SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
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Dave & Buster's, Inc.
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(Name of Registrant as Specified In Its Charter)
Dolphin Limited Partnership I, L.P.
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DOLPHIN LIMITED PARTNERSHIP I, L.P.
NINETY-SIX CUMMINGS POINT ROAD
STAMFORD, CT 06902
April 7, 2003
Dear Fellow Dave & Buster's Shareholder:
As you may know, Dolphin Limited Partnership I, L.P., DAB's largest single
shareholder with 9.5% of the stock, announced in early March 2003 that it will
wage a proxy fight at the June 10, 2003 Annual Meeting in support of its three
director nominees for election. Dolphin believes that the fiasco represented by
the current board's flawed, conflicted and failed sale process demonstrates that
this board cannot produce real value for the shareholders.
It is past time for new blood and new voices on this board who will act in
accordance with their fiduciary duties to the shareholders. Dolphin's
independent nominees, while they will constitute a minority of the board, are
committed to pursuing every avenue to maximize value for all shareholders.
In our opinion, a majority of this board has conflicts of interest and others
have track records that do not manifest the ability to deliver shareholder
value. Further, the shareholders have suffered through deteriorating operating
results and a stagnant share price while top management has been richly
compensated.
Our analysis of the poor results, conflicts of interest and the failed sale
process, as well as our program for reform is more fully described in our March
3, 2003 letter to the board which was filed with our Schedule 13D. A copy of the
letter is attached.
Unfortunately, current actions by this board since our March 3, 2003 letter
indicate they still just don't get it. While DAB announced some minor corporate
governance "reforms" shortly after our letter to the directors, we are concerned
that such "reforms" as instituted by this board will not serve the shareholders'
interests. For example, we are concerned that the newly formed nominating and
corporate governance committee is a precursor to the expansion of the board
without shareholder approval and designed to dilute the impact of our three
nominees, if they are elected.
We are even more concerned by the appointment of Mark Levy to the newly created
post of "Lead Director". While the establishment of this post was put forth by
us in our March 3, 2003 letter, we believe that Mr. Levy is not the appropriate
choice as he has chaired the Special Committee overseeing the flawed, conflicted
and failed sale process.
We will be mailing to you shortly our proxy materials that will provide our
nominees, and our program to maximize shareholder value. Some shareholders have
asked, "what can we do to help?" If you have questions about the flawed,
conflicted and failed sale process, the poor operating and share price
performance and the ongoing significant deficiencies in corporate governance, we
urge you to communicate them either in writing or orally directly with the board
and management.
The Company has scheduled a conference call and webcast on April 8, 2003 at 5:15
p.m. (East Coast Time) to discuss 2002 fourth quarter and fiscal year results.
If you wish to listen in or ask questions, the call-in number is 800-289-0579
and the confirmation code is 415744. The Dave & Buster's investor relations
number is 214-904-2288.
Sincerely,
/s/ Donald T. Netter
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Donald T. Netter
Senior Managing Director
The following is a list of the names and stockholdings, if any, of persons who
may be deemed to be "participants" in Dolphin's solicitation with respect to the
shares of the Company: Dolphin beneficially owns 1,235,900 shares of the
Company's outstanding common stock. Donald Netter, as Senior Managing Director
of Dolphin, may also be deemed to be a participant but does not individually own
any common stock of the Company. Dolphin intends to disseminate a proxy
statement with respect to its solicitation in support of its nomination of
directors at the Company's 2003 annual meeting. Shareholders should read this
proxy statement if and when it becomes available because it will contain
important information. Shareholders will be able to obtain copies of the proxy
statement, related materials and other documents filed with the Securities and
Exchange Commission's web site at http://www.sec.gov without charge when these
documents become available. Shareholders will also be able to obtain copies of
that proxy statement and related materials without charge, when available, from
Innisfree M&A Incorporated by oral or written request to: 501 Madison Avenue,
New York, New York 10022, telephone: 888-750-5833.
DOLPHIN LIMITED PARTNERSHIP I, L.P.
NINETY-SIX CUMMINGS POINT ROAD
STAMFORD, CT 06902
March 3, 2003
VIA FACSIMILE AND FEDERAL EXPRESS
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The Board of Directors
Dave & Buster's, Inc.
2481 Manana Drive
Dallas, TX 75220
Gentlemen:
As the Schedule 13D being filed today indicates, Dolphin Limited Partnership-I,
L.P. ("Dolphin"), which has been a long-time shareholder, now holds 8.8% of the
outstanding shares of Dave & Buster's, Inc. ("DAB" or the "Company") and is its
single largest shareholder. By the Schedule 13D and this letter, we inform the
board and our fellow long-suffering shareholders of our intention to run an
independent slate of directors to make corporate governance improvements to
promote integrity and accountability at the board and seek to maximize
shareholder value.
Although more prevalent, it's still rare for investors to be confronted with
such visible abuses of position and discretion that were finally revealed in the
background section (pages 16-22) of the Company's revised $13.50 preliminary
merger proxy (Amendment No. 2) filed October 2, 2002. Further, we have compared
this section to the relevant sections of the Company's 14D-9 filed on June 4,
2002 (pages 8-11), the preliminary merger proxy filed July 29, 2002 (pages
19-24) and amendment No. l to the preliminary merger proxy filed on September
11, 2002 (pages 16-21) and find very material inconsistencies and revelations
and, as such, we strongly believe that the pattern of behaviors exhibited
therein by certain directors constitutes repeated breaches of the duties of
care, loyalty and good faith required of directors under Missouri law.
The above referenced public documents, as well as others, detail the atrocious
prior failed sale process by the "Special Committee" (the "Committee") and the
entire board, the materially inconsistent and misleading public disclosures, the
numerous director conflicts, and the dual standard for top management who
continue to be richly compensated and benefit from lucrative stock option,
employment and executive retention agreements (that include change in control
features). In contrast, the DAB shareholders continue to suffer from a share
price that has gone nowhere for the past three years, versus the S&P Smallcap
Restaurant Stock Index which has appreciated approximately 52% in the same
period.
It is clear to us that this board does not yet appreciate what investors
everywhere are seeking and are entitled to in the leadership of their public
companies--integrity and
accountability. We believe that a director's presumed "business judgment" is not
a license to paper-up, by design, a flawed and unethical sale process that seeks
to deliver a company at a discounted price to a buyout group that includes
certain insiders. We believe that public companies do not exist to serve certain
members of senior management and certain directors, but rather, senior
management, directors and their advisors exist to faithfully serve their
constituents, especially their shareholders. We now believe that the only way to
reverse the Company's current direction and promote an honest sale process is
for the shareholders to elect new, independent representation on the board.
A Majority of the Board Members are Conflicted and Others have Dubious Track
Records
We believe that the root of many of DAB's difficulties relate to the facts that
a majority of DAB's board have material conflicts while others have dubious
track records with regard to maximizing shareholder value. In our view this
board does not manifest ability to deliver shareholder value.
The board is comprised of eight directors which are divided into three staggered
classes. The $12/share and $13.50/share buyout group included three Company
directors (the "Buyout Group"): Corriveau (Co-CEO, Co-Chairman of the board and
President), Corley (Co-CEO, Co-Chairman of the board and COO) and Henrion. Since
1989, Mr. Henrion has been a paid consultant (he received $150,000 for 2001)
under an agreement expiring in 2005. Why we have two Co-CEO's and two
Co-Chairmen at double the cost remains unclear. Mr. Maguire's real estate
company, Cypress Equities, Inc., has been involved in real estate transactions
with the Company (in 2001, Cypress Equities, Inc. collected approximately $1.2
million in rent from the Company) and Mr. Hallet's legal firm performs legal
services for the Company from time to time. Technically, that leaves only three
non-conflicted directors (Levy, Edison and Bernstein). The five directors (Levy,
Maguire, Hallet, Bernstein and Edison) that were not part of the Buyout Group
directly own less than .9% of DAB's outstanding shares.
