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 MAY 4, 2003.
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The number of shares of the Issuer's common stock, $.01 par value,
outstanding as of June 5, 2003 was 13,385,115 shares.
DAVE & BUSTER'S, INC.
FORM 10-Q
TABLE OF CONTENTS
<Table>
<Caption>
Page
----
PART I FINANCIAL INFORMATION
Item 1 Financial Statements ............................................................ 3
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................. 11
Item 3 Quantitative and Qualitative Disclosures About Market Risk....................... 15
Item 4 Controls and Procedures.......................................................... 15
PART II OTHER INFORMATION
Item 1 Legal Proceedings................................................................ 16
Item 6 Exhibits and Reports on Form 8-K................................................. 16
SIGNATURES ................................................................................. 17
CERTIFICATIONS ................................................................................. 18
</Table>
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
DAVE & BUSTER'S, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
13 WEEKS ENDED
MAY 4, MAY 5,
2003 2002
------------ ------------
Food and beverage revenues $ 47,664 $ 48,743
Amusements and other revenues 43,923 48,499
------------ ------------
Total revenues 91,587 97,242
Cost of revenues 16,671 18,116
Operating payroll and benefits 26,799 30,765
Other store operating expenses 28,192 27,943
General and administrative expenses 5,939 6,111
Depreciation and amortization expense 7,307 7,555
Preopening costs -- 152
------------ ------------
Total costs and expenses 84,908 90,642
Operating income 6,679 6,600
Interest expense, net 2,060 2,008
------------ ------------
Income before provision for income taxes 4,619 4,592
Provision for income taxes 1,570 1,676
------------ ------------
Income before cumulative effect of a
change in an accounting principle 3,049 2,916
Cumulative effect of a change in an
accounting principle -- (7,096)
------------ ------------
Net income (loss) $ 3,049 $ (4,180)
============ ============
Net income (loss) per share - basic
Before cumulative effect of a change
in an accounting principle $ 0.23 $ 0.22
Cumulative effect of a change in an
accounting principle -- (0.55)
------------ ------------
$ 0.23 $ (0.33)
============ ============
Net income (loss) per share - diluted
Before cumulative effect of a change
in an accounting principle $ 0.23 $ 0.22
Cumulative effect of a change in an
accounting principle -- (0.53)
------------ ------------
$ 0.23 $ (0.31)
============ ============
Basic weighted average shares outstanding 13,090 12,971
Diluted weighted average shares outstanding 13,283 13,307
</Table>
See accompanying notes to consolidated financial statements.
3
DAVE & BUSTER'S, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
ASSETS
May 4, February 2,
2003 2003
------------ ------------
Current assets:
Cash $ 2,934 $ 2,530
Inventories 26,313 26,634
Prepaid expense 4,021 2,049
Other current assets 1,823 2,136
------------ ------------
Total current assets 35,091 33,349
Property and equipment, net 249,324 249,451
Other assets 8,170 8,412
------------ ------------
Total assets $ 292,585 $ 291,212
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 8,300 $ 8,300
Accounts payable 14,167 14,952
Accrued liabilities 13,109 12,201
Income tax payable 2,008 325
Deferred income taxes 1,793 1,802
------------ ------------
Total current liabilities 39,377 37,580
Deferred income taxes 14,065 14,065
Other liabilities 10,922 10,471
Long-term debt, less current installments 55,369 59,494
Commitments and contingencies
Stockholders' equity:
Preferred stock, 10,000,000 authorized; none issued -- --
Common stock, $0.01 par value, 50,000,000 authorized
13,098,285 and 13,080,117 shares issued and outstanding
as of May 4, 2003 and February 2, 2003, respectively 132 132
Paid-in-capital 116,813 116,678
Restricted stock awards 674 608
Retained earnings 57,079 54,030
------------ ------------
174,698 171,448
Less treasury stock, at cost (175,000 shares) (1,846) (1,846)
------------ ------------
Total stockholders' equity 172,852 169,602
------------ ------------
Total liabilities and stockholders' equity $ 292,585 $ 291,212
============ ============
</Table>
See accompanying notes to consolidated financial statements.
