SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	FOR THE QUARTERLY PERIOD ENDED July 30, 2006.
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	FOR THE TRANSITION PERIOD FROM                          TO                          .

 

Commission file number:  0-25858

Dave & Buster’s Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Registrant’s telephone number, including area code: (214) 357-9588

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  o   No  x

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

 

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

Yes  o   No  x

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

Dave & Buster’s, Inc.

Form 10-Q

TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION
Item 1	Consolidated Financial Statements
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3	Quantitative and Qualitative Disclosures About Market Risk
Item 4	Controls and Procedures
PART II	OTHER INFORMATION
Item 1	Legal Proceedings
Item 6	Exhibits
SIGNATURES

 

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PART I.  FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS

DAVE & BUSTER’S, INC.

CONSOLIDATED BALANCE SHEETS

		July 30, 2006 (Successor)				January 29, 2006 (Predecessor)
		(unaudited)				(audited)
		(In thousands, except share amounts)
Assets
Current assets:
Cash and cash equivalents		$	653			$	7,582
Inventories		12,954				12,469
Prepaid expenses		8,343				2,985
Deferred income taxes		2,105				—
Other current assets		2,835				4,194
Total current assets		26,890				27,230
Property and equipment, net		342,282				374,616
Tradename		63,000				—
Goodwill		65,638				—
Other assets and deferred charges		24,776				21,216
Total assets		$	522,586			$	423,062
Liabilities and stockholders’ equity
Current liabilities:
Current installments of long-term debt (Note 3)		$	500			$	9,625
Accounts payable		13,763				25,069
Accrued liabilities		35,103				21,294
Income taxes payable		120				2,669
Deferred income taxes		—				5,779
Total current liabilities		49,486				64,436
Deferred income taxes		35,149				5,401
Deferred rent liability		50,510				74,583
Other liabilities		5,866				2,872
Payable to dissenting shareholders		51,733				—
Long-term debt, less current installments (Note 3)		227,578				70,550
Commitments and contingencies (Note 4)
Stockholders’ equity (Note 1):
Predecessor:
Common stock, $0.01 par value, 50,000,000 authorized; 13,722,750 issued and outstanding as of January 29, 2006		—				137
Less treasury stock, at cost (175,000 shares)		—				(1,846		)
Successor:
Common stock, $0.01 par value, 1,000 authorized; 100 issued and outstanding as of July 30, 2006		—				—
Preferred stock, 10,000,000 authorized; none issued		—				—
Restricted stock awards		—				2,180
Paid-in capital		108,100				125,312
Accumulated comprehensive income		67				345
Retained earnings (deficit)		(5,903		)		79,092
Total stockholders’ equity		102,264				205,220
Total liabilities and stockholders’ equity		$	522,586			$	423,062

 

See accompanying notes to consolidated financial statements.

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DAVE & BUSTER’S, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

(unaudited)

		Thirteen weeks ended July 30, 2006 (Successor)				Thirteen weeks ended July 31, 2005 (Predecessor)
Food and beverage revenues		$	67,374			$	60,378
Amusement and other revenues		55,777				50,451
Total revenues		123,151				110,829
Cost of food and beverage		17,408				15,680
Cost of amusement and other		8,019				6,970
Total cost of products		25,427				22,650
Operating payroll and benefits		35,608				32,300
Other store operating expenses		40,360				35,870
General and administrative expenses		8,959				7,204
Depreciation and amortization expense		11,455				12,317
Startup costs		821				804
Total operating costs		122,630				111,145
Operating income (loss)		521				(316		)
Interest expense, net		6,525				1,661
Income (loss) before provision for income taxes		(6,004		)		(1,977		)
Provision (benefit) for income taxes		(2,129		)		(721		)
Net income (loss)		$	(3,875	)		$	(1,256	)

 

See accompanying notes to consolidated financial statements.