The continuing members of the Committee were Messrs. Levy (Chairman), Edison and
Maguire, who, in addition to their stated compensation, were paid in the
aggregate $175,000 to serve on this Committee regardless of completion of a
transaction. The Committee initially included Mr. Bernstein but he resigned from
the Committee in April 2002 citing his "need to devote more of his time and
attention to the sale of Morton's Restaurant Group, Inc. ["MRG"] of which he is
the Chairman and Chief Executive Officer." We believe Mr. Maguire should never
have been a member of the Committee as he is obviously conflicted by virtue of
his ongoing involvement with the Company's real estate.
From 1989 to 1997, Mr. Edison served as a senior officer in various positions
and as a director of Edison Brothers Stores, Inc. which was effectively
controlled by his family members and their affiliates. Edison Brothers Stores,
Inc. was a public company (and the former parent of DAB) that filed for
bankruptcy in November 1995.
However, let's not overlook Mr. Bernstein. Dolphin, which owned 6.1% of MRG and
along with the other shareholders witnessed the MRG board, in mid-2001, discard
a $28.25/share all cash offer from a private investor group (which was financed
by Mr. Carl Icahn) only to see a March 27, 2002 $12.60/share buyout offer that
included senior management (some of whom were directors). In a subsequent public
bidding war, this low-ball bid was quickly driven up independently by Mr. Icahn
to $17/share by July 2002. How does one explain two restaurant companies, both
of which Mr. Bernstein served as a director, both of which undertook lengthy
sale processes, both of which had numerous interested buyers (MRG had 27
interested parties while DAB had 9 interested parties), only to find that a
buyout with senior management at a highly discounted price was the only
available transaction? What's a trusting shareholder to conclude from these
nearly identical fact patterns? It's a travesty when directors and certain
members of senior management apparently act in a predatory manner toward the
constituents they are morally and legally empowered to protect.
The Special Committee Has Neither Protected nor Promoted Shareholder Interests
The Company's October 24, 2002 press release indicated that the "Special
Committee of the board, which has been responsible for evaluating strategic
business and acquisition proposals, remains in place." On the December 5, 2002
earnings conference call, DAB's senior management indicated that the "Special
Committee remains in place upon advice of counsel..." and "...is not actively
pursuing anything..." In fact, the public record indicates that, throughout a
sale process initiated in 1999, at no time was the Committee or its advisors
authorized to, nor did it, conduct an auction despite the receipt of multiple,
unsolicited inquiries pertaining to a possible sale of the Company. The
Committee always remained in a passive mode, ran only a reactive process and, in
our view, permitted certain members of senior management who were also part of
the Buyout Group and who were directors to materially direct the process in
their favor. We believe the public record clearly demonstrates that certain
members of senior management who were directors, the Committee and/or the board
o in certain cases, required restrictive standstill/confidentiality
agreements of potential acquirers, and/or once having executed an
agreement, did not provide the relevant information to facilitate the
making of a proposal,
o in the most strident way, pushed away legitimate potential industry
and financial acquirers that did not meet their self-serving
requirements, and
o exposed the Company to a dubious merger transaction that was not only
subject to financing but also lacked financing commitments and which
ultimately failed.
One illustration of the board's flawed and unethical sale process was first
revealed in a July 9, 2002 complaint filed in the District Court of Dallas
County, Texas. This complaint describes, in painful detail, a series of
remarkable events in which Messrs. Corley, Corriveau and Henrion, state to a
credible potential industry acquirer that, management "intended to take the
Company private themselves." Later, Mr. Corriveau sent to the chairman of this
potential acquirer "an outline of the kind of deal a merger
would require for management to obtain its goals." That document, among other
things, indicated that "D&B's shareholders would receive only $9 per share and
that management earnouts would be 10% of EBITDA contributed by D&B operations
for the next five years." Since it was this potential buyer's view that "no one
would be entitled to 10% of EBITDA other than its shareholders," they were
uninterested in such a transaction.
Remarkably, this and other material background information was omitted from
DAB's 14D-9 filed on June 4, 2002, its preliminary proxy filed July 29, 2002 and
its Amendment No. 1 filed September 11, 2002. However, the Company's Amendment
No. 2, later filed on October 2, 2002, corroborates these facts and
substantiates other inappropriate behavior further revealed in this complaint by
members of senior management who were part of the Buyout Group and who are
directors of the company as well as serious deficiencies in the sale process
conducted by the Committee. We believe that conducting a purported sale process
with the above outlined actions and inadequate and misleading disclosure of
management conflicts and personal agendas is just as serious a breach of
fiduciary duty as the improprieties that have come to light regarding many high
profile public companies that shareholders, legislators and regulators have been
so outraged with.