4
DAVE & BUSTER'S, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
Common Stock
-------------------------- Paid-in Restricted Retained Treasury
Shares Amount Capital Stock Awards Earnings Stock Total
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, February 2, 2003 13,080 $ 132 $ 116,678 $ 608 $ 54,030 $ (1,846) $ 169,602
Proceeds from exercising
stock options 18 -- 126 -- -- -- 126
Tax benefit related to stock
option exercises -- -- 9 -- -- -- 9
Amortization of
restricted stock awards -- -- -- 66 -- -- 66
Net income -- -- -- -- 3,049 -- 3,049
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance May 4, 2003 13,098 $ 132 $ 116,813 $ 674 $ 57,079 $ (1,846) $ 172,852
============ ============ ============ ============ ============ ============ ============
</Table>
See accompanying notes to consolidated financial statements.
5
DAVE & BUSTER'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
13 Weeks Ended 13 Weeks Ended
May 4, 2003 May 5, 2002
---------------- ----------------
Cash flows from operating activities
Income before cumulative change in an accounting principle $ 3,049 $ 2,916
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,307 7,555
Provision for deferred income taxes (9) (15)
Restricted stock awards 66 --
Gain (loss) on sale of assets 160 (87)
Changes in assets and liabilities
Inventories 321 (94)
Prepaid expenses (1,972) (2,134)
Other current assets 313 (236)
Other assets 239 432
Accounts payable (785) (1,910)
Accrued liabilities 908 (494)
Income taxes payable 1,683 (2,074)
Other liabilities 451 570
---------------- ----------------
Net cash provided by operating activities 11,731 4,429
Cash flows from investing activities
Capital expenditures (7,424) (5,545)
Proceeds from sale of property and equipment 87 252
---------------- ----------------
Net cash used in investing activities (7,337) (5,293)
Cash flows from financing activities
Borrowing under long-term debt 1,750 6,852
Repayments under long-term debt (5,875) (9,079)
Proceeds from issuance of common stock 135 194
---------------- ----------------
Net cash used by financing activities (3,990) (2,033)
---------------- ----------------
Cash provided (used) 404 (2,897)
Beginning cash and cash equivalents 2,530 4,521
---------------- ----------------
Ending cash and cash equivalents $ 2,934 $ 1,624
================ ================
Supplemental disclosures of cash flow information:
Cash paid (received) for income taxes - net of refunds $ (113) $ 3,749
Cash paid for interest, net of amounts capitalized $ 1,659 $ 818
</Table>
See accompanying notes to consolidated financial statements.
6
DAVE & BUSTER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 4, 2003
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1: ORGANIZATION AND DESCRIPTION OF BUSINESS
Dave and Buster's, a Missouri corporation, is a leading operator of large
format, high-volume regional entertainment complexes. Our one industry segment
is the ownership and operation of restaurant/entertainment complexes under the
name "Dave and Buster's" which are located in the United States.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of Dave
& Buster's, Inc. and wholly-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation. These unaudited
financial statements have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC") and, in the opinion of
management, reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the financial position, results
of operations and cash flows for the periods presented in conformity with
generally accepted accounting principles. These unaudited financial statements
should be read in conjunction with the Company's audited financial statements
and notes thereto included in the Company's Annual Report on Form 10-K, as filed
with the SEC.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
INVENTORIES
Inventories, which consist of food, beverage and merchandise, are reported at
the lower of cost or market determined on a first-in, first-out method. Static
supplies inventory is capitalized at each store opening date and reviewed
periodically for valuation.
CUMULATIVE EFFECT OF A CHANGE IN AN ACCOUNTING PRINCIPLE
Pursuant to SFAS 142, the Company changed its accounting policy related to
goodwill effective January 1, 2002. SFAS 142 requires that goodwill no longer be
amortized to earnings, but instead should be reviewed for impairment at least
annually. Under SFAS 142, impairment is deemed to exist when the carrying value
of goodwill is greater that its implied fair value. This methodology differs
from the Company's previous policy, as
7
permitted under accounting standards existing before SFAS 142, of using
undiscounted cash flows of the businesses acquired over its estimated life.
As a result of applying the new standards, the initial assessment of fair value
of the Company resulted in a one-time charge for the entire write off of
goodwill of $7,100 for the first quarter ended May 5, 2002. This was recorded as
a cumulative effect of a change in accounting principle. The write off of
goodwill resulted in a negative $0.53 per diluted share for the first quarter
ended May 5, 2002. The remaining intangible asset (trademark) is insignificant
and continues to be amortized over its useful life.
