SEC Filing | Dave & Buster's Entertainment, Inc.

1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ------------------ FORM 10-Q X QUARTERLY REPORT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT FOR - ---- THE QUARTER ENDED OCTOBER 31, 1999. TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF - ---- 1934 FOR THE TRANSACTION PERIOD FROM _______ TO _______. COMMISSION FILE NUMBER: 0-25858 ------------------- DAVE & BUSTER'S, INC. (Exact Name of Registrant as Specified in Its Charter) MISSOURI 43-1532756 (State of Incorporation) (I.R.S. Employer Identification No.) 2481 MANANA DRIVE DALLAS, TEXAS 75220 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (214) 357-9588 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares of the Registrant's common stock, $.01 par value, outstanding as of December 9, 1999 was 12,953,375 shares.

2 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS DAVE & BUSTER'S, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 13 Weeks Ended 39 Weeks Ended -------------- -------------- October 31, November 1, October 31, November 1, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Food and beverage revenues $ 29,068 $ 22,183 $ 85,213 $ 60,814 Amusement and other revenues 29,920 23,226 91,092 64,203 --------- --------- --------- --------- Total revenues 58,988 45,409 176,305 125,017 Cost of revenues 11,600 9,071 33,295 24,666 Operating payroll and benefits 19,145 13,711 54,814 36,360 Other restaurant operating expenses 16,427 11,315 47,051 31,864 General and administrative expenses 3,681 2,690 10,776 7,597 Depreciation and amortization expense 5,246 3,134 14,109 8,377 Preopening costs 1,540 1,100 4,697 3,067 --------- --------- --------- --------- Total costs and expenses 57,639 41,021 164,742 111,931 --------- --------- --------- --------- Operating income 1,349 4,388 11,563 13,086 Interest (income) expense, net 988 (7) 2,026 (419) --------- --------- --------- --------- Income before provision for income taxes and cumulative effect of a change in an accounting principle 361 4,395 9,537 13,505 Provision for income taxes 132 1,661 3,505 5,104 --------- --------- --------- --------- Income before cumulative effect of a change in an accounting principle 229 2,734 6,032 8,401 Cumulative effect of a change in an accounting principle, net of income tax benefit of $2,928 -- -- 4,687 -- --------- --------- --------- --------- Net income $ 229 $ 2,734 $ 1,345 $ 8,401 Net income per share - basic Before cumulative effect of a change in an accounting principle $ 0.02 $ 0.21 $ 0.46 $ 0.64 Cumulative effect of a change in an accounting principle -- -- (0.36) -- --------- --------- --------- --------- $ 0.02 $ 0.21 $ 0.10 $ 0.64 Net income per share - dilutive Before cumulative effect of a change in an accounting principle $ 0.02 $ 0.21 $ 0.45 $ 0.64 Cumulative effect of a change in an accounting principle -- -- (0.35) -- --------- --------- --------- --------- $ 0.02 $ 0.21 $ 0.10 $ 0.64 Weighted average shares outstanding: Basic 13,076 13,062 13,086 13,048 Diluted 13,163 13,183 13,300 13,195 See accompanying notes to consolidated financial statements.

3 DAVE & BUSTER'S, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS ) ASSETS October 31, 1999 January 31, (unaudited) 1999 ----------- ----------- Current assets: Cash and cash equivalents $ 1,429 $ 4,509 Inventories 15,497 10,811 Prepaid expenses 2,039 1,743 Preopening costs -- 7,369 Other current assets 3,131 5,286 ----------- ----------- Total current assets 22,096 29,718 Property and equipment, net 220,106 177,910 Goodwill, net of accumulated amortization of $1,787 and $1,502 7,921 8,206 Other assets 1,745 758 ----------- ----------- Total assets $ 251,868 $ 216,592 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 10,632 $ 13,695 Accrued liabilities 5,366 3,785 Deferred income taxes 4,335 4,018 ----------- ----------- Total current liabilities 20,333 21,498 Deferred income taxes 2,798 5,638 Other liabilities 2,272 1,454 Long-term debt 80,000 42,500 Commitments and contingencies Stockholders' equity: Preferred stock, 10,000,000 authorized; none issued 0 0 Common stock, $0.01 par value, 50,000,000 authorized; 13,003,375 and 13,069,050 shares issued and outstanding as of October 31, 1999 and January 31, 1999, respectively 131 131 Paid in capital 115,654 114,621 Retained earnings 32,095 30,750 ----------- ----------- 147,880 145,502 Less: treasury stock, at cost (125,000 shares at October 31, 1999) 1,415 -- ----------- ----------- Total stockholders' equity 146,465 145,502 ----------- ----------- $ 251,868 $ 216,592 See accompanying notes to consolidated financial statements.

