FORM 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	FOR THE QUARTERLY PERIOD ENDED OCTOBER 29, 2006
Or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	FOR THE TRANSITION PERIOD FROM            TO

 

Commission File Number 001-15007

Dave & Buster’s, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

2481 Mañana Drive

Dallas, Texas 75220

(Address of principal executive offices)

(Zip Code)

(214) 357-9588

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x.    No  o.

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

Large accelerated filer  o    Accelerated filer  o    Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o.    No  x.

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

The number of shares of the Issuer’s common stock, $0.01 par value, outstanding as of October 29, 2006 was 100 shares.

Dave & Buster’s, Inc.

Form 10-Q

TABLE OF CONTENTS

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

 

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PART I.     FINANCIAL INFORMATION

Item 1.        CONSOLIDATED FINANCIAL STATEMENTS

DAVE & BUSTER’S, INC.

CONSOLIDATED BALANCE SHEETS

		October 29, 2006 (Successor)					January 29, 2006 (Predecessor)
		(unaudited)					(audited)
		(In thousands, except share amounts)
Assets
Current assets:
Cash and cash equivalents		$	1,037				$	7,582
Inventories		13,130					12,469
Prepaid expenses		5,952					2,985
Deferred income taxes		1,417					—
Other current assets		5,995					4,194
Total current assets		27,531					27,230
Property and equipment, net		318,677					351,883
Tradename		63,000					7,482
Goodwill		71,104					—
Assets held for sale (Note 7)		28,460					22,733
Other assets and deferred charges		23,172					13,734
Total assets		$	531,944				$	423,062
Liabilities and stockholders’ equity
Current liabilities:
Current installments of long-term debt (Note 3)		$	1,000				$	9,625
Accounts payable		14,947					25,069
Accrued liabilities		39,690					21,294
Income taxes payable		—					2,669
Deferred income taxes		—					5,779
Total current liabilities		55,637					64,436
Deferred income taxes		34,130					5,401
Deferred lease liability		50,263					74,583
Other liabilities		6,219					2,872
Long-term debt, less current installments (Note 3)		288,625					70,550
Commitments and contingencies (Note 4)
Stockholders’ equity (Note 1):
Predecessor:
Common stock, $0.01 par value, 50,000,000 authorized; 13,722,750 issued and outstanding as of January 29, 2006		—					137
Less treasury stock, at cost (175,000 shares)		—					(1,846		)
Preferred stock, 10,000,000 authorized; none issued		—					—
Restricted stock awards		—					2,180
Successor:
Common stock, $0.01 par value, 1,000 authorized; 100 issued and outstanding as of October 29, 2006		—					—
Paid-in capital		108,100					125,312
Accumulated comprehensive income		88					345
Retained earnings (deficit)		(11,118		)			79,092
Total stockholders’ equity		97,070					205,220
Total liabilities and stockholders’ equity		$	531,944				$	423,062

See accompanying notes to consolidated financial statements.

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DAVE & BUSTER’S, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

(unaudited)

		Thirteen weeks ended October 29, 2006 (Successor)					Thirteen weeks ended October 30, 2005 (Predecessor)
Food and beverage revenues		$	64,727				$	58,212
Amusement and other revenues		51,543					47,433
Total revenues		116,270					105,645
Cost of food and beverage		16,783					15,208
Cost of amusement and other		7,214					7,126
Total cost of products		23,997					22,334
Operating payroll and benefits		34,749					31,590
Other store operating expenses		38,458					36,054
General and administrative expenses		7,739					7,819
Depreciation and amortization expense		11,972					9,934
Startup costs		814					1,495
Total operating costs		117,729					109,226
Operating loss		(1,459		)			(3,581		)
Interest expense, net		7,200					1,458
Loss before provision for income taxes		(8,659		)			(5,039		)
Benefit for income taxes		(3,442		)			(1,839		)
Net loss		$	(5,217	)			$	(3,200	)

See accompanying notes to consolidated financial statements.

