SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

x

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

 

 

 

FOR THE QUARTERLY PERIOD ENDED July 30, 2006.

 

 

o

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

 

 

 

FOR THE TRANSITION PERIOD FROM                          TO                          .

 

Commission file number:  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 Mañana Drive

 

 

Dallas, Texas

 

75220

(Address of Principle 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  o   No  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large Accelerated filer  o

 

Accelerated filer  o

 

Non-accelerated filer  x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o   No  x

The number of shares of the Issuer’s common stock, $.01 par value, outstanding as of September 6, 2006 was 100 shares

 




Dave & Buster’s, Inc.
Form 10-Q
TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

 

 

 

 

Item 1

Consolidated Financial Statements

 

 

 

 

Item 2

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

 

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

Item 4

Controls and Procedures

 

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

Item 1

Legal Proceedings

 

 

 

 

Item 6

Exhibits

 

 

 

 

SIGNATURES

 

 

 

2




PART I.  FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS

DAVE & BUSTER’S, INC.

CONSOLIDATED BALANCE SHEETS

 

 

July 30, 2006
(Successor)

 

 

January 29, 2006
(Predecessor)

 

 

 

(unaudited)

 

 

(audited)

 

 

 

(In thousands, except share
amounts)

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

653

 

 

$

7,582

 

Inventories

 

12,954

 

 

12,469

 

Prepaid expenses

 

8,343

 

 

2,985

 

Deferred income taxes

 

2,105

 

 

 

Other current assets

 

2,835

 

 

4,194

 

Total current assets

 

26,890

 

 

27,230

 

Property and equipment, net

 

342,282

 

 

374,616

 

Tradename

 

63,000

 

 

 

Goodwill

 

65,638

 

 

 

Other assets and deferred charges

 

24,776

 

 

21,216

 

Total assets

 

$

522,586

 

 

$

423,062

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current installments of long-term debt (Note 3)

 

$

500

 

 

$

9,625

 

Accounts payable

 

13,763

 

 

25,069

 

Accrued liabilities

 

35,103

 

 

21,294

 

Income taxes payable

 

120

 

 

2,669

 

Deferred income taxes

 

 

 

5,779

 

Total current liabilities

 

49,486

 

 

64,436

 

Deferred income taxes

 

35,149

 

 

5,401

 

Deferred rent liability

 

50,510

 

 

74,583

 

Other liabilities

 

5,866

 

 

2,872

 

Payable to dissenting shareholders

 

51,733

 

 

 

Long-term debt, less current installments (Note 3)

 

227,578

 

 

70,550

 

Commitments and contingencies (Note 4)

 

 

 

 

 

 

Stockholders’ equity (Note 1):

 

 

 

 

 

 

Predecessor:

 

 

 

 

 

 

Common stock, $0.01 par value, 50,000,000 authorized; 13,722,750 issued and outstanding as of January 29, 2006

 

 

 

137

 

Less treasury stock, at cost (175,000 shares)

 

 

 

(1,846

)

Successor:

 

 

 

 

 

 

Common stock, $0.01 par value, 1,000 authorized; 100 issued and outstanding as of July 30, 2006

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, 10,000,000 authorized; none issued

 

 

 

 

Restricted stock awards

 

 

 

2,180

 

Paid-in capital

 

108,100

 

 

125,312

 

Accumulated comprehensive income

 

67

 

 

345

 

Retained earnings (deficit)

 

(5,903

)

 

79,092

 

Total stockholders’ equity

 

102,264

 

 

205,220

 

Total liabilities and stockholders’ equity

 

$

522,586

 

 

$

423,062

 

 

See accompanying notes to consolidated financial statements.

3




DAVE & BUSTER’S, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

(unaudited)

 

 

Thirteen weeks
ended July 30,
2006
(Successor)

 

 

Thirteen weeks
ended July 31,
2005
(Predecessor)

 

 

 

 

 

 

 

 

Food and beverage revenues

 

$

67,374

 

 

$

60,378

 

Amusement and other revenues

 

55,777

 

 

50,451

 

Total revenues

 

123,151

 

 

110,829

 

Cost of food and beverage

 

17,408

 

 

15,680

 

Cost of amusement and other

 

8,019

 

 

6,970

 

Total cost of products

 

25,427

 

 

22,650

 

Operating payroll and benefits

 

35,608

 

 

32,300

 

Other store operating expenses

 

40,360

 

 

35,870

 

General and administrative expenses

 

8,959

 

 

7,204

 

Depreciation and amortization expense

 

11,455

 

 

12,317

 

Startup costs

 

821

 

 

804

 

Total operating costs

 

122,630

 

 

111,145

 

Operating income (loss)

 

521

 

 

(316

)

Interest expense, net

 

6,525

 

 

1,661

 

Income (loss) before provision for income taxes

 

(6,004

)

 

(1,977

)

Provision (benefit) for income taxes

 

(2,129

)

 

(721

)

Net income (loss)

 

$

(3,875

)

 

$

(1,256

)

 

See accompanying notes to consolidated financial statements.

4




 

 

 

For the 145 Day
Period from
March 8, 2006
to July 30, 2006
(Successor)

 

 

For the 37 Day
Period from
January 30, 2006
to March 7, 2006
(Predecessor)

 

Twenty-six weeks
ended July 31,
2005
(Predecessor)

 

 

 

 

 

 

 

 

 

 

Food and beverage revenues

 

$

108,876

 

 

$

27,562

 

$

121,769

 

Amusement and other revenues

 

90,709

 

 

22,847

 

104,795

 

Total revenues

 

199,585

 

 

50,409

 

226,564

 

Cost of food and beverage

 

28,163

 

 

7,111

 

31,708

 

Cost of amusement and other

 

12,678

 

 

3,183

 

13,447

 

Total cost of products

 

40,841

 

 

10,294

 

45,155

 

Operating payroll and benefits

 

57,742

 

 

14,365

 

65,075

 

Other store operating expenses

 

63,827

 

 

15,505

 

69,857

 

General and administrative expenses

 

14,231

 

 

3,480

 

14,893

 

Depreciation and amortization expense

 

18,196

 

 

4,328

 

22,058

 

Startup costs

 

2,227

 

 

880

 

885

 

Total operating costs

 

197,064

 

 

48,852

 

217,923

 

Operating income

 

2,521

 

 

1,557

 

8,641

 

Interest expense, net

 

11,769

 

 

649

 

3,434

 

Income (loss) before provision for income taxes

 

(9,248

)

 

908

 

5,207

 

Provision (benefit) for income taxes

 

(3,345

)

 

422

 

1,901

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(5,903

)

 

$

486

 

$

3,306

 

 

See accompanying notes to consolidated financial statements.

5




DAVE & BUSTER’S, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share amounts)

(unaudited)

 

 

Common Stock

 

Paid-in

 

Treasury

 

Restricted

 

Accumulated
Other
Comprehensive

 

Retained
Earnings

 

 

 

 

 

Shares

 

Amount

 

Capital

 

Stock

 

Stock

 

Income

 

(Deficit)

 

Total

 

 

 

(In thousands)

 

Balance, January 29, 2006 (Predecessor)

 

13,722,750

 

$

137

 

$

125,312

 

$

(1,846

)

$

2,180

 

$

345

 

$

79,092

 

$

205,220

 

Net earnings

 

 

 

 

 

 

 

486

 

486

 

Unrealized foreign currency translation loss (net of tax)

 

 

 

 

 

 

(3

)

 

(3

)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

483

 

Stock option exercises

 

5,000

 

 

528

 

 

 

 

 

528

 

Tax benefit related to stock option exercises

 

 

 

10

 

 

 

 

 

10

 

Stock-based compensation

 

 

 

25

 

 

 

 

 

25

 

Amortization of restricted stock awards

 

 

 

 

 

61

 

 

 

61

 

Merger transaction

 

(13,727,750

)

(137

)

(125,875

)

1,846

 

(2,241

)

(342

)

(79,578

)

(206,327

)

Balance, March 8, 2006 (Successor)

 

 

 

 

 

 

 

 

 

Initial investment by WS Midway Acquisition Sub, Inc. and affiliates

 

100

 

 

108,100

 

 

 

 

 

$

108,100

 

Net loss

 

 

 

 

 

 

 

(5,903

)

(5,903

)

Unrealized foreign currency translation gain (net of tax)

 

 

 

 

 

 

67

 

 

67

 

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,836

)

Balance July 30, 2006 (Successor)

 

100

 

 

$

108,100

 

 

 

$

67

 

$

(5,903

)

$

102,264

 

 

See accompanying notes to consolidated financial statements.