4 DAVE & BUSTER'S, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS) (UNAUDITED) Common Stock ----------------------- Paid in Retained Treasury Shares Amount Capital Earnings Stock Total -------- --------- --------- --------- --------- --------- Balance, January 31, 1999 13,069 $ 131 $ 114,621 $ 30,750 $ 0 $ 145,502 Stock options exercised 59 0 757 0 0 757 Tax benefit related to options exercised 0 0 276 0 0 276 Purchase of treasury stock (125) 0 0 0 (1,415) (1,415) Net income 0 0 0 1,345 0 1,345 -------- --------- --------- --------- --------- --------- Balance, October 31, 1999 13,003 $ 131 $ 115,654 $ 32,095 $ (1,415) $ 146,465 See accompanying notes to consolidated financial statements.

5 DAVE & BUSTER'S, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) 39 Weeks Ended ------------------------- October 31, November 1, 1999 1998 ----------- ----------- Cash flows from operating activities Net income $ 1,345 $ 8,401 Adjustments to reconcile net income to net cash provided by operating activities Cumulative effect of change in an accounting principle 4,687 -- Depreciation and amortization 14,109 11,444 Provision for deferred income taxes 405 617 Changes in assets and liabilities Inventories (4,686) (2,666) Prepaid expenses (296) (539) Preopening costs 0 (6,468) Other assets 1,189 (530) Accounts payable (3,063) 7,785 Accrued liabilities 1,581 1,755 Other liabilities 818 465 -------- -------- Net cash provided by operating activities 16,089 20,264 Cash flows from investing activities Capital expenditures (56,011) (59,446) Sale of short-term investments -- 8,507 -------- -------- Net cash used by investing activities (56,011) (50,939) Cash flows from financing activities Spin-off and related transactions -- (2,244) Purchase of treasury stock 1,415 -- Proceeds from issuance of common stock 757 716 Borrowings under long-term debt 37,500 19,000 Repayments of long-term debt -- (1,000) -------- -------- Net cash provided by financing activities 36,842 16,472 -------- -------- Cash (used) (3,080) (14,203) Beginning cash and cash equivalents 4,509 14,309 -------- -------- Ending cash and cash equivalents $ 1,429 $ 106 See accompanying notes to consolidated financial statements.