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		For the 145 Day Period from March 8, 2006 to July 30, 2006 (Successor)				For the 37 Day Period from January 30, 2006 to March 7, 2006 (Predecessor)			Twenty-six weeks ended July 31, 2005 (Predecessor)
Food and beverage revenues		$	108,876			$	27,562		$	121,769
Amusement and other revenues		90,709				22,847			104,795
Total revenues		199,585				50,409			226,564
Cost of food and beverage		28,163				7,111			31,708
Cost of amusement and other		12,678				3,183			13,447
Total cost of products		40,841				10,294			45,155
Operating payroll and benefits		57,742				14,365			65,075
Other store operating expenses		63,827				15,505			69,857
General and administrative expenses		14,231				3,480			14,893
Depreciation and amortization expense		18,196				4,328			22,058
Startup costs		2,227				880			885
Total operating costs		197,064				48,852			217,923
Operating income		2,521				1,557			8,641
Interest expense, net		11,769				649			3,434
Income (loss) before provision for income taxes		(9,248		)		908			5,207
Provision (benefit) for income taxes		(3,345		)		422			1,901
Net income (loss)		$	(5,903	)		$	486		$	3,306

 

See accompanying notes to consolidated financial statements.

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DAVE & BUSTER’S, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share amounts)

(unaudited)

		Common Stock					Paid-in			Treasury			Restricted			Accumulated Other Comprehensive			Retained Earnings
		Shares		Amount			Capital			Stock			Stock			Income			(Deficit)			Total
		(In thousands)
Balance, January 29, 2006 (Predecessor)		13,722,750		$	137		$	125,312		$	(1,846	)	$	2,180		$	345		$	79,092		$	205,220
Net earnings		—		—			—			—			—			—			486			486
Unrealized foreign currency translation loss (net of tax)		—		—			—			—			—			(3		)	—			(3		)
Comprehensive income																						483
Stock option exercises		5,000		—			528			—			—			—			—			528
Tax benefit related to stock option exercises		—		—			10			—			—			—			—			10
Stock-based compensation		—		—			25			—			—			—			—			25
Amortization of restricted stock awards		—		—			—			—			61			—			—			61
Merger transaction		(13,727,750	)	(137		)	(125,875		)	1,846			(2,241		)	(342		)	(79,578		)	(206,327		)
Balance, March 8, 2006 (Successor)		—		—			—			—			—			—			—			—
Initial investment by WS Midway Acquisition Sub, Inc. and affiliates		100		—			108,100			—			—			—			—			$	108,100
Net loss		—		—			—			—			—			—			(5,903		)	(5,903		)
Unrealized foreign currency translation gain (net of tax)		—		—			—			—			—			67			—			67
Comprehensive loss																						(5,836		)
Balance July 30, 2006 (Successor)		100		—			$	108,100		—			—			$	67		$	(5,903	)	$	102,264

 

See accompanying notes to consolidated financial statements.

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DAVE & BUSTER’S, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

		For the 145 Day Period from March 8, 2006 to July 30, 2006				For the 37 Day Period from January 30, 2006 to March 7, 2006			Twenty-six weeks ended July 31, 2005
		Successor				Predecessor
Cash flows from operating activities:
Net income (loss)		$	(5,903	)		$	486		$	3,306
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization expense		18,196				4,328			22,058
Deferred income tax expense (benefit)		(1,249		)		(1,088		)	81
Tax benefit related to stock options		—				10			619
Restricted stock awards		—				61			361
Stock-based compensation charges		—				25			—
Warrants related to convertible debt		—				21			128
Other, net		219				7			(227		)
Changes in operating assets and liabilities, net of effect of business acquisitions
Inventories		(413		)		(72		)	(43		)
Prepaid expenses		(5,189		)		(169		)	(9,399		)
Other current assets		1,360				(1		)	81
Other assets and deferred charges		4,365				(66		)	3,158
Accounts payable		(3,172		)		(3,916		)	5,823
Accrued liabilities		2,941				6,918			677
Income taxes payable		(4,053		)		1,504			(4,527		)
Deferred rent liability		1,285				2,502			815
Other liabilities		163				191			2,037
Net cash provided by operating activities		8,550				10,741			24,948
Cash flows from investing activities:
Capital expenditures		(14,742		)		(10,600		)	(22,556		)
Purchase of Predecessor common stock		(274,711		)		—			—
Proceeds from sales of property and equipment		169				—			111
Net cash used in investing activities		(289,284		)		(10,600		)	(22,445		)
Cash flows from financing activities:
Borrowings under revolving credit facility		3,078				6,000			—
Repayments of long-term debt		(51,137		)		(6,439		)	(4,740		)
Borrowings under senior secured credit facility		50,000				—			—
Borrowings under senior notes		175,000				—			—
Initial investment by WS Midway Acquisition Sub, Inc. and affiliates		108,100				—			—
Debt issuance costs		(11,466		)		—			—
Proceeds from exercises of stock options		—				528			1,399
Net cash provided by (used in) financing activities		273,575				89			(3,341		)
Increase (decrease) in cash and cash equivalents		(7,159		)		230			(838		)
Beginning cash and cash equivalents		7,812				7,582			7,624
Ending cash and cash equivalents		$	653			$	7,812		$	6,786
Supplemental disclosures of cash flow information:
Cash paid for income taxes—net of refunds		$	1,692			$	—		$	11,535
Cash paid for interest, net of amounts capitalized		$	2,482			$	878		$	1,940

 

See accompanying notes to consolidated financial statements.

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DAVE & BUSTER’S, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share amounts)

Note 1: Summary of significant accounting policies

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

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

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

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

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

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

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

 

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

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

Accrued liabilities

Accrued liabilities consist of the following:

		July 30, 2006 Successor				January 29, 2006 Predecessor
Compensation and benefits		$	8,419			$	5,708
Redemption liability		4,639				624
Sales and use taxes		2,808				2,462
Real estate taxes		3,055				1,796
Interest		8,702				1,324
Other		7,480				9,380
Total accrued liabilities		$	35,103			$	21,294

 

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

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

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

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		Thirteen weeks ended July 31, 2005 Predecessor			Twenty-six weeks ended July 31, 2005 Predecessor
Net income (loss), as reported		$	(1,256	)	$	3,306
Stock compensation expenses recorded under the intrinsic method, net of income taxes		116			229
Pro forma stock compensation expense recorded under the fair value method, net of income taxes		(106		)	(259		)
Pro forma net income (loss)		$	(1,246	)	$	3,276

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sources
Revolving credit facility		$	4,376
Senior secured credit facility		50,000
Senior notes		175,000
Other liabilities—dissenting shareholders		51,733
Equity contribution		108,100
Cash on hand		203
Total sources		$	389,412
Uses
Consideration paid to stockholders		$	213,102
Consideration paid to convertible note and warrant holders		44,390
Consideration paid to option holders		9,279
Consideration payable to dissenting shareholders		51,733
Payment of existing debt		51,137
Transaction costs		19,771
Total uses		$	389,412

 

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

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

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

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

Purchase consideration		$	337,679
Accrued liability for dissenting shareholder rights		51,733
Total consideration		389,412
Allocation of purchase price:
Working capital deficit		(18,680		)
Property and equipment		344,701
Indefinite lived intangibles		128,638
Definite lived intangibles		8,000
Other long term assets		19,868
Rent liability		(49,225		)
Deferred income taxes		(38,187		)
Other long term liabilities		(5,703		)
		$	389,412

 

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

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

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

		Thirteen weeks ended July 31,  2005			Twenty-six weeks ended July 30, 2006			Twenty-six weeks ended July 31, 2005
Revenue		$	110,829		$	249,994		$	226,564
Net loss, pro forma		$	(3,961	)	$	(6,595	)	$	(5,358	)
Pro forma adjustments		(2,705		)	(1,178		)	(8,664		)
Net income (loss), as reported		$	(1,256	)	$	(5,417	)	$	3,306

 

Note 3: Long-term debt

Long-term debt consisted of the following:

		July 30, 2006 Successor				January 29, 2006 Predecessor
Senior Credit Facility—revolving		$	3,203			$	5,439
Senior Credit Facility—term		49,875				—
Senior notes		175,000				—
Term debt facility		—				45,375
Convertible subordinated notes, net of discount		—				29,361
		228,078				80,175
Less current installments		500				9,625
Long-term debt, less current installments		$	227,578			$	70,550