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DAVE & BUSTER’S, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

(unaudited)

		For the 236 Day Period from March 8, 2006 to October 29, 2006 (Successor)					For the 37 Day Period from January 30, 2006 to March 7, 2006 (Predecessor)			Thirty-nine weeks ended October 30, 2005 (Predecessor)
Food and beverage revenues		$	173,604				$	27,562		$	179,982
Amusement and other revenues		142,251					22,847			152,227
Total revenues		315,855					50,409			332,209
Cost of food and beverage		44,945					7,111			46,916
Cost of amusement and other		19,893					3,183			20,573
Total cost of products		64,838					10,294			67,489
Operating payroll and benefits		92,492					14,365			96,665
Other store operating expenses		102,284					15,505			105,911
General and administrative expenses		21,970					3,480			22,715
Depreciation and amortization expense		30,167					4,328			31,992
Startup costs		3,041					880			2,377
Total operating costs		314,792					48,852			327,149
Operating income		1,063					1,557			5,060
Interest expense, net		18,969					649			4,892
Income (loss) before provision for income taxes		(17,906		)			908			168
Provision (benefit) for income taxes		(6,788		)			422			62
Net income (loss)		$	(11,118	)			$	486		$	106

See accompanying notes to consolidated financial statements.

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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		—		—			—			—			—			—			(11,118		)	(11,118		)
Unrealized foreign currency translation gain (net of tax)		—		—			—			—			—			88			—			88
Comprehensive loss		—		—			—			—			—			—			—			(11,030		)
Balance October 29, 2006 (Successor)		100		—			$	108,100		—			—			$	88		$	(11,118	)	$	97,070

See accompanying notes to consolidated financial statements.

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DAVE & BUSTER’S, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

		For the 236 Day Period from March 8, 2006 to October 29, 2006					For the 37 Day Period from January 30, 2006 to March 7, 2006			Thirty-nine weeks ended October 30, 2005
		(Successor)					(Predecessor)
Cash flows from operating activities:
Net income (loss)		$	(11,118	)			$	486		$	106
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization expense		30,167					4,328			31,992
Deferred income tax expense benefit		(1,580		)			(1,088		)	(78		)
Tax benefit related to stock options		—					10			777
Restricted stock awards		—					61			544
Stock-based compensation charges		—					25			—
Warrants related to convertible debt		—					21			192
Other, net		(282		)			7			33
Changes in operating assets and liabilities, net of effect of business acquisitions
Inventories		(589		)			(72		)	(2,160		)
Prepaid expenses		(2,798		)			(169		)	(10,888		)
Other current assets		(1,800		)			(1		)	(260		)
Other assets and deferred charges		(5,154		)			(66		)	3,591
Accounts payable		(2,806		)			(3,916		)	7,632
Accrued liabilities		7,528					6,918			2,045
Income taxes payable		(4,173		)			1,504			(4,452		)
Deferred rent liability		1,038					2,502			2,935
Other liabilities		516					191			1,033
Net cash provided by operating activities		8,949					10,741			33,042
Cash flows from investing activities:
Capital expenditures		(24,727		)			(10,600		)	(41,870		)
Purchase of Predecessor common stock		(326,444		)			—			—
Proceeds from sales of property and equipment		325					—			198
Other investing activities		—					—			(1,158		)
Net cash used in investing activities		(350,846		)			(10,600		)	(42,830		)
Cash flows from financing activities:
Borrowings (repayments) under revolving credit facility		15,000					(439		)	2,026
Repayments of long-term debt		(51,137		)			—			—
Borrowings under senior secured credit facility		99,625					—			—
Borrowings under senior notes		175,000					—			—
Initial investment by WS Midway Acquisition Sub, Inc. and affiliates		108,100					—			—
Debt issuance costs		(11,466		)			—			—
Proceeds from exercises of stock options		—					528			1,998
Net cash provided by financing activities		335,122					89			4,024
Increase (decrease) in cash and cash equivalents		(6,775		)			230			(5,764		)
Beginning cash and cash equivalents		7,812					7,582			7,624
Ending cash and cash equivalents		$	1,037				$	7,812		$	1,860
Supplemental disclosures of cash flow information:
Cash paid for income taxes—net of refunds		$	1,760				$	—		$	11,669
Cash paid for interest, net of amounts capitalized		$	13,661				$	878		$	3,126

See accompanying notes to consolidated financial statements.

