DAVE & BUSTERS INC - 10-Q Quarterly Report

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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 AUGUST 3, 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

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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 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 September 8, 2003 was 13,412,118 shares.

DAVE & BUSTER'S, INC.

FORM 10-Q

TABLE OF CONTENTS

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)

See accompanying notes to consolidated financial statements.

3

DAVE & BUSTER'S, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)

See accompanying notes to consolidated financial statements.

4

DAVE & BUSTER'S, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)

See accompanying notes to consolidated financial statements.

5

DAVE & BUSTER'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

See accompanying notes to consolidated financial statements.

6

DAVE & BUSTER'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AUGUST 3, 2003

(UNAUDITED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 1: ORGANIZATION AND DESCRIPTION OF BUSINESS

Dave and Buster's, Inc., 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.

7

CUMULATIVE EFFECT OF A CHANGE IN AN ACCOUNTING PRINCIPLE

Pursuant to SFAS 142, we changed our 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 in the 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 August 3, 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 pro forma net income
(loss) per share as if we had adopted SFAS 123. The pro forma impact of applying
SFAS 123 for the quarters ended August 3, 2003 and August 4, 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):

8

NOTE 3: LONG-TERM DEBT

At August 3, 2003, long-term debt consisted of the following:

Long-term debt $ 61,344
Less current installments (9,075)
---------
$ 52,269
=========

In 2000, we 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
(1.1% at August 3, 2003) or, at our option, the bank's prime rate (4.0% at
August 3, 2003) plus, in each case, a margin based upon financial performance.
This rate at August 3, 2003 was 5.5%. The facility 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 and minimum
fixed charge coverage. At August 3, 2003, $22,695 was available under this
facility. The fair value of our long-term debt approximates its carrying value.

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 $44,388
at August 3, 2003 are fixed at 5.44%. We are exposed to credit losses for
periodic settlements of amounts due under the agreements if LIBOR decreases. The
market interest rate was below the fixed 5.44% rate at August 3, 2003. A charge
of $478 to interest expense was incurred in the second quarter of 2003 under the
agreement compared to $466 for the same quarter in 2002. A charge of $934 was
incurred for the 26 weeks ended August 3, 2003 compared to $895 for the 26 weeks
ended August 4, 2002.

On August 7, 2003 we closed a $30 million private placement of 5.0% convertible
subordinated notes due 2008 and warrants to purchase 522,446 shares of our
common stock at $13.46 per share. The investors may convert the notes into our
common stock at any time prior to the scheduled maturity date of August 7, 2008.
The conversion price is $12.92 per share, which represents a 20% premium over
the closing price of our common stock on August 5, 2003. If fully converted, the
notes will convert into 2,321,981 shares of our stock. After August 7, 2006, we
have the right to redeem the notes and we may also force the exercise of the
warrants if our common stock trades above a specified price during a specific
period of time.

We have used the net proceeds of the offering to reduce the outstanding balances
of our term and revolving loans under our senior bank credit facility. We have
agreed with the bank that up to $4 million of the repaid balance may be borrowed
to fund the proposed purchase of the Dave & Buster's complex in Toronto, Canada
from Funtime Hospitality Corp., our Canadian licensee. The purchase includes the
business and assets plus the assumption of certain liabilities. The agreement is
subject to various closing conditions, including completion of due diligence,
obtaining of all necessary corporate approvals and consents and approval of the
seller's shareholders. The transaction is expected to close in October and will
terminate Funtime's rights to license and develop Dave & Buster's locations in
Canada.

9

NOTE 4: CONTINGENCIES

EBS Litigation (update)

In March 2000, the 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 was rendered by the court. In early 2003, the trial court judge ruled
that the third-party action should be stayed pending the court reaching a
verdict in the underlying action. Beginning in March 2003, the court conducted a
series of mandatory mediation sessions among the parties to the third-party
action. In a mediation session in August 2003, the plaintiffs accepted our
settlement offer of $130,000. Although we continue to believe that we and our
directors have no liability for the third-party plaintiff's allegations, we
believe this settlement is in our best interests to remove us from this
protracted litigation. Separately, we have reached agreement with the carrier of
our directors and officers insurance policy whereby substantially all of our
settlement payment will be covered by insurance.