 

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

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

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

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

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

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

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

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

		Debt outstanding at July 30, 2006
1 year or less		$	500
2 years		500
3 years		500
4 years		500
5 years		500
Thereafter		225,578
Total future payments		$	228,078

 

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

Note 4: Commitments and Contingencies

The Company is subject to certain legal proceedings and claims that arise in the ordinary course of its business. In the opinion of management, based upon consultation with legal counsel, the amount of ultimate liability with respect to all actions will not materially affect the consolidated results of operations or financial condition of the Company.

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

		1 Year or less			Year 2			Year 3			Year 4			Year 5			Thereafter			Total
Operating leases		$	40,682		$	40,225		$	40,145		$	40,480		$	40,078		$	354,506		$	556,116

Note 5: Income Taxes

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

		July 30, 2006 Successor				January 29, 2006 Predecessor
Deferred tax liabilities:
Trademark/Tradename		$	(24,134	)		$	—
Fixed asset basis differences		(12,010		)		(17,468		)
Other, net		(938		)		(648		)
Deferred tax liability		$	(37,082	)		$	(18,116	)
Deferred tax assets:
Leasing transactions		$	—			$	6,051
Worker’s compensation		1,346				831
Amusement redemption liability		1,520				—
Other		1,173				54
Deferred tax asset		4,039				6,936
Net deferred tax liability		$	(33,043	)		$	(11,180	)

 

Note 6: Condensed Consolidating Financial Information

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

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

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

July 30, 2006 (Successor):

		Issuer and Subsidiary Guarantors			Subsidiary Non- Guarantors			Consolidating Adjustments			Dave & Buster’s, Inc.
Assets
Current assets		$	29,824		$	606		$	(3,540	)	$	26,890
Property and equipment, net		336,150			6,132			—			342,282
Tradename		63,000			—			—			63,000
Goodwill		65,638			—			—			65,638
Investment in Sub		1,831			—			(1,831		)	—
Other assets and deferred charges		24,677			99			—			24,776
Total assets		$	521,120		$	6,837		$	(5,371	)	$	522,586
Liabilities and stockholders’ equity
Current liabilities		$	48,245		$	4,781		$	(3,540	)	$	49,486
Deferred income taxes		35,149			—			—			35,149
Deferred rent liability		50,489			21			—			50,510
Other liabilities		5,866			—			—			5,866
Payable to dissenting shareholders		51,733			—			—			51,733
Long-term debt, less current installments (Note 3)		227,374			204			—			227,578
Stockholders’ equity		102,264			1,831			(1,831		)	102,264
Total liabilities and stockholders’ equity		$	521,120		$	6,837		$	(5,371	)	$	522,586

January 29, 2006 (Predecessor):

		Issuer and Subsidiary Guarantors			Subsidiary Non- Guarantors			Consolidating Adjustments			Dave & Buster’s, Inc.
Assets
Current assets		$	29,076		$	907		$	(2,753	)	$	27,230
Property and equipment, net		369,469			5,147			—			374,616
Investment in Sub		1,071			—			(1,071		)	—
Other assets and deferred charges		21,115			101			—			21,216
Total assets		$	420,731		$	6,155		$	(3,824	)	$	423,062
Liabilities and stockholders’ equity
Current liabilities		$	63,764		$	3,425		$	(2,753	)	$	64,436
Deferred income taxes		5,401			—			—			5,401
Deferred rent liability		74,363			220			—			74,583
Other liabilities		2,872			—			—			2,872
Long-term debt, less current installments (Note 3)		69,111			1,439			—			70,550
Stockholders’ equity		205,220			1,071			(1,071		)	205,220
Total liabilities and stockholders’ equity		$	420,731		$	6,155		$	(3,824	)	$	423,062

 

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Note 7: Subsequent Events

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

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

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

The main provisions of this amendment are as follows:

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

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

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

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

General

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

Merger with WS Midway Acquisition Sub, Inc.

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

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

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

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

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

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

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