STOCK BASED COMPENSATION
We have elected to follow Accounting Principles Board, or APB, Opinion No. 25,
Accounting for Stock Issued to Employees, in accounting for our employee stock
options. Under APB 25, if the exercise price of an employee's stock options
equals or exceeds the market price of the underlying stock on the date of grant,
no compensation expense is recognized. At May 4, 2003, we had two stock-based
compensation plans covering employees and directors.
Although SFAS 123 allows us to continue to follow the present APB 25 guidelines,
we are required to disclose pro forma net income (loss) and net income (loss)
per share as if we had adopted SFAS 123. The pro forma impact of applying SFAS
123 for the first quarters ended May 4, 2003 and May 5, 2002 will not
necessarily be representative of the pro forma impact in future years. Our pro
forma information is as follows (in thousands, except per share data):
<Table>
<Caption>
13 Weeks ended
May 4, May 5,
2003 2002
------------ ------------
Net income (loss), as reported $ 3,049 $ (4,180)
Pro forma stock compensation expense recorded under the
fair value method, net of income taxes (236) (440)
------------ ------------
Pro forma net income (loss) $ 2,813 $ (4,620)
============ ============
Basic earnings (loss) per common share, as reported $ 0.23 $ (0.33)
Diluted earnings (loss) per common share, as reported $ 0.23 $ (0.31)
Pro forma basic earnings (loss) per common share $ 0.22 $ (0.36)
Pro forma diluted earnings (loss) per common share $ 0.21 $ (0.35)
</Table>
NOTE 3: LONG-TERM DEBT
At May 4, 2003, long-term debt consisted of the following:
<Table>
Long-term debt $ 63,669
Less current installments (8,300)
------------
$ 55,369
============
</Table>
In 2000, the Company secured a $110,000 senior secured revolving credit and term
loan facility. The facility includes a five-year revolver and five and
seven-year term debt. The facility agreement calls for quarterly payments of
principal on the term debt through the maturity date and is secured by all
assets of the company.
Borrowing under the facility bears interest at a floating rate based on LIBOR
(1.3% at May 4, 2003) or, at the Company's option, the bank's prime rate (4.25%
at May 4, 2003) plus, in each case, a margin based upon financial performance.
The facility is secured by all assets of the Company. The facility has certain
financial
8
covenants including a minimum consolidated tangible net worth level, a maximum
leverage ratio and minimum fixed charge coverage. At May 4, 2003, $19,745 was
available under this facility. The fair value of the Company's long-term debt
approximates its carrying value.
The Company has entered into an agreement that expires in 2007, to change a
portion of our variable rate debt to fixed-rate debt. Notional amounts
aggregating $46,265 are fixed at 5.44%. The Company is exposed to credit losses
for periodic settlements of amounts due under the agreements if LIBOR decreases.
A charge of $456 to interest expense was incurred in the first quarter of 2003
under the agreement.
NOTE 4: CONTINGENCIES
EBS Litigation
In March 2000, a class of former shareholders of Edison Brothers Stores, Inc.
brought a third party action against us and certain of our directors in Federal
district court in Delaware. The third-party plaintiff class consists of former
shareholders of EBS who received stock in our company following its spin-off
from EBS in 1995. Within five months after the spin-off, EBS filed for
protection under the bankruptcy laws. The bankruptcy trustee of EBS (through an
entity named EBS Litigation LLC) is pursuing fraudulent conveyance claims on
behalf of unsecured creditors of EBS against a defendant class of former
shareholders arising out of the spin-off distribution of our stock. The former
shareholders' third party action against us alleges that, if it is determined
that the distribution of our stock to the former shareholders rendered EBS
insolvent and was therefore a fraudulent conveyance, then we and certain of our
directors (who were our directors at the time of the spin-off) aided and abetted
the fraud and are liable for contribution and/or indemnification. We dispute the
former shareholders' third party allegations against us and our directors and
are vigorously defending this litigation.
In March 2001, the trial court dismissed all of the third party claims against
us and rendered judgment in our favor based on a statute of limitations defense.
The third-party plaintiffs appealed this ruling. In September 2002, the Third
Circuit appellate court reversed the judgment of the district court and remanded
the case for further proceedings. In November 2002, our petition for limited
rehearing was denied by the Third Circuit.