DownCity Energy Company LLC v. Dave & Buster's Inc (update)

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 claims
relate to unpaid invoices for HVAC charges for a period from approximately
January 2001 through September 2002. In January 2003, we filed a counterclaim
against DownCity and a Third-Party Complaint against Providence Place Group, L.
P., our Landlord, alleging, among other things, fraudulent inducement,
conspiracy, breach of contract and breach of duty of good faith. We have
disputed the excessive HVAC billings from inception and believe the plaintiff's
claims to be without merit, based primarily on our assertion that we 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. We also
believe that we have meritorious counterclaims against DownCity and third party
claims against the Landlord to counter any further action by DownCity for
damages. Nevertheless, in order to forestall a threat by DownCity to interrupt
utility services to our store, in December 2002, we entered into an Interim
Agreement with DownCity, pursuant to which we agreed to pay a lump sum of
$450,000 plus the "actual costs" of monthly HVAC services billed by DownCity
from January 2003 forward. Such agreement provided that the payments would
offset any potential settlement or judgment against us in favor of DownCity.

DownCity answered our counterclaim in March 2003 and Providence Place answered
our third party complaint in April 2003. In June 2003, we commenced preliminary
settlement negotiations with Providence Place with a view towards a three-way
settlement agreement that would modify our lease terms with Providence Place and
require Providence Place to resolve DownCity's complaints against us. As a
result of such negotiations, a tentative settlement proposal was reached

10

and a draft of a proposed agreement has been circulated for approval among the
parties and counsel. The proposed settlement will not require us to make any
additional lump sum payment, but would increase our monthly payments for HVAC on
a going forward basis.

Although the settlement is not yet final, based on our current analysis of (a)
the amounts previously paid by us, (b) the terms of the proposed settlement and
(c) the potential maximum adverse impact of the claims against us if such
settlement does not become final, we do not believe that the outcome of this
lawsuit could reasonably be anticipated to have a material adverse affect on us
and our operations.

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 than 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.

11

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:

12

Results of Operations - 13 Weeks Ended August 3, 2003 Compared to 13 Weeks Ended
August 4, 2002

Total revenues for the 13 week period ended August 3, 2003 were $88,309, a
decrease of $3,841, or 4.2% from $92,150 for the 13 weeks ended August 4, 2002.
The new store opened in fiscal year 2002 contributed $2,074 in revenues, while
comparable store revenues were down $5,085, or 6.3%, and other non-comparable
store revenues were down $671. The decrease in comparable store revenues is
primarily attributed to a continued weak economic environment, which impacts the
more discretionary amusement portion of our revenues. Total revenues from
licensing agreements were $79.

Cost of revenues decreased to $16,544 for the 13 weeks ended August 3, 2003 from
$16,715 for the 13 weeks ended August 4, 2002, a decrease of $171, or 1.0%. As a
percentage of revenues, cost of revenues were up .6% to 18.7% for the 13 week
period ended August 3, 2003 versus 18.1% for comparable period in the prior
year. The increase in cost of revenues is attributed to higher beverage and
amusement costs, up 1.1% and .4%, respectively offset by a .1% decline in food
costs.

Operating payroll and benefits decreased to $25,951 for the 13 weeks ended
August 3, 2003 from $28,583 for the 13 weeks ended August 4, 2002, a decrease of
$2,632, or 9.2%. As a percentage of revenues, operating payroll and benefits
were 29.4% for the 13 weeks ended August 3, 2003, down from 31.0% for the
comparable period in the prior year. We adjusted our staffing levels in response
to the current economic environment.

Other store operating expenses decreased to $28,058 for the 13 weeks ended
August 3, 2003 from $28,199 for the 13 weeks ended August 4, 2002, a decrease of
$141, or .5%. As a percentage of revenues, other stores operating expense is up
1.2% to 31.8% for the 13 weeks ended August 3, 2003 as compared to 30.6% for the
prior year. During the quarter, the decrease in absolute dollars over the prior
year is attributed to opening one new store during fiscal year 2002 offset by
reductions in marketing expense and renegotiation of cleaning and janitorial
contracts at stores. The increase as a percentage of revenue is attributed to
the decline in comparable store sales.

General and administrative expenses decreased to $6,396 for the 13 weeks ended
August 3, 2003 from $7,601 for the 13 weeks ended August 4, 2002, a decrease of
$1,205, or 15.9%. The decrease in absolute dollars in the second quarter of 2003
can be attributed to lower wages/benefits ($1,100), no transaction costs related
to the proposed merger agreement from the prior year ($1,200), offset by legal
and professional services relating to our cost efficiency studies ($460) and our
proxy contest costs ($640). As a percentage of revenues, general and
administrative expenses were down 1.1% to 7.2% for the 13 weeks ended August 3,
2003 from 8.3% for the same period in the prior year.

