------------
1998 1998 Pro
Company Forma 1998 Pro
Historical Adjustments Forma
Dollars in thousands ---------- ----------- ----------
Total revenues.............................. $1,176,778 $ -- $1,176,778
Income before provision (benefit) for income
taxes...................................... 63,948 -- 63,948
Provision (benefit) for income taxes........ (12,928) 18,900 5,972
---------- --------- ----------
Net income.................................. $ 76,876 $ (18,900) $ 57,976
========== ========= ==========
Comprehensive income........................ $ 76,365 $ (18,736) $ 57,629
========== ========= ==========
F-21
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
You should rely only upon the information contained in this prospectus. We
have not authorized any other person to provide you with different informa-
tion. If anyone provides you with different or inconsistent information, you
should not rely on it. We are not making an offer to sell these securities in
any jurisdiction where the offer or sale is not permitted. You should assume
that the information appearing in this prospectus is accurate as of the date
on the front cover of this prospectus only. Our business, financial condition,
results of operations and prospects may have changed since that date.
----------------
TABLE OF CONTENTS
Page
----
Prospectus Summary...................................................................... 1
Risk Factors............................................................................ 15
Recent Developments .................................................................... 21
Use of Proceeds......................................................................... 22
Capitalization.......................................................................... 23
Unaudited Pro Forma Condensed Consolidated Financial Data .............................. 24
Selected Historical Consolidated Financial Data......................................... 29
Management's Discussion and Analysis of Financial Condition and Results of Operations .. 31
Business................................................................................ 37
Management ............................................................................. 46
Principal Stockholders.................................................................. 52
Certain Relationships and Related Transactions.......................................... 54
Description of Senior Credit Facilities................................................. 55
Description of Exchange Notes........................................................... 57
The Exchange Offer...................................................................... 90
Certain Federal Income Tax Consequences................................................. 99
Plan of Distribution ................................................................... 103
Legal Matters........................................................................... 104
Independent Public Accountants.......................................................... 104
Index to Consolidated Financial Statements.............................................. F-1
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Domino's, Inc.
Exchange Offer
$275,000,000
10 3/8% Series B
Senior Subordinated
Notes due 2009
----------------
PROSPECTUS
----------------
March , 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20 Indemnification of Directors and Officers.
The Certificate of Incorporation, as amended, and by-laws of each of Domino's,
Inc. and Domino's Pizza International, Inc. provide that each corporation shall
indemnify its respective directors and officers to the maximum extent permitted
from time to time by the Delaware General Corporation Law ("DGCL").
Section 145 of the DGCL provides that a corporation may indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Section 145 further
provides that a corporation similarly may indemnify any such person serving in
any such capacity who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor, against expenses actually and
reasonably incurred in connection with the defense or settlement of such action
or suit if he acted in good faith and in a manner he reasonably believed to be
in, or not opposed to, the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or such other
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Section 102(b)(7) permits a corporation to include in its certificate of
incorporation a provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, provided, however, that such provision shall
not eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the DGCL, which relates
to unlawful payment of dividends and unlawful stock purchases and redemptions,
or (iv) for any transaction from which the director derived an improper
personal benefit.
The by-laws of each of Domino's Pizza, Inc., Metro Detroit Pizza, Inc. and
Domino's Franchise Holding Co. provide that each such corporation shall
indemnify its respective directors and officers to the fullest extent
authorized or permitted by the Michigan Business Corporation Act. Section
450.1561 of the Michigan Business Corporation Act permits a corporation to
indemnify any person who was or is a party or is threatened to be made a party
to a threatened, pending or completed action, suit, or proceeding, whether
civil, criminal, administrative or investigative and whether formal or
informal, other than an action by or in the right of the corporation, by reason
of the fact that he or she is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, partner, trustee, employee or agent of another foreign or
domestic corporation, partnership, joint venture, trust or other enterprise,
whether for profit or not, against expenses, including attorneys' fees,
judgments, penalties, fines and amounts paid in settlement actually and
reasonably incurred by him or her in connection with the action, suit, or
proceeding, if the person acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
corporation or its shareholders, and with respect to a criminal action or
proceeding, if the person had no reasonable cause to believe his or her conduct
was unlawful.
