Back to GetFilings.com
1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 1, 1998 Commission File No. 0-25858
DAVE & BUSTER'S, INC.
(Exact name of registrant as specified in its charter)
Missouri 43-1532756
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
2481 Manana Drive, Dallas, Texas 75220
(Address of principal executive offices) (zip code)
Registrant's telephone number,
including area code (214) 357-9588
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Title of Each Class
Common Stock, $0.01 par value
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
----
The aggregate market value of the voting stock held by persons other than
directors and officers of registrant (who might be deemed to be affiliates of
registrant) at April 28, 1998 was $295,896,138.
The number of shares of common stock outstanding at April 28, 1998 was
13,045,450 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement dated May 11, 1998, for its annual
meeting of Stockholders on June 9, 1998, are incorporated by reference into Part
III hereof, to the extent indicated herein.
1
2
PART I
Item 1. BUSINESS.
General
Dave & Buster's, Inc. (the "Company") operates 12 large format,
high-volume Restaurant/Entertainment Complexes ("Complexes") under the
Dave & Buster's name. Each Dave & Buster's Complex offers a full menu
of high quality food and beverage items combined with an extensive
array of entertainment attractions such as pocket billiards,
shuffleboard, state-of-the-art interactive simulators and virtual
reality systems, and traditional carnival-style games of skill. The
Company's current large format, 50,000 to 60,000 square foot prototype
Complex, is designed to promote easy access to, and maximize customer
cross-over between, the multiple dining and entertainment areas within
each Complex. The Company emphasizes high levels of customer service to
create casual, yet sophisticated, "ideal playing conditions" for
adults.
The Dave & Buster's Concept
The Company seeks to differentiate itself by providing high quality
dining, bar service and entertainment attractions in a comfortable,
adult atmosphere. The key factors of the Company's market positioning
and operating strategy are:
Distinctive Concept. Each Dave & Buster's offers a distinctive
combination of dining, bar service and entertainment. A full menu and
complete bar service are available from early lunch until late at night
in each restaurant and throughout almost all of the entertainment
areas. The broad array of attractions, ranging from table and carnival
games to state-of-the-art virtual reality games, is continuously
reviewed and updated to maintain a fresh entertainment environment. The
Company has actively sought to enhance the popularity of its
traditional games, such as pocket billiards and shuffleboard, by
providing high quality tables, a clean and comfortable environment and
a high standard of service.
A Large, Multiple Attraction Destination. The Complexes range in
approximate total area from 30,000 square feet to 70,000 square feet,
with a current prototype of approximately 50,000 to 60,000 square feet.
The large scale of each operation, together with the numerous food,
beverage and entertainment options offered, is designed to attract a
diverse customer base and consolidate multiple-destination customer
spending into one location. Each Dave & Buster's attracts local
customers from a wide geographical area (estimated to be a twenty-mile
radius) along with tourists, conventioneers and business travelers.
Commitment to Quality. The Company strives to provide its customers
with good food and an inviting atmosphere. Accordingly, each Dave &
Buster's offers an extensive menu which features popular, moderately
priced food and beverage items that are individually prepared with a
commitment to value and quality. The Company makes a significant
investment in each Complex, and the Company's facilities are designed
with an attention to detail. In addition, the customer-participation
entertainment attractions are tastefully presented in an atmosphere
that the Company defines as "ideal playing conditions."
2
3
High Standard of Customer Service. Through intensive personnel
training, constant monitoring of operations and stringent operational
controls, the Company strives to maintain a consistently high standard
of food, beverage and amusement service throughout each Complex. The
Company's commitment to customer service is evidenced by the
availability of full food and beverage service in entertainment areas
as well as the restaurant and bar areas.
With respect to entertainment, the Company's commitment to customer
service is demonstrated by service staff in each of the entertainment
areas who offer assistance in playing and enjoying the games. The
Company believes its customer service is enhanced by a strong
commitment to employee motivation and appreciation programs. The
Company also believes that high service standards are critical to
promoting customer loyalty and to generating frequent-visiting patterns
and referrals by customers.
Comfortable Adult Atmosphere. Each Dave & Buster's is primarily adult
oriented and, while children are welcome, strict guidelines are
enforced. Customers under twenty-one years of age must be accompanied
by a responsible adult at all times during their visit and are not
allowed in a Dave & Buster's after 10:00 p.m. (11:00 p.m. in the summer
months). The Company believes that these policies help maintain the
type of pleasant, relaxed atmosphere that appeals to adult customers.