6




DAVE & BUSTER’S, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

For the 145 Day
Period from
March 8, 2006 to
July 30, 2006

 

 

For the 37 Day
Period from
January 30, 2006
to March 7,
2006

 

Twenty-six weeks
ended July 31, 2005

 

 

 

Successor

 

 

Predecessor

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(5,903

)

 

$

486

 

$

3,306

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

18,196

 

 

4,328

 

22,058

 

Deferred income tax expense (benefit)

 

(1,249

)

 

(1,088

)

81

 

Tax benefit related to stock options

 

 

 

10

 

619

 

Restricted stock awards

 

 

 

61

 

361

 

Stock-based compensation charges

 

 

 

25

 

 

Warrants related to convertible debt

 

 

 

21

 

128

 

Other, net

 

219

 

 

7

 

(227

)

Changes in operating assets and liabilities, net of effect of business acquisitions

 

 

 

 

 

 

 

 

Inventories

 

(413

)

 

(72

)

(43

)

Prepaid expenses

 

(5,189

)

 

(169

)

(9,399

)

Other current assets

 

1,360

 

 

(1

)

81

 

Other assets and deferred charges

 

4,365

 

 

(66

)

3,158

 

Accounts payable

 

(3,172

)

 

(3,916

)

5,823

 

Accrued liabilities

 

2,941

 

 

6,918

 

677

 

Income taxes payable

 

(4,053

)

 

1,504

 

(4,527

)

Deferred rent liability

 

1,285

 

 

2,502

 

815

 

Other liabilities

 

163

 

 

191

 

2,037

 

Net cash provided by operating activities

 

8,550

 

 

10,741

 

24,948

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

(14,742

)

 

(10,600

)

(22,556

)

Purchase of Predecessor common stock

 

(274,711

)

 

 

 

Proceeds from sales of property and equipment

 

169

 

 

 

111

 

Net cash used in investing activities

 

(289,284

)

 

(10,600

)

(22,445

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Borrowings under revolving credit facility

 

3,078

 

 

6,000

 

 

Repayments of long-term debt

 

(51,137

)

 

(6,439

)

(4,740

)

Borrowings under senior secured credit facility

 

50,000

 

 

 

 

Borrowings under senior notes

 

175,000

 

 

 

 

Initial investment by WS Midway Acquisition Sub, Inc. and affiliates

 

108,100

 

 

 

 

Debt issuance costs

 

(11,466

)

 

 

 

Proceeds from exercises of stock options

 

 

 

528

 

1,399

 

Net cash provided by (used in) financing activities

 

273,575

 

 

89

 

(3,341

)

Increase (decrease) in cash and cash equivalents

 

(7,159

)

 

230

 

(838

)

Beginning cash and cash equivalents

 

7,812

 

 

7,582

 

7,624

 

Ending cash and cash equivalents

 

$

653

 

 

$

7,812

 

$

6,786

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for income taxes—net of refunds

 

$

1,692

 

 

$

 

$

11,535

 

Cash paid for interest, net of amounts capitalized

 

$

2,482

 

 

$

878

 

$

1,940

 

 

See accompanying notes to consolidated financial statements.

7




DAVE & BUSTER’S, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share amounts)

Note 1: Summary of significant accounting policies

Basis of presentation—Dave & Buster’s, Inc. (“Dave & Buster’s” or the “Company”), a Missouri corporation, was acquired on March 8, 2006, by WS Midway Holdings, Inc., a newly-formed Delaware corporation, through the merger (the “Merger”) of WS Midway Acquisition Sub, Inc., a newly-formed Missouri corporation and a direct, wholly-owned subsidiary of WS Midway Holdings, Inc., with and into Dave & Buster’s with Dave & Buster’s as the surviving corporation. Affiliates of Wellspring Capital Management LLC (“Wellspring”) and HBK Investments L.P. (“HBK”) control approximately 82% and 18%, respectively, of the outstanding capital stock of WS Midway Holdings, Inc. We continue as the same legal entity after the Merger and the accompanying condensed consolidated statements of operations, stockholders equity and cash flows present our results of operations and cash flows (including the accounts of Dave & Buster’s and all wholly-owned subsidiaries) for the periods preceding the Merger (“Predecessor”) and the period succeeding the Merger (“Successor”), respectively.  All material intercompany accounts and transactions have been eliminated in consolidation. See Note 2.

Dave & Buster’s is an operator of large format, high-volume regional entertainment complexes. The Company’s one industry segment is the ownership and operation of 47 restaurant/entertainment complexes (a “Complex” or “Store”) under the names “Dave & Buster’s,” “Dave & Buster’s Grand Sports Café” and “Jillian’s,” which are principally located in the United States and Canada.

Our fiscal year ends on the Sunday after the Saturday closest to January 31. All references to the second quarter of 2006 relate to the thirteen weeks ended July 30, 2006 of the Successor.  All references to the second quarter of 2005 relate to the thirteen week period ended July 31, 2005 of the Predecessor. All references to the year-to-date fiscal year 2006 period relate to the combined 145 day period ended July 30, 2006 of the Successor and the 37 day period ended March 7, 2006 of the Predecessor. All references to 2006 relate to the combined 53 week period ended February 4, 2007 and all references to 2005 relate to the 52 weeks ended January 29, 2006.

Our quarterly financial data should be read in conjunction with our consolidated financial statements for the year ended January 29, 2006. The results of operations for the periods ended March 7, 2006 and July 30, 2006, are not necessarily indicative of the results that may be achieved for the entire 53 week fiscal year, which ends on February 4, 2007.

Use of estimates—The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Cash and cash equivalents—We consider amounts receivable from credit card companies and all highly liquid temporary investments with original maturities of three months or less to be cash equivalents.

Inventories—Food and beverage and amusements inventories are reported at the lower of cost or market determined on a first-in, first-out method. Amusements inventory includes electronic equipment, stuffed animals and small novelty items used as redemption prizes for certain midway games, as well, as supplies needed for midway operations. Prior to the Merger, smallware supplies inventories, consisting of china, glassware and kitchen utensils, were capitalized at the store opening date, or when the smallware inventory increased due to changes in our menu, and were reviewed periodically for valuation. Smallware replacements are expensed as incurred. The Successor has recorded smallwares as fixed assets and amortizes smallwares over an estimated useful life of 7 years. Accordingly, smallwares inventory was reclassified to property and equipment for the fiscal year ended January 29, 2006 for consistency in presentation. Inventories consist of the following:

 

July 30, 2006
Successor

 

 

 

January 29, 2006
Predecessor

 

Food and beverage

 

$

2,509

 

 

 

$

2,460

 

Amusements

 

5,619

 

 

 

5,668

 

Other

 

4,826

 

 

 

4,341

 

 

 

$

12,954

 

 

 

$

12,469

 

 

8




Property and equipment—Property and equipment are recorded at cost. Expenditures that substantially increase the useful lives of the property and equipment are capitalized, whereas costs incurred to maintain the appearance and functionality of such assets are charged to repair and maintenance expense. Interest costs incurred during construction of facilities are capitalized and depreciated based on the estimated useful life of the underlying asset. Interest costs capitalized during the construction of facilities for the thirteen weeks ended July 30, 2006 and July 31, 2005 were $40 and $78, respectively and for the twenty–six weeks ended July 30, 2006 and July 31, 2005 were $149, and $93, respectively. As disclosed under “Recent Accounting Pronouncements” below, beginning October 31, 2005, we no longer capitalize rental costs incurred during construction. Rent costs capitalized during the construction period of facilities for the thirteen weeks and twenty-six weeks ended July 31, 2005 were $239 and $299, respectively.

