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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-Q
X QUARTERLY REPORT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---- EXCHANGE ACT FOR THE QUARTER ENDED NOVEMBER 1, 1998.
- ---- 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
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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 Principal 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 16, 1998 was 13,064,750 shares.
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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 1, November 2, November 1, November 2,
1998 1997 1998 1997
---- ---- ---- ----
Food and beverage revenues $22,183 $15,458 $60,814 $44,891
Amusement and other revenues 23,226 15,382 64,203 44,252
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Total revenues 45,409 30,840 125,017 89,143
Cost of revenues 9,071 6,109 24,666 17,402
Operating payroll and benefits 13,711 8,997 36,360 25,385
Other restaurant operating expenses 11,315 7,893 31,864 22,630
General and administrative expenses 2,690 2,115 7,597 5,948
Depreciation and amortization expense 3,134 2,238 8,377 6,103
Preopening cost amortization 1,100 833 3,067 2,328
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Total costs and expenses 41,021 28,185 111,931 79,796
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Operating income 4,388 2,655 13,086 9,347
Interest (income) expense, net (7) 138 (419) 618
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Income before provision for income taxes 4,395 2,517 13,505 8,729
Provision for income taxes 1,661 982 5,104 3,404
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Net income $ 2,734 $ 1,535 $ 8,401 $ 5,325
Basic net income per share $0.21 $0.14 $0.64 $0.48
Basic weighted average shares outstanding 13,062 11,300 13,048 11,037
Diluted net income per share $ 0.21 $ 0.13 $ 0.64 $ 0.48
Diluted weighted average shares outstanding 13,183 11,541 13,195 11,199
See accompanying notes to consolidated financial statements.
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DAVE & BUSTER'S, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
November 1,
1998 February 1,
(unaudited) 1998
--------- ----
Current assets:
Cash and cash equivalents $ 106 $ 14,309
Short-term investments 0 8,507
Inventories 8,888 6,222
Prepaid expenses 1,773 1,234
Preopening costs 6,817 3,415
Other current assets 2,510 2,018
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Total current assets 20,094 35,705
Property and equipment, net 165,423 114,060
Goodwill, net of accumulated amortization of $1,407 and $1,121 8,301 8,587
Other assets 666 637
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Total assets $194,484 $158,989
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,860 $ 4,075
Accrued liabilities 5,010 3,255
Deferred income taxes 2,379 1,967
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Total current liabilities 19,249 9,297
Deferred income taxes 3,735 3,530
Other liabilities 1,271 806
Long-term debt 30,000 12,000
Commitments and contingencies
Stockholders' equity:
Preferred stock, 10,000,000 authorized; none issued 0 0
Common stock, $0.01 par value, 50,000,000 authorized;
13,064,750 and 13,019,050 shares issued and outstanding
as of November 1, 1998 and February 1, 1998, respectively 130 130
Paid in capital 114,526 116,054
Retained earnings 25,573 17,172
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Total stockholders' equity 140,229 133,356
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$194,484 $158,989
See accompanying notes to consolidated financial statements.
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DAVE & BUSTER'S, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)
Common Stock
------------ Paid in Retained
Shares Amount Capital Earnings Total
------ ------ ------- -------- -----
Balance, February 1, 1998 13,019 $130 $116,054 $17,172 $133,356
Stock options exercised 46 0 515 0 515
Tax benefit related to
options exercised 0 0 201 0 201
Spin-off and related transactions 0 0 (2,244) 0 (2,244)
Net income 0 0 0 8,401 8,401
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Balance, November 1, 1998 13,065 $130 $114,526 $25,573 $140,229
See accompanying notes to consolidated financial statements.
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DAVE & BUSTER'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
39 Weeks Ended
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November 1, November 2,
1998 1997
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Cash flows from operating activities
Net income $ 8,401 $ 5,325
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 11,444 8,431
Provision for deferred income taxes 617 1,370
Changes in assets and liabilities
Inventories (2,666) (1,601)
Prepaid expenses (539) (670)
Preopening costs (6,468) (3,183)
Other assets (530) (1,385)
Accounts payable 7,785 1,310
Accrued liabilities 1,755 1,378
Income taxes payable 0 0
Other liabilities 465 (802)
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Net cash provided by operating activities 20,264 10,173
Cash flows from investing activities
Capital expenditures (59,446) (27,796)
Sale of short-term investments 8,507 0
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Net cash used by investing activities (50,939) (27,796)
Cash flows from financing activities
Spin-off and related transactions (2,244) 0
Proceeds from issuance of common stock 0 48,885
Proceeds from options exercised 716 215
Purchase of fractional shares 0 (10)
Borrowings under long-term debt 19,000 36,411
Repayments of long-term debt (1,000) (32,661)
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Net cash provided by financing activities 16,472 52,840
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Cash provided (used) (14,203) 35,217
Beginning cash and cash equivalents 14,309 358
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Ending cash and cash equivalents $ 106 $ 35,575
See accompanying notes to consolidated financial statements.