The underlying case brought by EBS Litigation LLC against the defendant
shareholder class was tried before the district court in January 2002, but no
verdict has yet been rendered by the court. If the plaintiff in the underlying
case is successful in its case against the former shareholders and we are
ultimately unsuccessful in our defense of the shareholders third-party
litigation against us on the merits, the outcome could have a material adverse
affect on us and our operations.
DownCity Energy Company LLC v. Dave & Buster's, Inc.
In September 2002, we were served with a Complaint filed in the Providence,
Rhode Island Superior Court against us by DownCity Energy Company LLC, a
provider of energy services to our store in the Providence Place Mall. DownCity
is seeking damages for breach of contract, services rendered and open account in
the amount of $2.3 million, plus interest, costs and attorney's fees. The claim
relates to alleged unpaid invoices for HVAC charges for a period from
approximately January 2001 through September 2002.
We have disputed the HVAC billing from inception and believe the plaintiff's
claims to be without merit, based on our assertion that we successfully
exercised a right under our lease with Providence Place Group, L.P. in January
2001 to opt out of the alleged HVAC charges and put DownCity on notice thereof.
In addition, in the event that DownCity is successful on the merits of their
claims against us, we believe that we have meritorious third party claims
against the Landlord for damages, including potential indemnification or
contribution. However, if we are ultimately unsuccessful in our defense of
DownCity's claims and in the pursuit of our third party action against our
Landlord, the result could have a material adverse affect on us and our
operations.
9
Other Legal Proceedings
We are also subject to certain other legal proceedings and claims that arise in
the ordinary course of our business, none of which, in the opinion of
management, would have a material affect on the consolidated results of
operations or our financial condition if adversely determined.
NOTE 5: RECENT ACCOUNTING PRONOUNCEMENTS
In July 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
146, Accounting for Costs Associated with Exit or Disposal Activities. This
statement nullifies Emerging Issues Task Force or EITF Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). The standard
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather that at the date of commitment to an
exit or disposal plan. This statement is applicable to exit or disposal
activities initiated after December 31, 2002. The adoption of this standard did
not have a significant effect on our financial position or results of
operations.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLARS IN THOUSANDS)
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles. The
preparation of these financial statements requires management to make certain
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. On an ongoing basis, management evaluates its
estimates and judgments, including those that relate to depreciable lives,
goodwill and debt covenants. The estimates and judgments made by management are
based on historical data and on various other factors believed to be reasonable
under the circumstances.
The following table sets forth, for the periods indicated, the percentage of
total revenues represented by certain items reflected in our consolidated
statements of operations:
<Table>
<Caption>
Fiscal Year Ended
May 4, May 5,
2003 2002
------------ ------------
Revenues:
Food and beverage 52.0% 50.1%
Amusements and other 48.0 49.9
------------ ------------
Total revenues 100.0 100.0
Costs and expenses:
Cost of revenues 18.2 18.6
Operating payroll and benefits 29.3 31.6
Other store operating 30.8 28.7
General and administrative 6.5 6.3
Depreciation and amortization 8.0 7.8
Preopening costs 0.0 0.2
------------ ------------
Total costs and expenses 92.7 93.2
Operating income 7.3 6.8
Interest expense 2.3 2.1
Income before provision for income taxes 5.0 4.7
Provision for income taxes 1.7 1.7
Income before cumulative effect of a change in an
accounting principle 3.3 3.0
Cumulative effect of a change in an accounting principle -- 7.3
------------ ------------
Net income (loss) 3.3% (4.3)%
</Table>
RESULTS OF OPERATIONS - 13 WEEKS ENDED MAY 4, 2003 COMPARED TO 13 WEEKS ENDED
MAY 5, 2002
Total revenues decreased $5,655 or 5.8% to $91,587 for the first quarter ended
May 4, 2003 from $97,242 for the first quarter ended May 5, 2002. The new store
opened in fiscal year 2002 contributed $2,451 in revenues, while comparable
store revenues were down $6,399, or 7.5%, and other non-comparable store
revenues were down $1,990, or 17.8%. The decrease in comparable store revenues
is primarily attributed to a continued weak economic environment, the war in
Iraq and severe winter weather conditions in some of our markets. Total revenues
from licensing agreements were $158.