Property and equipment, excluding most games, are depreciated using the straight-line method over the estimated useful life of the assets. Games are generally depreciated on the 150 percent declining-balance method over the estimated useful life of the assets. Reviews are performed regularly to determine whether facts or circumstances exist that indicate the carrying values of our property and equipment are impaired. We assess the recoverability of our property and equipment by comparing the projected future undiscounted net cash flows associated with these assets to their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the estimated fair market value of the assets.

Accrued liabilities

Accrued liabilities consist of the following:

 

July 30,
2006
Successor

 

 

January 29,
2006
Predecessor

 

Compensation and benefits

 

$

8,419

 

 

$

5,708

 

Redemption liability

 

4,639

 

 

624

 

Sales and use taxes

 

2,808

 

 

2,462

 

Real estate taxes

 

3,055

 

 

1,796

 

Interest

 

8,702

 

 

1,324

 

Other

 

7,480

 

 

9,380

 

Total accrued liabilities

 

$

35,103

 

 

$

21,294

 

 

Income taxes—We use the liability method which recognizes the amount of current and deferred taxes payable or refundable at the date of the financial statements as a result of all events that are recognized in the financial statements and as measured by the provisions of enacted tax laws.

Predecessor stock-based compensation—In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payments,” (“SFAS 123R”).  SFAS 123R is a revision of SFAS No. 123, “Accounting for Stock Based Compensation,” (“SFAS 123”) and supersedes APB 25. Among other items, SFAS 123R eliminates the use of APB 25 and the intrinsic value method of accounting, and requires companies to recognize in the financial statements the cost of employee services received in exchange for awards of equity instruments, based on the fair value of those awards on the grant date. The effective date of SFAS 123R is the first reporting period beginning after June 15, 2005. We adopted SFAS No. 123R as of the beginning of our first quarter of 2006 using the modified prospective method, accordingly, we have not restated prior period amounts presented herein. We recorded non-cash charges for stock compensation of approximately $25 in the period from January 30, 2006 to March 7, 2006. The impact of SFAS 123R on our results of operations for the period after the Merger cannot be predicted at this time, because no additional options have been issued or are currently planned to be issued.

SFAS 123, as amended by SFAS 148, “Accounting for Stock-Based Compensation—Transaction and Disclosure—an Amendment of FASB Statement 123” changed the method for recognition of the cost of stock option and award plans. Adoption of the cost recognition requirements under SFAS 123 was optional; however, the following supplemental information is provided (in thousands):

9




 

 

Thirteen
weeks ended
July 31, 2005
Predecessor

 

Twenty-six
weeks ended
July 31, 2005
Predecessor

 

Net income (loss), as reported

 

$

(1,256

)

$

3,306

 

Stock compensation expenses recorded under the intrinsic method, net of income taxes

 

116

 

229

 

Pro forma stock compensation expense recorded under the fair value method, net of income taxes

 

(106

)

(259

)

Pro forma net income (loss)

 

$

(1,246

)

$

3,276

 

 

Foreign currency translation—The financial statements related to our operations of our Toronto complex are prepared in Canadian dollars. Income statement amounts are translated at average exchange rates for each period, while the assets and liabilities are translated at year-end exchange rates. Translation adjustments are included in stockholders’ equity as a component of comprehensive income.

Revenue recognition—Food and beverage revenues are recorded at point of service. Amusement revenues consist primarily of deposits on power cards used by customers to activate most of our midway games. These deposits are generally recognized at the time of sale rather than when utilized, as the estimated amount of unused deposits which will be used for future game activations has historically not been material to our financial position or results of operations.

Foreign license revenues are deferred until the Company fulfills its obligations under license agreements. The license agreements provide for continuing royalty fees based on a percentage of gross revenues, which are recognized when realization is assured. Revenue from international licensees for the thirteen weeks ended July 30, 2006 and July 31, 2005 were $0 and $81, respectively and for the twenty–six weeks ended July 30, 2006 and July 31, 2005 were $77, and $333, respectively.

Amusements costs of products—Certain of our midway games allow customers to earn coupons which may be redeemed for prizes, including electronic equipment, sports memorabilia, stuffed animals, clothing and small novelty items. The cost of these prizes is included in the cost of amusement products.

Startup costs—Startup costs include costs associated with the opening and organizing of new complexes or conversion of existing complexes, including the cost of feasibility studies, staff-training and recruiting and travel costs for employees engaged in such startup activities. All startup costs are expensed as incurred.

Lease accounting—Rent is computed on a straight line basis over the lease term. The lease term for newly constructed locations commences on the date when the Company takes possession and has the right to control the use of the leased premises. The lease term includes the initial non-cancelable lease term plus any periods covered by renewal options that the Company considers reasonably assured of exercising. Our lease obligations were adjusted to their estimated fair values as a result of the Merger with WS Midway Acquisition Sub, Inc. (Note 2).

Comprehensive income—Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. In addition to net income (loss), unrealized foreign currency translation gain (loss) is included in comprehensive income. Unrealized translation gains/(losses) for the thirteen weeks ended July 30, 2006 and July 31, 2005 were $(82) and $(128), respectively and for the twenty–six weeks ended July 30, 2006 and July 31, 2005 were $64 and $(158), respectively.

Recent accounting pronouncements—In October 2005, the Financial Accounting Standards Board (“FASB”) issued a FASB Staff Position (“FSP”), FAS 13-1, “Accounting for Rental Costs Incurred during a Construction Period.” The FSP addresses accounting for rental costs associated with building and ground operating leases that are incurred during a construction period. The Board concluded that such costs incurred during a construction period should be recognized as rental expense. The provisions of this FSP must be applied to the first reporting period beginning after December 15, 2005. Early adoption was permitted. Accordingly, effective October 31, 2005, we no longer capitalized rent incurred during the construction period. The impact of this new standard on our future financial statements will be dependent on the number of complexes opened each period and the terms of the related lease agreements.

10




Note 2: Merger with WS Midway Acquisition Sub, Inc.

At the effective time of the Merger described in Note 1, the following events occurred:

·      All outstanding shares of Dave & Buster’s common stock (including those issued upon the conversion of our convertible subordinated notes), other than shares held by WS Midway Holdings, Inc., were converted into the right to receive $18.05 per share without interest, less any applicable withholding taxes;

·      All outstanding options or warrants to acquire our common stock were converted into the right to receive an amount in cash equal to the difference between the per share exercise price and $18.05, without interest, less any applicable withholding taxes; and

·      To the extent not converted into shares of our common stock, we redeemed for cash our convertible subordinated notes due 2008 and the indenture governing the convertible notes ceased to have any effect.

The Merger transactions resulted in a change in ownership of 100 percent of the Company’s outstanding common stock and is being accounted for in accordance with Statement of Financial Accounting Standards (“SFAS”) 141, “Business Combinations,”. The purchase price paid in the Merger has been “pushed down” to the Company’s financial statements and is allocated to record the acquired assets and liabilities assumed based on their fair value. The Merger and the allocation of the purchase price have been recorded as of March 8, 2006 based on preliminary valuation studies. The allocation of the purchase price is subject to change based on completion of such studies, resolution of matters related to dissenting shareholders referred to below and the resolution of certain personnel matters. The adjustments, if any, arising out of the finalization of the allocation of the purchase price will not impact our cash flows including cash interest and rent. However, such adjustments could result in material increases or decreases to net income and earnings before interest expense, income taxes, depreciation and amortization. Further revisions to the purchase price allocation will be made as additional information becomes available. The purchase price was approximately $389,412 of which approximately $337,679 has been paid as of July 30, 2006. The sources and uses of funds in connection with the Merger are summarized below:

Sources

 

 

 

Revolving credit facility

 

$

4,376

 

Senior secured credit facility

 

50,000

 

Senior notes

 

175,000

 

Other liabilities—dissenting shareholders

 

51,733

 

Equity contribution

 

108,100

 

Cash on hand

 

203

 

Total sources

 

$

389,412

 

 

 

 

 

Uses

 

 

 

Consideration paid to stockholders

 

$

213,102

 

Consideration paid to convertible note and warrant holders

 

44,390

 

Consideration paid to option holders

 

9,279

 

Consideration payable to dissenting shareholders

 

51,733

 

Payment of existing debt

 

51,137

 

Transaction costs

 

19,771

 

Total uses

 

$

389,412

 

 

Holders of approximately 2.6 million shares notified us of their intent to exercise dissenters’ rights and initiate proceedings under Section 351.455 of the General and Business Corporation Law of Missouri to demand fair value with respect to their shares. On July 10, 2006, the Company and all dissenting shareholders reached an agreement which provided, among other things, for the permanent and irrevocable settlement of all claims among the parties. On August 15, 2006, the Company paid approximately $51,733 to the shareholders in accordance with the terms of the settlement agreement. Payments of the settlement were funded from borrowings under our senior secured credit facility and available cash.