The Company also believes that this atmosphere allows it to attract
groups of customers such as private parties and business organizations.
Integrated Systems. The Company utilizes centralized information and
accounting systems that are designed to allow its management to
efficiently monitor labor, food and other direct operating expenses and
to provide timely access to financial and operating data. Management
believes that its integrated computer systems permit it, on both an
overall and per Complex basis, to efficiently operate the
Restaurant/Entertainment Complexes.
Restaurant/Entertainment Concept and Menu
Dave & Buster's offers a full menu of high quality food and beverage
items combined with an extensive array of entertainment attractions
such as pocket billiards, shuffleboard, state-of-the-art interactive
simulators and virtual reality systems, and traditional carnival-style
games of skill. The Company's facilities are designed to promote easy
access to, and maximize customer cross-over between, the multiple
dining and entertainment areas within each Complex. The Company
emphasizes high levels of customer service to create casual, yet
sophisticated, "ideal playing conditions" for adults.
The Dave & Buster's menu is offered from early lunch until late night
and features moderately priced food designed to appeal to a wide
variety of customers. This well-rounded fare includes gourmet pastas,
individual sized pizzas, burgers, steaks, seafood and chicken.
Specialties of the house include babyback ribs, blackened chicken
pasta, mesquite-peppered rib eye steak and a Philadelphia cheesesteak
sandwich. A wide variety of other appetizers, soups, salads, sandwiches
and desserts is also available. Entree prices range from $6.50 to
$16.95, with many entrees in the $7.95 to $9.95 range. In order to
promote customer flow and complement the entertainment areas, full, sit
down food service is offered not only in the restaurant areas but also
throughout Dave & Buster's. In addition, throughout the restaurant and
entertainment areas each
3
4
Dave & Buster's offers full bar service including over 50 different
beers, an extensive wine selection and a variety of non-alcoholic
beverages such as its own private label, "D&B Old Fashioned Philly Root
Beer."
The entertainment attractions in each Dave & Buster's are geared toward
customer participation and offer both traditional entertainment and
"Million Dollar Midway" entertainment. Each Dave & Buster's offers a
number of traditional entertainment options.
Traditional Entertainment. Each Dave & Buster's offers a number of
traditional entertainment options. These traditional offerings include
"world class" pocket billiards, "championship-style" shuffleboard
tables, the Show Room which is designed for hosting private social
parties and business gatherings as well as Company sponsored events,
and D&B Lanes, which is bowling, Dave & Buster's style. Traditional
entertainment games are rented by the hour.
Million Dollar Midway Games. The largest area in each Dave & Buster's
is the Million Dollar Midway which is designed to provide high-energy,
escapism entertainment through a broad selection of electronic, skill
and sports-oriented games. The Dave & Buster's Power Card activates all
the midway games (with the exception of coin action games) and can be
recharged for additional play. The Power Card enables customers to
activate games more easily and encourages extended play of games.
Customers have increased their initial purchases of game credits and
frequency of play, resulting in an increase in the Company's total
revenues and a 4.4% increase in the percentage of the Company's
revenues derived from amusements, which have a greater operating margin
than food and beverage revenues, to 49.7% in fiscal year 1997 from
45.3% in fiscal year 1996. In addition, by replacing coin activation,
the Power Card has eliminated the technical difficulties and
maintenance issues associated with coin activated equipment.
Furthermore, the Power Card feature has increased the Company's
flexibility in the pricing and promotion of games.
Attractions within the Million Dollar Midway include fantasy/high
technology and classic midway entertainment. Fantasy/high-technology
offerings include simulator games such as formula race cars, off-road
vehicles, fighter jets and motorcycles; Galaxian Theater, a
multi-participant, enclosed simulation theater where up to six players
take part in mock battles with alien invaders; Virtuality, an
interactive, electronic game designed to simulate an actual battlefield
environment; Virtual World, a fantasy environment attraction; Iwerks
Turbo Ride Theatre, a 16 to 18 seat motion simulation theater,
large-screen interactive electronic games; and "The 19th Hole" which is
a large, enclosed, state-of-the-art golf simulator.
