10-Q 1 d92829e10-q.txt FORM 10-Q FOR QUARTER ENDED NOVEMBER 4, 2001 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-Q X QUARTERLY REPORT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT --- FOR THE QUARTER ENDED NOVEMBER 4, 2001. TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT --- OF 1934 FOR THE TRANSACTION PERIOD FROM TO . -------- -------- COMMISSION FILE NUMBER: 0-25858 ---------- DAVE & BUSTER'S, INC. (Exact Name of Registrant as Specified in Its Charter) MISSOURI 43-1532756 (State of Incorporation) (I.R.S. Employer Identification No.) 2481 MANANA DRIVE DALLAS, TEXAS 75220 (Address of Principle Executive Offices) (Zip Code) 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 [X] No [ ] The number of shares of the Registrant's common stock, $.01 par value, outstanding as of December 14, 2001 was 12,957,042 shares. PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS DAVE & BUSTER'S, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
13 Weeks Ended 39 Weeks Ended ------------------------- ------------------------ November 4, October 29, November 4, October 29, 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Food and beverage revenues $ 41,171 $ 39,782 $ 126,325 $ 117,252 Amusement and other revenues 40,200 39,462 126,878 117,407 ---------- ---------- ---------- ---------- Total revenues 81,371 79,244 253,203 234,659 Cost of revenues 15,248 14,783 47,504 43,337 Operating payroll and benefits 26,573 24,780 79,207 71,336 Other store operating expenses 26,426 22,500 75,417 66,111 General and administrative expenses 5,120 4,811 15,374 14,465 Depreciation and amortization expense 7,407 6,706 21,315 18,688 Preopening costs 1,850 709 3,750 4,266 ---------- ---------- ---------- ---------- Total costs and expenses 82,624 74,289 242,567 218,203 ========== ========== ========== ========== Operating (loss) income (1,253) 4,955 10,636 16,456 Interest expense, net (1,683) 2,587 6,063 6,126 ---------- ---------- ---------- ---------- Income (loss) before provision for income taxes (2,936) 2,368 4,573 10,330 Provision for income taxes (1,063) 869 1,655 3,791 ---------- ---------- ---------- ---------- Net income (loss) $ (1,873) $ 1,499 $ 2,918 $ 6,539 Basic net income (loss) per share $ (0.14) $ 0.12 $ 0.23 $ 0.50 Basic weighted average shares outstanding 12,956 12,953 12,955 12,953 Diluted net income (loss) per share $ (0.14) $ 0.12 $ 0.22 $ 0.50 Diluted weighted average shares outstanding 12,956 12,974 13,016 12,963
See accompanying notes to consolidated financial statements. DAVE & BUSTER'S, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS November 4, February 4, 2001 2001 ----------- ----------- (unaudited) Current assets: Cash and cash equivalents $ 3,379 $ 3,179 Inventories 24,056 21,758 Prepaid expenses 4,689 3,663 Other current assets 2,287 1,787 ------------ ------------ Total current assets 34,411 30,387 Property and equipment, net 267,380 260,467 Goodwill, net of accumulated amortization of $2,517 and $2,263 7,191 7,445 Other assets 4,473 5,576 ------------ ------------ Total assets $ 313,455 $ 303,875 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current installments of long-term debt $ 5,500 $ 4,124 Accounts payable 16,553 9,291 Accrued liabilities 10,717 7,050 Income taxes payable 3,524 3,567 Deferred income taxes 1,221 1,229 ------------ ------------ Total current liabilities 37,515 25,261 Deferred income taxes 8,143 7,667 Other liabilities 6,318 4,700 Long-term debt, less current installments 96,065 103,860 Commitments and contingencies Stockholders' equity: Preferred stock, 10,000,000 authorized; none issued -- -- Common stock, $0.01 par value, 50,000,000 authorized; 12,955,542 and 12,953,375 shares issued and outstanding as of November 4, 2001 and February 4, 2001, respectively 131 131 Paid in capital 115,675 115,659 Restricted stock awards 336 243 Retained earnings 51,118 48,200 ============ ============ 167,260 164,233 Less: treasury stock, at cost (175,000 shares) 1,846 1,846 ------------ ------------ Total stockholders' equity 165,414 162,387 ------------ ------------ Total liabilities and stockholders' equity $ 313,455 $ 303,875
See accompanying notes to consolidated financial statements. DAVE & BUSTER'S, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS) (UNAUDITED)