In connection with the preliminary purchase price allocation, our estimates of the fair values of assets acquired and liabilities assumed are based primarily on preliminary valuation results from independent valuation specialists. As of July 30, 2006, we have recorded preliminary purchase accounting adjustments to the carrying value of our property and equipment, to establish intangible assets for our tradenames and trademarks and to revalue our deferred rent liability, among other things. This allocation of the purchase price is preliminary and subject to finalization of the independent valuation and our analysis of the fair

11




value of other assets and liabilities as of the date of the Merger. The final allocation of the purchase price may result in additional adjustments to the recorded amounts of our assets and liabilities and may also result in adjustments to depreciation and amortization expense, rent expense, other operating costs, and the provision for income taxes. The adjustments, if any, arising out of the finalization of the purchase allocation will not impact our cash flows including cash interest and rent. However, such adjustments could result in material increases or decreases to operating income and net income. Further revisions to the purchase price allocation will be made as additional information becomes available.

The purchase price was determined and has been preliminarily allocated as follows:

Purchase consideration

 

$

337,679

 

Accrued liability for dissenting shareholder rights

 

51,733

 

Total consideration

 

389,412

 

Allocation of purchase price:

 

 

 

Working capital deficit

 

(18,680

)

Property and equipment

 

344,701

 

Indefinite lived intangibles

 

128,638

 

Definite lived intangibles

 

8,000

 

Other long term assets

 

19,868

 

Rent liability

 

(49,225

)

 

 

 

 

Deferred income taxes

 

(38,187

)

Other long term liabilities

 

(5,703

)

 

 

$

389,412

 

 

In connection with the Merger, the Successor incurred approximately $1,500 in Merger related costs, primarily a bridge funding fee, that is recorded in the statement of operations for the 54 day period from March 8, 2006 to April 30, 2006 as interest expense.

Indefinite lived intangibles include our tradenames in the amount of $63,000 and goodwill in the amount of $67,557 and are not subject to amortization, but instead are reviewed for impairment at least annually.

Pro forma financial information – The following unaudited pro forma results of operations assumes that the Merger occurred on January 31, 2005.  This unaudited pro forma information should not be relied upon as necessarily being indicative of the historical results that would have been obtained if the Merger had actually occurred on that date, nor the results that may be obtained in the future.

 

 

Thirteen weeks
ended July 31,  2005

 

Twenty-six weeks
ended July 30, 2006

 

Twenty-six weeks
ended July 31, 2005

 

 

 

 

 

 

 

 

 

Revenue

 

$

110,829

 

$

249,994

 

$

226,564

 

Net loss, pro forma

 

$

(3,961

)

$

(6,595

)

$

(5,358

)

Pro forma adjustments

 

(2,705

)

(1,178

)

(8,664

)

Net income (loss), as reported

 

$

(1,256

)

$

(5,417

)

$

3,306

 

 

Note 3: Long-term debt

Long-term debt consisted of the following:

 

July 30, 2006
Successor

 

 

January 29, 2006
Predecessor

 

Senior Credit Facility—revolving

 

$

3,203

 

 

$

5,439

 

Senior Credit Facility—term

 

49,875

 

 

 

Senior notes

 

175,000

 

 

 

Term debt facility

 

 

 

45,375

 

Convertible subordinated notes, net of discount

 

 

 

29,361

 

 

 

228,078

 

 

80,175

 

Less current installments

 

500

 

 

9,625

 

Long-term debt, less current installments

 

$

227,578

 

 

$

70,550

 

 

12




In connection with the Merger, we terminated our existing credit facility and entered into a new senior secured credit facility that (a) provides a $100,000 term loan facility (with up to $50,000 of the term loan facility available on a delayed-draw basis for a period of six months) with a maturity of seven years from the closing date of the Merger and (b) provides a $60,000 revolving credit facility with a maturity of five years from the closing date of the Merger. The $60,000 revolving credit facility will include (i) a $20,000 letter of credit sub-facility, (ii) a $5,000 swingline sub-facility and (iii) a $5,000 (in US Dollar equivalent) sub facility available in Canadian dollars to the Canadian subsidiary. The revolving credit facility will be used to provide financing for working capital and general corporate purposes. As of July 30, 2006, borrowings under the revolving credit facility were $3,203, we drew approximately $49,875 under the term loan facility and had $7,002 in letters of credit outstanding.  See also Note 7.

The interest rates per annum applicable to loans, other than swingline loans, under our new senior secured credit facility are, at our option, equal to either a base rate (or, in the case of the Canadian revolving credit facility, a Canadian prime rate) or a Eurodollar rate (or, in the case of the Canadian revolving credit facility, a Canadian cost of funds rate) for one-, two-, three- or six-month (or, in the case of the Canadian revolving credit facility, 30, 60, 90 or 180-day) interest periods chosen by us, in each case, plus an applicable margin percentage. Swingline loans bear interest at the base rate plus the applicable margin. The weighted average rate of interest on our senior credit facility was 7.6 percent at July 30, 2006.

Effective June 30, 2006, we entered into two interest rate swap agreements that expire in 2011, to change a portion of our variable rate debt to fixed rate debt. Pursuant to the swap agreements, the interest rate on notional amounts aggregating $47,000 at June 30, 2006 is fixed at 5.31 percent. The agreements provide for an increase in the notional amounts to $94,600 and retention of the 5.31 percent fixed rate at September 30, 2006. The notional amounts decline ratably over the term of the agreements. The agreements have not been designated as hedges and adjustments to mark the instruments to their fair value are recorded as interest income/expense.  As a result of the swap agreements, we recorded additional interest income of $7 for the second quarter of 2006.

Our new senior secured credit facility requires that we comply with the following financial covenants: a minimum fixed charge coverage ratio test and a maximum leverage ratio test. We will initially be required to maintain a minimum fixed charge coverage ratio of 1.00:1.00 and a maximum leverage ratio of 4.75:1.00 as of July 30, 2006. The financial covenants will become more restrictive over time. The required minimum fixed charge coverage ratio increases annually to a required ratio of 1.20:1.00 in the fourth quarter of fiscal year 2009 and thereafter. The maximum leverage ratio decreases annually to a required ratio of 3.50:1.00 in the fourth quarter of fiscal year 2010 and thereafter. In addition, our new senior secured credit facility includes negative covenants restricting or limiting our, WS Midway Holdings, Inc.’s and our subsidiaries’ ability to, among other things incur additional indebtedness, make capital expenditures and sell or acquire assets.  Virtually all of the Company’s assets are pledged as collateral for the senior secured credit facility.

Our new senior secured credit facility also contains certain customary representations and warranties, affirmative covenants and events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults and cross-acceleration to certain indebtedness, certain events of bankruptcy, certain events under ERISA, material judgments, actual or asserted failures of any guarantee or security document supporting our new senior secured credit facility to be in full force and effect and a change of control. If an event of default occurs, the lenders under our new senior secured credit facility would be entitled to take various actions, including acceleration of amounts due under our new senior secured credit facility and all actions permitted to be taken by a secured creditor.  On August 17, 2006, certain covenants under our senior secured credit facility were amended.  See Note 7.