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

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

Dave & Buster’s fiscal year ends on the Sunday after the Saturday closest to January 31. All references to the third quarter of 2006 relate to the thirteen weeks ended October 29, 2006 of the Successor.  All references to the third quarter of 2005 relate to the thirteen week period ended October 30, 2005 of the Predecessor. All references to the year-to-date fiscal year 2006 period relate to the combined 236 day period ended October 29, 2006 of the Successor and the 37 day period ended March 7, 2006 of the Predecessor. All references to 2006 relate to the combined 53 week period ending on February 4, 2007 and all references to 2005 relate to the 52 weeks ended January 29, 2006.  In the opinion of management, these financial statements contain all adjustments, necessary to present fairly the financial position, results of operations and cash flows for the periods indicated.

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

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

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

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

 

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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 October 29, 2006 and October 30, 2005 were $173 and $247, respectively, and for the thirty-nine weeks ended October 29, 2006 and October 30, 2005 were $322, and $340, respectively.

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

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

Accrued liabilities

Accrued liabilities consist of the following:

 

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

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

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

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

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Foreign license revenues are deferred until the Company fulfills its obligations under license agreements. The license agreements provide for continuing royalty fees based on a percentage of gross revenues, which are recognized when realization is assured. Revenue from international licensees for the thirteen weeks ended October 29, 2006 and October 30, 2005 were $0 and $254, respectively, and for the thirty-nine weeks ended October 29, 2006 and October 30, 2005 were $77, and $587, respectively.

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

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

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

Comprehensive income—Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. In addition to net income (loss), unrealized foreign currency translation gain (loss) is included in comprehensive income. Unrealized translation gains/(losses) for the thirteen weeks ended October 29, 2006 and October 30, 2005 were $21 and $223, respectively, and for the thirty-nine weeks ended October 29, 2006 and October 30, 2005 were $85 and $65, respectively.

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

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

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

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

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

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

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

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

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The Merger transactions resulted in a change in ownership of 100 percent of the Company’s outstanding common stock and is being accounted for in accordance with Statement of Financial Accounting Standards (“SFAS”) 141, “Business Combinations.”  The purchase price paid in the Merger has been “pushed down” to the Company’s financial statements and is allocated to record the acquired assets and liabilities assumed based on their fair value.  The Merger and the allocation of the purchase price to the assets and liabilities as of March 8, 2006 have been recorded based on preliminary valuation studies. The allocation of the purchase price is subject to change based on completion of such studies and the resolution of certain personnel matters.  The adjustments, if any, arising out of the finalization of the allocation of the purchase price will not impact cash flow including cash interest and rent.  However, such adjustments could result in material increases or decreases to net income and earnings before interest expense, income taxes, depreciation and amortization.  Further revisions to the purchase price allocation will be made as additional information becomes available.  The sources and uses of funds in connection with the Merger as of October 29, 2006 are summarized below:

 

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

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

On July 10, 2006, the Company and all dissenting shareholders reached an agreement which provided, among other things, for the permanent and irrevocable settlement of all claims among the parties.  Considerations paid to stockholders include the payment of approximately $51,733 to the shareholders in accordance with the terms of the settlement agreement.  Payments of the settlement were funded from borrowings under the senior secured credit facility and available cash.

In connection with the preliminary purchase price allocation, estimates of the fair values of assets acquired and liabilities assumed are based primarily on preliminary valuation results from independent valuation specialists.  As of October 29, 2006, the Company recorded preliminary purchase accounting adjustments to the carrying value of property and equipment, to establish intangible assets for tradenames and trademarks and to revalue the deferred rent liability, among other things.  This allocation of the purchase price is preliminary and subject to finalization of independent valuation and analysis of the fair value of other assets and liabilities as of the date of the Merger.  The final allocation of the purchase price may result in additional adjustments to the recorded amounts of assets and liabilities and may also result in adjustments to depreciation and amortization expense, rent expense, other operating costs, and the provision for income taxes. Adjustments arising out of the finalization of the purchase allocation will not impact cash flow including cash interest and rent.  However, such adjustments could result in material increases or decreases to operating income and net income.  Further revisions to the purchase price allocation will be made as additional information becomes available.