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DAVE & BUSTER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 1, 1998
(UNAUDITED)
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 present a
fair statement of the results for the interim periods.
NOTE 2: BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Dave &
Buster's, Inc. (the "Company") and all wholly-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated in consolidation.
The consolidated balance sheet data presented herein for February 1, 1998 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 primary business of the Company is the
ownership and operation of restaurant/entertainment Complexes (a "Complex")
under the name "Dave & Buster's".
NOTE 3: EARNINGS PER COMMON SHARE
Effective December 15, 1997, the Company adopted the provisions of SFAS No.
128, "Accounting for Earnings Per Share." SFAS No. 128 requires companies to
present basic earnings per share (EPS) and diluted EPS, instead of the primary
and fully diluted EPS presentations that were formerly required by Accounting
Principles Board Opinion No. 15, "Earnings Per Share." Basic EPS is computed by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding during the period. For the Company, diluted
EPS includes the dilutive effect of potential stock option exercises, calculated
using the treasury stock method. EPS amounts for all periods presented reflect
the provisions of SFAS No. 128, including amounts presented for prior periods
which have been restated to conform with SFAS No. 128.
NOTE 4: CONTINGENCIES
In April 1998, a litigation limited liability corporation owned by the
creditors of Edison Brothers filed a lawsuit against the Company and related
parties, seeking recovery in connection with the June 1995 spin-off and certain
related transactions. In August 1998, the Company settled the litigation with
the limited liability litigation corporation. The Company paid $2,244,000 in
full and final settlement of all claims against the Company.
NOTE 5: LONG TERM DEBT
See Management Discussion and Analysis
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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 condition of the Company.
Management's Discussion and Analysis
Results of Operations - 13 Weeks Ended November 1, 1998 Compared to 13 Weeks
Ended November 2, 1997
Total revenues for the 13 weeks ended November 1, 1998 increased by 47%
over the 13 weeks ended November 2, 1997. The increase in revenues was primarily
attributable to revenues from new complexes and a 3% increase in comparable
complex revenues. New complexes opened in the comparable period are Denver,
Colorado in the fourth quarter of fiscal 1997 and Utica, Michigan, Irvine,
California and Rockland County, New York which opened in the second and third
quarters of fiscal 1998, respectively. Total revenues also increased due to the
opening of the second complex under the Bass licensing agreement. Total revenues
for the second quarter of fiscal 1998 from the Bass agreement were $76,000.
Cost of revenues, as a percentage of revenues, increased to 20.0% from
19.8% in the prior comparable period. The increase in cost of revenues was
primarily a result of higher costs associated with food and amusement revenues
offset by lower costs associated with beverage revenues. The increase in food
costs were a function of higher produce, dairy and grocery costs. Amusement
costs were higher due to increased redemption and merchandise costs while the
decrease in beverage costs was primarily associated with lower wine, liquor and
beer costs.
Operating payroll and benefits increased to 30.2% from 29.2% in the prior
comparable period due to higher variable labor and benefits costs. The increase
in variable labor is partially due to a higher head count associated with
retaining people for the fourth quarter and preparing for three new store
openings. Benefit costs increased due to higher medical and dental insurance
costs.
Other operating expenses decreased to 24.9% compared to 25.6% in the prior
comparable period. Other operating expenses as a percentage of revenue were
lower due to utilities, repairs and maintenance and fixed expenses at the
complexes.
General and administrative costs increased $575,000 over the prior
comparable period as a result of increased administrative payroll and related
costs for new personnel and additional costs associated with the Company's
future growth plans. As a percentage of revenues, general and administrative
expenses decreased to 5.9% compared to 6.9% for the comparable prior period due
to increased leverage from revenues.