In connection with the Merger on March 8, 2006, we closed a placement of $175,000 aggregate principal amount of senior notes. The notes are general unsecured, unsubordinated obligations of the Company and mature on March 15, 2014. Interest on the notes compounds semi-annually and accrues at the rate of 11.25% per annum. On or after March 15, 2010, we may redeem all or, from time to time, a part of the senior notes upon not less than 30 nor more than 60 days notice, at redemption prices (expressed as a percentage of principal amount) plus accrued and unpaid interest on the senior notes. Prior to March 15, 2010, we may on any one or more occasions redeem up to 35% of the original principal amount of the notes using the proceeds of certain equity offerings completed before March 15, 2010.  On August 11, 2006, we commenced an offer to the holders of our 11.25% senior notes to exchange their existing notes sold in March 2006 pursuant to Rule 144A and Regulation S of the Securities Act of 1933, as amended, for an equal amount of newly issued 11.25% senior notes, which have been registered under the Securities Act of 1933.  See Note 7.

Our new senior notes restrict our ability to incur indebtedness, outside of our new senior credit facility, unless our consolidated coverage ratio exceeds 2.00:1.00 or other financial and operational requirements are met. Additionally, the terms of the notes restrict our ability to make certain payments to affiliated entities.

13




The following table sets forth the Company’s future debt payment obligations as of July 30, 2006:

 

Debt outstanding
at July 30, 2006

 

1 year or less

 

$

500

 

2 years

 

500

 

3 years

 

500

 

4 years

 

500

 

5 years

 

500

 

Thereafter

 

225,578

 

Total future payments

 

$

228,078

 

 

For the thirteen weeks ended July 30, 2006 and July 31, 2005 we recorded interest expense of $6,644 and $1,833, respectively and for the twenty–six weeks ended July 30, 2006 and July 31, 2005 interest expense was $12,148 and $3,370, respectively.  Interest costs capitalized during the construction of facilities for the thirteen weeks ended July 30, 2006 and July 31, 2005 was $40 and $78, respectively and for the twenty–six weeks ended July 30, 2006 and July 31, 2005 was $149 and $93, respectively.

Note 4: Commitments and 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 upon consultation with legal counsel, the amount of ultimate liability with respect to all actions will not materially affect the consolidated results of operations or financial condition of the Company.

The following table sets forth our operating lease commitments as of July 30, 2006:

 

 

1 Year or
less

 

Year 2

 

Year 3

 

Year 4

 

Year 5

 

Thereafter

 

Total

 

Operating leases

 

$

40,682

 

$

40,225

 

$

40,145

 

$

40,480

 

$

40,078

 

$

354,506

 

$

556,116

 

Note 5: Income Taxes

Significant components of the deferred tax assets and liabilities in the consolidated balance sheets are as follows:

 

July 30, 2006
Successor

 

 

January 29, 2006
Predecessor

 

Deferred tax liabilities:

 

 

 

 

 

 

Trademark/Tradename

 

$

(24,134

)

 

$

 

Fixed asset basis differences

 

(12,010

)

 

(17,468

)

Other, net

 

(938

)

 

(648

)

Deferred tax liability

 

$

(37,082

)

 

$

(18,116

)

Deferred tax assets:

 

 

 

 

 

 

Leasing transactions

 

$

 

 

$

6,051

 

Worker’s compensation

 

1,346

 

 

831

 

Amusement redemption liability

 

1,520

 

 

 

Other

 

1,173

 

 

54

 

Deferred tax asset

 

4,039

 

 

6,936

 

Net deferred tax liability

 

$

(33,043

)

 

$

(11,180

)

 

Note 6: Condensed Consolidating Financial Information

In connection with the Merger, we closed the placement of $175,000 aggregate principle amount senior notes as described in Note 3. The notes are guaranteed on a senior basis by all of our domestic subsidiaries. The subsidiary guarantees of the notes are full and unconditional and joint and several. Each of the subsidiary guarantors are 100 percent owned by Dave and Buster’s, Inc.

The accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10 “Financial statements of guarantors and issuers of guaranteed securities registered or being

14




registered.” No other condensed consolidating financial statements are presented herein. Our results of operations and cash flows from operating activities from our non-guarantor subsidiary were ($214) and $1,772, respectively for the twenty-six week period ended July 30, 2006.

July 30, 2006 (Successor):

 

 

Issuer and
Subsidiary
Guarantors

 

Subsidiary Non-
Guarantors

 

Consolidating
Adjustments

 

Dave & Buster’s, Inc.

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Current assets

 

$

29,824

 

$

606

 

$

(3,540

)

$

26,890

 

Property and equipment, net

 

336,150

 

6,132

 

 

342,282

 

Tradename

 

63,000

 

 

 

63,000

 

Goodwill

 

65,638

 

 

 

65,638

 

Investment in Sub

 

1,831

 

 

(1,831

)

 

Other assets and deferred charges

 

24,677

 

99

 

 

24,776

 

Total assets

 

$

521,120

 

$

6,837

 

$

(5,371

)

$

522,586

 

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

48,245

 

$

4,781

 

$

(3,540

)

$

49,486

 

Deferred income taxes

 

35,149

 

 

 

35,149

 

Deferred rent liability

 

50,489

 

21

 

 

50,510

 

Other liabilities

 

5,866

 

 

 

5,866

 

Payable to dissenting shareholders

 

51,733

 

 

 

51,733

 

Long-term debt, less current installments (Note 3)

 

227,374

 

204

 

 

227,578

 

Stockholders’ equity

 

102,264

 

1,831

 

(1,831

)

102,264

 

Total liabilities and stockholders’ equity

 

$

521,120

 

$

6,837

 

$

(5,371

)

$

522,586

 

January 29, 2006 (Predecessor):

 

 

Issuer and
Subsidiary
Guarantors

 

Subsidiary Non-
Guarantors

 

Consolidating
Adjustments

 

Dave & Buster’s, Inc.

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Current assets

 

$

29,076

 

$

907

 

$

(2,753

)

$

27,230

 

Property and equipment, net

 

369,469

 

5,147

 

 

374,616

 

Investment in Sub

 

1,071

 

 

(1,071

)

 

Other assets and deferred charges

 

21,115

 

101

 

 

21,216

 

Total assets

 

$

420,731

 

$

6,155

 

$

(3,824

)

$

423,062

 

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

63,764

 

$

3,425

 

$

(2,753

)

$

64,436

 

Deferred income taxes

 

5,401

 

 

 

5,401

 

Deferred rent liability

 

74,363

 

220

 

 

74,583

 

Other liabilities

 

2,872

 

 

 

2,872

 

Long-term debt, less current installments (Note 3)

 

69,111

 

1,439

 

 

70,550

 

Stockholders’ equity

 

205,220

 

1,071

 

(1,071

)

205,220

 

Total liabilities and stockholders’ equity

 

$

420,731

 

$

6,155

 

$

(3,824

)

$

423,062

 

 

15




Note 7: Subsequent Events

On August 11, 2006, we commenced an exchange offer to the holders of our 11.25% Senior Notes due 2014 to exchange their existing notes sold in March 2006 pursuant to Rule 144A and Regulation S of the Securities Act of 1933, as amended, for an equal amount of newly issued 11.25% Notes due 2014, which have been registered under the Securities Act of 1933.  The exchange offer will expire on September 15, 2006, unless extended.  We will accept for exchange any and all original notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on the expiration date.  Tenders of original notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the expiration date.  The terms of the exchange offer and other information relating to Dave & Buster’s are set forth in the prospectus dated August 7, 2006.

On July 10, 2006, the Company and all dissenting shareholders reached an agreement which provides, among other things, for the permanent and irrevocable settlement of all claims among the parties.  On August 15, 2006, the Company paid approximately $51,733 to the holders of approximately 2.6 million shares that, in connection with the Merger, had previously notified us of their intent to exercise dissenters’ rights and initiate proceedings under Section 351.455 of the General and Business Corporation Law of Missouri to demand fair value with respect to their shares. Payments of the settlement were funded from borrowings under our senior secured credit facility and available cash.

On August 17, 2006, covenants under the $160 million Senior Credit Facility were amended.

The main provisions of this amendment are as follows:

1.     Consent to enter into a sale-leaseback transaction on three fee owned properties, the proceeds of which would be used to pay down the outstanding balance of the term loan portion of the Senior Credit Facility with up to $5.0 million being available for reinvestment. Net proceeds are estimated to be approximately $20.0 million, with an estimated closing date in October or November of 2006.