Depreciation and amortization decreased to $7,394 for the 13 weeks ended August
3, 2003 from $7,561 for the 13 weeks ended August 4, 2002, a decrease of $167,
or 2.2%. As a percentage of revenues, depreciation and amortization increased
..2% to 8.4% for the 13 week period ended August 3, 2003 as compared to 8.2% for
the same period in the prior year, again as a result of the decline in
comparable store sales.

There were no preopening expenses incurred during the second quarter. There were
$248 incurred in the same period of the prior year.

Interest expense was $1,748 for the 13 weeks ended August 3, 2003 compared to
$1,792 for the 13 weeks ended August 4, 2002, a decrease of $44, or 2.5%. The
reduction in interest expense related to lower outstanding debt was offset by an
increase in bank fees, along with reductions in both capitalized interest of $83
and interest income of $150 from the prior year.

The effective tax rate for the 13 week period ended August 3, 2003 remained at
34% as compared to the same period in the prior year.

Net income for the period is $1,464, or $ .11 per diluted share, compared to a
net income of $921, or $ .07 per diluted share for the same period in the prior
year. The current quarter proxy contest costs were $640 before tax, or $ .03 per
diluted share net of tax.

13

Results of Operations - 26 Weeks Ended August 3, 2003 Compared to 26 Weeks Ended
August 4, 2002

Total revenues for the 26 week period ended August 3, 2003 were $179,896, a
decrease of $9,496, or 5.0%, from $189,392 for the 26 weeks ended August 4,
2003. The new store opened in fiscal year 2002 contributed $4,524 in revenues,
while comparable store revenues were down $11,484, or 6.9%, and other
non-comparable store revenues were down $2,858, or 13.4%. The decrease in
comparable store revenues is attributable to a continued weak economic
environment, which impacts the more discretionary amusement portion of our
revenues. Total revenues from licensing agreements were $237.

Cost of revenues decreased to $33,215 for the 26 weeks ended August 3, 2003 from
$34,831 for the 26 weeks ended August 4, 2002, a decrease of $1,616, or 4.6%.
The reduction in cost of revenue is attributed to a .4% decline in both
amusement and food costs offset by an .8% increase in beverage costs. As a
percentage of revenues, cost of revenues were up .1% to 18.5% for the 26 weeks
ended August 3, 2003 versus 18.4% for comparable period in the prior year.

Operating payroll and benefits decreased to $52,750 for the 26 weeks ended
August 3, 2003 from $58,962 for the 26 weeks ended August 4, 2002, a decrease of
$6,212, or 10.5%. As a percentage of revenues, operating payroll and benefits
were 29.3% for the 26 weeks ended August 3, 2003, down from 31.3% for the
comparable period in the prior year. We adjusted our staffing levels in response
to the current economic environment.

Other store operating expenses were down slightly to $56,250 for the 26 weeks
ended August 3, 2003 from $56,527 for the 26 weeks ended August 4, 2002, a
decrease of $277, or .5%. As a percentage of revenues, other store operating
expenses were up 1.3% to 31.2% for the 26 weeks ended August 3, 2003 as compared
to 29.9% for the prior year. During the quarter, the decrease in absolute
dollars over the prior year is attributed to opening one new store during fiscal
year 2002 offset by reductions in marketing expense and renegotiation of
cleaning and janitorial contracts at the stores. The increase as a percentage of
revenues is attributed to the decline in comparable stores sales.

General and administrative expenses decreased to $12,335 for the 26 weeks ended
August 3, 2003 from $13,712 for the 26 weeks ended August 4, 2002, a decrease of
$1,377, or 10.0%. The decrease in absolute dollars in fiscal 2003, can be
attributed to lower wages and benefits ($2,100), no transaction costs related to
the proposed merger agreement in the prior year ($1,200), offset by legal and
professional services relating to our cost efficiency studies ($740) and the
proxy contest costs ($741). As a percentage of revenues, general and
administrative expenses were down .3% to 6.9% for the 26 weeks ended August 3,
2003 from 7.2% for the same period in the prior year.

Depreciation and amortization decreased to $14,701 for the 26 weeks ended August
3, 2003 from $15,116 for the 26 weeks ended August 4, 2002, a decrease of $415,
or 2.7%. As a percentage of revenues, depreciation and amortization increased
..2% to 8.2% for the 26 week period ended August 3, 2003 as compared to 8.0% for
the same period in the prior year.