Common Stock Paid in Restricted Retained Treasury Shares Amount Capital Stock Awards Earnings Stock Total --------- --------- --------- --------- --------- --------- --------- Balance, February 4, 2001 12,953 $ 131 $ 115,659 $ 243 $ 48,200 $ (1,846) $ 162,387 Proceeds from exercising stock options 3 -- 15 -- -- -- 15 Tax benefit related to stock option exercises -- -- 1 -- -- -- 1 Amortization of restricted stock awards -- -- -- 93 -- -- 93 Net income -- -- -- -- 2,918 -- 2,918 --------- --------- --------- --------- --------- --------- --------- Balance, November 4, 2001 12,956 $ 131 $ 115,675 $ 336 $ 51,118 $ (1,846) $ 165,414
See accompanying notes to consolidated financial statements. DAVE & BUSTER'S, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
39 Weeks Ended ----------------------------- November 4, October 29, 2001 2000 ------------ ------------ Cash flows from operating activities Net income $ 2,918 $ 6,539 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 21,315 18,688 Provision for deferred income taxes 468 -- Restricted stock awards 93 120 Changes in assets and liabilities Inventories (2,298) (2,298) Prepaid expenses (1,026) (2,336) Other assets 594 (357) Accounts payable 7,262 (1,698) Accrued liabilities 3,667 3,950 Income taxes payable (43) 1,630 Other liabilities 1,618 1,637 ------------ ------------ Net cash provided by operating activities 34,568 25,875 ------------ ------------ Cash flows from investing activities: Capital expenditures (35,211) (42,277) Proceeds from sale of property and equipment 7,245 -- ------------ ------------ Net cash used by investing activities (27,966) (42,277) ------------ ------------ Cash flows from financing activities: Proceeds from issuance of common stock, net 16 -- Borrowings under long-term debt 18,810 124,542 Repayments of long-term debt (25,228) (108,120) ------------ ------------ Net cash provided (used) by financing activities (6,402) 16,422 ------------ ------------ Decrease in cash and cash equivalents 200 20 Beginning cash and cash equivalents 3,179 3,091 ------------ ------------ Ending cash and cash equivalents $ 3,379 $ 3,111
See accompanying notes to consolidated financial statements. DAVE & BUSTER'S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 4, 2001 (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 1: RESULTS OF OPERATIONS The results of operations for the interim periods reported are not necessarily indicative of results to be expected for the year. The information furnished herein reflects all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary to fairly present the results of operations and financial position for the interim periods. NOTE 2: BASIS OF PRESENTATION BASIS OF PRESENTATION. The consolidated financial statements include the accounts of Dave & Buster's, Inc. and wholly-owned subsidiaries (the "Company"). All material intercompany accounts and transactions have been eliminated in consolidation. The consolidated balance sheet data presented herein for February 4, 2001 was derived from the Company's audited consolidated financial statements for the fiscal year then ended. The preparation of financial statements in accordance with generally accepted accounting principles requires the Company's management to make certain estimates and assumptions for the reporting periods covered by the financial statements. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses. Actual amounts could differ from these estimates. The Company's one industry segment is the ownership and operation of restaurant/entertainment Complexes (a "Complex" or "Store") under the name "Dave & Buster's" which are principally located in the United States. CHANGE IN METHOD OF ACCOUNTING. The Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("FAS 133") effective February 5, 2001. FAS 133 requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of hedge, changes in fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. During the current quarter, the Company has entered into an agreement that expires in 2007, to fix its variable-rate debt to fixed-rate debt (5.44% at November 4, 2001) on notional amounts aggregating $52,503. The market risks associated with the agreements are mitigated because increased interest payments under the agreement resulting from a decrease in LIBOR are effectively offset by decreased payments under the debt obligation. The Company is exposed to credit losses for periodic settlements of amounts due under the agreements. Such amounts were not material at November 4, 2001. NEW PRONOUNCEMENTS. In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets ("Statements"), effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of the Statements is expected to result in an increase in net income of $243 ($.02 per diluted share) in 2002 as a result of nonamortization of existing goodwill. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of February 4, 2002. While the Company has not yet determined what the effect of these tests will be on the earnings and financial position, no assurance can be given that the Company will not be required to write-off its goodwill of $7,191 upon the adoption of the new standard. Such write off, if required, is to be recorded as a change in accounting principal. NOTE 3: LONG-TERM DEBT At November 4, 2001, long-term debt consisted of the following: Long-term debt $108,810 Cash held for application to debt (7,245) ------- 101,565 Less current installments (5,500) ------- $ 96,065