11
Cost of revenues decreased to $16,671 for the first quarter ended May 4, 2003
from $18,116 for the first quarter ended May 5, 2002, a decrease of $1,445, or
8.0%. As a percentage of revenues, cost of revenues were down to 18.2% for the
quarter ended May 4, 2003 versus 18.6% for comparable period in prior year. The
reduction in cost of revenues is attributed to decreases in amusement and food
costs, offset by an increase in beverage costs.
Operating payroll and benefits decreased to $26,799 for the first quarter ended
May 4, 2003 from $30,765 for the first quarter ended May 5, 2002, a decrease of
$3,966, or 12.9%. As a percentage of revenues, operating payroll and benefits
were 29.3% for the quarter ended May 4, 2003, down from 31.6% for the comparable
period in prior year. The Company adjusted its staffing levels in response to
the current economic environment and eliminated certain store hourly and
management positions late in fiscal year 2002. In addition, the Company
redesigned some of its benefits programs to reduce the overall cost of the plans
while remaining competitive in meeting the needs of its employees.
Other store operating expenses increased to $28,192 for the first quarter ended
May 4, 2003 from $27,943 for the first quarter ended May 5, 2002, an increase of
$249, or 0.9%. During the quarter, the increase in absolute dollars over prior
year is attributed to opening one new store during fiscal year 2002 offset by
reductions in marketing expense and cleaning and janitorial costs. As a
percentage of revenues, other store operating expense is up to 30.8% for the
quarter ended May 4, 2003 as compared to 28.7% for prior year. The increase is
primarily attributed to the decline in comparable store sales.
General and administrative expenses decreased to $5,939 for the first quarter
ended May 4, 2003 from $6,111 for the first quarter ended May 5, 2002, a
decrease of $172, or 2.8%. The increase in absolute dollars in the first quarter
of 2003 can be attributed to professional services relating to our cost
efficiency studies offset by lower salaries and benefits. The decline in
comparable store sales is the predominate factor in the increase in general and
administrative expense as a percentage of sales. If comparable store sales had
remained flat to prior year, general and administrative expense for the first
quarter of fiscal 2003, as a percentage of sales would have declined to 6.1% as
compared to 6.3% in prior year.
Depreciation and amortization decreased to $7,307 for the first quarter ended
May 4, 2003 from $7,555 for the first quarter ended May 5, 2002, a decrease of
$248, or 3.3%. As a percentage of revenues, depreciation and amortization
increased to 8.0% for the quarter ended May 4, 2003 as compared to 7.8% for the
same period in the prior year, again as a result of the decline in comparable
store sales.
There were no preopening costs in the first quarter of fiscal 2003 compared to
$152 for the first quarter ended May 5, 2002. There were no stores opened in the
first quarter of fiscal 2003.
Interest expense remained relatively flat at $2,060 for the first quarter ended
May 4, 2003 from $2,008 for the first quarter ended May 5, 2002, an increase of
$52, or 2.6%. The change is due to an increase in bank fees, offset by a
decrease in interest expense associated with lower outstanding debt.
The effective tax rate for the first quarter ended May 4, 2003 remained at 34%
as compared to the same period in prior year.
Liquidity and Capital Resources
Cash flows from operations was $11,731 for the first quarter ended May 4, 2003
compared to $4,429 for the first quarter ended May 5, 2002, an increase of
$7,302. This was due to changes in components of working capital.
Cash used in investing activities was $7,337 for the first quarter ended May 4,
2003 compared to $5,293 for the first quarter ended May 5, 2002. The increase of
$2,044 was principally the result of remodeling and maintenance capital
expenditures (which include the costs for new games in the amusement portion of
the business).
Financing activities resulted in a use of cash of $3,990 compared to $2,033 for
the quarter ended May 5, 2002. This increased use of cash was directly
attributed to a net repayment of long-term debt during the quarter.
12
We have a $110,000 senior secured revolving credit and term loan facility. The
facility includes a five-year revolver and five and seven-year term loans. The
facility agreement calls for quarterly payments of principal on the term loans
through maturity. Borrowings under the facility bear interest at a floating rate
based on LIBOR (1.30% at May 4, 2003) or, at our option, the bank's prime rate
(4.25% at May 4, 2003) plus, in each case, a margin based upon financial
performance. The facility is secured by all assets of Dave & Buster's. The
facility has certain financial covenants including a minimum consolidated
tangible net worth level, a maximum leverage ratio and minimum fixed charge
coverage. The Company believes it will be in compliance with all of its
financial and other debt covenants during the fiscal year ending February 1,
2004. At May 4, 2003, $19,475 was available under this facility.
We have entered into an agreement that expires in 2007, to change a portion of
our variable rate debt to fixed-rate debt. Notional amounts aggregating $46,265
at May 4, 2003 are fixed at 5.44%. We are exposed to credit losses for periodic
settlements of amounts due under the agreements if LIBOR decreases. A charge of
$456 was incurred in the first quarter of 2003.