The purchase price has been preliminarily allocated as follows:

 

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In connection with the Merger, the Successor incurred approximately $1,500 in Merger related costs, primarily a bridge funding fee that is recorded in the statement of operations for the 236 day period from March 8, 2006 to October 29, 2006 as interest expense.

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

Indefinite lived intangibles include tradenames in the amount of $63,000 and goodwill in the amount of $71,104 and are not subject to amortization, but instead are reviewed for impairment at least annually.

Pro forma financial information — The following unaudited pro forma results of operations assumes that the Merger occurred on January 31, 2005.  This unaudited pro forma information should not be relied upon as necessarily being indicative of the historical results that would have been obtained if the Merger had actually occurred on that date, nor the results that may be obtained in the future.  Pro forma adjustments reflect additional expenses incurred had the Merger occurred on January 31, 2005, consisting primarily of interest, depreciation and amortization expenses.

 

Note 3: Long-term debt

Long-term debt consisted of the following:

 

In connection with the Merger, the Company terminated the existing credit facility and entered into a new senior secured credit facility that (a) provides a $100,000 term loan facility ($50,000 of the term loan facility was available as of the date of the Merger, March 8, 2006, and $50,000 was available on a delayed draw basis and was borrowed on August 15, 2006) with a maturity of seven years from the closing date of the Merger, and (b) provides a $60,000 revolving credit facility with a maturity of five years from the closing date of the Merger. The $60,000 revolving credit facility will include (i) a $20,000 letter of credit sub-facility, (ii) a $5,000 swingline sub-facility and (iii) a $5,000 (in US Dollar equivalent) sub-facility available in Canadian dollars to the Canadian subsidiary. The revolving credit facility will be used to provide financing for working capital and general corporate purposes. As of October 29, 2006, borrowings under the revolving credit facility and term loan facility were $15,000 and $99,625, respectively, and the Company had $6,956 in letters of credit outstanding.

The interest rates per annum applicable to loans, other than swingline loans, under the senior secured credit facility are, at the Company’s option, equal to, either a base rate (or, in the case of the Canadian revolving credit facility, a Canadian prime rate) or a Eurodollar rate (or, in the case of the Canadian revolving credit facility, a Canadian cost of funds rate) for one-, two-, three- or six-month (or, in the case of the Canadian revolving credit facility, 30, 60, 90 or 180-day) interest periods chosen by the Company, in each case, plus an applicable margin percentage.  Swingline loans bear interest at the base rate plus the applicable margin.  The weighted average rate of interest on the senior credit facility was 7.8 percent at October 29, 2006.

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Effective June 30, 2006, the Company entered into two interest rate swap agreements that expire in 2011, to change a portion of the variable rate debt to fixed rate debt.  Pursuant to the swap agreements, the interest rate on notional amounts aggregating $94,600 at October 29, 2006 is fixed at 5.31 percent. The notional amounts decline ratably over the term of the agreements. The agreements have not been designated as hedges and adjustments to mark the instruments to their fair value are recorded as interest income/expense.  As a result of the swap agreements, the Company recorded additional interest income of $20 for the thirteen weeks ended October 29, 2006 and $27 for the thirty-nine weeks ended October 29, 2006.

The Company’s senior secured credit facility requires compliance with the following financial covenants: a minimum fixed charge coverage ratio test and a maximum leverage ratio test.  The Company will initially be required to maintain a minimum fixed charge coverage ratio of 1.00:1.00 and a maximum leverage ratio of 4.75:1.00 as of October 29, 2006.  The financial covenants will become more restrictive over time.  The required minimum fixed charge coverage ratio increases annually to a required ratio of 1.20:1.00 in the fourth quarter of fiscal year 2009 and thereafter.  The maximum leverage ratio decreases annually to a required ratio of 3.50:1.00 in the fourth quarter of fiscal year 2010 and thereafter.  In addition, the new senior secured credit facility includes negative covenants restricting or limiting, WS Midway Holdings, Inc.’s and its subsidiaries’ ability to, among other things, incur additional indebtedness, make capital expenditures and sell or acquire assets.  Virtually all of the Company’s assets are pledged as collateral for the senior secured credit facility.