There were no preopening expenses incurred during the 26 weeks ended August 3,
2003. There were $401 incurred in the same period of the prior year.

Interest expense remained relatively flat at $3,808 for the 26 weeks ended
August 3, 2003 compared to $3,801 for the 26 weeks ended August 4, 2002, an
increase of $7, or .2%. The reduction in interest expense related to lower
outstanding debt was more than offset by an increase in bank fees, along with
reductions in both capitalized interest of $91 and interest income of $150 from
the prior year.

The effective tax rate for the 26 weeks ended August 3, 2003 remained at 34% as
compared to the same period in the prior year.

14

Net income for the year is $4,513, or $ .34 per diluted share, compared to a net
loss of $3,259, or $ .24 per diluted share for the same period in prior year.
The proxy contest costs for the year were $741 before tax, or $.04 per diluted
share net of tax.

Liquidity and Capital Resources

Cash provided by operating activities was $23,182 for the 26 weeks ended August
3, 2003 compared to $21,404 for the 26 weeks ended August 4, 2002, an increase
of $1,778. This was primarily due to changes in components of working capital.

Cash used in investing activities was $13,473 for the 26 weeks ended August 3,
2003 compared to $17,407 for the 26 weeks ended August 4, 2002. The decrease of
$3,934 was attributed to no store openings in fiscal 2003 offset by remodeling
and maintenance capital expenditures, which include the costs for new games in
the amusement portion of the business. The proposed purchase of the Dave &
Buster's location in Toronto, Canada from the Canadian licensee, Funtime
Hospitality Corp. is expected to close in October. The purchase price is $3.6
million plus the assumption of certain liabilities.

Net cash used by financing activities was $6,030 compared to $6,156 for the 26
weeks ended August 4, 2002. We have agreed with the bank that up to $4 million
of the repaid balance can be borrowed to fund the proposed Canadian purchase.

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 (1.1% at August 3, 2003) or, at our option, the bank's prime rate
(4.00% at August 3, 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 August 3, 2003, $22,695 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 $44,388
at August 3, 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 $934 was incurred in the 26 week period ended August 3, 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.

15

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:

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

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.

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Contractual Obligations and Commercial Commitments

The following tables set forth our contractual obligations and commercial
commitments (in thousands) after issuance of the new convertible debt and
repayment of the existing debt on August 7, 2003, as discussed below.

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.

Subsequent Events

On August 7, 2003 we closed a $30 million private placement of 5.0% convertible
subordinated notes due 2008 and warrants to purchase 522,446 shares of our
common stock at $13.46 per share. The investors may convert the notes into our
common stock at any time prior to the scheduled maturity date of August 7, 2008.
The conversion price is $12.92 per share, which represents a 20% premium over
the closing price of our common stock on August 5, 2003. If fully converted, the
notes will convert into 2,321,981 shares of our stock. After August 7, 2006, we
have the right to redeem the notes and we may also force the exercise of the
warrants if our common stock trades above a specified price during a specific
period of time.

We have used the net proceeds of the offering to reduce the outstanding balances
of our term and revolving loans under our senior bank credit facility. We have
agreed with the bank that up to $4 million of the repaid balance may be borrowed
to fund the proposed purchase of the Dave & Buster's complex in Toronto, Canada
from Funtime Hospitality Corp., our Canadian licensee. The purchase includes the
business and assets plus the assumption of certain liabilities. The agreement is
subject to various closing conditions, including completion of due diligence,
obtaining of all necessary corporate approvals and consents and approval of the
seller's shareholders. The transaction is expected to close in October and will
terminate Funtime's rights to license and develop Dave & Buster's locations in
Canada.

"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

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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 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

Our market risk exposure relates to changes in the general level of interest
rates. Our earnings are affected by changes in interest rates due to the impact
those changes have on our interest expense from variable-rate debt. Our
agreement to fix a portion of our variable-rate debt mitigates this exposure. If
short-term interest rates had been 1.0% higher during the first twenty-six weeks
of fiscal year 2003, our interest expense would have increased by approximately
$0.1 million. This amount was determined by applying the hypothetical interest
rate change to our floating rate borrowings balance during the first twenty-six
weeks of fiscal year 2003.

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 made as of August 3, 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 August 3, 2003 there have been no significant changes in our internal
controls or in other factors that could significantly affect such controls.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

EBS Litigation (update)

In March 2000, the 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.