6 DAVE & BUSTER'S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 1999 (UNAUDITED) (DOLLARS IN THOUSANDS) NOTE 1: RESULTS OF OPERATIONS The results of operations for the interim periods reported are not necessarily indicative of results to be expected for the year. The information furnished herein reflects all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary to fairly present the results of operations and financial position for the interim periods. NOTE 2: BASIS OF PRESENTATION The consolidated financial statements include the accounts of Dave & Buster's, Inc. and all wholly-owned subsidiaries (the "Company"). All material intercompany accounts and transactions have been eliminated in consolidation. The consolidated balance sheet data presented herein for January 31, 1999 was derived from the Company's audited consolidated financial statements for the fiscal year then ended. The preparation of financial statements in accordance with generally accepted accounting principles requires the Company's management to make certain estimates and assumptions for the reporting periods covered by the financial statements. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses. Actual amounts could differ from these estimates. The Company's one industry segment is the ownership and operation of restaurant/entertainment Complexes (a "Complex" or "Store") under the name "Dave & Buster's" which are located in Texas, Georgia, Pennsylvania, Illinois, Florida, Maryland, California, Ohio, Colorado, Michigan, New York, and Missouri. NOTE 3: RECENT ACCOUNTING PRONOUNCEMENTS In April 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued a Statement of Position ("SOP") 98-5 entitled "Reporting on the Costs of Start-Up Activities". The SOP, was effective for fiscal years beginning after December 15, 1998, requires entities to expense as incurred all start-up and preopening costs that are not otherwise capitalizable as long-lived assets. Restatement of previously issued annual financial statements was not permitted by the SOP, and entities were not permitted to report the pro forma effects of the retroactive application of the new accounting standard. The Company adopted the SOP in the first quarter of fiscal 1999 and recorded a charge for the cumulative effect of a change in an accounting principle of approximately $4,687 net of income tax benefits of approximately $2,928. NOTE 4: CONTINGENCIES The Company is subject to certain legal proceedings and claims that arise in the ordinary course of its business. In the opinion of management, based on discussions with and advice of legal counsel, the

7 amount of ultimate liability with respect to these actions will not materially affect the consolidated results of operations or financial condition of the Company. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS) Results of Operations - 13 Weeks Ended October 31, 1999 Compared to 13 Weeks Ended November 1, 1998 Total revenues increased to $58,988 for the 13 weeks ended October 31, 1999 from $45,409 for the 13 weeks ended November 1, 1998, an increase of $13,579 or 30%. The increase in revenues was attributable to incremental revenues from eight complexes opened after August 2, 1998. Revenues at comparable Stores decreased 6.2% for the 13 weeks ended October 31, 1999. The decrease in comparable stores revenues was primarily attributable to reduced traffic at the Stores. Total revenues for the 13 weeks ended August 1, 1999 from the Bass licensing agreement were $91. Cost of revenues increased to $11,600 for the 13 weeks ended October 31, 1999 from $9,071 for the 13 weeks ended November 1, 1998, an increase of $2,529 or 28%. The increase was principally attributable to the 30% increase in revenues. As a percentage of revenues, cost of revenues decreased to 19.7% in the 13 weeks ended October 31, 1999 from 20.0% in the 13 weeks ended November 1, 1998 due to lower food and beverage costs offset by higher amusement costs. Operating payroll and benefits increased to $19,145 for the 13 weeks ended October 31, 1999 from $13,711 for the 13 weeks ended November 1, 1998, an increase of $5,434 or 40%. As a percentage of revenue, operating payroll and benefits increased to 32.5% in the 13 weeks ended October 31, 1999 from 30.2% in the 13 weeks ended November 1, 1998 due to higher variable and fixed labor costs. Other restaurant operating expenses increased to $16,427 for the 13 weeks ended October 31, 1999 from $11,315 for the 13 weeks ended November 1, 1998, an increase of $5,112 or 45%. As a percentage of revenues, other restaurant operating expenses were 27.8% of revenues in the 13 weeks ended October 31, 1999 as compared to 24.9% of revenues in the 13 weeks ended November 1, 1998. Other restaurant operating expenses were higher due to increased fixed and occupancy costs at the Stores. General and administrative increased to $3,681 for the 13 weeks ended October 31, 1999 from $2,690 for the 13 weeks ended November 1, 1998, an increase of $991 or 37%. The increase over the prior comparable period resulted from increased administrative payroll and related costs for new personnel, and additional costs associated with the Company's growth plans. As a percentage of revenues, general and administrative expenses increased to 6.2% in the 13 weeks ended October 31, 1999 from 5.9% in the 13 weeks ended November 1, 1998. Depreciation and amortization increased to $5,246 for the 13 weeks ended October 31, 1999 from $3,134 for the 13 weeks ended November 1, 1998, an increase of $2,112 or 67%. As a percentage of revenues, depreciation and amortization increased to 8.9% from 6.9% for the comparable prior period. The increase was attributable to the eight new Stores opened after August 2, 1998. Beginning in fiscal 1999, in accordance with the adoption of SOP 98-5 (see note 3), the Company expenses all costs incurred during start-up activities, including preopening costs, as incurred. Preopening costs incurred and recorded as expense for the 13 weeks ended October 31, 1999 were $1,540. The amount of preopening costs recorded for fiscal 1998 represents preopening costs which were amortized over the 12 months following opening. This amortization expense for the 13 weeks

8 ended November 1, 1998 was $1,100. The timing of Complex openings affects the amount of such costs in any given period. Interest expense for the 13 weeks ended October 31, 1999 was $988 versus an interest income of $7 for the 13 weeks ended November 1, 1998. The increase was primarily due to higher average debt in 1999 versus 1998. The effective tax rate for the 13 weeks ended October 31, 1999 was 36.6% as compared to 37.8% for the 13 weeks ended November 1, 1998, as the result of a lower effective state tax rate. Results of Operations - 39 Weeks Ended October 31, 1999 Compared to 39 Weeks Ended November 1, 1998 Total revenues increased to $176,305 for the 39 weeks ended October 31, 1999 from $125,017 for the 39 weeks ended November 1, 1998, an increase of $51,288 or 41%. The increase in revenues was attributable to incremental revenues from ten complexes opened after February 1, 1998. Revenues at comparable Stores decreased 1.2% for the 39 weeks ended October 31, 1999. Total revenues for the 39 weeks ended October 31, 1999 from the Bass licensing agreement were $268. Cost of revenues increased to $33,295 for the 39 weeks ended October 31, 1999 from $24,666 for the 39 weeks ended November 1, 1998, an increase of $8,629 or 35%. The increase was principally attributable to the 41% increase in revenues. As a percentage of revenues, cost of revenues decreased to 18.9% in the 39 weeks ended October 31, 1999 from 19.7% in the 39 weeks ended November 1, 1998 due to lower food, beverage and amusement costs. Operating payroll and benefits increased to $54,814 for the 39 weeks ended October 31, 1999 from $36,360 for the 39 weeks ended November 1, 1998, an increase of $18,454 or 51%. As a percentage of revenue, operating payroll and benefits increased to 31.1% in the 39 weeks ended October 31, 1999 from 29.1% in the 39 weeks ended November 1, 1998 due to higher variable and fixed labor costs. Other restaurant operating expenses increased to $47,051 for the 39 weeks ended October 31, 1999 from $31,864 for the 39 weeks ended November 1, 1998, an increase of $15,187 or 48%. As a percentage of revenues, other restaurant operating expenses were 26.7% of revenues in the 39 weeks ended October 31, 1999 as compared to 25.5% of revenues in the 39 weeks ended November 1, 1998. Other restaurant operating expenses were higher due to increased occupancy costs at the Stores offset by lower utilities costs. General and administrative increased to $10,776 for the 39 weeks ended October 31, 1999 from $7,597 for the 39 weeks ended November 1, 1998, an increase of $3,179 or 42%. The increase over the prior comparable period resulted from increased administrative payroll and related costs for new personnel, and additional costs associated with the Company's growth plans. As a percentage of revenues, general and administrative expenses were flat at 6.1% for both the 39 weeks ended October 31, 1999 and the 39 weeks ended November 1, 1998. Depreciation and amortization increased to $14,109 for the 39 weeks ended October 31, 1999 from $8,377 for the 39 weeks ended November 1, 1998, an increase of $5,732 or 68%. As a percentage of revenues, depreciation and amortization increased to 8.0% from 6.7% for the comparable prior period. The increase was attributable to new Stores opened after February 1, 1998. Beginning in fiscal 1999, in accordance with the adoption of SOP 98-5 (see note 3), the Company expenses all costs incurred during start-up activities, including preopening costs, as incurred.