On November 19, 2001, the Company amended its senior secured revolving credit and term loan facility. The amendment allows proceeds from sales/leaseback transactions to be applied to both the revolving credit and the term loans. Cash held for application to debt was allocated to the revolving credit and term loans on November 19, 2001. At November 19, 2001, $4,347 was available under this facility. NOTE 4: 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 on discussions with and advice of legal counsel, the amount of ultimate liability with respect to these actions will not materially affect the consolidated results of operations or financial conditions of the Company. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS) Results of Operations - 13 Weeks Ended November 4, 2001 Compared to 13 Weeks Ended October 29, 2000 Total revenues increased to $81,371 for the 13 weeks ended November 4, 2001 from $79,244 for the 13 weeks ended October 29, 2000, an increase of $2,127 or 3%. New stores opened in fiscal 1999 and 2000 and the first quarter of 2001 increased revenues during the period by $7,094. Revenues at comparable stores decreased 6.7% for the 13 weeks ended November 4, 2001. The decrease in comparable stores revenues was primarily attributable to the attack on New York and Washington on September 11 and to a decline in company sponsored private parties. Total revenues for the 13 weeks ended November 4, 2001 from licensing agreements were $103. Cost of revenues increased to $15,248 for the 13 weeks ended November 4, 2001 from $14,783 for the 13 weeks ended October 29, 2000, an increase of $465 or 3%. As a percentage of revenues, cost of revenues increased to 18.7% in the 13 weeks ended November 4, 2001 from 18.6% in the 13 weeks ended October 29, 2000 due to higher beverage costs and higher amusement costs associated with redemption and freight costs offset by lower food costs. Operating payroll and benefits increased to $26,573 for the 13 weeks ended November 4, 2001 from $24,780 for the 13 weeks ended October 29, 2000, an increase of $1,793 or 7%. As a percentage of revenue, operating payroll and benefits increased to 32.6% in the 13 weeks ended November 4, 2001 from 31.3% in the 13 weeks ended October 29, 2000 due to higher fixed labor and fringe benefit costs due to increased headcounts. Other store operating expenses increased to $26,426 for the 13 weeks ended November 4, 2001 from $22,500 for the 13 weeks ended October 29, 2000, an increase of $3,926 or 17%. As a percentage of revenues, other store operating expenses were 32.5% of revenues in the 13 weeks ended November 4, 2001 as compared to 28.4% of revenues in the 13 weeks ended October 29, 2000. Other store operating expenses as a percentage of revenue increased due to higher utility, marketing and occupancy costs. General and administrative increased to $5,120 for the 13 weeks ended November 4, 2001 from $4,811 for the 13 weeks ended October 29, 2000, an increase of $309 or 6%. As a percentage of revenues, general and administrative expenses increased to 6.3% in the 13 weeks ended November 4, 2001 from 6.1% in the 13 weeks ended October 29, 2000. Depreciation and amortization increased to $7,407 for the 13 weeks ended November 4, 2001 from $6,706 for the 13 weeks ended October 29, 2000, an increase of $701 or 10%. As a percentage of revenues, depreciation and amortization increased to 9.1% from 8.5% for the comparable period due to new store openings. Preopening costs increased to $1,850 for the 13 weeks ended November 4, 2001 from $709 for the 13 weeks ended October 29, 2000. The timing of opening affects the amount of such costs in any given period. Interest expense decreased to $1,683 for the 13 weeks ended November 4, 2001 from $2,587 for the 13 weeks ended October 29, 2000. The decrease was primarily due to lower interest rates in fiscal year 2001 offset by higher average debt. The effective tax rate for the 13 weeks ended November 4, 2001 was 36.2% as compared to 36.7% for the 