Depreciation and amortization expense increased $896,000 over the prior
comparable period as a result of the opening of the Cincinatti, Ohio, Denver,
Colorado, Utica, Michigan, Irvine, California and Rockland County, New York
locations. As a percentage of revenues, depreciation and amortization decreased
to 6.9% from 7.2% for the comparable prior period.
Preopening cost amortization increased $267,000 over the prior comparable
period as a result of five additional complex months of amortization. As a
percentage of revenue, preopening costs decreased to 2.4% from 2.7% in the
comparable period.
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The effective tax rate for the third quarter of 1998 was 37.8% as compared
to 39.0% for the comparable period last year and was the result of a lower
effective state tax rate.
Results of Operations - 39 Weeks Ended November 1, 1998 Compared to 39 Weeks
Ended November 2, 1997
Total revenues for the 39 weeks ended November 1, 1998 increased by 40%
over the 39 weeks ended November 2, 1997. The increase in revenues was primarily
attributable to revenues from new complexes and a 7% increase in comparable
complex revenues. New complexes opened in the comparable period are Cincinnati,
Ohio and Denver, Colorado which opened in the third and fourth quarters of
fiscal 1997, respectively, and Utica, Michigan, Irvine, California and Rockland
County, New York which opened in the second and third quarters of fiscal 1998,
respectively. Total revenues also increased due to the opening of the second
complex under the Bass licensing agreement. Total revenues for the first 39
weeks of fiscal 1998 from the Bass agreement were $279,000.
Cost of revenues, as a percentage of revenues, increased to 19.7% from
19.5% in the prior comparable period. The increase in cost of revenues was
primarily a result of higher costs associated with food and amusement revenues
offset by lower costs associated with beverage revenues. The increase in food
costs were a function of higher produce, dairy and grocery costs. Amusement
costs were higher due to increased redemption and merchandise costs while the
decrease in beverage costs was primarily associated with lower wine, liquor and
beer costs.
Operating payroll and benefits increased to 29.1% from 28.5% in the prior
comparable period due to higher variable labor and benefits costs. The increase
in variable labor is partially due to the second increment of the Federal
minimum wage increase implemented in September 1997 as well as a higher head
count associated with preparing for three new store openings. Benefit costs
increased due to higher medical and dental insurance costs.
Other operating expenses increased to 25.5% compared to 25.4% in the prior
comparable period. Other operating expenses were higher due to increased
occupancy costs associated with the addition of the Cincinnati, Ohio, Denver,
Colorado, Utica, Michigan, Irvine, California and Rockland County, New York
locations. The increase was also a function of higher restaurant supplies and
advertising costs at the complexes.
General and administrative costs increased $1,649,000 over the prior
comparable period as a result of increased administrative payroll and related
costs for new personnel and additional costs associated with the Company's
future growth plans. As a percentage of revenues, general and administrative
expenses decreased to 6.1% compared to 6.7% for the comparable prior period due
to increased leverage from revenues.
Depreciation and amortization expense increased $2,274,000 over the prior
comparable period as a result of the opening of the Cincinnati, Ohio, Denver,
Colorado, Utica, Michigan, Irvine, California and Rockland County, New York
locations. As a percentage of revenues, depreciation and amortization decreased
to 6.7% from 6.8% in prior comparable period.
Preopening cost amortization increased $739,000 over the prior comparable
period as a result of eight additional complex months of amortization. As a
percentage of revenue, preopening costs decreased to 2.4% compared to 2.6% in
the prior comparable period. The percentage decrease is attributable to the
leverage from increased revenues.
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The Company defers its restaurant preopening costs and amortizes them over
the twelve-month period following the opening of each respective complex. In
April 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 requires entities to expense as incurred all start-up and
preopening costs that are not otherwise capitalizable as long-lived assets. SOP
98-5 is effective for fiscal years beginning after December 15, 1998, although
earlier adoption is encouraged. Restatement of previously issued financial
statements is not permitted by SOP 98-5, and entities are not required to report
the pro forma effects of the retroactive application of the new accounting
standard. The Company's adoption of the expense-as-incurred accounting principle
required by SOP 98-5 will involve the recognition of the cumulative effect of
the change in accounting principle required by SOP 98-5 as a one-time charge
against earnings, net of any related income tax effect, retroactive to the
beginning of the fiscal year of adoption. Total deferred preopening costs were
$6.8 million at November 1, 1998 and $3.4 million at February 1, 1998.