2.     For the purposes of satisfying negative covenants under the Senior Credit Facility, (a) the amount of start-up costs to be added back to the Company’s net income would be increased from $5.0 million to $7.5 million for the year 2006, and (b) the amount of payments to employees under change in control contracts to be added back to the Company’s net income would be set at $10.0 million through the Company’s 2007 fiscal year.

3.     The ability to utilize purchasing cards, and treat up to $5.0 million of such purchasing card obligations as pari passu secured obligations.

16




Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (dollars in thousands).

General

Our fiscal year ends on the Sunday after the Saturday closest to January 31. All references to the second quarter of 2006 relate to the thirteen weeks ended July 30, 2006 of the Successor.  All references to the second quarter of 2005 relate to the thirteen week period ended July 31, 2005 of the Predecessor. All references to the year-to-date fiscal year 2006 period relate to the combined 145 day period ended July 30, 2006 of the Successor and the 37 day period ended March 7, 2006 of the Predecessor. All references to 2006 relate to the combined 53 week period ended February 4, 2007 and all references to 2005 relate to the 52 weeks ended January 29, 2006.  All dollar amounts are presented in thousands, unless otherwise noted, except share and per share amounts.

Merger with WS Midway Acquisition Sub, Inc.

Dave & Buster’s was acquired on March 8, 2006, by WS Midway Holdings, Inc., a newly-formed Delaware corporation, through the merger (the “Merger”) of WS Midway Acquisition Sub, Inc., a newly-formed Missouri corporation and a direct, wholly-owned subsidiary of WS Midway Holdings, Inc., with and into Dave & Buster’s with Dave & Buster’s as the surviving corporation. Affiliates of Wellspring Capital Management LLC (“Wellspring”) and HBK Investments L.P. (“HBK”) control approximately 82% and 18%, respectively, of the outstanding capital stock of WS Midway Holdings, Inc. Although we continue as the same legal entity after the Merger, the accompanying condensed consolidated statements of operations, stockholders equity and cash flows present our results of operations and cash flows for the periods preceding the Merger (“Predecessor”) and the period succeeding the Merger (“Successor”), respectively.

At the effective time of the Merger discussed above, the following events occurred:

1.             All outstanding shares of Dave & Buster’s common stock (including those issued upon the conversion of our convertible subordinated notes), other than shares held by WS Midway Holdings, Inc. or held by stockholders who perfected their appraisal rights under Missouri law, were converted into the right to receive $18.05 per share without interest, less any applicable withholding taxes;

2.             All outstanding options or warrants to acquire our common stock were converted into the right to receive an amount in cash equal to the difference between the per share exercise price and $18.05, without interest, less any applicable withholding taxes; and

3.             To the extent not converted into shares of our common stock, we redeemed for cash our convertible subordinated notes due 2008 and the indenture governing the convertible notes ceased to have any effect.

The Merger resulted in a change of ownership of 100 percent of the Company’s outstanding common stock and is being accounted for in accordance with Statement of Financial Accounting Standards (“SFAS”) 141, “Business Combinations”. The purchase price paid in the Merger has been “pushed down” to the Company’s financial statements and is allocated to record the acquired assets and liabilities assumed based on their fair value. The Merger and the allocation of the purchase price have been recorded as of March 8, 2006 based on preliminary valuation studies. The allocation of the purchase price is subject to change based on completion of such studies and other matters that may impact the determination of fair value as of the acquisition date.

17




The purchase price was approximately $389,412, of which approximately $337,679 has been paid as of July 30, 2006. The sources and uses of funds in connection with the Merger are summarized below:

Sources

 

 

 

Revolving credit facility

 

$

4,376

 

Senior secured credit facility

 

50,000

 

Senior notes

 

175,000

 

Other liabilities—dissenting shareholders

 

51,733

 

Equity contribution

 

108,100

 

Cash on hand

 

203

 

Total sources

 

$

389,412

 

 

 

 

 

Uses

 

 

 

Consideration paid to stockholders

 

$

213,102

 

Consideration paid to convertible note and warrant holders

 

44,390

 

Consideration paid to option holders

 

9,279

 

Consideration payable to dissenting shareholders

 

51,733

 

Payment of existing debt

 

51,137

 

Transaction costs

 

19,771

 

Total uses

 

$

389,412

 

Holders of up to approximately 2.6 million shares notified us of their intent to exercise dissenters’ rights and initiate proceedings under Section 351.455 of the General and Business Corporation Law of Missouri to demand fair value with respect to their shares. On July 10, 2006, the Company and all dissenting shareholders reached an agreement which provides, among other things, for the permanent and irrevocable settlement of all claims among the parties. On August 15, 2006, the Company paid approximately $51,733 to the shareholders in accordance with the terms of the settlement agreement. Payments of the settlement were funded from borrowings under our senior secured credit facility and available cash.

Acquisitions and disposals

On August 28, 2005, a subsidiary of ours closed the acquired Jillian’s complex located at the Mall of America in Bloomington, Minnesota due to continuing operating losses attributable to this complex and our unsuccessful efforts to renegotiate the terms of the related leases. As a result of the closing, we recorded total pre-tax charges of approximately $2,500 in the second quarter of 2005 for additional depreciation, amortization and impairment of the assets that were abandoned and whose carrying value was not recoverable as of July 31, 2005. This charge is included in depreciation and amortization expense in the accompanying consolidated statements of operations.

We have converted six of our former Jillian’s locations to our “Dave & Buster’s Grand Sports Café” brand.  We believe this conversion will enhance our efforts to improve the operating economics of our brand throughout the system.   We began converting the stores in September 2005, and have converted five of the stores in fiscal 2005. We converted one additional store in the first quarter of 2006. We will continue to evaluate the performance of the converted stores in order to determine if conversion of the remaining units is appropriate.

In October 2005, we acquired the general partner interest in a limited partnership which owns a Jillian’s complex in the Discover Mills Mall near Atlanta, Georgia. The limited partner currently earns a preferred return on its remaining invested capital. We currently have a 50.1 percent interest in the income or losses of the partnership. After deducting the preferred return to the limited partner, our interest in the income or losses of the partnership is not expected to be significant to our results of operations until the limited partner receives a full return of its invested capital and preferred return. We also manage the complex under a management agreement for which we receive a fee of 4.0 percent of operating revenues annually. We account for our general partner interest using the equity method due to the substantive participative rights of the limited partner in the operations of the partnership.

Overview

We monitor and analyze a number of key performance measures and indicators in order to manage our business and evaluate our financial and operating performance. Those indicators include:

Revenues.  We derive revenues primarily from food and beverage and amusement sales. For the thirteen weeks ended

18




July 30, 2006, we derived 36.9 percent of our total revenue from food sales, 17.8 percent from beverage sales, 43.3 percent from amusement sales and 2.0 percent from other sources. For the twenty-six weeks ended July 30, 2006, we derived 36.2 percent of our total revenue from food sales, 18.4 percent from beverage sales, 43.5 percent from amusement sales and 1.9 percent from other sources. We continually monitor the success of current food and beverage items, the availability of new menu offerings, our menu price structure and our ability to adjust prices where competitively appropriate. In the beverage component, we operate fully licensed facilities, which means that we have full beverage service throughout the complex. Our complexes also offer an extensive array of amusements, including state-of-the-art simulators, high-tech video games, traditional pocket billiards and shuffleboard, as well as a variety of redemption games, which dispense coupons that can be redeemed for prizes in our Winner’s Circle. Our redemption games include basic games of skill, such as skee-ball and basketball, and the prizes in our Winner’s Circle range from small-ticket novelty items to high-end electronics, such as flatscreen televisions. We review the game play on existing amusements in an effort to match amusements availability with guest preferences. We will continue to invest in new games as they become available and prove to be attractive to our guests. We currently anticipate spending approximately $8,100 on new games during the full fiscal year of 2006.  We believe that special events business is a very important component of our revenue, because a significant percentage of the guests attending a special event are in a Dave & Buster’s for the first time. This is a very advantageous way to introduce the concept to new guests. Accordingly, we place considerable emphasis on this area through our in-store sales teams.