13 weeks ended October 29, 2000. Results of Operations - 39 Weeks Ended November 4, 2001 Compared to 39 Weeks Ended October 29, 2000 Total revenues increased to $253,203 for the 39 weeks ended November 4, 2001 from $234,659 for the 39 weeks ended October 29, 2000, an increase of $18,544 or 8%. New stores opened in fiscal 1999 and 2000 and the first of 2001 increased revenues during the period by $24,239. Revenues at comparable stores decreased 3.4% for the 39 weeks ended November 4, 2001. The decrease in comparable stores revenues was primarily attributable to a decline in company sponsored private parties and also to the September 11 tragedy. Total revenues for the 39 weeks ended November 4, 2001 from licensing agreements were $398. Cost of revenues increased to $47,504 for the 39 weeks ended November 4, 2001 from $43,337 for the 39 weeks ended October 29, 2000, an increase of $4,167 or 10%. As a percentage of revenues, cost of revenues increased to 18.7% in the 39 weeks ended November 4, 2001 from 18.4% in the 39 weeks ended October 29, 2000 due to higher amusement costs offset by lower food and beverage costs. Operating payroll and benefits increased to $79,207 for the 39 weeks ended November 4, 2001 from $71,336 for the 39 weeks ended October 29, 2000, an increase of $7,871 or 11%. As a percentage of revenue, operating payroll and benefits increased to 31.3% in the 39 weeks ended November 4, 2001 from 30.4% in the 39 weeks ended October 29, 2000 due to higher headcounts which result in higher fixed labor and fringe benefit costs offset by slightly lower variable labor costs. Other store operating expenses increased to $75,417 for the 39 weeks ended November 4, 2001 from $66,111 for the 39 weeks ended October 29, 2000, an increase of $9,306 or 14%. As a percentage of revenues, other store operating expenses were 29.8% of revenues in the 39 weeks ended November 4, 2001 as compared to 28.2% of revenues in the 39 weeks ended October 29, 2000. Other store operating expenses were higher due to increased utility and marketing costs at the stores. General and administrative increased to $15,374 for the 39 weeks ended November 4, 2001 from $14,465 for the 39 weeks ended October 29, 2000, an increase of $909 or 6%. As a percentage of revenues, general and administrative expenses decreased to 6.1% in the 39 weeks ended November 4, 2001 from 6.2% in the 39 weeks ended October 29, 2000. Depreciation and amortization increased to $21,315 for the 39 weeks ended November 4, 2001 from $18,688 for the 39 weeks ended October 29, 2000, an increase of $2,627 or 14%. As a percentage of revenues, depreciation and amortization increased to 8.4% from 8.0% for the comparable period due to new store openings. Preopening costs decreased to $3,750 for the 39 weeks ended November 4, 2001 from $4,266 for the 39 weeks ended October 29, 2000. The timing of complex openings affects the amount of such costs in any given period. Interest expense decreased to $6,063 for the 39 weeks ended November 4, 2001 from $6,126 for the 39 weeks ended October 29, 2000. The decrease was primarily due to lower interest rates in fiscal year 2001 offset by higher average debt. The effective tax rate for the 39 weeks ended November 4, 2001 was 36.2% as compared to 36.7% for the 39 weeks ended October 29, 2001 offset by higher average debt. Liquidity and Capital Resources Cash flows from operations increased to $34,568 for the 39 weeks ended November 4, 2001 from $25,875 for the 39 weeks ended October 29, 2000. The increase was attributable to an increase in depreciation and amortization, an increase in operational receipts and the extension of vendor terms. The Company has a $110,000 senior secured revolving credit and term loan facility. The facility includes a five-year revolver and five and seven-year term debt. Borrowing under the facility bears interest at a floating rate based on LIBOR or, at the Company's option, the bank's prime rate plus, in each case, a margin based upon financial performance (6.2% at November 4, 2001) and is secured by all assets of the Company. The facility has certain financial covenants including a minimum consolidated tangible net worth level, a maximum leverage ratio, minimum fixed charge coverage and maximum level of capital expenditures. On November 19,2001, the Company amended the facility to allow proceeds from sale/leaseback transactions to be applied to both the revolving credit and the term loans. At November 19, 2001, $4,347 was available under this facility. The Company has entered into an agreement that expires in 2007, to fix its