The market risks associated with the agreements are mitigated because increased
interest payments under the agreement resulting from reductions in LIBOR are
effectively offset by a reduction in interest expense under the debt obligation.
The credit facility, as amended, restricts us from opening any new complexes in
fiscal 2003 or in any fiscal year thereafter without the unanimous consent of
the bank group. Therefore, since we do not plan to open any new complexes in the
current year, we will continue to reduce debt and strategically reinvest capital
in our stores through game replacement and other projects, which we expect to
yield benefits over the long term.
We believe that available cash and cash flow from operations, together with
borrowings under the credit facility, will be sufficient to cover our working
capital, capital expenditures and debt service needs in the foreseeable future.
Our ability to make scheduled payments of principal or interest on, or to
refinance, our indebtedness, or to fund planned capital expenditures, will
depend on our future performance, which is subject to general economic
conditions, competitive environment and other factors. We may not generate
sufficient cash flow from operations, realize anticipated revenue growth and
operating improvements or obtain future capital in a sufficient amount or on
acceptable terms, to enable us to service our indebtedness or to fund our other
liquidity needs.
Recent Accounting Pronouncements
In July 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
146, Accounting for Costs Associated with Exit or Disposal Activities. This
statement nullifies Emerging Issues Task Force or EITF Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). The standard
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather that at the date of commitment to an
exit or disposal plan. This statement is applicable to exit or disposal
activities initiated after December 31, 2002. The adoption of this standard did
not have a significant effect on our financial position or results of
operations.
Critical Accounting Policies
Management believes the following critical accounting policies, among others,
affect its more significant judgments and estimates used in the preparation of
its consolidated financial statements.
Depreciable lives - expenditures for new facilities and those that
substantially increase the useful lives of the property, including interest
during construction, are capitalized along with equipment purchases at cost.
These costs are depreciated over various methods based on an estimate of the
depreciable life, resulting in a charge to the operating results of the Company.
The actual results may differ from these estimates under different assumptions
or conditions. The depreciable lives are as follows:
13
<Table>
Property and Equipment
Games 5 years
Buildings 40 years
Furniture, fixtures and equipment 5 to 10 years
Leasehold and building improvements Shorter of 20 years or lease life
Intangible Assets
Trademarks Over statutory lives
Lease Rights Over remaining lease term
</Table>
Goodwill - Pursuant to SFAS 142, the Company changed its accounting
policy related to goodwill effective January 1, 2002. SFAS 142 requires that
goodwill no longer be amortized to earnings, but instead should be reviewed for
impairment at least annually. Under SFAS 142, impairment is deemed to exist when
the carrying value of goodwill is greater than its implied fair value. This
methodology differs from the Company's previous policy, as permitted under
accounting standards existing before SFAS 142, of using undiscounted cash flows
of the businesses acquired over its estimated life. As a result of applying the
new standards, the initial assessment of fair value of the Company resulted in a
one-time charge for the entire write off of goodwill of $7,100 for the first
quarter ended May 5, 2002. This was recorded as a cumulative effect of a change
in accounting principle. The write off of goodwill resulted in a negative $0.53
per diluted share for the first quarter ended May 5, 2002. The remaining
intangible asset (trademark) is insignificant and continues to be amortized over
its useful life.
Debt Covenants - The Company's credit facility requires compliance with
certain financial covenants including a minimum consolidated tangible net worth
level, maximum leverage ratio and minimum fixed charge coverage. The Company
believes the results of operations for the fiscal year ending February 1, 2004
and thereafter would enable the Company to remain in compliance with the
existing covenants absent any material negative event affecting the U.S. economy
as a whole. However, the Company's expectations of future operating results and
continued compliance with the debt covenants cannot be assured and the lenders'
actions are not controllable by the Company. If the projections of future
operating results are not achieved and the debt is placed in default, the
Company would experience a material adverse impact on its reported financial
position and results of operations.