Section 450.1562 of the Michigan Business Corporation Act further provides that
a corporation may indemnify any such person serving in such capacity who was or
is a party or is threatened to be made a party to a threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment its favor, against expenses (including attorneys' fees) and amounts
paid in settlement actually and reasonably incurred in connection with the
action or suit if the person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation or
its shareholders, except that no indemnification shall be made for a claim,
issue or matter in which the person has been found liable to the corporation
except to the extent authorized by the court upon application for
indemnification pursuant to Section 450.1564c.
II-1
The Articles of Incorporation of Domino's Pizza International Payroll Services,
Inc. empowers the corporation to broadly indemnify its directors and officers.
Section 607.0850 of the Florida Business Corporation Act permits a corporation
to indemnify, in a case-by-case determination) any person who is or was a party
to any proceeding by reason of the fact that such person is or was a director,
officer, employee or agent of the corporation or serving in such a capacity at
the request of the corporation for another corporation, or other specified
business entity, in which such person acted in good faith and in a manner
reasonably believed to be in, or not opposed to, the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reason to believe his conduct was unlawful, for the amount of liability
incurred in connection with such proceeding and any appeal thereof.
The directors and officers of Domino's, Domino's Pizza, Inc., Domino's
Franchise Holding Co., Metro Detroit Pizza, Inc., Domino's Pizza International,
Inc., Domino's Pizza International Payroll Services, Inc. and Domino's Pizza-
Government Services Division, Inc. are covered under directors' and officers'
liability insurance policies maintained by TISM, Inc.
Item 21 Exhibits and Financial Statement Schedules.
(a) Exhibits
Exhibit
Number Description
------- -----------
2.1 Agreement and Plan of Merger dated as of September 25, 1998.
2.2 Amendment No. 1 to Agreement and Plan of Merger dated as of November
24, 1998.
2.3 Amendment No. 2 to Agreement and Plan of Merger dated as of November
24, 1998.
2.4 Amendment No. 3 to Agreement and Plan of Merger dated December 18,
1998.
3.1 Domino's, Inc. Amended and Restated Certificate of Incorporation.
3.2 Domino's, Inc. Amended and Restated By-Laws.
3.3 Domino's Pizza, Inc. Restated Articles of Incorporation.
3.4 Domino's Pizza, Inc. By-laws.
3.5 Metro Detroit Pizza, Inc. Restated Articles of Incorporation.
3.6 Metro Detroit Pizza, Inc. By-Laws.
3.7 Domino's Franchise Holding Co. Articles of Incorporation.
3.8 Domino's Franchise Holding Co. By-Laws.
3.9 Domino's Pizza International, Inc. Amended and Restated Certificate of
Incorporation.
3.10 Domino's Pizza International, Inc. Amended and Restated By-Laws.
3.11 Domino's Pizza International Payroll Services, Inc. Articles of
Incorporation.
3.12 Domino's Pizza International Payroll Services, Inc. By-Laws.
3.13 Domino's Pizza-Government Services Division, Inc. Articles of
Incorporation.
3.14 Domino's Pizza-Government Services Division, Inc. By-Laws.
4.1 Indenture dated as of December 21, 1998 by and among Domino's Inc.,
Domino's Pizza, Inc., Metro Detroit Pizza, Bluefence, Inc., Domino's
Pizza International, Inc., Domino's Pizza International Payroll
Services, Inc., Domino's Pizza--Government Services Division, Inc. and
IBJ Schroder Bank and Trust Company.
4.2 Registration Rights Agreement dated as of December 21, 1998 by and
among Domino's, Inc., Domino's Pizza, Inc., Metro Detroit Pizza, Inc.,
Bluefence, Inc., Domino's Pizza International, Inc., Domino's Pizza
International Payroll Services, Inc., Domino's Pizza--Government
Services Division, Inc., J.P. Morgan Securities, Inc. and Goldman,
Sachs & Co.
5.1 Opinion of Ropes & Gray.
5.2 Opinion of Honigman Miller Schwartz and Cohn.
10.1 Amended and Restated Purchase Agreement dated December 21, 1998 by and
among Domino's Inc., Domino's Pizza, Inc., Metro Detroit Pizza, Inc.,
Bluefence, Inc., Domino's Pizza International, Inc., Domino's Pizza
International Payroll Services, Inc., Domino's Pizza--Government
Services Division, Inc., J.P. Morgan Securities, Inc. and Goldman,
Sachs & Co.
II-2
Exhibit
Number Description
------- -----------
10.2 Consulting Agreement dated December 21, 1998 by and between Domino's
Pizza, Inc. and Thomas S. Monaghan.