As has been the case with the Company's current deferred method for
accounting for preopening costs, preopening expense comparisons under the new
expense-as-incurred standard will continue to vary from period to period,
depending on the number and timing of complex openings and the specific
preopening expenses incurred for each complex during each period being compared.
Based on the Company's current expansion plans, the Company believes total
preopening expenses for fiscal 1998 and 1999 under either accounting principle
(deferred or expense-as-incurred) will likely exceed the respective amount for
each immediate prior year. However, the new expense-as-incurred accounting
principle required by SOP 98-5 will, by definition, cause an accelerated
recognition of preopening expenses. The impact of this accelerated recognition
on the Company's results of operaions for any given period could be significant,
depending on the number of complexes opened during that period.
The effective tax rate for the first 39 weeks of fiscal 1998 was 37.8% as
compared to 39.0% for the comparable period last year and was the result of a
lower effective state tax rate.
Liquidity and Capital Resources
Cash flows from operations increased from $10.2 million in the first 39
weeks of fiscal 1997 to $20.3 million in the first 39 weeks of fiscal 1998. The
increase was a result of the Cincinnati, Ohio and Denver, Colorado locations
which, opened in the third and fourth quarters of fiscal 1997, respectively, and
the Utica, Michigan, Irvine, California and Rockland County, New York locations
which opened in the second and third quarters of fiscal 1998.
The Company has a senior revolving credit facility which permits
borrowing up to a maximum of $50,000,000 at a floating rate based on the London
Interbank Offered Rate ("LIBOR") or, at the Company's option, the bank's prime
rate plus in each case a margin based upon financial performance (8.0% at
November 1, 1998). The facility, which matures in May 2000, 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 new stores. At November 1, 1998, $20,000,000 was
available under the senior revolving credit facility.
On November 5, 1998 the Company expanded its current senior revolving
credit facility. The expanded facility permits borrowing up to $100,000,000
million at a floating rate based on the London Interbank Offered Rate ("LIBOR")
or, at the Company's option, the bank's prime rate plus in each case a margin
based upon financial performance. The facility, which matures in May 2001, 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 new stores.
On December 7,1998 the Company entered into an interest rate swap
agreement whereby the Company traded its floating rate debt for fixed rate
debt. The notional amount was for $35,000,000 and was for a period of one year.
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The Company's plan is to open four large format complexes in fiscal 1998.
The first three complexes opened in Utica (Suburban Detroit), Michigan and
Irvine, California and Rockland County, New York during the second and third
quarters on May 7, 1998, July 16, 1998 and September 17, 1998, respectively. The
Company opened an additional large format complex in Orange, California on
November 5, 1998. The Company also plans on opening a small format complex in
the fourth quarter of 1998 in Columbus, Ohio. In fiscal 1999, the Company's goal
is to open four large format and two small format complexes. The Company
estimates that its capital expenditures will be approximately $71.4 million and
$74.9 million for 1998 and 1999, respectively. The Company intends to finance
this development with cash flow from operations and the senior revolving credit
facility.
Impact of the Year 2000 Issues
The Company's comprehensive Year 2000 initiative is designed to ensure
that there is no adverse effect on the Company's core business operations and
that transactions with customers, suppliers and financial institutions are fully
supported. The Company is well under way with these efforts, which are scheduled
to be completed in early 1999. The Company currently estimates that it will
spend approximately $2.4 million on new software which will replace existing
software that may not be year 2000 compliant. Such costs are being capitalized.
While the Company believes its planning efforts are adequate to address its Year
2000 concerns, there can be no guarantee that the systems of other companies on
which the Company's systems and operations rely will be converted on a timely
basis and will not have a material effect on the Company.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Second Amendment to Credit Agreement, dated November 5,
1998, among the Company, Chase Bank of Texas National
Association (as agent) and the banks named therein.
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the 39 weeks ended
November 1, 1998.
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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 16, 1998 by /s/ David O. Corriveau
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David O. Corriveau
Co-Chairman of the Board, Co-
Chief Executive Officer and
President
Dated: December 16, 1998 by /s/ Charles Michel
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Charles Michel
Vice President,
Chief Financial Officer
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EXHIBIT INDEX
10.1 Second Amendment to Credit Agreement.
27 Financial Data Schedule