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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 was rendered by the court. In early 2003, the trial court judge ruled
that the third-party action should be stayed pending the court reaching a
verdict in the underlying action. Beginning in March 2003, the court conducted a
series of mandatory mediation sessions among the parties to the third-party
action. In a mediation session conducted in August 2003, the plaintiffs accepted
our settlement offer of $130,000. The final settlement documentation is pending.
Although we continue to believe and assert that we and our directors have no
liability for the third-party plaintiff's allegations, we believe this
settlement is in our best interests to avoid the continuing costs and
distractions associated with this protracted litigation. We have reached
agreement with the carrier of our directors and officers insurance policy
whereby substantially all of our settlement payment will be covered by
insurance.

DownCity Energy Company LLC v. Dave & Buster's Inc (update)

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 claims
relate to unpaid invoices for HVAC charges for a period from approximately
January 2001 through September 2002. In January 2003, we filed a counterclaim
against DownCity and a Third-Party Complaint against Providence Place Group, L.
P., our Landlord, alleging, among other things, fraudulent inducement,
conspiracy, breach of contract and breach of duty of good faith. We have
disputed the excessive HVAC billings from inception and believe the plaintiff's
claims to be without merit, based primarily on our assertion that we 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. We also
believe that we have meritorious counterclaims against DownCity and third party
claims against the Landlord to counter any further action by DownCity for
damages. Nevertheless, in order to forestall a threat by DownCity to interrupt
utility services to our store, in December 2002, we entered into an Interim
Agreement with DownCity, pursuant to which we agreed to pay a lump sum of
$450,000 plus the "actual costs" of monthly HVAC services billed by DownCity
from January 2003 forward. Such agreement provided that the payments would
offset any potential settlement or judgment against us in favor of DownCity.

DownCity answered our counterclaim in March 2003 and Providence Place answered
our third party complaint in March 2003. Providence Place also filed a
counterclaim against us for breach of contract and other related matters to
which we filed our reply. Thereafter, we commenced preliminary settlement
negotiations with Providence Place with a view towards a three-way settlement
agreement that would modify our lease terms with Providence Place and require
Providence Place to resolve DownCity's complaints against us. As a result of
such negotiations, a tentative settlement proposal was reached and a draft of a
proposed agreement has been circulated for approval among the parties. The
proposed settlement will not require us to make any significant additional lump
sum payments, but would increase our monthly payments for HVAC on a going
forward basis.

Although the settlement is not yet final, based on our current analysis of (a)
the amounts previously paid by us, (b) the terms of the proposed settlement and
(c) the potential maximum adverse impact of the claims against us if such
settlement does not become final, we now do not believe that the outcome of this
lawsuit could reasonably be anticipated to have a material adverse affect on us
or our operations.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a)-(b) At the Company's Annual Meeting of Shareholders on June 10, 2003, the
following persons were elected as directors for a term of three years:

Class II
James W. Corley, Peter A. Edison, Patricia P. Priest

The following directors continued their terms of office as
directors of the Company after the Annual Meeting:

2. Ratification of Ernst & Young, LLP as auditors for the
Company's 2003 fiscal year:

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

10.1.5 Amendment No. 5 to Revolving Credit and Term Loan Agreement
dated August 6, 2003, by and among the Company and its
subsidiaries, Fleet National Bank (as agent) and the financial
institutions named therein.

10.24 Asset Purchase Agreement dated July 25, 2003 by and among
Funtime Hospitality Corp., and the Company.

12 Dave & Buster's Inc. Computation of Ratio of Earnings to Fixed
Charges.

31.1 Rule 13a-14(a)/15d-14(a) Certification of the CEO.

31.2 Rule 13a-14(a)/15d-14(a) Certification of the CFO.

32.1 Section 1350 Certification of the CEO.

32.2 Section 1350 Certification of the CFO.

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(b) Reports on Form 8-K

We filed the following reports on Form 8-K during the quarter ended
August 3, 2003:

1. Form 8-K filed on May 30, 2003 to report the hiring of a new
Senior Vice President - Marketing of the Company.

2. Form 8-K filed on June 4, 2003 to report the results of the
first quarter ended May 4, 2003.

3. Form 8-K filed on July 30, 2003 to report the signing of an
agreement to purchase our Canadian licensee's business in
Toronto, Canada.

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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: September 11, 2003 by /s/ JAMES W. CORLEY
--------------------------
James W. Corley
Chief Executive Officer

Date: September 11, 2003 by /s/ W. C. HAMMETT, JR.
--------------------------
W. C. Hammett, Jr.
Senior Vice President,
Chief Financial Officer

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INDEX OF EXHIBITS