Cost of products.  Cost of products includes the cost of food, beverages and Winner’s Circle amusement items. During the thirteen weeks ended July 30, 2006, our cost of food products averaged 25.9 percent of food revenue and our cost of beverage products averaged 25.8 percent of beverage revenue. During the twenty-six weeks ended July 30, 2006, our cost of food products averaged 26.0 percent of food revenue and our cost of beverage products averaged 25.6 percent of beverage revenue. Our amusement cost of products averaged 13.1 percent and 12.6 percent of amusement revenues for the thirteen week and twenty-six week periods ended July 30, 2006, respectively. Our cost of products is driven by product mix and pricing movements from third party suppliers. We continually strive to gain efficiencies in both the acquisition and use of products while maintaining high standards of product quality.

Operating payroll and benefits.  Operating payroll and benefits consist of wages, employer taxes and benefits for our store personnel. We continually review the opportunity for efficiencies principally through scheduling refinements.

Other store operating expenses.  Other store operating expenses consist of store-related occupancy, restaurant expenses, utilities, repair and maintenance and marketing costs.

Liquidity and cash flows.  Our primary source of cash flow is from operating activities and availability under our revolving credit facility.

Quarterly fluctuations, seasonality and inflation.  As a result of the substantial revenues associated with each new complex, the timing of new complex openings will result in significant fluctuations in quarterly results. We also expect seasonality to be a factor in the operation or results of our business in the future with anticipated lower third quarter revenues and higher fourth quarter revenues associated with the year-end holidays. We also expect that volatile energy costs will continue to exert pressure on both supplier pricing and consumer spending related to entertainment and dining alternatives. The effects of any supplier price increases are expected to be partially offset by selected menu price increases where competitively appropriate. However, there is no assurance that the cost of our product will remain stable or that the federal or state minimum wage rate will not increase. We expect that our historically higher revenues during the fourth quarter due to the winter holiday season will continue to make our financial results susceptible to the impact of severe weather on customer traffic and sales during that period.

19




Results of operations

The following table sets forth selected data, in thousands of dollars and as a percentage of total revenues (unless otherwise noted) for the periods indicated. All information is derived from the accompanying consolidated statements of operations.

 

 

 

 

 

 

 

 

Thirteen weeks
ended
July 30, 2006

 

 

Thirteen weeks
ended
July 31, 2005

 

 

 

(Successor)

 

 

(Predecessor)

 

Food and beverage revenues

 

$

67,374

 

54.7

%

 

$

60,378

 

54.5

%

Amusement and other revenues

 

55,777

 

45.3

%

 

50,451

 

45.5

%

Total revenues

 

123,151

 

100.0

%

 

110,829

 

100.0

%

Cost of food and beverage (as a percentage of food and beverage revenues)

 

17,408

 

25.8

%

 

15,680

 

26.0

%

Cost of amusement and other (as a percentage of amusement and other revenues)

 

8,019

 

14.4

%

 

6,970

 

13.8

%

Total cost of products

 

25,427

 

20.6

%

 

22,650

 

20.4

%

Operating payroll and benefits

 

35,608

 

28.9

%

 

32,300

 

29.1

%

Other store operating expenses

 

40,360

 

32.8

%

 

35,870

 

32.4

%

General and administrative expenses

 

8,959

 

7.3

%

 

7,204

 

6.5

%

Depreciation and amortization expense

 

11,455

 

9.3

%

 

12,317

 

11.1

%

Startup costs

 

821

 

0.7

%

 

804

 

0.8

%

Total operating costs

 

122,630

 

99.6

%

 

111,145

 

100.3

%

Operating income

 

521

 

0.4

%

 

(316

)

(0.3

)%

Interest expense, net

 

6,525

 

5.3

%

 

1,661

 

1.5

%

Income (loss)) before provisions for income taxes

 

(6,004

)

(4.9

)%

 

(1,977

)

(1.8

)%

Provision (benefit) for income taxes

 

(2,129

)

(1.7

)%

 

(721

)

(0.7

)%

Net income (loss)

 

$

(3,875

)

(3.2

)%

 

$

(1,256

)

(1.1

)%

 

 

 

 

 

 

 

 

 

 

 

EBITDA(1)

 

$

11,976

 

 

 

 

$

12,001

 

 

 

Change in comparable store sales(2)

 

 

 

5.6

%

 

 

 

0.2

%

Stores open at end of period(3)

 

 

 

47

 

 

 

 

44

 

Comparable stores open at end of period

 

 

 

33

 

 

 

 

33

 

 

 

 

 

 

 

 

 

 

 

 

 

20




 

 

 

 

 

 

 

 

 

 

 

 

 

 

145 Day
period from
March 8,
2006 to
July 30, 2006

 

 

37 Day
period from
January 30,
2006 to
March 7, 2006

 

Twenty-six weeks
ended
July 30, 2006

 

Twenty-six weeks
ended
July 31, 2005

 

 

 

(Successor)

 

 

(Predecessor)

 

(Combined)

 

(Predecessor)

 

Food and beverage revenues

 

$

108,876

 

54.6

%

 

$

27,562

 

54.7

%

$

136,438

 

54.6

%

$

121,769

 

53.7

%

Amusement and other revenues

 

90,709

 

45.4

%

 

22,847

 

45.3

%

113,556

 

45.4

%

104,795

 

46.3

%

Total revenues

 

199,585

 

100.0

%

 

50,409

 

100.0

%

249,994

 

100.0

%

226,564

 

100.0

%

Cost of food and beverage (as a percentage of food and beverage revenues)

 

28,163

 

25.9

%

 

7,111

 

25.8

%

35,274

 

25.9

%

31,708

 

26.0

%

Cost of amusement and other (as a percentage of amusement and other revenues)

 

12,678

 

14.0

%

 

3,183

 

13.9

%

15,861

 

14.0

%

13,447

 

12.8

%

Total cost of products

 

40,841

 

20.5

%

 

10,294

 

20.4

%

51,135

 

20.5

%

45,155

 

19.9

%

Operating payroll and benefits

 

57,742

 

28.9

%

 

14,365

 

28.5

%

72,107

 

28.8

%

65,075

 

28.7

%

Other store operating expenses

 

63,827

 

32.0

%

 

15,505

 

30.8

%

79,332

 

31.7

%

69,857

 

30.9

%

General and administrative expenses

 

14,231

 

7.1

%

 

3,480

 

6.9

%

17,711

 

7.1

%

14,893

 

6.6

%

Depreciation and amortization expense

 

18,196

 

9.1

%

 

4,328

 

8.6

%

22,524

 

9.0

%

22,058

 

9.7

%

Startup costs

 

2,227

 

1.1

%

 

880

 

1.7

%

3,107

 

1.2

%

885

 

0.4

%

Total operating costs

 

197,064

 

98.7

%

 

48,852

 

96.9

%

245,916

 

98.3

%

217,923

 

96.2

%

Operating income

 

2,521

 

1.3

%

 

1,557

 

3.1

%

4,078

 

1.7

%

8,641

 

3.8

%

Interest expense, net

 

11,769

 

5.9

%

 

649

 

1.3

%

12,418

 

5.0

%

3,434

 

1.5

%

Income (loss)) before provisions for income taxes

 

(9,248

)

(4.6

)%

 

908

 

1.8

%

(8,340

)

(3.3

)%

5,207

 

2.3

%

Provision (benefit) for income taxes

 

(3,345

)

(1.6

)%

 

422

 

0.8

%

(2,923

)

(1.1

)%

1,901

 

0.8

%

Net income (loss)

 

$

(5,903

)

(3.0

)%

 

$

486

 

1.0

%

$

(5,417

)

(2.2

)%

$

3,306

 

1.5

%

Cash provided by (used in):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

8,550

 

 

 

 

$

10,741

 

 

 

$

19,291

 

 

 

$

24,948

 

 

 

Investing activities

 

(289,284

)

 

 

 

(10,600

)

 

 

(299,884

)

 

 

(22,445

)

 

 

Financing activities

 

273,575

 

 

 

 

89

 

 

 

273,664

 

 

 

(3,341

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBITDA(1)

 

$

20,717

 

 

 

 

$

5,885

 

 

 