10.3 Lease Agreement dated as of December 21, 1998 by and between Domino's
Farms Office Park Limited Partnership and Domino's Pizza, Inc.
10.4 Management Agreement by and among TISM, Inc., each of its direct and
indirect subsidiaries and Bain Capital Partners VI, L.P.
10.5 Stockholders Agreement dated as of December 21, 1998 by and among
TISM, Inc., Domino's, Inc., Bain Capital Fund VI, L.P., Bain Capital
VI Coinvestment Fund, L.P., BCIP, PEP Investments PTY Ltd., Sankaty
High Yield Asset Partners, L.P., Brookside Capital Partners Fund,
L.P., RGIP, LLC, DP Investors I, LLC, DP Investors II, LLC, J.P.
Morgan Capital Corporation, Sixty Wall Street Fund, L.P., DP
Transitory Corporation, Thomas S. Monaghan, individually and in his
capacity as trustee, and Marjorie Monaghan, individually and in her
capacity as trustee, Harry J. Silverman, Michael D. Soignet, Stuart K.
Mathis, Patrick Kelly, Gary M. McCausland and Cheryl Bachelder.
10.6 Senior Executive Deferred Bonus Plan of Domino's, Inc. dated as of
December 21, 1998.
10.7 Domino's Pizza, Inc. Deferred Compensation Plan adopted effective
January 4, 1999.
10.8 TISM, Inc. Stock Option Plan.
10.9 Severance Agreement dated as of August 4, 1998 between Domino's Pizza,
Inc. and Stuart Mathis.
10.10 Severance Agreement dated as of August 4, 1998 between Domino's Pizza,
Inc. and Pat Kelly.
10.11 Severance Agreement dated as of August 4, 1998 between Domino's Pizza,
Inc. and Harry J. Silverman.
10.12 Severance Agreement dated as of August 4, 1998 between Domino's Pizza,
Inc. and Gary McCausland.
10.13 Severance Agreement dated as of August 4, 1998 between Domino's Pizza,
Inc. and Cheryl Bachelder.
10.14 Severance Agreement dated as of August 4, 1998 between Domino's Pizza,
Inc. and Michael D. Soignet.
10.15 Credit Agreement dated as of December 21, 1998 by and among Domino's,
Inc., Bluefence, Inc., J.P. Morgan Securities, Inc., Morgan Guaranty
Trust Company of New York, Bank One and Comerica Bank.
10.16 Borrower Pledge Agreement dated as of December 21, 1998 by and among
Domino's, Inc., Bluefence, Inc. and Morgan Guaranty Trust Company of
New York, as Collateral Agent.
10.17 Subsidiary Pledge Agreement dated as of December 21, 1998 by and among
Domino's Pizza, Inc., Metro Detroit Pizza, Inc., Domino's Pizza
International, Inc., Domino's Pizza International Payroll Services,
Inc., Domino's Pizza--Government Services Division, Inc. and Morgan
Guaranty Trust Company of New York, as Collateral Agent.
10.18 Borrower Security Agreement dated as of December 21, 1998 by and among
Domino's, Inc., and Morgan Guaranty Trust Company of New York, as
Collateral Agent.
10.19 Subsidiary Security Agreement dated as of December 21, 1998 by and
among Domino's Pizza, Inc., Metro Detroit Pizza, Inc., Domino's Pizza
International, Inc., Domino's Pizza International Payroll Services,
Inc., Domino's Pizza--Government Services Division, Inc. and Morgan
Guaranty Trust Company of New York, as Collateral Agent.
10.20 Collateral Account Agreement dated as of December 21, 1998 by and
among Domino's, Inc., Bluefence, Inc. and Morgan Guaranty Trust
Company of New York, as Collateral Agent.
12.1 Statement Regarding Computation of Ratio of Earnings to Fixed Charges.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Ropes & Gray (See Exhibit 5.1).
23.3 Consent of Honigman Miller Schwartz and Cohn (See Exhibit 5.2).
24.1 Powers of Attorney (See Signature Pages).
25.1 Statement of Eligibility on Form T-1 of IBJ Whitehall Bank & Trust
Company as Trustee under the Indenture.
27.1 Financial Data Schedule.
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*
99.3 Form of Exchange Agent Agreement.*
- ---------
* To be filed by amendment.
II-3
(b) The following Consolidated Financial Statement Schedules of Domino's, Inc.
for the Three Years Ended January 3, 1999 are included in this Registration
Statement.
DOMINO'S, INC. and SUBSIDIARIES
SCHEDULE II--VALUATION and QUALIFYING ACCOUNTS
(Dollars In Thousands)
Balance * Additions/ Balance
Beginning Provision Deductions Translation End of
of Year (Benefit) from Reserves Adjustments Year
--------- --------- ------------- ----------- -------
Allowance for doubtful
accounts receivable
1998.................. 3,978 174 (1,362) 4 2,794
1997.................. 5,223 904 (2,128) (21) 3,978
1996.................. 5,235 1,140 (1,138) (14) 5,223
Allowance for doubtful
notes receivable
1998.................. 5,708 (3,386) 837 6 3,165
1997.................. 5,725 227 (222) (22) 5,708
1996.................. 4,522 (198) 1,397 4 5,725
- ---------
*Consists primarily of write-offs and recoveries of bad debts
Item 22 Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrants, pursuant to the foregoing provisions, or otherwise, the
Registrants have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrants of expenses incurred or paid by a director, officer
or controlling person of the Registrants in the successful defense of any
action, suit or proceeding) is asserted by any such director, officer or
controlling person in connection with the securities being registered, the
Registrants will, unless in the opinion of their counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether or not such indemnification is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
The undersigned registrants hereby undertake:
(1) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
(2) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(3) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(4) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Domino's, Inc. has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Ann Arbor, State of
Michigan, on the 19th day of March, 1999.
Domino's, Inc.
/s/ Harry J. Silverman
By: ____________________________________
Name: Harry J. Silverman
Title: Vice President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
indicated on the 19th day of March, 1999. KNOW ALL MEN BY THESE PRESENTS that
each officer and director of Domino's, Inc. whose signature appears below
constitutes and appoints Harry J. Silverman, Mark E. Nunnelly and Robert F.
White, and each of them, his or her true and lawful attorney-in-fact and agent,
with full power of substitution and revocation, for him or her and in his or
her name, place and stead, in any and all capacities, to execute any and all
amendments, including any post-effective amendments and supplements to this
Registration Statement, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said attorney-
in-fact and agent, or his or her substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Signature Title
--------- -----
/s/ Harry J. Silverman Vice President
______________________________________ (Principal
Harry J. Silverman Executive,
Financial and
Accounting
Officer)
/s/ Thomas S. Monaghan Director
______________________________________
Thomas S. Monaghan
/s/ Mark E. Nunnelly Director
______________________________________
Mark E. Nunnelly
/s/ Robert F. White Director
______________________________________
Robert F. White
/s/ Jonas L. Steinman Director
______________________________________
Jonas L. Steinman
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Domino's Pizza,
Inc. has duly caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Ann Arbor, State of
Michigan, on the 19th day of March, 1999.
Domino's Pizza, Inc.
/s/ Harry J. Silverman
By: ____________________________________
Name: Harry J. Silverman
Title: Vice President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
indicated on the 19th day of March, 1999.
Signature Title
--------- -----
/s/ Harry J. Silverman Director and Vice
______________________________________ President
Harry J. Silverman (Principal
Executive,
Financial and
Accounting
Officer)
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Metro Detroit
Pizza, has duly caused this Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Ann Arbor, State
of Michigan, on the 19th day of March, 1999.
Metro Detroit Pizza, Inc.
/s/ Harry J. Silverman
By: ____________________________________
Name: Harry J. Silverman
Title: President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
indicated on the 19th day of March, 1999.
Signature Title
--------- -----
/s/ Harry J. Silverman Director and
______________________________________ President
Harry J. Silverman (Principal
Executive,
Financial and
Accounting
Officer)
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Domino's, Franchise
Holding Co. has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Ann Arbor,
State of Michigan, on the 19th day of March, 1999.
Domino's Franchise Holding Co.
/s/ Harry J. Silverman
By: ____________________________________
Name: Harry J. Silverman
Title: President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
indicated on the 19th day of March, 1999.
Signature Title
--------- -----
/s/ Harry J. Silverman Director and
______________________________________ President
Harry J. Silverman (Principal
Executive,
Financial and
Accounting
Officer)
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Domino's Pizza
International, Inc. has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Ann
Arbor, State of Michigan, on the 19th day of March, 1999.