variable-rate debt to fixed-rate debt (5.44% at November 4, 2001) on notional amounts aggregating $52,503. The market risks associated with the agreements are mitigated because increased interest payments under the agreement resulting from a decrease in LIBOR are effectively offset by decreased payments under the debt obligation. The Company is exposed to credit losses for periodic settlements of amounts due under the agreements. Such amounts were not material at November 4, 2001. Through November 7, 2001, the Company opened a new store in Miami, Florida, Frisco, Texas, Honolulu, Hawaii and in Cleveland, Ohio. The Company estimates that its capital expenditures will be approximately $44,000 for 2001. For 2002 the Company plans to open one complex and estimates its capital expenditures will be approximately $28,500. The Company intends to finance these capital expenditures with cash flow from operations, the senior secured revolving credit and term loan facility, and other additional resources which management is currently pursuing. NEW PRONOUNCEMENTS. In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets ("Statements"), effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of the Statements is expected to result in an increase in net income of $243 ($.02 per diluted share) in 2002 as a result of nonamortization of existing goodwill. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of February 4, 2002. While the Company has not yet determined what the effect of these tests will be on the earnings and financial position, no assurance can be given that the Company will not be required to write-off its goodwill of $7,191 upon the adoption of the new standard. Such write off, if required, is to be recorded as a change in accounting principal. "Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995 Certain statements in this Report on Form 10-Q are not based on historical facts but are "forward-looking statements" that are based on numerous assumptions made as of the date of this report. Forward looking statements are generally identified by the words "believes", "expects", "intends", "anticipates", "scheduled", and certain similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of Dave & Buster's, Inc. to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions; competition; availability; locations and terms of sites for Complex development; quality of management; changes in, or the failure to comply with, government regulations; and other risks indicated in this filing and discussed under "Risks" in the Company's Form 10-K filed with the Securities and Exchange Commission. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1.2 Amendment No. 2 to Revolving Credit and Term Loan Agreement dated as of November 19, 2001 by and among the Company and its subsidiaries, Fleet National Bank (as agent) and the financial institutions named therein. 10.16 Agreement of Sale and Purchase dated October 1, 2001 between the Company, as seller, and General Electric Capital Business Asset Funding Corporation, as purchaser, for the Company's corporate headquarters in Dallas, Texas. 10.17 Lease Agreement dated October 18, 2001 by and between General Electric Capital Business Asset Funding Corporation, as landlord, and the Company, as tenant, for the Company's corporate headquarters in Dallas, Texas. (b) Reports on Form 8-K No reports on Form 8-K were filed during the 13 weeks ended November 4, 2001. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DAVE & BUSTER'S, INC. Dated: December 14, 2001 by /s/ David O. Corriveau ------------------ -------------------------------- David O. Corriveau Co-Chairman of the Board, Co-Chief Executive Officer and President Dated: December 14, 2001 by /s/ William C. Hammett, Jr. ------------------ -------------------------------- William C. Hammett, Jr. Vice President, Chief Financial Officer INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.1.2 Amendment No. 2 to Revolving Credit and Term Loan Agreement dated as of November 19, 2001 by and among the Company and its subsidiaries, Fleet National Bank (as agent) and the financial institutions named therein. 10.16 Agreement of Sale and Purchase dated October 1, 2001 between the Company, as seller, and General Electric Capital Business Asset Funding Corporation, as purchaser, for the Company's corporate headquarters in Dallas, Texas. 10.17 Lease Agreement dated October 18, 2001 by and between General Electric Capital Business Asset Funding Corporation, as landlord, and the Company, as tenant, for the Company's corporate headquarters in Dallas, Texas.