FORM 10-Q

 


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

x

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

 

 

 

FOR THE QUARTERLY PERIOD ENDED OCTOBER 29, 2006

 

 

Or

 

 

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 001-15007


Dave & Buster’s, Inc.

(Exact Name of Registrant as Specified in Its Charter)

MISSOURI

 

43-1532756

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

2481 Mañana Drive

Dallas, Texas 75220

(Address of principal executive offices)

(Zip Code)

(214) 357-9588

(Registrant’s telephone number, including area code)


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  o.

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

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.

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.

The number of shares of the Issuer’s common stock, $0.01 par value, outstanding as of October 29, 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.        CONSOLIDATED FINANCIAL STATEMENTS

DAVE & BUSTER’S, INC.

CONSOLIDATED BALANCE SHEETS

 

 

October 29, 2006
(Successor)

 

 

 

January 29, 2006
(Predecessor)

 

 

 

(unaudited)

 

 

 

(audited)

 

 

 

(In thousands, except share
amounts)

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,037

 

 

 

$

7,582

 

Inventories

 

13,130

 

 

 

12,469

 

Prepaid expenses

 

5,952

 

 

 

2,985

 

Deferred income taxes

 

1,417

 

 

 

 

Other current assets

 

5,995

 

 

 

4,194

 

Total current assets

 

27,531

 

 

 

27,230

 

Property and equipment, net

 

318,677

 

 

 

351,883

 

Tradename

 

63,000

 

 

 

7,482

 

Goodwill

 

71,104

 

 

 

 

Assets held for sale (Note 7)

 

28,460

 

 

 

22,733

 

Other assets and deferred charges

 

23,172

 

 

 

13,734

 

Total assets

 

$

531,944

 

 

 

$

423,062

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current installments of long-term debt (Note 3)

 

$

1,000

 

 

 

$

9,625

 

Accounts payable

 

14,947

 

 

 

25,069

 

Accrued liabilities

 

39,690

 

 

 

21,294

 

Income taxes payable

 

 

 

 

2,669

 

Deferred income taxes

 

 

 

 

5,779

 

Total current liabilities

 

55,637

 

 

 

64,436

 

Deferred income taxes

 

34,130

 

 

 

5,401

 

Deferred lease liability

 

50,263

 

 

 

74,583

 

Other liabilities

 

6,219

 

 

 

2,872

 

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

 

288,625

 

 

 

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

)

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

 

 

 

 

 

Restricted stock awards

 

 

 

 

2,180

 

Successor:

 

 

 

 

 

 

 

Common stock, $0.01 par value, 1,000 authorized; 100 issued and outstanding
as of October 29, 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

Paid-in capital

 

108,100

 

 

 

125,312

 

Accumulated comprehensive income

 

88

 

 

 

345

 

Retained earnings (deficit)

 

(11,118

)

 

 

79,092

 

Total stockholders’ equity

 

97,070

 

 

 

205,220

 

Total liabilities and stockholders’ equity

 

$

531,944

 

 

 

$

423,062

 

See accompanying notes to consolidated financial statements.

3




DAVE & BUSTER’S, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

(unaudited)

 

 

Thirteen weeks
ended October 29,
2006
(Successor)

 

 

 

Thirteen weeks
ended October 30,
2005
(Predecessor)

 

 

 

 

 

 

 

 

 

Food and beverage revenues

 

$

64,727

 

 

 

$

58,212

 

Amusement and other revenues

 

51,543

 

 

 

47,433

 

Total revenues

 

116,270

 

 

 

105,645

 

Cost of food and beverage

 

16,783

 

 

 

15,208

 

Cost of amusement and other

 

7,214

 

 

 

7,126

 

Total cost of products

 

23,997

 

 

 

22,334

 

Operating payroll and benefits

 

34,749

 

 

 

31,590

 

Other store operating expenses

 

38,458

 

 

 

36,054

 

General and administrative expenses

 

7,739

 

 

 

7,819

 

Depreciation and amortization expense

 

11,972

 

 

 

9,934

 

Startup costs

 

814

 

 

 

1,495

 

Total operating costs

 

117,729

 

 

 

109,226

 

Operating loss

 

(1,459

)

 

 

(3,581

)

Interest expense, net

 

7,200

 

 

 

1,458

 

Loss before provision for income taxes

 

(8,659

)

 

 

(5,039

)

Benefit for income taxes

 

(3,442

)

 

 

(1,839

)

Net loss

 

$

(5,217

)

 

 

$

(3,200

)

See accompanying notes to consolidated financial statements.

4




DAVE & BUSTER’S, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

(unaudited)

 

 

For the 236 Day
Period from
March 8, 2006
to October 29,
2006
(Successor)

 

 

 

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

 

Thirty-nine weeks
ended October 30,
2005
(Predecessor)

 

 

 

 

 

 

 

 

 

 

 

Food and beverage revenues

 

$

173,604

 

 

 

$

27,562

 

$

179,982

 

Amusement and other revenues

 

142,251

 

 

 

22,847

 

152,227

 

Total revenues

 

315,855

 

 

 

50,409

 

332,209

 

Cost of food and beverage

 

44,945

 

 

 

7,111

 

46,916

 

Cost of amusement and other

 

19,893

 

 

 

3,183

 

20,573

 

Total cost of products

 

64,838

 

 

 

10,294

 

67,489

 

Operating payroll and benefits

 

92,492

 

 

 

14,365

 

96,665

 

Other store operating expenses

 

102,284

 

 

 

15,505

 

105,911

 

General and administrative expenses

 

21,970

 

 

 

3,480

 

22,715

 

Depreciation and amortization expense

 

30,167

 

 

 

4,328

 

31,992

 

Startup costs

 

3,041

 

 

 

880

 

2,377

 

Total operating costs

 

314,792

 

 

 

48,852

 

327,149

 

Operating income

 

1,063

 

 

 

1,557

 

5,060

 

Interest expense, net

 

18,969

 

 

 

649

 

4,892

 

Income (loss) before provision for income taxes

 

(17,906

)

 

 

908

 

168

 

Provision (benefit) for income taxes

 

(6,788

)

 

 

422

 

62

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(11,118

)

 

 

$

486

 

$

106

 

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

 

 

 

 

 

 

 

(11,118

)

(11,118

)

Unrealized foreign currency translation gain (net of tax)

 

 

 

 

 

 

88

 

 

88

 

Comprehensive loss

 

 

 

 

 

 

 

 

(11,030

)

Balance October 29, 2006 (Successor)

 

100

 

 

$

108,100

 

 

 

$

88

 

$

(11,118

)

$

97,070

 

See accompanying notes to consolidated financial statements.

6




DAVE & BUSTER’S, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

For the 236 Day
Period from
March 8, 2006 to
October 29, 2006

 

 

 

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

 

Thirty-nine
weeks ended
October 30, 2005

 

 

 

(Successor)

 

 

 

(Predecessor)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(11,118

)

 

 

$

486

 

$

106

 

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

 

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

30,167

 

 

 

4,328

 

31,992

 

Deferred income tax expense benefit

 

(1,580

)

 

 

(1,088

)

(78

)

Tax benefit related to stock options

 

 

 

 

10

 

777

 

Restricted stock awards

 

 

 

 

61

 

544

 

Stock-based compensation charges

 

 

 

 

25

 

 

Warrants related to convertible debt

 

 

 

 

21

 

192

 

Other, net

 

(282

)

 

 

7

 

33

 

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

 

 

 

 

 

 

 

 

 

Inventories

 

(589

)

 

 

(72

)

(2,160

)

Prepaid expenses

 

(2,798

)

 

 

(169

)

(10,888

)

Other current assets

 

(1,800

)

 

 

(1

)

(260

)

Other assets and deferred charges

 

(5,154

)

 

 

(66

)

3,591

 

Accounts payable

 

(2,806

)

 

 

(3,916

)

7,632

 

Accrued liabilities

 

7,528

 

 

 

6,918

 

2,045

 

Income taxes payable

 

(4,173

)

 

 

1,504

 

(4,452

)

Deferred rent liability

 

1,038

 

 

 

2,502

 

2,935

 

Other liabilities

 

516

 

 

 

191

 

1,033

 

Net cash provided by operating activities

 

8,949

 

 

 

10,741

 

33,042

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

Capital expenditures

 

(24,727

)

 

 

(10,600

)

(41,870

)

Purchase of Predecessor common stock

 

(326,444

)

 

 

 

 

Proceeds from sales of property and equipment

 

325

 

 

 

 

198

 

Other investing activities

 

 

 

 

 

(1,158

)

Net cash used in investing activities

 

(350,846

)

 

 

(10,600

)

(42,830

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

Borrowings (repayments) under revolving credit facility

 

15,000

 

 

 

(439

)

2,026

 

Repayments of long-term debt

 

(51,137

)

 

 

 

 

Borrowings under senior secured credit facility

 

99,625

 

 

 

 

 

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

 

1,998

 

Net cash provided by financing activities

 

335,122

 

 

 

89

 

4,024

 

Increase (decrease) in cash and cash equivalents

 

(6,775

)

 

 

230

 

(5,764

)

Beginning cash and cash equivalents

 

7,812

 

 

 

7,582

 

7,624

 

Ending cash and cash equivalents

 

$

1,037

 

 

 

$

7,812

 

$

1,860

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

 

Cash paid for income taxes—net of refunds

 

$

1,760

 

 

 

$

 

$

11,669

 

Cash paid for interest, net of amounts capitalized

 

$

13,661

 

 

 

$

878

 

$

3,126

 

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., 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, Inc. with Dave & Buster’s, Inc. 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.  Dave & Buster’s Inc. continues as the same legal entity after the Merger. The accompanying condensed consolidated statements of operations, stockholders’ equity and cash flows present the results of operations and cash flows of Dave & Buster’s Inc. and all wholly-owned subsidiaries (collectively, “Dave & Buster’s” or the “Company”), 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 located in the United States and Canada and the franchise of one complex under the name “Dave & Buster’s” located in Mexico.

Dave & Buster’s fiscal year ends on the Sunday after the Saturday closest to January 31. All references to the third quarter of 2006 relate to the thirteen weeks ended October 29, 2006 of the Successor.  All references to the third quarter of 2005 relate to the thirteen week period ended October 30, 2005 of the Predecessor. All references to the year-to-date fiscal year 2006 period relate to the combined 236 day period ended October 29, 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 ending on February 4, 2007 and all references to 2005 relate to the 52 weeks ended January 29, 2006.  In the opinion of management, these financial statements contain all adjustments, necessary to present fairly the financial position, results of operations and cash flows for the periods indicated.

Dave & Buster’s quarterly financial data should be read in conjunction with the consolidated financial statements for the year ended January 29, 2006.  The results of operations for the periods ended March 7, 2006 and October 29, 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 the 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:

 

October 29, 2006
(Successor)

 

 

 

January 29, 2006
(Predecessor)

 

Food and beverage

 

$

2,487

 

 

 

$

2,460

 

Amusements

 

2,696

 

 

 

5,668

 

Other

 

7,947

 

 

 

4,341

 

 

 

$

13,130

 

 

 

$

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 October 29, 2006 and October 30, 2005 were $173 and $247, respectively, and for the thirty-nine weeks ended October 29, 2006 and October 30, 2005 were $322, and $340, 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 the property and equipment are impaired. The Company assesses the recoverability of the 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.

Assets held for sale—Assets held for sale represent the net book value of the land and buildings of three locations that will be sold under the terms of the sale leaseback transaction described in Note 7.  The reported amounts of these assets reflect the historical net book value of the Predecessor as of January 29, 2006 and the estimated net book value determined in accordance with Statement of Financial Accounting Standards (“SFAS”) 141, “Business Combinations,” as more fully described in Note 2, as of October 29, 2006.

Accrued liabilities

Accrued liabilities consist of the following:

 

October 29,
2006
(Successor)

 

 

 

January 29,
2006
(Predecessor)

 

Compensation and benefits

 

$

14,151

 

 

 

$

5,708

 

Redemption liability

 

4,639

 

 

 

624

 

Sales and use taxes

 

2,445

 

 

 

2,462

 

Real estate taxes

 

2,507

 

 

 

1,796

 

Interest

 

4,191

 

 

 

1,324

 

Deferred gift card liability

 

2,326

 

 

 

1,384

 

Other

 

9,431

 

 

 

7,996

 

Total accrued liabilities

 

$

39,690

 

 

 

$

21,294

 

 

Income taxes—The Company uses 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.  The Company adopted SFAS No. 123R as of the beginning of the first quarter of 2006 using the modified prospective method, accordingly, the Company has not restated prior period amounts presented herein. Dave & Buster’s 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 the 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.

Foreign currency translation—The financial statements related to the operations of the 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 period-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 the 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 the financial position or results of operations of the Company.

9




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 October 29, 2006 and October 30, 2005 were $0 and $254, respectively, and for the thirty-nine weeks ended October 29, 2006 and October 30, 2005 were $77, and $587, respectively.

Amusements costs of products—Certain 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.  The Company’s lease obligations were adjusted to their estimated fair values as a result of the Merger. (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 October 29, 2006 and October 30, 2005 were $21 and $223, respectively, and for the thirty-nine weeks ended October 29, 2006 and October 30, 2005 were $85 and $65, respectively.

Recent accounting pronouncementsIn June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 requires companies to determine whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. This interpretation also provides guidance on derecognition, classification, accounting in interim periods, and expanded disclosure requirements. FIN 48 is effective for fiscal years beginning after December 15, 2006.  The Company is currently in the process of assessing the impact that FIN 48 will have on the consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”).  SFAS 157 clarifies the definition of fair value, describes methods used to appropriately measure fair value, and expands fair value disclosure requirements.  This statement is effective for fiscal years beginning after November 15, 2007.  The Company is currently in the process of assessing the impact that SFAS 157 will have on the consolidated financial statements.

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

At the effective time of the Merger described in Note 2, the following events occurred:

·                  All outstanding shares of Dave & Buster’s common stock (including those issued upon the conversion of the 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;

·                  Holders of approximately 2.6 million shares exercised dissenters’ rights and initiated proceedings under Section 351.455 of the General and Business Corporation Law of Missouri to demand fair value with respect to their shares.

·                  All outstanding options or warrants to acquire the 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 common stock, the Company redeemed for cash the convertible subordinated notes due 2008 and the indenture governing the convertible notes ceased to have any effect.

10




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 to the assets and liabilities as of March 8, 2006 have been recorded based on preliminary valuation studies. The allocation of the purchase price is subject to change based on completion of such studies 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 cash flow 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 sources and uses of funds in connection with the Merger as of October 29, 2006 are summarized below:

Sources

 

 

 

Revolving credit facility and cash on hand

 

$

15,724

 

Senior secured credit facility(1)

 

100,000

 

Senior notes

 

175,000

 

Equity contribution

 

108,100

 

Total sources

 

$

398,824

 

 

 

 

 

Uses

 

 

 

Consideration paid to stockholders

 

$

264,835

 

Consideration paid to convertible note and warrant holders

 

44,390

 

Consideration paid to option holders

 

9,279

 

Payment of existing debt

 

51,137

 

Transaction costs(2)

 

29,183

 

Total uses

 

$

398,824

 

 


(1)                                  As of the date of the Merger, March 8, 2006, $50,000 of the senior secured credit facility was available and $50,000 was available on a delayed draw basis and was borrowed on August 15, 2006.

(2)                                  Transaction costs assumed in connection with the Merger include approximately $11,614 related to the exercise of Change in Control agreements by certain executives.

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.  Considerations paid to stockholders include the payment of approximately $51,733 to the shareholders in accordance with the terms of the settlement agreement.  Payments of the settlement were funded from borrowings under the senior secured credit facility and available cash.

In connection with the preliminary purchase price allocation, estimates of the fair values of assets acquired and liabilities assumed are based primarily on preliminary valuation results from independent valuation specialists.  As of October 29, 2006, the Company recorded preliminary purchase accounting adjustments to the carrying value of property and equipment, to establish intangible assets for tradenames and trademarks and to revalue the deferred rent liability, among other things.  This allocation of the purchase price is preliminary and subject to finalization of independent valuation and analysis of the fair 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 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. Adjustments arising out of the finalization of the purchase allocation will not impact cash flow 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 has been preliminarily allocated as follows:

Working capital deficit

 

$

(18,822

)

Property and equipment

 

349,958

 

Indefinite lived intangibles

 

134,104

 

Definite lived intangibles

 

8,000

 

Other long-term assets

 

18,699

 

Rent liability

 

(49,225

)

Deferred income taxes

 

(38,187

)

Other long-term liabilities

 

(5,703

)

 

 

$

398,824

 

 

11




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 236 day period from March 8, 2006 to October 29, 2006 as interest expense.

Adjustments recorded to the preliminary purchase price allocations in the third quarter include the following: i) $4,089 increase to property and equipment and other assets, primarily related to adjustment to the fair value of the properties identified in Note 7, ii) liabilities in the amount of $8,946 related to severance payments due to the termination of employees as a result of the Merger, and iii) additional liabilities of $435 related to the Merger transaction.  The net effect of these adjustments resulted in an increase to goodwill in the amount of $5,292.  Remaining liabilities for severance costs unpaid as of October 29, 2006 are $3,827.

Indefinite lived intangibles include tradenames in the amount of $63,000 and goodwill in the amount of $71,104 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.  Pro forma adjustments reflect additional expenses incurred had the Merger occurred on January 31, 2005, consisting primarily of interest, depreciation and amortization expenses.

 

Thirteen weeks ended
October 30,
2005

 

Thirty-nine weeks
ended October 29,
2006

 

Thirty-nine weeks
ended October 29,
2005

 

 

 

 

 

 

 

 

 

Revenue

 

$

105,645

 

$

366,264

 

$

332,209

 

Net loss, pro forma

 

(7,980

)

(11,810

)

(11,416

)

Pro forma adjustments

 

(4,780

)

(1,178

)

(11,522

)

Net income (loss), as reported

 

$

(3,200

)

$

(10,632

)

$

106

 

 

Note 3: Long-term debt

Long-term debt consisted of the following:

 

October 29, 2006
(Successor)

 

 

 

January 29, 2006
(Predecessor)

 

Senior Credit Facility—revolving

 

$

15,000

 

 

 

$

5,439

 

Senior Credit Facility—term

 

99,625

 

 

 

 

Senior notes

 

175,000

 

 

 

 

Term debt facility

 

 

 

 

45,375

 

Convertible subordinated notes, net of discount

 

 

 

 

29,361

 

 

 

289,625

 

 

 

80,175

 

Less current installments

 

1,000

 

 

 

9,625

 

Long-term debt, less current installments

 

$

288,625

 

 

 

$

70,550

 

 

In connection with the Merger, the Company terminated the existing credit facility and entered into a new senior secured credit facility that (a) provides a $100,000 term loan facility ($50,000 of the term loan facility was available as of the date of the Merger, March 8, 2006, and $50,000 was available on a delayed draw basis and was borrowed on August 15, 2006) 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 October 29, 2006, borrowings under the revolving credit facility and term loan facility were $15,000 and $99,625, respectively, and the Company had $6,956 in letters of credit outstanding.

The interest rates per annum applicable to loans, other than swingline loans, under the senior secured credit facility are, at the Company’s 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 the Company, 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 the senior credit facility was 7.8 percent at October 29, 2006.

12




Effective June 30, 2006, the Company entered into two interest rate swap agreements that expire in 2011, to change a portion of the variable rate debt to fixed rate debt.  Pursuant to the swap agreements, the interest rate on notional amounts aggregating $94,600 at October 29, 2006 is fixed at 5.31 percent. 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, the Company recorded additional interest income of $20 for the thirteen weeks ended October 29, 2006 and $27 for the thirty-nine weeks ended October 29, 2006.

The Company’s senior secured credit facility requires compliance with the following financial covenants: a minimum fixed charge coverage ratio test and a maximum leverage ratio test.  The Company 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 October 29, 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, the new senior secured credit facility includes negative covenants restricting or limiting, WS Midway Holdings, Inc.’s and its 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.

The 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 the 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 the new senior secured credit facility would be entitled to take various actions, including acceleration of amounts due under the new senior secured credit facility and all actions permitted to be taken by a secured creditor.

On August 17, 2006, certain covenants under the senior secured 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.

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.

In connection with the Merger on March 8, 2006, the Company 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, the Company 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, 2009, the Company 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, 2009.  On September 22, 2006, the Company completed an exchange with the holders of the 11.25% senior notes pursuant to which the existing notes sold in March 2006 pursuant to Rule 144A and Regulation S of the Securities Act of 1933, as amended, were exchanged for an equal amount of newly issued 11.25% senior notes, which have been registered under the Securities Act of 1933.

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

13




The following table sets forth the Company’s future debt payment obligations as of October 29, 2006:

 

 

Debt outstanding
at October 29, 2006

 

1 year or less

 

$

1,000

 

2 years

 

1,000

 

3 years

 

1,000

 

4 years

 

1,000

 

5 years

 

1,000

 

Thereafter

 

$

284,625

 

Total future payments

 

$

289,625

 

 

For the thirteen weeks ended October 29, 2006 and October 30, 2005, the Company recorded interest expense of $7,544 and $1,910, respectively, and for the thirty-nine weeks ended October 29, 2006 and October 30, 2005 interest expense was $20,272 and $5,685, respectively.  Interest costs capitalized during the construction of facilities for the thirteen weeks ended October 29, 2006 and October 30, 2005 was $173 and $247, respectively, and for the thirty-nine weeks ended October 29, 2006 and October 30, 2005 was $322 and $340, 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 October 29, 2006:

 

 

1 Year or
less

 

Year 2

 

Year 3

 

Year 4

 

Year 5

 

Thereafter

 

Total

 

Operating leases

 

$

42,167

 

$

41,589

 

$

41,702

 

$

41,829

 

$

41,625

 

$

377,517

 

$

586,429

 

 

During the fourth quarter of 2005, the board of directors approved an operating lease agreement for a future site located in Maple Grove, Minnesota, which opened on November 13, 2006.  Future obligations related to this agreement are included in the table above.  On November 17, 2006, the Company announced the sale and simultaneous leaseback of three locations.  (See Note 7.)  Future obligations related to this agreement are included in the table above.  The Company has an operating lease agreement for a future site located near Tempe, Arizona.  The Company’s commitments under the Tempe, Arizona agreement are contingent upon, among other things, the landlord’s delivery of access to the premises for construction.  Further obligations related to this agreement are not included in the table above.

Note 5: Income Taxes

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

 

October 29, 2006
Successor

 

 

 

January 29, 2006
Predecessor

 

Deferred tax liabilities:

 

 

 

 

 

 

 

Trademark/Tradename

 

$

(24,029

)

 

 

$

 

Fixed asset basis differences

 

(11,019

)

 

 

(17,468

)

Other, net

 

(1,883

)

 

 

(648

)

Deferred tax liability

 

$

(36,931

)

 

 

$

(18,116

)

Deferred tax assets:

 

 

 

 

 

 

 

Leasing transactions

 

$

765

 

 

 

$

6,051

 

Worker’s compensation

 

1,330

 

 

 

831

 

Amusement redemption liability

 

1,520

 

 

 

 

Other

 

603

 

 

 

54

 

Deferred tax asset

 

4,218

 

 

 

6,936

 

Net deferred tax liability

 

$

(32,713

)

 

 

$

(11,180

)

 

Note 6: Condensed Consolidating Financial Information

In connection with the Merger, the Company closed the placement of $175,000 aggregate principal amount senior notes as described in Note 3.  The notes are guaranteed on a senior basis by all domestic subsidiaries, each of which is wholly-owned by Dave & Buster’s, Inc.  The subsidiaries’ guarantee of the notes are full and unconditional and joint and several.

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 registered.” No other

14




condensed consolidating financial statements are presented herein.  The results of operations and cash flows from operating activities from the non-guarantor subsidiary were $(146) and $2,044, respectively, for the thirty-nine week period ended October 29, 2006.

 

October 29, 2006 (Successor):

 

 

Issuer and
Subsidiary
Guarantors

 

Subsidiary Non-
Guarantors

 

Consolidating
Adjustments

 

Dave & Buster’s,
Inc.

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Current assets

 

$

22,723

 

$

1,150

 

$

3,658

 

$

27,531

 

Property and equipment, net

 

312,718

 

5,959

 

 

318,677

 

Tradename

 

63,000

 

 

 

63,000

 

Goodwill

 

71,104

 

 

 

71,104

 

Investment in Sub

 

1,912

 

 

(1,912

)

 

Assets held for sale

 

28,460

 

 

 

28,460

 

Other assets and deferred charges

 

23,072

 

100

 

 

23,172

 

Total assets

 

$

522,989

 

$

7,209

 

$

1,746

 

$

531,944

 

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

46,721

 

$

5,258

 

$

3,658

 

$

55,637

 

Deferred income taxes

 

34,130

 

 

 

34,130

 

Deferred rent liability

 

50,224

 

39

 

 

50,263

 

Other liabilities

 

6,219

 

 

 

6,219

 

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

 

288,625

 

 

 

288,625

 

Stockholders’ equity

 

97,070

 

1,912

 

(1,912

)

97,070

 

Total liabilities and stockholders’ equity

 

$

522,989

 

$

7,209

 

$

1,746

 

$

531,944

 

 

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

 

346,736

 

5,147

 

 

351,883

 

Tradename

 

7,482

 

 

 

7,482

 

Investment in Sub

 

1,071

 

 

(1,071

)

 

Assets held for sale

 

22,733

 

 

 

22,733

 

Other assets and deferred charges

 

13,633

 

101

 

 

13,734

 

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 November 17, 2006, the Company announced the sale and simultaneous leaseback of the land and buildings of three owned Dave & Buster’s facilities located in the states of Florida, Illinois and Ohio.  The transaction was completed through National Retail Properties, Inc. (NYSE:NNN) at a sale price of $29,600.  Net proceeds from the transaction were used to pay down outstanding balances on the Company’s senior credit and revolving credit facilities after a $5,000 hold back for reinvestment.

The Company agreed to lease back these facilities from National Retail Properties, Inc. under various operating lease agreements, which have an initial term of 17.5 years.  The leases require Dave & Buster’s to make monthly rental payments, which aggregate to $2,453 on an annual basis.  Rental payments under the leases are subject to adjustment based on defined changes in the Consumer Price Index.  In addition to the rental payments described above the Company is required to pay the property taxes and certain maintenance charges related to the properties.  The assets sold in this sale leaseback transaction have been recorded as held for sale in accordance with Statement of Financial Accounting Standards 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” in the Consolidated Balance Sheets as of October 29, 2006 and January 29, 2006.

16




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

General

Dave & Buster’s fiscal year ends on the Sunday after the Saturday closest to January 31.  All references to the third quarter of 2006 relate to the thirteen weeks ended October 29, 2006 of the Successor.  All references to the third quarter of 2005 relate to the thirteen week period ended October 30, 2005 of the Predecessor.  All references to the year-to-date fiscal year 2006 period relate to the combined 236 day period ended October 29, 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 ending on 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 the Company continues as the same legal entity after the Merger, the accompanying condensed consolidated statements of operations, stockholders’ equity, and cash flows present the 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 the 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;

2.                                       Holders of up to approximately 2.6 million shares exercised dissenters’ rights and initiated proceedings under Section 351.455 of the General and Business Corporation Law of Missouri to demand fair value with respect to their shares.

3.                                       All outstanding options or warrants to acquire the 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

4.                                       To the extent not converted into shares of common stock, the Company redeemed for cash the 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 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 to the asset and liabilities as of March 8, 2006 have been recorded 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 sources and uses of funds in connection with the Merger as of October 29, 2006 are summarized below:

 

Sources

 

 

 

Revolving credit facility and cash on hand

 

$

15,724

 

Senior secured credit facility (1)

 

100,000

 

Senior notes

 

175,000

 

Equity contribution

 

108,100

 

Total sources

 

$

398,824

 

 

 

 

 

Uses

 

 

 

Consideration paid to stockholders

 

$

264,835

 

Consideration paid to convertible note and warrant holders

 

44,390

 

Consideration paid to option holders

 

9,279

 

Payment of existing debt

 

51,137

 

Transaction costs (2)

 

29,183

 

Total uses

 

$

398,824

 

 


(1)                                  As of the date of the Merger, March 8, 2006, $50,000 of the senior secured credit facility was available and $50,000 was available on a delayed draw basis and was borrowed on August 15, 2006.

(2)                                  Transaction costs assumed in connection with the Merger include approximately $11,614 related to the exercise of Change in Control agreements by certain executives.

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.  Considerations paid to stockholders include the payment of approximately $51,733 to the shareholders in accordance with the terms of the settlement agreement.  Payments of the settlement were funded from borrowings under the senior secured credit facility and available cash.

Acquisitions and Disposals

On August 28, 2005, a subsidiary 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 the unsuccessful efforts to renegotiate the terms of the related leases. As a result of the closing, the Company 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.  The Company incurred expenses of approximately $500 in the third quarter of 2005 related to severance and other costs required to complete the closure of the complex.  These costs are included in operating payroll and benefits of approximately $400 and other store operating expenses of approximately $100.

The Company has converted six of the former Jillian’s locations to “Dave & Buster’s Grand Sports Café” brand.  The Company believes this conversion will enhance efforts to improve the operating economics of the Dave & Buster’s brand throughout the system.   The Company began converting the stores in September 2005, and converted five of the stores in fiscal 2005.  One additional store was converted in the first quarter of 2006.  The Company 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, the Company 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.  The Company currently has a 50.1 percent interest in the income or losses of the partnership.  After deducting the preferred return to the limited partner, the interest in the income or losses of the partnership is not expected to be significant to the results of operations until the limited partner receives a full return of its invested capital and preferred return.  The Company also manages the complex under a management agreement and receives a fee of 4.0 percent of operating revenues annually.  The Company accounts for the general partner interest using the equity method due to the substantive participative rights of the limited partner in the operations of the partnership.

Overview

The Company monitors and analyzes a number of key performance measures and indicators in order to manage the business, and evaluates the financial and operating performance.  Those indicators include:

18




Revenues.  The Company derives revenue primarily from food and beverage and amusement sales.  For the thirteen weeks ended October 29, 2006, the Company derived 36.5 percent of its total revenue from food sales, 19.2 percent from beverage sales, 42.3 percent from amusement sales, and 2.0 percent from other sources.  For the thirty-nine weeks ended October 29, 2006, the Company derived 36.3 percent of its total revenue from food sales, 18.6 percent from beverage sales, 43.1 percent from amusement sales, and 2.0 percent from other sources.  The Company continually monitors the success of current food and beverage items, the availability of new menu offerings, the menu price structure and the ability to adjust prices where competitively appropriate.  In the beverage component, the Company operates fully licensed facilities, which means that the Company offers full beverage service, including alcoholic beverages, throughout the complex.  The Company’s 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 the Winner’s Circle.  The Company’s redemption games include basic games of skill, such as skee-ball and basketball. The prizes in the Winner’s Circle range from small-ticket novelty items to high-end electronics, such as flatscreen televisions.  The Company reviews the game play on existing amusements in an effort to match amusements availability with guest preferences.  The Company will continue to invest in new games as they become available and prove to be attractive to the guests.  The Company currently anticipates spending approximately $7,300 on new games during the full fiscal year of 2006.

The Company believes the special events business is a very important component of Dave & Buster’s 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, the Company places considerable emphasis on this area through the 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 October 29, 2006, cost of food products averaged 26.2 percent of food revenue, and the cost of beverage products averaged 25.4 percent of beverage revenue.  During the thirty-nine weeks ended October 29, 2006, cost of food products averaged 26.0 percent of food revenue, and the cost of beverage products averaged 25.6 percent of beverage revenue.  The amusement cost of products averaged 12.7 percent of amusement revenues for the thirteen week and thirty-nine week periods ended October 29, 2006.  The cost of products is driven by product mix and pricing movements from third party suppliers.  The Company continually strives 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 the store personnel.  The Company continually reviews 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.  The Company’s primary source of cash flow is from operating activities and availability under the 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.  The Company also expects seasonality to be a factor in the operation or results of business in the future with anticipated lower third quarter revenues and higher fourth quarter revenues associated with the year-end holidays.  Additionally, the Company expects that volatile energy costs will continue to exert pressure on both supplier pricing and consumer spending related to entertainment and dining alternatives. Although, there is no assurance that the cost of product will remain stable or that the federal or state minimum wage rate will not increase, the effects of any supplier price increases or minimum wage rate increases are expected to be partially offset by selected menu price increases where competitively appropriate.  The Company expects that historically higher revenues during the fourth quarter due to the winter holiday season will continue to make 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
October 29, 2006

 

 

 

Thirteen weeks
ended
October 30, 2005

 

 

 

(Successor)

 

 

 

(Predecessor)

 

Food and beverage revenues

 

$

64,727

 

55.7

%

 

 

$

58,212

 

55.1

%

Amusement and other revenues

 

51,543

 

44.3

%

 

 

47,433

 

44.9

%

Total revenues

 

116,270

 

100.0

%

 

 

105,645

 

100.0

%

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

 

16,783

 

25.9

%

 

 

15,208

 

26.1

%

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

 

7,214

 

14.0

%

 

 

7,126

 

15.0

%

Total cost of products

 

23,997

 

20.6

%

 

 

22,334

 

21.1

%

Operating payroll and benefits

 

34,749

 

29.9

%

 

 

31,590

 

29.9

%

Other store operating expenses

 

38,458

 

33.1

%

 

 

36,054

 

34.1

%

General and administrative expenses

 

7,739

 

6.7

%

 

 

7,819

 

7.4

%

Depreciation and amortization expense

 

11,972

 

10.3

%

 

 

9,934

 

9.4

%

Startup costs

 

814

 

0.7

%

 

 

1,495

 

1.4

%

Total operating costs

 

117,729

 

101.3

%

 

 

109,226

 

103.3

%

Operating income

 

(1,459

)

(1.3

)%

 

 

(3,581

)

(3.3

)%

Interest expense net

 

7,200

 

6.2

%

 

 

1,458

 

1.4

%

Income (loss) before provisions for income taxes

 

(8,659

)

(7.5

)%

 

 

(5,039

)

(4.7

)%

Provision (benefit) for income taxes

 

(3,442

)

(3.0

)%

 

 

(1,839

)

(1.7

)%

Net income (loss)

 

$

(5,217

)

(4.5

)%

 

 

$

(3,200

)

(3.0

)%

 

 

 

 

 

 

 

 

 

 

 

 

EBITDA(1)

 

10,513

 

 

 

 

 

6,353

 

 

 

Change in comparable store sales(2)

 

 

 

4.3

%

 

 

 

 

3.2

%

Stores open at end of period(3)

 

 

 

47

 

 

 

 

 

45

 

Comparable stores open at end of period

 

 

 

33

 

 

 

 

 

33

 

 

20




 

 

 

236 Day
period from
March 8, 2006 to
October 29, 2006

 

 

 

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

 

Thirty-nine weeks
ended
October 29, 2006

 

Thirty-nine weeks
ended
October 30, 2005

 

 

 

(Successor)

 

 

 

(Predecessor)

 

(Combined)

 

(Predecessor)

 

Food and beverage revenues

 

$

173,604

 

55.0

%

 

 

$

27,562

 

54.7

%

$

201,166

 

54.9

%

$

179,982

 

54.2

%

Amusement and other revenues

 

142,251

 

45.0

%

 

 

22,847

 

45.3

%

165,098

 

45.1

%

152,227

 

45.8

%

Total revenues

 

315,855

 

100.0

%

 

 

50,409

 

100.0

%

366,264

 

100.0

%

332,209

 

100.0

%

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

 

44,945

 

25.9

%

 

 

7,111

 

25.8

%

52,056

 

25.9

%

46,916

 

26.1

%

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

 

19,893

 

14.0

%

 

 

3,183

 

13.9

%

23,076

 

14.0

%

20,573

 

13.5

%

Total cost of products

 

64,838

 

20.5

%

 

 

10,294

 

20.4

%

75,132

 

20.5

%

67,489

 

20.3

%

Operating payroll and benefits

 

92,492

 

29.3

%

 

 

14,365

 

28.5

%

106,857

 

29.1

%

96,665

 

29.1

%

Other store operating expenses

 

102,284

 

32.4

%

 

 

15,505

 

30.8

%

117,789

 

32.2

%

105,911

 

31.9

%

General and administrative expenses

 

21,970

 

7.0

%

 

 

3,480

 

6.9

%

25,450

 

6.9

%

22,715

 

6.8

%

Depreciation and amortization expense

 

30,167

 

9.5

%

 

 

4,328

 

8.6

%

34,495

 

9.4

%

31,992

 

9.6

%

Startup costs

 

3,041

 

1.0

%

 

 

880

 

1.7

%

3,921

 

1.1

%

2,377

 

0.7

%

Total operating costs

 

314,792

 

99.7

%

 

 

48,852

 

96.9

%

363,644

 

99.2

%

327,149

 

98.4

%

Operating income

 

1,063

 

0.3

%

 

 

1,557

 

3.1

%

2,620

 

0.8

%

5,060

 

1.6

%

Interest expense, net

 

18,969

 

6.0

%

 

 

649

 

1.3

%

19,618

 

5.4

%

4,892

 

1.5

%

Income (loss) before provisions for income taxes

 

(17,906

)

(5.7

)%

 

 

908

 

1.8

%

(16,998

)

(4.6

)%

168

 

0.1

%

Provision (benefit) for income taxes

 

(6,788

)

(2.1

)%

 

 

422

 

0.8

%

(6,366

)

(1.7

)%

62

 

0.0

%

Net income (loss)

 

$

(11,118

)

(3.6

)%

 

 

$

486

 

1.0

%

$

(10,632

)

(2.9

)%

106

 

0.1

%

Cash provided by (used in):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

8,949

 

 

 

 

 

$

10,741

 

 

 

$

19,690

 

 

 

$

33,042

 

 

 

Investing activities

 

(350,846

)

 

 

 

 

(10,600

)

 

 

(361,446

)

 

 

(42,830

)

 

 

Financing activities

 

335,122

 

 

 

 

 

89

 

 

 

335,211

 

 

 

4,024

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBITDA(1)

 

31,230

 

 

 

 

 

$

5,885

 

 

 

37,115

 

 

 

37,052

 

 

 

Change in comparable store sales(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

5.3

%

 

 

0.5

%

Stores open at end of period(3)

 

 

 

47

 

 

 

 

 

46

 

 

 

47

 

 

 

45

 

Comparable stores open at end of period

 

 

 

33

 

 

 

 

 

33

 

 

 

33

 

 

 

33

 

 


(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 accounting principles generally accepted in the United States (“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. The calculation of EBITDA, for the periods presented is set forth below:

 

 

Thirteen weeks
ended
October 29,
2006

 

 

 

Thirteen
weeks ended
October 30,
2005

 

236 Day
period from
March 8,
2006 to
October 29,
2006

 

 

 

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

 

Thirty-nine
weeks
ended
October 29,
2006

 

Thirty-nine
weeks
ended
October 30,
2005

 

 

 

(Successor)

 

 

 

(Predecessor)

 

(Successor)

 

 

 

(Predecessor)

 

(Combined)

 

(Predecessor)

 

Net income (loss)

 

$

(5,217

)

 

 

(3,200

)

$

(11,118

)

 

 

$

486

 

$

(10,632

)

$

106

 

Interest expense, net

 

7,200

 

 

 

1,458

 

18,969