Domino's Pizza International, Inc.
/s/ Harry J. Silverman
By: ____________________________________
Name: Harry J. Silverman
Title: President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
indicated on the 19th day of March, 1999.
Signature Title
--------- -----
/s/ Harry J. Silverman Director and
______________________________________ President
Harry J. Silverman (Principal
Executive,
Financial and
Accounting
Officer)
II-9
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Domino's Pizza
International Payroll Services, Inc. has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Ann Arbor, State of Michigan, on the 19th day of
March, 1999.
Domino's Pizza International Payroll
Services, Inc.
/s/ Harry J. Silverman
By: ____________________________________
Name: Harry J. Silverman
Title: President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
indicated on the 19th day of March, 1999.
Signature Title
--------- -----
/s/ Harry J. Silverman Director and
______________________________________ President
Harry J. Silverman (Principal
Executive,
Financial and
Accounting
Officer)
II-10
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Domino's Pizza--
Government Services Division, Inc. has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Ann Arbor, State of Michigan, on the 19th day of March, 1999.
Domino's Pizza--Government Services
Division, Inc.
/s/ Harry J. Silverman
By: ____________________________________
Name: Harry J. Silverman
Title: President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
indicated on the 19th day of March, 1999.
Signature Title
--------- -----
/s/ Harry J. Silverman Director and
______________________________________ President
Harry J. Silverman (Principal
Executive,
Financial and
Accounting
Officer)
II-11
EXHIBITS
Exhibit
Number Description
------- -----------
2.1 Agreement and Plan of Merger dated as of September 25, 1998.
2.2 Amendment No. 1 to Agreement and Plan of Merger dated as of November
24, 1998.
2.3 Amendment No. 2 to Agreement and Plan of Merger dated as of November
24, 1998.
2.4 Amendment No. 3 to Agreement and Plan of Merger dated December 18,
1998.
3.1 Domino's, Inc. Amended and Restated Certificate of Incorporation.
3.2 Domino's, Inc. Amended and Restated By-Laws.
3.3 Domino's Pizza, Inc. Restated Articles of Incorporation.
3.4 Domino's Pizza, Inc. By-laws.
3.5 Metro Detroit Pizza, Inc. Restated Articles of Incorporation.
3.6 Metro Detroit Pizza, Inc. By-Laws.
3.7 Domino's Franchise Holding Co. Articles of Incorporation.
3.8 Domino's Franchise Holding Co. By-Laws.
3.9 Domino's Pizza International, Inc. Amended and Restated Certificate of
Incorporation.
3.10 Domino's Pizza International, Inc. Amended and Restated By-Laws.
3.11 Domino's Pizza International Payroll Services, Inc. Articles of
Incorporation.
3.12 Domino's Pizza International Payroll Services, Inc. By-Laws.
3.13 Domino's Pizza-Government Services Division, Inc. Articles of
Incorporation.
3.14 Domino's Pizza-Government Services Division, Inc. By-Laws.
4.1 Indenture dated as of December 21, 1998 by and among Domino's Inc.,
Domino's Pizza, Inc., Metro Detroit Pizza, Bluefence, Inc., Domino's
Pizza International, Inc., Domino's Pizza International Payroll
Services, Inc., Domino's Pizza--Government Services Division, Inc. and
IBJ Schroder Bank and Trust Company.
4.2 Registration Rights Agreement dated as of December 21, 1998 by and
among Domino's, Inc., Domino's Pizza, Inc., Metro Detroit Pizza, Inc.,
Bluefence, Inc., Domino's Pizza International, Inc., Domino's Pizza
International Payroll Services, Inc., Domino's Pizza--Government
Services Division, Inc., J.P. Morgan Securities, Inc. and Goldman,
Sachs & Co.
5.1 Opinion of Ropes & Gray.
5.2 Opinion of Honigman Miller Schwartz and Cohn.
10.1 Amended and Restated Purchase Agreement dated December 21, 1998 by and
among Domino's Inc., Domino's Pizza, Inc., Metro Detroit Pizza, Inc.,
Bluefence, Inc., Domino's Pizza International, Inc., Domino's Pizza
International Payroll Services, Inc., Domino's Pizza--Government
Services Division, Inc., J.P. Morgan Securities, Inc. and Goldman,
Sachs & Co.
10.2 Consulting Agreement dated December 21, 1998 by and between Domino's
Pizza, Inc. and Thomas S. Monaghan.
10.3 Lease Agreement dated as of December 21, 1998 by and between Domino's
Farms Office Park Limited Partnership and Domino's Pizza, Inc.
10.4 Management Agreement by and among TISM, Inc., each of its direct and
indirect subsidiaries and Bain Capital Partners VI, L.P.
10.5 Stockholders Agreement dated as of December 21, 1998 by and among
TISM, Inc., Domino's, Inc., Bain Capital Fund VI, L.P., Bain Capital
VI Coinvestment Fund, L.P., BCIP, PEP Investments PTY Ltd., Sankaty
High Yield Asset Partners, L.P., Brookside Capital Partners Fund,
L.P., RGIP, LLC, DP Investors I, LLC, DP Investors II, LLC, J.P.
Morgan Capital Corporation, Sixty Wall Street Fund, L.P., DP
Transitory Corporation, Thomas S. Monaghan, individually and in his
capacity as trustee, and Marjorie Monaghan, individually and in her
capacity as trustee, Harry J. Silverman, Michael D. Soignet, Stuart K.
Mathis, Patrick Kelly, Gary M. McCausland and Cheryl Bachelder.
Exhibit
Number Description
------- -----------
10.6 Senior Executive Deferred Bonus Plan of Domino's, Inc. dated as of
December 21, 1998.
10.7 Domino's Pizza, Inc. Deferred Compensation Plan adopted effective
January 4, 1999.
10.8 TISM, Inc. Stock Option Plan.
10.9 Severance Agreement dated as of August 4, 1998 between Domino's Pizza,
Inc. and Stuart Mathis.
10.10 Severance Agreement dated as of August 4, 1998 between Domino's Pizza,
Inc. and Pat Kelly.
10.11 Severance Agreement dated as of August 4, 1998 between Domino's Pizza,
Inc. and Harry J. Silverman.
10.12 Severance Agreement dated as of August 4, 1998 between Domino's Pizza,
Inc. and Gary McCausland.
10.13 Severance Agreement dated as of August 4, 1998 between Domino's Pizza,
Inc. and Cheryl Bachelder.
10.14 Severance Agreement dated as of August 4, 1998 between Domino's Pizza,
Inc. and Michael D. Soignet.
10.15 Credit Agreement dated as of December 21, 1998 by and among Domino's,
Inc., Bluefence, Inc., J.P. Morgan Securities, Inc., Morgan Guaranty
Trust Company of New York, Bank One and Comerica Bank.
10.16 Borrower Pledge Agreement dated as of December 21, 1998 by and among
Domino's, Inc., Bluefence, Inc. and Morgan Guaranty Trust Company of
New York, as Collateral Agent.
10.17 Subsidiary Pledge Agreement dated as of December 21, 1998 by and among
Domino's Pizza, Inc., Metro Detroit Pizza, Inc., Domino's Pizza
International, Inc., Domino's Pizza International Payroll Services,
Inc., Domino's Pizza--Government Services Division, Inc. and Morgan
Guaranty Trust Company of New York, as Collateral Agent.
10.18 Borrower Security Agreement dated as of December 21, 1998 by and among
Domino's, Inc., and Morgan Guaranty Trust Company of New York, as
Collateral Agent.
10.19 Subsidiary Security Agreement dated as of December 21, 1998 by and
among Domino's Pizza, Inc., Metro Detroit Pizza, Inc., Domino's Pizza
International, Inc., Domino's Pizza International Payroll Services,
Inc., Domino's Pizza--Government Services Division, Inc. and Morgan
Guaranty Trust Company of New York, as Collateral Agent.
10.20 Collateral Account Agreement dated as of December 21, 1998 by and
among Domino's, Inc., Bluefence, Inc. and Morgan Guaranty Trust
Company of New York, as Collateral Agent.
12.1 Statement Regarding Computation of Ratio of Earnings to Fixed Charges.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Ropes & Gray (See Exhibit 5.1).
23.3 Consent of Honigman Miller Schwartz and Cohn (See Exhibit 5.2).
24.1 Powers of Attorney (See Signature Pages).
25.1 Statement of Eligibility on Form T-1 of IBJ Whitehall Bank & Trust
Company as Trustee under the Indenture.
27.1 Financial Data Schedule.
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*
99.3 Form of Exchange Agent Agreement.*
- ---------
* To be filed by amendment.