9 Preopening costs incurred and recorded as expense for the 39 weeks ended October 31, 1999 were $4,697. The amount of preopening costs recorded for fiscal 1998 represents preopening costs which were amortized over the 12 months following opening. This amortization expense for the 39 weeks ended November 1, 1998 was $3,067. The timing of Complex openings affects the amount of such costs in any given period. Interest expense for the 39 weeks ended October 31, 1999 was $2,026 versus an interest income of $419 for the 39 weeks ended November 1, 1998. The increase was primarily due to higher average debt in 1999 versus 1998. The effective tax rate for the 39 weeks ended October 31, 1999 was 36.8% as compared to 37.8% for the 39 weeks ended November 1, 1998, and the result of a lower effective state tax rate. Liquidity and Capital Resources Cash flows from operations decreased to $16,089 for the 39 weeks ended October 31, 1999 from $20,264 for the 39 weeks ended November 1, 1998. The decrease was attributable to a decrease in net income. The Company has a secured revolving line of credit, which permits borrowing up to a maximum of $100,000. Borrowings under this facility bear interest at a floating rate based on the London Interbank Offered Rate ("LIBOR") or, at the Company's option, the bank's prime rate plus, in each case, a margin based upon financial performance (7.3% at October 31, 1999) and is secured by all capital stock or equity interest in the stock of the Company and its subsidiaries. The facility, which matures in May 2001, has certain financial covenants including a minimum consolidated tangible net worth level, a maximum leverage ratio, minimum fixed charge coverage, and maximum level of capital expenditures on new Stores. At October 31, 1999, $13,620 was available under this facility. On July 29, 1999 the Company terminated its interest rate swap agreement that fixed its variable-rate debt to fixed-rate debt on notional amounts aggregating $45,000. The terminated agreement resulted in a $40 gain being recognized during the period. The Company's plan is to open six and four complexes in fiscal 1999 and 2000, respectively. The Company estimates that its capital expenditures will be approximately $68,000 and $56,000 for 1999 and 2000, respectively. The Company intends to finance this development with cash flow from operations, the senior revolving credit facility, and other additional capital resources which management is currently pursuing. However, there is no assurance that the Company can secure these additional resources. During 1999, the Company has opened new complexes in San Antonio, Texas, Atlanta, Georgia, St. Louis, Missouri, Austin, Texas and Jacksonville, Florida. Impact of the Year 2000 Issues The Company's comprehensive Year 2000 initiative is designed to ensure that there is no adverse effect on the Company's core business operations and that transactions with customers, suppliers and financial institutions are fully supported. The Company is substantially complete with these efforts as of October 31, 1999. The Company spent approximately $3.5 million on new software, which replaced existing software that might not have been year 2000 compliant. Such costs were capitalized. While the Company believes its planning efforts are adequate to address its Year 2000 concerns, there can be no guarantee that the systems of other companies on which the Company's systems and operations rely will be converted on a timely basis and will not have a material effect on the Company.

10 "Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995 Certain statements in this Report on Form 10-Q constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions; competition; availability, locations and terms of sites for Complex development; quality of management; changes in, or the failure to comply with, government regulations; and other risks indicated in this filing and discussed under "Risks" in the Company's Form 10-K filed with the Securities and Exchange Commission. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed during the 39 weeks ended October 31, 1999.

11 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DAVE & BUSTER'S, INC. Dated: December 15, 1999 by /s/ David O. Corriveau ----------------- ------------------------------ David O. Corriveau Co-Chairman of the Board, Co-Chief Executive Officer and President Dated: December 15, 1999 by /s/ Charles Michel ----------------- ---------------------- Charles Michel Vice President, Chief Financial Officer

12 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------- ----------- 27 Financial Data Schedule

5 9-MOS JAN-30-2000 OCT-31-1999 1,429 0 0 0 15,497 22,096 267,510 47,404 251,868 20,333 80,000 0 0 131 146,334 146,465 176,305 176,305 33,295 164,742 0 0 2,026 9,537 3,505 6,032 0 0 4,687 1,345 .10 .10