$

26,602

 

 

 

$

30,699

 

 

 

Change in comparable store sales(2)

 

 

 

 

 

 

 

 

 

 

 

 

5.8

%

 

 

(0.8

)%

Stores open at end of period(3)

 

 

 

47

 

 

 

 

46

 

 

 

47

 

 

 

44

 

Comparable stores open at end of period

 

 

 

33

 

 

 

 

33

 

 

 

33

 

 

 

33

 

Effective tax rate

 

 

 

 

 

 

 

 

 

 

 

 

35.0

%

 

 

36.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21





(1)           “EBITDA” is calculated as net income, plus interest and taxes, plus depreciation and amortization expense. EBITDA is presented because certain investors use it as a measure of a company’s historical operating performance and its ability to service and incur debts. However, EBITDA, is not a measure prepared in accordance with GAAP. Accordingly, this measure should not be considered in isolation from, as an alternative to or as more meaningful than net income, cash flows or other income data (as calculated in accordance with GAAP) or as a measure of liquidity. EBITDA, as presented, may not be comparable to similarly-titled measures reported by other companies. Our calculation of EBITDA, for the periods presented is set forth below:

 

 

Thirteen weeks
ended
July 30, 2006

 

 

Thirteen 
weeks
ended
July 31, 2005

 

145 Day
period from
March 8,
2006 to
July 30, 2006

 

 

37 Day
period from
January 30,
2006 to
March 7, 2006

 

Twenty-six 
weeks
ended
July 30, 2006

 

Twenty-six 
weeks
ended
July 31, 2005

 

 

 

(Successor)

 

 

(Predecessor)

 

(Successor)

 

 

(Predecessor)

 

(Combined)

 

(Predecessor)

 

Net income (loss)

 

$

(3,875

)

 

$

(1,256

)

$

(5,903

)

 

$

486

 

$

(5,417

)

$

3,306

 

Interest expense, net

 

6,525

 

 

1,661

 

11,769

 

 

649

 

12,418

 

3,434

 

Provision (benefit) for
income taxes

 

(2,129

)

 

(721

)

(3,345

)

 

422

 

(2,923

)

1,901

 

Depreciation and
amortization expense

 

11,455

 

 

12,317

 

18,196

 

 

4,328

 

22,524

 

22,058

 

EBITDA

 

$

11,976

 

 

12,001

 

$

20,717

 

 

$

5,885

 

$

26,602

 

$

30,699

 

 

(2)           “Comparable store sales” (year-over-year comparison of complexes open at least 18 months as of the beginning of each of our fiscal years) is a key performance indicator used within our industry and are indicative of acceptance of our initiatives as well as local economic and consumer trends.

(3)           The number of stores open at July 30, 2006 includes the opening of a complex in New York Times Square on April 5, 2006, the openings of complexes in Omaha, Buffalo and Kansas City in the second, third and fourth quarters of 2005, respectively.

Thirteen Weeks Ended July 30, 2006 Compared to Thirteen Weeks Ended July 31, 2005

Revenues

Total revenues increased 11.1 percent, or $12,322, for second quarter 2006 compared to second quarter 2005.  Comparable stores revenue increased 5.6 percent, or $5,038 for second quarter 2006 compared to second quarter 2005.

The increased revenues were derived from the following sources:

Comparable stores

 

$

5,038

 

Non comparable stores:

 

 

 

Stores opened or acquired prior to fiscal 2005

 

1,043

 

Stores opened in fiscal 2005

 

4,991

 

Stores opened in fiscal 2006

 

3,236

 

Closed stores and other

 

(1,986

)

Total

 

$

12,322

 

Revenues at our comparable stores increased 5.6 percent for second quarter 2006 over the same period for 2005. Food sales at our comparable stores increased by 5.2 percent over sales levels achieved in the same period of 2005. This increase in food sales was accomplished in part by the continued success of our “Power Combo” promotion. Our revenues were bolstered by seven weeks of advertising on cable television in all of our markets and spot radio support in selected markets. Our marketing efforts in the second quarter of 2006 represented a 22.0 percent increase in our marketing exposure compared to the second quarter of 2005. Beverage sales at our comparable stores increased by 6.7 percent over second quarter 2005 as we experienced continued positive results of our “Late Night Happy Hour” and other promotional activity around the beverage component of our business. Comparable store amusements revenue in the second quarter of 2006 increased by 4.8 percent versus the same period of 2005.

22




Comparable special events revenues accounted for 14.5 percent of consolidated revenue for the second quarter of 2006, up from 13.5 percent in the comparable 2005 period.

Our revenue mix was 54.7 percent for food and beverage and 45.3 percent for amusements and other. This compares to 54.5 percent and 45.5 percent, respectively, for the comparable period in 2005. The shift in our revenue mix was influenced by the success of two promotional efforts launched in the middle of the second quarter of 2005, our “Power Combo” promotion and our “Super Charge” promotion. The “Power Combo” promotion provides our guests with a value offering that includes selected entrees and a game card at a fixed price. Our “Super Charge” promotion allows guests to increase purchased game play on certain Power Cards by twenty-five percent for a discounted amount.

Cost of products

Cost of food and beverage products declined 20 basis points to 25.8 percent of revenue for the second quarter of 2006 compared to 26.0 percent for the second quarter of 2005.  Slight increases in the cost of meat and produce were offset by reduced dairy and beverage costs compared to the same period in fiscal 2005.

The costs of amusements, as a percentage of amusements revenue, increased 30 basis points to 13.1 percent of amusement and other revenue for the second quarter of 2006 compared to 12.8 percent for the second quarter of 2005.

Operating payroll and benefits

Operating payroll and benefits decreased 20 basis points to 28.9 percent of revenue for the second quarter of 2006, compared to 29.1 percent for the second quarter of 2005. This decrease was primarily driven by lower labor costs at our comparable stores which was partially offset by increased labor requirements related to new store openings and other non-comparable store operations.

Other store operating expenses

Other store operating expenses increased 40 basis points to 32.8 percent for the second quarter of 2006, compared to 32.4 percent for the same period of 2005. This increase was primarily driven by increase in repair and maintenance costs and increased utility expenses, offset by decreases in other store expenses.

General and administrative expenses

General and administrative expenses consist primarily of personnel, facilities and professional expenses for the various departments of corporate headquarters. General and administrative expenses increased 80 basis points for the second quarter of 2006 compared to the second quarter of 2005. Reductions in costs incurred for legal and audit services were offset by expenses associated with the Merger transaction and provision for estimated incentive compensation programs.

Depreciation and amortization expense

Depreciation and amortization expense decreased $862.  On August 28, 2005, a subsidiary of the Company closed the Jillian’s entertainment complex located at the Mall of America in Bloomington, Minnesota.  As a result of the closing, we recorded a pre-tax charge of approximately $2,500 in the second quarter of 2005.  The charge consisted of additional depreciation, amortization and impairment of the assets which were abandoned and whose carrying value was not recoverable as of July 31, 2005.

Startup costs

Startup costs include costs associated with the opening and organizing of new complexes or conversion of existing complexes, including the cost of feasibility studies, staff-training and recruiting and travel costs for employees engaged in such startup activities. All startup costs are expensed as incurred. The increase in startup costs is primarily attributable to higher opening expense levels associated with our Times Square location compared to costs incurred in opening our Omaha location in the second quarter of 2005.

Interest expense

The increase in interest expense is attributed to borrowings of $53,078 under our new senior secured credit facility and

23




the private placement of $175,000 aggregate principal amount of senior notes that were issued in connection with the Merger.

Provision for income taxes

Our effective tax rate differs from the statutory rate primarily due to the deduction for FICA tip credits and state income taxes.

Twenty-six Weeks Ended July 30, 2006 Compared to Twenty-six Weeks Ended July 31, 2005

Revenues

Total revenues increased 10.3 percent, or $23,430, for the twenty-six week period ended July 30, 2006 compared to the twenty-six week period ended July 31, 2006. Comparable stores revenue increased 5.8 percent, or $10,532 for the twenty-six week period ended July 30, 2006 compared to the twenty-six week period ended July 31, 2006.

The increased revenues were derived from the following sources: