SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
Amendment No. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 3, 2002 Commission File No. 0-25858
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 number)
2481 Manana Drive, Dallas, Texas 75220
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
Including area code (214) 357-9588
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
-------------------
Common Stock, $0.01 par value
Securities registered pursuant to Section 12(g) of the Act: None
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
-----
The aggregate market value of the voting stock held by non-affiliates of
registrant at April 17, 2002 was $121,999,320.
The number of shares of common stock outstanding at April 17, 2002 was
13,266,641 shares.
1
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS)
Management's Discussion and Analysis of Financial Condition and Results
of Operations discusses our consolidated financial statements, which
have been prepared in accordance with generally accepted accounting
principles. The preparation of these financial statements requires
management to make certain estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. On
an ongoing basis, management evaluates its estimates and judgements,
including those that relate to depreciable lives, goodwill and debt
covenants. The estimates and judgements made by management are based on
historical data and on various other factors believed to be reasonable
under the circumstances.
Management believes the following critical accounting policies, among
others, affect its more significant judgements and estimates used in
the preparation of its consolidated financial statements.
Depreciable lives - expenditures for new facilities and those which
substantially increase the useful lives of the property, including
interest during construction, are capitalized along with equipment
purchases at cost. These costs are depreciated over various methods
based on an estimate of the depreciable life, resulting in a charge to
the operating results of the Company. The actual results may differ
from these estimates under different assumptions or conditions. The
depreciable lives are as follows:
Property and Equipment
Games 5 years
Buildings 40 years
Furniture, fixtures and equipment 5 to 10 years
Leasehold and building improvements Shorter of 20 years or lease life
Intangible Assets
Trademarks Over statutory lives
Lease Rights Over remaining lease term
Goodwill - is being amortized over 30 years. Whenever there is an
indication of impairment, the Company evaluates the recoverability of
goodwill using future undiscounted cash flows. Any resulting impairment
loss could have a material adverse impact on our financial condition
and results of operations, however an impairment charge was not
considered necessary under FAS 121 as of February 3, 2002.
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, Business
Combinations and No. 142, Goodwill and Other Intangible Assets
("Statements"), effective for fiscal years beginning after December 15,
2001. Under the new rules, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject
to annual impairment tests in accordance with the Statements. Other
intangible assets will continue to be amortized over their useful
lives.
The Company will apply the new standards on accounting for goodwill and
other intangible assets beginning in the first quarter of 2002.
Application of the nonamortization provisions of the Statements is
expected to result in an increase in income before tax of $349 ($.03
per diluted share) in 2002 as a result of nonamortization of existing
goodwill. During the first quarter 2002, the Company will perform the
required impairment test of goodwill as of February 3, 2002. Based on
current analysis, the Company will record a one-time expense to
"Cumulative effect of a change in accounting principle" of $7,096 ($.55
per diluted share), upon the adoption of the
2
new standard. If FAS 142 had been adopted as of the beginning of the
1999 fiscal year, the amortization of expense would have had the
following impact on prior period operations:
Fiscal Year Ended
January 30, February 4, February 3,
2000 2001 2002
----------- ----------- -----------
Reported Net Income $ 5,205 $ 12,245 $ 7,578
Amortization expense recorded for the period 349 349 349
---------- ---------- ----------
Adjusted Net Income $ 5,554 $ 12,954 $ 7,927
Reported net income per share (diluted) $ 0.39 $ 0.94 $ 0.58
Goodwill amortization per share (diluted) 0.03 0.03 .03
---------- ---------- ----------
Adjusted net income per share (diluted) $ 0.42 $ 0.97 $ 0.61
Debt Covenants - of the Company's facility agreement require compliance
with certain financial covenants including a minimum consolidated
tangible net worth level, maximum leverage ratio, minimum fixed charge
coverage and maximum level of capital expenditures. The Company was in
compliance with the covenants for the fiscal year ended February 3,
2002. The Company believes the results of operations for the fiscal
year ending February 2, 2003 and thereafter would enable us to remain
in compliance with the existing covenants absent any material negative
event affecting the U.S. economy as a whole. However, the Company's
expectations of future operating results and continued compliance with
the debt covenants cannot be assured and our lenders' actions are not
controllable by us. If the projections of future operating results are
not achieved and the debt is placed in default, the Company would
experience a material adverse impact on our reported financial position
and results of operations.
FISCAL 2001 COMPARED TO FISCAL 2000
Total revenues increased to $358,009 for fiscal 2001 from $332,303 for
fiscal 2000, an increase of $25,706 or 7.7%. New stores opened in
fiscal 2001 increased revenues by $28,431. Revenues from comparable
stores decreased by 2.8% in fiscal 2001. The decrease in comparable
stores revenues is primarily attributed to the attack on New York and
Washington, D.C. on September 11th resulting in a decline in corporate
events of 15.4%. Total revenues from licensing agreements were $537.
Costs of revenues increased to $66,939 for fiscal 2001 from $61,547 for
fiscal 2000, an increase of $5,392 or 8.8%. The increase was
principally attributed to opening four new stores during the year. As a
percentage of revenues, cost of revenues were up .2% to 18.7% for
fiscal 2001 versus 18.5% in fiscal 2000 due to freight costs and higher
amusement costs associated with redemption, offset by lower food costs.
Operating payroll and benefits increased to $110,478 for fiscal 2001
from $101,143 for fiscal 2000, an increase of $9,335 or 9.2%. As a
percentage of revenue, operating payroll and benefits were 30.9% in
fiscal 2001 up .5% from 30.4% in fiscal 2000 due to higher store fixed
labor and benefits.
Other store operating expenses increased to $106,971 for fiscal 2001
from $90,581 for fiscal 2000, an increase of $16,390 or 18.1%. As a
percentage of revenues, other store operating
3
expenses were 29.9% in fiscal 2001 as compared to 27.3% in fiscal 2000.
The increase in other store operating expenses is due to increases in
utilities, marketing and occupancy costs.
General and administrative expenses increased to $20,653 in fiscal 2001
from $20,019 for fiscal 2000, an increase of $634 or 3.2%. As a
percentage of revenues, general and administrative expenses for fiscal
2001 were 5.8% and 6.0% for fiscal 2000.
Depreciation and amortization expense increased $2,977 to $28,693 in
fiscal 2001 from $25,716 in fiscal 2000. As a percentage of revenues,
depreciation and amortization increased to 8.0% from 7.7% for the
comparable period due to new store openings.
Preopening costs decreased to $4,578 for fiscal 2001 from $5,331 for
fiscal 2000, a decrease of $753 or 14.1%. As a percentage of revenues,
preopening costs were 1.3% for fiscal 2001 as compared to 1.6% for
fiscal 2000. This decrease is due to timing of store openings and only
one store scheduled to open in fiscal 2002.
Interest expense-net decreased to $7,820 for fiscal 2001 from $8,712
for fiscal 2000. The decrease was due to lower interest rates in fiscal
year 2001.
The effective tax rate for fiscal 2001 was 36.2% as compared to 36.4%
for fiscal 2000 and was the result of a lower effective state tax rate.
FISCAL 2000 COMPARED TO FISCAL 1999
Total revenues increased to $332,303 for fiscal 2000 from $247,134 for
fiscal 1999, an increase of $85,169 or 34%. New stores opened in fiscal
2000 and in fiscal 1999 accounted for 91% of the increase. Revenues at
comparable stores increased 3.6% for fiscal 2000. Increases in revenues
were also attributable to a 2% overall price increase and a higher
average guest check. Total revenues for fiscal 2000 from licensing
agreements were $966.
Cost of revenues increased to $61,547 for fiscal 2000 from $45,720 for
fiscal 1999, an increase of $15,827 or 35%. The increase was
principally attributable to the 34% increase in revenues. As a
percentage of revenues, cost of revenues were the same for fiscal 2000
and fiscal 1999 at 18.5%.
Operating payroll and benefits increased to $101,143 for fiscal 2000
from $76,242 for fiscal 1999, an increase of $24,901 or 33%. As a
percentage of revenue, operating payroll and benefits decreased to
30.4% in fiscal 2000 from 30.9% in fiscal 1999 due to lower fixed labor
costs, taxes and benefits offset by higher variable labor costs.
Other store operating expenses increased to $90,581 for fiscal 2000
from $65,292 for fiscal 1999, an increase of $25,289 or 39%. As a
percentage of revenues, other store operating expenses were 27.3% of
revenues in fiscal 2000 as compared to 26.4% of revenues in fiscal
1999. Other store operating expenses were higher due to higher
marketing costs associated with the Company's 2000 marketing campaign.
General and administrative expenses increased to $20,019 for fiscal
2000 from $14,988 for fiscal 1999, an increase of $5,031 or 34%. The
increase over the prior comparable period resulted from increased
administrative payroll and related costs for new personnel, and
additional costs associated with the Company's future growth plans. As
a percentage of revenues, general and administrative expenses decreased
to 6.0% in fiscal year 2000 from 6.1% in fiscal year 1999.
4
Depreciation and amortization expense increased to $25,716 for fiscal
2000 from $19,884 for fiscal 1999, an increase of $5,832 or 29%. The
increase was attributable to new stores opened in fiscal 2000 and in
fiscal 1999. As a percentage of revenues, depreciation and amortization
decreased to 7.7% from 8.0% for the comparable prior period.
Preopening costs decreased to $5,331 for fiscal 2000 from $6,053 for
fiscal 1999, a decrease of $722 or 12%. As a percentage of revenues,
preopening costs were 1.6% for fiscal 2000 as compared to 2.4% for
fiscal 1999. This decrease was due to the lesser number of new stores
opened in 2000 compared to 1999.
Interest expense - net increased to $8,712 for fiscal 2000 from $3,339
for fiscal 1999. The increase was due to a higher average debt balance
and higher interest rates in 2000 versus 1999.
The effective tax rate for fiscal year 2000 was 36.4% as compared to
36.7% for fiscal year 1999 and was the result of a lower effective
state tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities increased to $49,626 in 2001
compared to $36,678 in 2000 and $24,940 in 1999. Operating cash flows
in 2001 increased primarily due to the timing of accounts payable
disbursements. The increase in 2000 was attributable to improvement in
profitability and timing of operational receipts and payments.
Cash used in investing activities was $30,877 in 2001 and $53,574 in
2000 compared to $73,798 in 1999. All investing expenditures are
related to opening of new stores and normal recurring maintenance at
previously existing stores.
Financing activities provided cash of $47,440 in 1999 and $16,984 in
2000 compared to a use of cash of $17,407 in 2001. Net use of cash by
financing activities in 2001 was directly attributed to repayment of
long-term debt of $41,648 offset by borrowings from long-term debt of
$24,060. Net cash provided by financing activities in 2000 and 1999 was
due to borrowings under long-term debt exceeding any repayments during
each year.
The Company has a $110,000 senior secured revolving credit and term
loan facility. The facility includes a five-year revolver and five and
seven-year term debt. The facility agreement calls for quarterly
payments of principal on the term debt through maturity. Borrowing
under the facility bears interest at a floating rate based on LIBOR
(1.77% at February 3, 2002) or, at the Company's option, the bank's
prime rate (4.75% at February 3, 2002) plus, in each case, a margin
based upon financial performance. The facility is secured by all assets
of the Company. The facility has certain financial covenants including
a minimum consolidated tangible net worth level, a maximum leverage
ratio, minimum fixed charge coverage and maximum level of capital
expenditures. On November 19, 2001, the Company amended the facility to
allow proceeds from sale/leaseback transactions to be applied to both
the revolving credit and the term loans for a limited period. At
February 3, 2002, $5,208 was available under this facility.
The Company has entered into an agreement that expires in 2007, to
change a portion of its variable rate debt to fixed-rate debt. Notional
amounts aggregating $51,255 are fixed at 5.44%. The Company is exposed
to credit losses for periodic settlements of amounts due under the
agreements if LIBOR decreases. A charge of $858 to interest expense was
incurred in fiscal 2001 under the agreement.
5
The market risks associated with the agreements are mitigated because
increased interest payments under the agreement resulting from
reductions in LIBOR are effectively offset by a reduction in interest
expense under the debt obligation.
The Company plans to open one new store during the fiscal year ended
February 2, 2003. The preopening and construction costs of the new
store will be provided from internal cash flow. Subsequent to the
fiscal year ending February 2, 2003, the Company intends to open up to
three stores per year, if adequate external financing can be secured to
supplement internally generated cash flow.
SALE/LEASEBACK TRANSACTIONS
During the year ended February 3, 2002, the Company completed the
sale/leaseback of two stores (Atlanta and Houston) and the corporate
headquarters in Dallas. Cash proceeds of $18,474 were received along
with $5,150 in twenty year interest bearing notes receivable at 7-7.5%.
The locations were sold to non-affiliated entities. No revenue or
profit was recorded at the time of the transaction.
Upon execution of the sale/leaseback transactions, property costs of
$27,360 and accumulated depreciation of $3,832 were removed from the
Company's books resulting in a loss of $272 which was recognized in
2001 and a gain of $713 on one facility being amortized over the term
of the operating lease.
Future operating lease obligations under the lease agreements are as
follows: $2,917 in 2002, $2,957 in 2003, $2,997 in 2004, $3,037 in
2005, $3,078 in 2006 and $50,976 thereafter. Future minimum note
payments and interest income associated with the sale/leasebacks at
Houston and Atlanta are as follows: $488 in 2002, $488 in 2003, $488 in
2004, $488 in 2005 and $7,782 thereafter.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following tables set forth the Company's contractual obligations
and commercial commitments (in thousands):
Payments Due by Period
------------------------------------------------------------------------
Contractual Obligations 1 Year 2-3 4-5 After 5
----------------------- Total or less Years Years Years
----- ------- ----- ----- -----
Long-term debt $ 90,396 $ 5,500 $ 19,700 $ 54,653 $ 10,543
Operating leases 344,633 19,474 37,614 36,566 250,979
Operating leases under
sale/leaseback transactions 65,964 2,917 5,953 6,115 50,979
--------- -------- -------- -------- ---------
Total $ 500,993 $ 27,891 $ 63,267 $ 97,334 $ 312,501
Amount of Commitment Expiration Per Period
--------------------------------------------------------
Other Commercial 1 Year 2-3 4-5 After 5
Commitments Total or less Years Years Years
----------- ----- ------- ----- ----- -----
Letters of Credit $ 940 $ 940 $ -- $ -- $ --
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
6
expects seasonality to be a factor in the operation or results of its
business in the future due to expected lower third quarter revenues due
to the fall season, and expects higher fourth quarter revenues
associated with the year-end holidays. The effects of supplier price
increases are not expected to be material. The Company believes low
inflation rates in its market areas have contributed to stable food and
labor costs in recent years. However, there is no assurance that low
inflation rates will continue or that the Federal minimum wage rate
will not increase.
MARKET RISK
The Company's market risk exposure relates to changes in the general
level of interest rates. The Company's earnings are affected by changes
in interest rates due to the impact those changes have on its interest
expense from variable-rate debt. The Company's agreement to fix a
portion of its variable-rate debt mitigates this exposure.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
Certain statements in this Annual Report are not based on historical
facts but are "forward-looking statements" that are based on numerous
assumptions made as of the date of this report. Forward looking
statements are generally identified by the words "believes", "expects",
"intends", "anticipates", "scheduled", and similar expressions. Such
forward-looking statements involve known and unknown risks,
uncertainties, and other factors which may cause the actual results,
performance, or achievements of Dave & Buster's, Inc. to be materially
different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Such factors
include, among others, the following: general economic and business
conditions; competition; availability of capital; locations and terms
of sites for Complex development; quality of management; changes in, or
the failure to comply with, government regulations; and other risks
indicated in this filing.
7
PART IV
Item 14 EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
Page
----
(a) (1) Financial Statements
Consolidated Balance Sheets --
February 3, 2002 and February 4, 2001 F-1
Consolidated Statement of Income --
Fiscal years ended February 3, 2002, February 4, 2001
and January 30 ,2002. F-2
Consolidated Statements of Stockholders' Equity -- Fiscal years
ended February 3, 2002, February 4, 2001
and January 30, 2000 F-3
Consolidated Statements of Cash Flows --
Fiscal years ended February 2, 2002, February 4, 2001
and January 30, 2000 F-4
Notes to Consolidated Financial Statements F-5 through F-12
Report of Independent Auditors
(a) (3) Exhibits incorporated by reference or filed with this Report
23 Independent Auditors' Consent. (9)
8
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dave & Buster's, Inc.
a Missouri corporation
By: /s/ W.C. Hammett, Jr.
---------------------
W. C. Hammett, Jr.,
Vice President, Chief
Financial Officer
Date: June 14, 2002
9
CONSOLIDATED BALANCE SHEETS
DAVE & BUSTER'S, INC.
FEBRUARY 3, 2002 FEBRUARY 4, 2001
(in thousands, except share and per share amounts)
Assets
Current assets:
Cash and cash equivalents $ 4,521 $ 3,179
Inventories 25,964 21,758
Prepaid expenses 1,442 3,663
Other current assets 2,445 1,787
--------- ---------
Total current assets 34,372 30,387
Property and equipment, net (Note 2) 258,302 260,467
Goodwill, net of accumulated amortization of $2,612 and $2,263 7,096 7,445
Other assets 9,364 5,576
--------- ---------
Total assets $ 309,134 $ 303,875
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt (Note 4) $ 5,500 $ 4,124
Accounts payable 15,991 9,291
Accrued liabilities (Note 3) 11,085 7,050
Income taxes payable (Note 5) 5,054 3,567
Deferred income taxes (Note 5) 1,220 1,229
--------- ---------
Total current liabilities 38,850 25,261
Deferred income taxes (Note 5) 8,143 7,667
Other liabilities 7,099 4,700
Long-term debt, less current installments (Note 4) 84,896 103,860
Commitments and contingencies (Notes 4, 6 and 11)
Stockholders' equity (Note 7):
Preferred stock, 10,000,000 authorized; none issued -- --
Common stock, $0.01 par value, 50,000,000 authorized;
12,959,209 and 12,953,375 shares issued and outstanding
as of February 3, 2002 and February 4, 2001, respectively 131 131
Paid in capital 115,701 115,659
Restricted stock awards 382 243
Retained earnings 55,778 48,200
--------- ---------
171,992 164,233
Less: treasury stock, at cost (175,000 shares) 1,846 1,846
--------- ---------
Total stockholders' equity 170,146 162,387
--------- ---------
Total liabilities and stockholders' equity $ 309,134 $ 303,875
See accompanying notes to consolidated financial statements.
F-1
CONSOLIDATED STATEMENTS OF INCOME
DAVE & BUSTER'S, INC.
FISCAL YEAR 2001 2000 1999
(in thousands, except per share amounts)
Food and beverage revenues $ 181,358 $ 168,085 $ 121,390
Amusement and other revenues 176,651 164,218 125,744
--------- --------- ---------
Total revenues 358,009 332,303 247,134
Cost of revenues 66,939 61,547 45,720
Operating payroll and benefits 110,478 101,143 76,242
Other store operating expenses 106,971 90,581 65,292
General and administrative expenses 20,653 20,019 14,988
Depreciation and amortization expense 28,693 25,716 19,884
Preopening costs 4,578 5,331 6,053
--------- --------- ---------
Total costs and expenses 338,312 304,337 228,179
Operating income 19,697 27,966 18,955
Interest expense, net 7,820 8,712 3,339
--------- --------- ---------
Income before provision for income taxes
and cumulative effect of a change in an
accounting principle 11,877 19,254 15,616
Provision for income taxes (Note 5) 4,299 7,009 5,724
--------- --------- ---------
Income before cumulative effect of a
change in an accounting principle 7,578 12,245 9,892
Cumulative effect of a change in an accounting
principle, net of income tax benefit of $2,928 -- -- 4,687
--------- --------- ---------
Net income $ 7,578 $ 12,245 $ 5,205
Net income per share - basic
Before cumulative effect of a change in an accounting principle $ .58 $ .95 $ .76
Cumulative effect of a change in an accounting principle -- .36
--------- --------- ---------
$ .58 $ .95 $ .40
Net income per share - diluted
Before cumulative effect of a change in an accounting principle $ .58 $ .94 $ .75
Cumulative effect of a change in an accounting principle -- -- .36
--------- --------- ---------
$ .58 $ .94 $ .39
Weighted average shares outstanding
Basic 12,956 12,953 13,054
Diluted 13,016 12,986 13,214
See accompanying notes to consolidated financial statements.
F-2
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
DAVE & BUSTER'S, INC.
Common Stock Paid in Restricted Retained Treasury
------------ Capital Stock Awards Earnings Stock Total
Shares Amount (in thousands)
Balance, January 31, 1999 13,069 $ 131 $ 114,621 $ -- $ 30,750 $ -- $ 145,502
Proceeds from exercising
stock options 59 -- 786 -- -- -- 786
Tax benefit related to stock
option exercises -- -- 252 -- -- -- 252
Purchase of treasury stock (175) -- -- -- -- (1,846) (1,846)
Net income -- -- -- -- 5,205 -- 5,205
--------- --------- --------- --------- --------- --------- ---------
Balance, January 30, 2000 12,953 $ 131 $ 115,659 $ -- $ 35,955 $ (1,846) $ 149,899
Amortization of restricted
stock awards -- -- -- 243 -- -- 243
Net income -- -- -- -- 12,245 -- 12,245
--------- --------- --------- --------- --------- --------- ---------
Balance, February 4, 2001 12,953 $ 131 $ 115,659 $ 243 $ 48,200 $ (1,846) $ 162,387
Amortization of restricted
stock awards -- -- -- 139 -- -- 139
Proceeds from exercising
stock options 6 -- 40 -- -- -- 40
Tax benefit related to stock
option exercises -- -- 2 -- -- -- 2
Net income -- -- -- -- 7,578 -- 7,578
--------- --------- --------- --------- --------- --------- ---------
Balance, February 3, 2002 12,959 $ 131 $ 115,701 $ 382 $ 55,778 $ (1,846) $ 170,146
See accompanying notes to consolidated financial statements.
F-3
CONSOLIDATED STATEMENTS OF CASH FLOWS
DAVE & BUSTER'S, INC.
FISCAL YEAR 2001 2000 1999
(in thousands)
Cash flows from operating activities:
Net income $ 7,578 $ 12,245 $ 5,205
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in an accounting principle -- -- 4,687
Depreciation and amortization 28,693 25,716 19,884
Provision for deferred income taxes 467 1,182 986
Restricted stock awards -- 243 --
Gain on sale of assets (441) -- --
Changes in assets and liabilities
Inventories (4,206) (5,515) (5,432)
Prepaid expenses 2,221 (1,559) (361)
Other assets 693 (671) (666)
Accounts payable 6,700 (2,577) (1,827)
Accrued liabilities 4,035 2,192 1,073
Income taxes payable 1,487 3,567 --
Other liabilities 2,399 1,855 1,391
--------- --------- ---------
Net cash provided by operating activities 49,626 36,678 24,940
Cash flows from investing activities:
Proceeds from sale/leasebacks 18,474 -- --
Capital expenditures (49,351) (53,574) (73,798)
--------- --------- ---------
Net cash used in investing activities (30,877) (53,574) (73,798)
--------- --------- ---------
Cash flows from financing activities:
Purchase of treasury stock -- -- (1,846)
Borrowings under long-term debt 24,060 131,292 50,000
Repayments of long-term debt (41,648) (114,308) (1,500)
Proceeds from issuance of common stock, net 181 -- 786
--------- --------- ---------
Net cash (used in)/provided by financing activities (17,407) 16,984 47,440
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 1,342 88 (1,418)
Beginning cash and cash equivalents 3,179 3,091 4,509
--------- --------- ---------
Ending cash and cash equivalents $ 4,521 $ 3,179 $ 3,091
Supplemental disclosures of cash flow information:
Cash paid for income taxes $ 2,590 $ 1,941 $ 4,188
Cash paid for interest, net of amounts capitalized $ 7,261 $ 8,363 $ 3,455
See accompanying notes to consolidated financial statements.
F-4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DAVE & BUSTER'S, INC.
IN THOUSANDS EXCEPT PER SHARE AMOUNTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION -- The consolidated financial statements include the
accounts of Dave & Buster's, Inc. and all wholly-owned subsidiaries (the
"Company"). All material intercompany accounts and transactions have been
eliminated in consolidation. The Company's one industry segment is the ownership
and operation of restaurant/entertainment complexes (a "Complex" or "Store")
under the name "Dave & Buster's," which are principally located in the United
States.
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.
FISCAL YEAR -- The Company's fiscal year ends on the Sunday after the Saturday
closest to January 31. References to 2001, 2000 and 1999 are to the 52 weeks
ended February 3, 2002 and to the 53 weeks ended February 4, 2001 and to the 52
weeks ended January 30, 2000, respectively.
INVENTORIES -- Inventories, which consist of food, beverage and merchandise are
reported at the lower of cost or market determined on a first-in, first-out
method. Static supplies inventory is capitalized at each store opening date and
reviewed periodically for valuation.
PREOPENING COSTS -- The Company adopted Statement of Position 98-5 ("SOP 98-5"),
"Reporting on the Costs of Start-Up Activities", in the first quarter of fiscal
1999. This accounting standard requires the Company to expense all start-up and
preopening costs as they are incurred. The Company previously deferred such
costs and amortized them over the twelve-month period following the opening of
each store. The cumulative effect of this accounting change, net of income tax
benefit of $2,928, was $4,687 in fiscal 1999.
PROPERTY AND EQUIPMENT -- Expenditures for new facilities and those which
substantially increase the useful lives of the property, including interest
during construction, are capitalized. Interest capitalized in 2001, 2000 and
1999 was $892, $1,555 and $1,623, respectively. Equipment purchases are
capitalized at cost. Property and equipment lives are estimated as follows:
buildings, 40 years; leasehold and building improvements, shorter of 20 years or
lease life; furniture, fixtures and equipment, 5 to 10 years; games, 5 years.
GOODWILL -- Goodwill of $9,708 is being amortized over 30 years. Whenever there
is an indication of impairment, the Company evaluates the recoverability of
goodwill using future undiscounted cash flows. In June 2001, the Financial
Accounting Standards Board issued Statements of Financial Accounting Standards
No. 141, Business Combinations and No. 142, Goodwill and Other Intangible Assets
("Statements"), effective for fiscal years beginning after December 15, 2001.
Under the new rules, goodwill and intangible assets deemed to have indefinite
lives will no longer be amortized but will be subject to annual impairment tests
in accordance with the Statements. Other intangible assets will continue to be
amortized over their useful lives.
The Company will apply the new standards on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
nonamortization provisions of the Statements is expected to result in an
increase in income before tax of $349 ($.03 per diluted share) in 2002 as a
result of nonamortization of existing goodwill. During the first quarter of
2002, the Company will perform the required impairment test of goodwill as of
February 3, 2002. Based on current analysis, the Company will record a one-time
expense to "Cumulative effect of a change in accounting principle" of $7,096
($.55 per diluted share), upon the adoption of the new standard. If FAS 142 had
been adopted as of the beginning of the 1999 fiscal year, the amortization of
expense would have had the following impact on prior period operations:
F-5
Fiscal Year Ended
January 30, February 4, February 3,
2000 2001 2002
----------- ----------- -----------
Reported Net Income $ 5,205 $ 12,245 $ 7,578
Amortization expense recorded for the period 349 349 349
---------- ---------- ----------
Adjusted Net Income $ 5,554 $ 12,954 $ 7,927
Reported net income per share (diluted) $ 0.39 $ 0.94 $ 0.58
Goodwill amortization per share (diluted) 0.03 0.03 .03
---------- ---------- ----------
Adjusted net income per share (diluted) $ 0.42 $ 0.97 $ 0.61
DEPRECIATION AND AMORTIZATION -- Property and equipment, excluding most games,
are depreciated on the straight-line method over the estimated useful life of
the assets. Games are generally depreciated on the 150%-double-declining-balance
method over the estimated useful lives of the assets. Intangible assets are
amortized on the straight-line method over estimated useful lives as follows:
trademarks over statutory lives and lease rights over remaining lease terms.
INTEREST RATE SWAP AGREEMENTS -- The Company adopted Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities ("FAS 133") effective February 5, 2001. FAS 133 requires the Company
to recognize all derivatives on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in fair
value of derivatives will either be offset against the change in fair value of
the hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. During the year, the Company has entered
into an agreement that expires in 2007, to fix its variable-rate debt to
fixed-rate debt (5.44% at February 3, 2002) on notional amounts aggregating
$51,255. The market risks associated with the agreements are mitigated because
increased interest payments under the agreement resulting from reductions in
LIBOR are effectively offset by reduction in interest expense under the debt
obligation.
The Company is exposed to credit losses for periodic settlements of amounts due
under the agreements. A charge of $858 to interest expense was incurred in
fiscal 2001 under the agreement.
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.
STOCK OPTION PLAN -- The Company elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under SFAS No. 123, "Accounting
for Stock-Based Compensation", requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, because
the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
REVENUE RECOGNITION -- Food, beverage and amusement revenues are recorded at
point of service. Foreign license revenues are deferred until the Company
fulfills its obligations under license agreements, which is upon the opening of
the Complex. The license agreements provide for continuing royalty fees based on
a percentage of gross revenues and are recognized when assured.
ADVERTISING COSTS -- In accordance with SOP 93-7 "Reporting on Advertising
Costs", all costs of advertising are recorded as expense in the period in which
the costs are incurred or the first time the advertising takes place. For fiscal
2001 and 2000, such expenses are 3.7% and 3.3% of revenue, respectively.
TREASURY STOCK -- During fiscal 1999, the Company's Board of Directors approved
a plan to repurchase up to 1,000 shares of the Company's common stock. Pursuant
to the plan, the Company repurchased 175 shares of its common stock for
approximately $1,846 during fiscal 1999.
F-6
NOTE 2: PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
2001 2000
Land .................................................. $ 6,706 $ 11,308
Buildings ............................................. 34,232 56,023
Leasehold and building improvements ................... 143,114 110,559
Games ................................................. 79,673 69,970
Furniture, fixtures, and equipment .................... 92,033 72,723
Construction in progress .............................. 3,711 17,914
--------- ---------
Total cost ....................................... 359,469 338,497
Accumulated depreciation .............................. (101,167) (78,030)
--------- ---------
$ 258,302 $ 260,467
NOTE 3: ACCRUED LIABILITIES
Accrued liabilities consist of the following:
2001 2000
Payroll ............................................... $ 2,393 $ 1,873
Sales and use tax ..................................... 1,387 1,618
Real estate tax ....................................... 2,620 1,873
Other ................................................. 4,685 1,686
-------- --------
Total accrued liabilities ....................... $ 11,085 $ 7,050
NOTE 4: LONG-TERM DEBT
In 2000, the Company secured a $110,000 senior secured revolving credit and term
loan facility. On November 19, 2001, the Company amended its senior secured
revolving credit and term loan facility to allow proceeds from sale/leaseback
transactions to be applied to both the revolving credit and term loans. The
facility includes a five-year revolver and five and seven-year term debt. The
facility agreement calls for quarterly payments of principal on the term debt
through the maturity date. Borrowing under the facility bears interest at a
floating rate based on LIBOR (1.77% at February 3, 2002) or, at the Company's
option, the bank's prime rate (4.75% at February 3, 2002) plus, in each case, a
margin based upon financial performance. The facility is secured by all assets
of the Company. The facility has certain financial covenants including a minimum
consolidated tangible net worth level, a maximum leverage ratio, minimum fixed
charge coverage and maximum level of capital expenditures. At February 3, 2002,
$5,208 was available under this facility. The fair value of the Company's
long-term debt approximates its carrying value.
The Company has entered into an agreement that expires in 2007, to change a
portion of its variable rate debt to fixed-rate debt. Notional amounts
aggregating $51,255 are fixed at 5.44%. The Company is exposed to credit losses
for periodic settlements of amounts due under the agreements if LIBOR decreases.
A charge of $858 to interest expense was incurred in 2001 under the agreement.
F-7
NOTE 5: INCOME TAXES
The provision for income taxes is as follows:
2001 2000 1999
Current expense
Federal ................................ $ 3,149 $ 5,077 $ 4,242
State and local ........................ 504 750 496
Deferred tax expense ........................ 646 1,182 986
------- ------- -------
Total provision for income taxes ....... $ 4,299 $ 7,009 $ 5,724
Significant components of the deferred tax liabilities and assets in the
consolidated balance sheets are as follows:
2001 2000 1999
Accelerated depreciation ................... $ 11,399 $ 9,474 $ 7,475
Preopening costs ........................... (1,378) -- --
Prepaid expenses ........................... 152 129 130
Capitalized interest costs ................. 1,740 1,281 1,346
-------- -------- --------
Total deferred tax liabilities ........ 11,913 10,884 8,951
Worker's compensation ...................... 281 304 330
Leasing transactions ....................... 2,288 1,500 791
Other ...................................... (19) 184 116
-------- -------- --------
Total deferred tax assets ............. 2,550 1,988 1,237
-------- -------- --------
Net deferred tax liability ................. $ (9,363) $ (8,896) $ (7,714)
Reconciliation of federal statutory rates to effective income tax rates:
2001 2000 1999
Federal corporate statutory rate ........................................ 35.0% 35.0% 35.0%
State and local income taxes, net of federal income tax benefit ......... 3.1% 2.2% 2.1%
Goodwill amortization and other nondeductible expenses .................. 1.0% 2.1% 2.2%
Tax credits ............................................................. (4.3)% (2.0)% (1.9)%
Effect of change in deferred tax rate ................................... -- (1.9)% (2.4)%
Other ................................................................... 1.4% 1.0% 1.7%
----- ----- -----
Effective tax rate ...................................................... 36.2% 36.4% 36.7%
NOTE 6: LEASES
The Company leases certain properties and equipment under operating leases. Some
of the leases include options for renewal or extension on various terms. Most
leases require the Company to pay property taxes, insurance and maintenance of
the leased assets. Some leases have provisions for additional percentage rentals
based on revenues; however, payments of percentage rent were minimal during the
three-year period ended February 3, 2002. For 2001, 2000 and 1999, rent expense
for operating leases was $19,469, $14,295 and $11,119, respectively. At February
3, 2002, future minimum lease payments required under operating leases are
$22,391 in 2002; $21,892 in 2003; $21,675 in 2004; $21,368 in 2005; $21,313 in
2006 and $301,957 thereafter.
During the year ended February 3, 2002, the Company completed the sale/leaseback
of two stores (Atlanta and Houston) and the corporate headquarters in Dallas.
Cash proceeds of $18,474 were received along with $5,150 in twenty year interest
bearing notes receivable at 7-7.5%. The locations were sold to non-affiliated
entities. No revenue or profit was recorded at the time of the transaction.
F-8
Upon execution of the sale/leaseback transactions, property costs of $27,360 and
accumulated depreciation of $3,832 were removed from the Company's books
resulting in a loss of $272 which was recognized in 2001 and a gain of $713 on
one facility being amortized over the term of the operating lease.
Future operating lease obligations under the lease agreements are as follows:
$2,917 in 2002, $2,957 in 2003, $2,997 in 2004, $3,037 in 2005, $3,078 in 2006
and $50,976 thereafter. Future minimum note payments and interest income
associated with the sale/leasebacks at Houston and Atlanta are as follows: $488
in 2002, $488 in 2003, $488 in 2004, $488 in 2005 and $7,782 thereafter.
NOTE 7: COMMON STOCK
In 1995, the Company adopted the Dave & Buster's, Inc. 1995 Stock Option Plan
(the "Plan") covering 675 shares of common stock. In 1997, 1998 and 2001, the
Company increased the shares of common stock covered by the Plan to 1,350, 2,350
and 2,950 respectively. The Plan provides that incentive stock options may be
granted at option prices not less than fair market value at date of grant (110%
in the case of an incentive stock option granted to any person who owns more
than 10% of the total combined voting power of all classes of stock of the
Company). Non-qualified stock options may not be granted for less than 85% of
the fair market value of the common stock at the time of grant and are primarily
exercisable over a three to five year period from the date of the grant.
In 1996, the Company adopted a stock option plan for outside directors (the
"Directors' Plan"). A total of 150 shares of common stock are subject to the
Directors Plan. The options granted under the Directors' Plan vest ratably over
a three year period. In 2001, the Company increased the shares of common stock
subject to the Directors' Plan from 150 shares to 190 shares.
In 2000, the Company amended and restated the Dave & Buster's, Inc. 1995 Stock
Incentive Plan to allow the Company to grant restricted stock awards. These
restricted stock awards will fully vest at the end of the vesting period or the
attainment of one or more performance targets established by the Company.
Recipients are not required to provide consideration to the Company other than
render service and have the right to vote the shares and to receive dividends.
The Company issued in 2001 and 2000, 63.5 and 267 shares of restricted stock at
a market value of $6.45 - $7.90 and $6.75, respectively, which vest at the
earlier of attaining certain performance targets or seven years. The total
market value of the restricted shares, as determined at the date of issuance, is
treated as unearned compensation and is charged to expense over the vesting
period. The charge to expense for the unearned compensation was $139 and $243 in
2001 and 2000, respectively.
Pro forma information regarding net income and earnings per common share is
required by SFAS 123, and is used as if the Company had accounted for its
employee stock options under the fair value method. The fair value for these
options is estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for 2001, 2000 and 1999,
respectively: risk-free interest rates of 4.59%, 6.30%, and 5.39%; dividend
yields of 0.0%; volatility factors of the expected market price of the Company's
common stock of .650, .740, and .494; and a weighted-average life of the option
of 3.2, 2.7, and 4.4 years.
The Black-Scholes option valuation model is used in estimating the fair value of
traded options, which have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. Because the Company's
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option's vesting period. Because SFAS 123
requires compensation expense to be recognized over the vesting period, the
impact on pro forma net income and pro forma earnings per common share as
reported below may not be representative of pro forma compensation expense in
future years.