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

On August 17, 2006, certain covenants under the senior secured credit facility were amended.  The main provisions of this amendment are as follows:

1.   Consent to enter into a sale-leaseback transaction on three fee owned properties, the proceeds of which would be used to pay down the outstanding balance of the term loan portion of the Senior Credit Facility with up to $5.0 million being available for reinvestment.

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

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

In connection with the Merger on March 8, 2006, the Company closed a placement of $175,000 aggregate principal amount of senior notes.  The notes are general unsecured, unsubordinated obligations of the Company and mature on March 15, 2014.  Interest on the notes compounds semi-annually and accrues at the rate of 11.25% per annum.  On or after March 15, 2010, the Company may redeem all, or from time-to-time, a part of the senior notes upon not less than 30 nor more than 60 days notice, at redemption prices (expressed as a percentage of principal amount) plus accrued and unpaid interest on the senior notes.  Prior to March 15, 2009, the Company may on any one or more occasions redeem up to 35% of the original principal amount of the notes using the proceeds of certain equity offerings completed before March 15, 2009.  On September 22, 2006, the Company completed an exchange with the holders of the 11.25% senior notes pursuant to which the existing notes sold in March 2006 pursuant to Rule 144A and Regulation S of the Securities Act of 1933, as amended, were exchanged for an equal amount of newly issued 11.25% senior notes, which have been registered under the Securities Act of 1933.

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

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

 

 

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

Note 4: Commitments and Contingencies

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

The following table sets forth our operating lease commitments as of October 29, 2006:

		1 Year or less			Year 2			Year 3			Year 4			Year 5			Thereafter			Total
Operating leases		$	42,167		$	41,589		$	41,702		$	41,829		$	41,625		$	377,517		$	586,429

 

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

Note 5: Income Taxes

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

 

Note 6: Condensed Consolidating Financial Information

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

The accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10 “Financial statements of guarantors and issuers of guaranteed securities registered or being registered.” No other

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

 

October 29, 2006 (Successor):

		Issuer and Subsidiary Guarantors			Subsidiary Non- Guarantors			Consolidating Adjustments			Dave & Buster’s, Inc.
Assets
Current assets		$	22,723		$	1,150		$	3,658		$	27,531
Property and equipment, net		312,718			5,959			—			318,677
Tradename		63,000			—			—			63,000
Goodwill		71,104			—			—			71,104
Investment in Sub		1,912			—			(1,912		)	—
Assets held for sale		28,460			—			—			28,460
Other assets and deferred charges		23,072			100			—			23,172
Total assets		$	522,989		$	7,209		$	1,746		$	531,944
Liabilities and stockholders’ equity
Current liabilities		$	46,721		$	5,258		$	3,658		$	55,637
Deferred income taxes		34,130			—			—			34,130
Deferred rent liability		50,224			39			—			50,263
Other liabilities		6,219			—			—			6,219
Long-term debt, less current installments (Note 3)		288,625			—			—			288,625
Stockholders’ equity		97,070			1,912			(1,912		)	97,070
Total liabilities and stockholders’ equity		$	522,989		$	7,209		$	1,746		$	531,944

 

January 29, 2006 (Predecessor):

		Issuer and Subsidiary Guarantors			Subsidiary Non- Guarantors			Consolidating Adjustments			Dave & Buster’s, Inc.
Assets
Current assets		$	29,076		$	907		$	(2,753	)	$	27,230
Property and equipment, net		346,736			5,147			—			351,883
Tradename		7,482			—			—			7,482
Investment in Sub		1,071			—			(1,071		)	—
Assets held for sale		22,733			—			—			22,733
Other assets and deferred charges		13,633			101			—			13,734
Total assets		$	420,731		$	6,155		$	(3,824	)	$	423,062
Liabilities and stockholders’ equity
Current liabilities		$	63,764		$	3,425		$	(2,753	)	$	64,436
Deferred income taxes		5,401			—			—			5,401
Deferred rent liability		74,363			220			—			74,583
Other liabilities		2,872			—			—			2,872
Long-term debt, less current installments (Note 3)		69,111			1,439			—			70,550
Stockholders’ equity		205,220			1,071			(1,071		)	205,220
Total liabilities and stockholders’ equity		$	420,731		$	6,155		$	(3,824	)	$	423,062

 

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Note 7: Subsequent Events

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

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

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