So, it appears to us that, we have a purported auction which was nothing of the
sort, but rather a flawed and unethical process designed to deliver the Company
in the most beneficial transaction to certain insiders. This process initially
led to a $12/share tender offer (not subject to financing) from the Buyout Group
that was unable to gather the necessary shareholder support with several
institutional investors being openly opposed. At that time, a "significant"
shareholder put it well by publicly stating, "...selling in a management buyout
at such depressed prices essentially permits management to exploit its own lack
of execution for financial gain."
After this transaction failed, this not so special Committee quickly accepted a
sweetened $13.50/share merger transaction from the Buyout Group but, this time,
the transaction was not only subject to financing but also lacked financing
commitments. What was the board thinking? After the Company initiated a sale
process in the fall of 1999 following "a significant decline in the share
price," incurred $1.3 million of transaction fees and expenses for the second
and third quarters of fiscal 2002 alone, and created a drain on management time
and attention, the board accepted a revised merger that was not only subject to
financing but also lacked financing commitments precisely when the capital
markets were challenged. Worse still, the board declined to facilitate financing
for this transaction when it was available by paying $3.0 million, half the
costs associated with a special redemption of the funded senior notes in the
event of termination of the merger. On October 24, 2002 this buyout collapsed
citing "continuing adverse conditions in the debt financing market." If a proper
process had been conducted, the shareholders likely would have been spared this
costly saga and who knows what favorable transaction value might have been
achieved?
How did the Committee passively sit by and let this happen? How can certain of
DAB's directors and senior management place their agenda ahead of the moral and
legal obligations to its unaffiliated shareholders?
Operating Results and Share Price Continue to Suffer, While Senior Management
Has Been Richly Compensated.
On December 5, 2002, the Company announced its fiscal 2002 third quarter
financial results. Same store revenue, EBITDA and EPS were all lower than
analyst expectations and showed no improvement versus comparable depressed 2001
results.
On DAB's fiscal 2002 third quarter earnings conference call, senior management
provided fiscal 2003 (ending January 2004) projections of $370-$380 million of
revenue, $53-$55 million of EBITDA, $.77-$.85 of diluted EPS and a modest ending
total debt balance of $51-$53 million (approximately 24% of projected fiscal
2003 capitalization). These projections reflect -2% to 0% same store revenue
growth, no new complex openings, over $5.0 million of identified annualized cost
reductions and were considered by senior management to be "solidly on the
conservative side." With the announcement of these already implemented cost
savings in such close proximity to the termination of the merger (October 24,
2002), should shareholders conclude that these savings would have only benefited
the Buyout Group? What other cost savings exist that shareholders have not yet
seen and that might explain the Company's depressed margins? Over the past
several years, the gross margin has remained a relatively constant 81.5% while
the EBITDA margin has declined from 16.2% for fiscal 2000 to an estimated 12.6%
for fiscal 2002.
Although part of the EBITDA margin deterioration may be explained by the three
sale/leaseback transactions entered into since calendar 2001 (reducing this
margin by approximately 80 basis points) DAB, similar to its benchmark publicly
traded competitors, currently leases approximately 84% of its square footage.
With a similar percentage of leased square footage but significantly greater
average revenue per square foot (approximately $235/square foot) than these
competitors, DAB's projected fiscal 2003 EBITDA margin of 14% is still lower
than these competitors.
Further, on this earnings conference call, the Company stated that it would
resume new complex openings with two more in fiscal 2004. Notwithstanding the
Company's demonstrated ability to generate significant free cash flow that would
facilitate the opening of these and other new complexes, the shares remain
comparatively significantly undervalued.
Utilizing a current DAB share price of approximately $8.25 (now significantly
below $10.59, the closing price prior to the announcement of the $12 tender
offer), and senior management's "conservative" fiscal 2003 projections, we
calculate total enterprise value multiples of approximately 0.4 and 3.0 times
Revenue and EBITDA, respectively, as well as a P/E ratio of approximately 10
times fiscal 2003 diluted EPS guidance. The current share price is also less
than 68% of projected fiscal 2002 tangible book value per share. These valuation
multiples are all markedly lower than nearly all of DAB's benchmark publicly
traded competitors.
Even though the operating results and share price have slid, DAB's proxy
statements indicate that the combined compensation (salary, bonuses, other cash
items, and restricted stock) for just Messrs. Corley and Corriveau has climbed
from $775,000 for fiscal 1999
to $1,742,000 (including restricted stock of $960,000) for fiscal 2000 and
$1,426,000 for fiscal 2001. Hopefully senior management's compensation for
fiscal 2002 and beyond will finally reflect this continued underperformance and
the board will not take additional value from the shareholders by granting
additional options to members of senior management at this distressed share
price level. As of fiscal 2001 there were 2.925 million options outstanding with
an $11.56 average exercise price (representing an excessive 18% of the fully
diluted shares). Included in these options are 1.9 million options issued at
depressed prices in fiscal years 2000 and 2001 (representing an outsized 13% of
the fully diluted shares) with three to five year vesting.
Shareholders Must Act to Promote Board Integrity, Accountability and
Independence and Maximize Value
We recently visited the Company's headquarters and several of its complexes.
Prior to our headquarters visit, we were informed that members of DAB's senior
management (including either Corley or Corriveau) would meet with us. We were
disappointed to learn at the meeting that neither of the Co-CEO's was available
to visit with us, one of your largest shareholders. Notwithstanding a two-hour
discussion that followed, we still have significant questions as to why DAB's
projected fiscal 2003 EBITDA margin of approximately 14% is at the lowest end of
the range of its benchmark publicly traded competitors. Further, the discussion
of the many publicly disclosed operational missteps and governance deficiencies
over the past several years has now crystallized in our mind the need for
progressive shareholder action. With years of --
o poor operating and share price performance,
o excessive senior management total compensation,
o numerous director conflicts,
o materially deficient and misleading public disclosures, and
o a lengthy, flawed and failed sale process,
we believe DAB's shareholders will appreciate positive change and exercise their
exclusive franchise to install new directors through an election process and
thereby seek to change the direction of the Company and maximize shareholder
value.
Accordingly, Dolphin is sponsoring a slate of three independent directors at the
Company's upcoming 2003 annual shareholders' meeting, historically, and in
accordance with the Company's bylaws, held in the second week in June. This new
independent director slate will be submitted at the appropriate time. As the
director terms of Messrs. Corley, Edison and Henrion expire in 2003, the
election of the Dolphin sponsored independent director slate would remove two
currently conflicted directors, make the total number of non-conflicted
directors comprise a majority of the board, provide the shareholders with
representation that constitutes a substantial presence on the board
(three of eight directors) and create a preferred balance between senior
management and independence at the board--certainly a greatly improved
governance structure.
Given the Company's remarkable public disclosures of how the sale process was so
unfairly directed to favor certain members of senior management who were also
directors, we question whether legitimate buyers will now seriously pursue an
acquisition of DAB, until there is greater board independence and a newly
constituted Committee. Accordingly, this independent director nominee slate will
have a mandate to seek to work with the other non-conflicted members of the
board to--
o aggressively improve DAB's operating results,
o create a "lead director" position to preside over board sessions held
without senior management present and act as the board's liaison with
senior management,
o eliminate director conflicts,
o conduct a thorough review of the prior lengthy sale process and
correct its patent shortcomings,
o reconstitute a special committee to include some or all of the
directors from the new slate, for the purpose of aggressively seeking
to maximize shareholder value without inappropriate influence from
certain members of senior management,
o destagger the board to provide for the annual election of all
directors, creating the accountability to the shareholders that has
been so lacking, and
o implement other corporate governance improvements.
In the interim, we expect that the current board will take no actions that would
compromise any shareholder rights or interfere with the ability of shareholders
to exercise their exclusive franchise at the 2003 annual meeting customarily
held in June.
Very truly yours,
/s/ Donald T. Netter
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Donald T. Netter
Senior Managing Director