Quarterly Fluctuations, Seasonality and Inflation
As a result of the substantial revenues associated with each new Complex, the
timing of new Complex openings will result in significant fluctuations in
quarterly results. We expect seasonality to be a factor in the operation or
results of our business in the future with anticipated lower third quarter
revenues due to the fall season. The effects of supplier price increases are not
expected to be material. We believe that low inflation rates in our market areas
have contributed to stable food and labor costs in recent years. However, there
is no assurance that low inflation rates will continue or that the Federal
minimum wage rate will not increase.
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995
Certain information contained in this 10-Q includes forward-looking statements.
Forward-looking statements include statements regarding our expectations,
beliefs, intentions, plans, projections, objectives, goals, strategies, future
events or performance and underlying assumptions and other statements which are
other than statements of historical facts. These statements may be identified,
without limitations, by the use of forward looking terminology such as "may,"
"will," "anticipates," "expects," "projects," "believes," "intends," "should,"
or comparable terms or the negative thereof. All forward-looking statements
included in this press release are based on information available to us on the
date hereof. Such statements speak only as of the date hereof. These statements
involve risks and uncertainties that could cause actual results to differ
materially from those described in the statements. These risks and uncertainties
include, but are not limited to, the following: our ability to open new
high-volume restaurant/entertainment complexes; our ability to raise and access
sufficient capital in the future; changes in consumer preferences, general
economic conditions or consumer discretionary spending; the outbreak or
continuation of war or other hostilities involving the United States; potential
fluctuation in our quarterly operating result due to seasonality and other
factors; the continued service of key management personnel; our ability to
attract, motivate and retain qualified personnel; the impact of federal, state
or local government regulations relating to our personnel or the sale of food or
alcoholic beverages; the impact of
14
litigation; the effect of competition in our industry; additional costs
associated with compliance with the Sarbanes-Oxley Act and related regulations
and requirements; and other risk factors described from time to time in our
reports filed with the SEC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk exposure relates to changes in the general level of
interest rates. The Company's earnings are affected by changes in interest rates
due to the impact those changes have on its interest expense from variable-rate
debt. The Company's agreement to fix a portion of its variable-rate debt
mitigates this exposure.
ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer, James W. Corley, and our Chief Financial Officer,
W.C. Hammett, Jr. have reviewed and evaluated the disclosure controls and
procedures that we have in place with respect to the accumulation and
communication of information to management and the recording, processing,
summarizing and recording thereof for the purpose of preparing and filing this
Quarterly Report on Form 10-Q. Such review was conducted during the week ended
May 23, 2003. Based upon their review, these executive officers have concluded
that we have an effective system of internal controls and an effective means for
timely communication of information required to be disclosed in this Report.
Since May 23, 2003 there have been no significant changes in our internal
controls or in other factors that could significantly affect such controls.
15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in any of the legal proceedings
reported in our Annual Report on Form 10-K for the year ended February 2, 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of CEO pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of CFO pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
We filed the following reports on Form 8-K during the quarter
ended May 4, 2003:
1. Form 8-K filed on March 10, 2003 to report the
formation of a Nominating and Corporate Governance
committee of the Board and appointment of a Lead
Director.
2. Form 8-K filed on March 24, 2003 to report the
setting of a date and record date for the annual
meeting of shareholders.
3. Form 8-K filed on April 10, 2003 to report the
results of the fourth quarter and fiscal year ended
February 2, 2003.
16
SIGNATURES
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.
Date: June 10, 2003 by /s/ JAMES W. CORLEY
-----------------------------
James W. Corley
Chief Executive Officer
Date: June 10, 2003 by /s/ W. C. HAMMETT, JR.
-----------------------------
W. C. Hammett, Jr.
Senior Vice President,
Chief Financial Officer
17
CERTIFICATIONS
I, James W. Corley, Chief Executive Officer of Dave & Buster's Inc., certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Dave & Buster's Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ JAMES W. CORLEY
----------------------------
James W. Corley
Chief Executive Officer
Date: June 10, 2003
18
I, W. C. Hammett, Jr., Chief Financial Officer of Dave & Buster's Inc., certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Dave & Buster's Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ W. C. HAMMETT, JR.
--------------------------
W. C. Hammett, Jr.
Chief Financial Officer
Date: June 10, 2003
19
INDEX OF EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
99.1 Certification of CEO pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Certification of CFO pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
</Table>
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