F-9
The Company's pro forma information is as follows:
2001 2000 1999
Net income, as reported ............................... $ 7,578 $ 12,245 $ 5,205
Pro forma net income .................................. $ 5,931 $ 10,018 $ 3,627
Basic net income per share, as reported ............... $ .58 $ .95 $ .40
Pro forma basic net income per share .................. $ .46 $ .77 $ .28
Diluted net income per share, as reported ............. $ .58 $ .94 $ .39
Pro forma diluted net income per share ................ $ .46 $ .77 $ .27
A summary of the Company's stock option activity and related information is as
follows:
2001 2000 1999
Weighted-Average Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price Options Exercise Price
Outstanding -- beginning of year 1,932 $ 14.78 1,666 $ 17.24 1,145 $ 16.82
Granted 1,233 $ 6.82 674 $ 7.49 734 $ 18.10
Exercised (6) $ 6.80 -- -- (59) $ 12.88
Forfeited (234) $ 13.16 (408) $ 12.77 (154) $ 20.09
Outstanding -- end of year 2,925 $ 11.56 1,932 $ 14.78 1,666 $ 17.24
Exercisable -- end of year 1,178 $ 15.26 642 $ 17.37 516 $ 14.87
Weighted-average fair value of options
granted during the year $ 3.28 $ 3.96 $ 8.36
As of February 3, 2002, exercise prices for 2,925 options ranged from $6.10 to
$25.32. The weighted-average remaining contractual life of the options is 7.6
years.
Under a Shareholder Protection Rights Plan adopted by the Company, each share of
outstanding common stock includes a right which entitles the holder to purchase
one one-hundredth of a share of Series A Junior Participating Preferred Stock
for seventy five dollars. Rights attach to all new shares of commons stock
whether newly issued or issued from treasury stock and become exercisable only
under certain conditions involving actual or potential acquisitions of the
Company's common stock. Depending on the circumstances, all holders except the
acquiring person may be entitled to 1) acquire such number of shares of Company
common stock as have a market value at the time of twice the exercise price of
each right, or 2) exchange a right for one share of Company common stock or one
one-hundredth of a share of the Series A Junior Participating Preferred Stock,
or 3) receive shares of the acquiring company's common stock having a market
value equal to twice the exercise price of each right. The rights remain in
existence until ten years after the Distribution, unless they are redeemed (at
one cent per right).
F-10
NOTE 8: EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
2001 2000 1999
Numerator-Net Income $ 7,578 $ 12,245 $ 5,205
-------- -------- --------
Denominator:
Denominator for basic net income per share --
Weighted average shares 12,956 12,953 13,054
Effect of dilutive securities -- employee stock options 60 33 160
-------- -------- --------
Denominator for diluted earnings per share -- adjusted
weighted average shares 13,016 12,986 13,214
Basic net income per share $ .58 $ .95 $ .40
Diluted net income per share $ .58 $ .94 $ .39
Options to purchase 1,529, 1,346 and 925 shares of common stock for 2001, 2000
and 1999, respectively, were not included in the computation of diluted net
income per share because the options would have been antidilutive.
NOTE 9: RELATED PARTY ACTIVITY
During 2000, the Company was party to a consulting agreement with Sandell
Investments ("Sandell"), a partnership whose controlling partner is a director
of the Company. Sandell advises the Company with respect to expansion and site
selection, market analysis, improvement and enhancement of the Dave & Buster's
concept and other similar and related activities. Annual fees of $125 were paid
to Sandell in 2000 and 1999, the maximum fee provided for under the agreement.
The Company was a party to a sale/leaseback transaction with Cypress Equities,
Inc. for its San Diego, California location, whereby the Company received $8,000
in exchange for committing to lease payments of approximately $6,300 over 20
years with options for renewal. A director of the Company is the managing member
of Cypress Equities, Inc. Payments to Cypress Equities, Inc. in 2001 and 2000
were $1,242 and $349, respectively.
NOTE 10: EMPLOYEE BENEFIT PLAN
The Company sponsors a plan to provide retirement benefits under the provision
of Section 401(k) of the Internal Revenue Code (the "401(k) Plan") for all
employees who have completed a specified term of service. Company contributions
may range from 0% to 100% of employee contributions, up to a maximum of 6% of
eligible employee compensation, as defined. Employees may elect to contribute up
to 20% of their eligible compensation on a pretax basis. Benefits under the
401(k) Plan are limited to the assets of the 401(k) Plan.
NOTE 11: 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, 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.
F-11
NOTE 12: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Fiscal 2001 First Second Third Fourth
Total revenues ................................................... $ 88,210 $ 83,622 $ 81,371 $ 104,806
Income before provision for income taxes ......................... 4,834 2,675 (2,936) 7,304
Net income ....................................................... 3,084 1,707 (1,873) 4,660
Basic net income per share ....................................... $ .24 $ .13 $ (.14) $ .36
Basic weighted average shares outstanding ........................ 12,953 12,954 12,956 12,957
Diluted net income per share ..................................... $ .24 $ .13 $ (.14) $ .36
Diluted weighted average shares outstanding ...................... 13,068 13,028 12,956 12,992
Fiscal 2000 First Second Third Fourth
Total revenues ................................................... $ 77,849 $ 77,566 $ 79,244 $ 97,644
Income before provision for income taxes ......................... 4,565 3,397 2,368 8,924
Net income ....................................................... 2,890 2,150 1,499 5,706
Basic net income per share ....................................... $ .22 $ .17 $ .12 $ .44
Basic weighted average shares outstanding ........................ 12,953 12,953 12,953 12,953
Diluted net income per share ..................................... $ .22 $ .17 $ .12 $ .44
Diluted weighted average shares outstanding ...................... 12,960 12,954 12,974 13,077
F-12
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
23 Independent Auditors' Consent
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-80537 and 333-88183) pertaining to Dave & Buster's Inc. 1995 Stock
Option Plan and Employee 401(k) Savings Plan of our report dated March 21, 2002
with respect to the consolidated financial statements of Dave & Buster's, Inc.
included in this Annual Report (Form 10-K/A) for the year ended February 3,
2002.
/s/ ERNST & YOUNG LLP
Dallas, Texas
June 13, 2002
REPORT OF INDEPENDENT AUDITORS