Classic midway entertainment includes sports-oriented games of skill;
carnival-style games, which are intended to replicate the atmosphere
found in many local county fairs; and D&B Downs which is one of several
multiple-player race games offered in each Dave & Buster's. At the
Winner's Circle, players can redeem coupons won from selected games of
skill for a wide variety of prizes, many of which display the Dave &
Buster's logo. The prizes include stuffed animals, ballcaps, T-shirts,
boxer shorts and small electronic items.
4
5
Locations
At February 1, 1998, the Company operated twelve locations in nine
states, which included two in Dallas, and one each in Houston, Atlanta,
Philadelphia, Hollywood, Florida, North Bethesda, Maryland, Ontario,
California, Cincinnati, Ohio, Denver, Colorado and two in Chicago.
Business Development
The Company continually seeks to identify and evaluate new locations
for expansion.
LARGE FORMAT.
The Company's goal is to open four large format (50,000 to 60,000
square foot prototype) Complexes in both fiscal years 1998 and 1999 and
at least five large format Complexes each fiscal year thereafter. The
Company will open a Complex in Utica (suburban Detroit), Michigan in
May 1998, and has commenced construction in Irvine, California, and
Rockland County, New York for Complexes due open in fiscal 1998. The
Company has signed a long-term lease agreement with Orange City Mills
Shopping Center in Orange, California for an additional Complex. The
Orange Complex will open in fiscal 1998. Potential locations for
openings in fiscal 1999 have been tentatively identified and site
negotiations are currently in progress.
The Company believes that the location of its large format Complexes is
critical to the Company's long-term success and devotes significant
time and resources to analyzing each prospective site. In general, the
Company targets high-profile sites within metropolitan areas of at
least one million people. In addition to carefully analyzing
demographic information (such as average income levels) for each
prospective site, the Company considers factors such as visibility,
accessibility to regional highway systems, zoning, regulatory
restrictions and proximity to shopping areas, office complexes, tourist
attractions and residential areas. The Company also carefully studies
the restaurant and entertainment competition in prospective areas. In
addition, the Company must select a site of sufficient size to
accommodate its prototype facility with ample, convenient customer
parking.
The typical cost of opening a large format Dave & Buster's ranges from
approximately $7.0 million to $12.0 million (excluding preopening
expenses and developer allowances), depending upon the location and
condition of the premises. The Company will base the decision of owning
or leasing a site on the projected unit economics. The Complexes opened
in 1997 and those anticipated in 1998 have been and will be leased
facilities. Opening a leased facility reduces the Company's capital
investment in a Complex because the Company does not incur land and
site improvement costs and might also receive a construction allowance
from the landlord for improvements. The decor and interior design of a
large format Dave & Buster's is flexible and can be readily adapted to
different types of buildings. The Company has opened Complexes in both
new and existing structures. Complexes are located in both urban and
suburban areas.
5
6
SMALL FORMAT.
The Company's goal is to open one small format (30,000 to 40,000 square
foot prototype) Complex in fiscal 1998, two small format Complexes in
fiscal 1999 and at least two small format Complexes each fiscal year
thereafter. The Company has signed a letter of intent and is currently
in land purchase contract negotiations for the first small format
Complex planned to open in Columbus, Ohio, in fiscal year 1998.
Potential locations for openings in fiscal 1999 have been tentatively
identified and site negotiations are currently in progress.
The small format Complex will be the same basic concept and attraction
as the Company's large format Complexes with some of the standard
areas, such as pocket billiards, shuffleboard tables and the back of
the house, being smaller. The main revenue drivers, the Million Dollar
Midway and food serving areas, will remain the same basic size as the
Company's large format Complexes.
The Company believes that the location of its small format Complexes is
critical to the Company's long-term success and devotes significant
time and resources to analyzing each prospective site. In general, the
Company targets high-profile sites within metropolitan areas of at
least 600,000 people. In addition to carefully analyzing demographic
information (such as average income levels) for each prospective site,
the Company considers factors such as visibility, accessibility to
regional highway systems, zoning, regulatory restrictions and proximity
to shopping areas, office complexes, tourist attractions and
residential areas. The Company also carefully studies the restaurant
and entertainment competition in prospective areas. In addition, the
Company must select a site of sufficient size to accommodate its
prototype facility with ample, convenient customer parking.
The Company estimates the cost of opening a small format Dave &
Buster's to be approximately $6.0 million to $8.0 million (excluding
preopening expenses and developer allowances), depending upon the
location and condition of the premises. The Company will base the
decision of owning or leasing a site on the projected unit economics.
The Company's projected fiscal 1998 Complex is a leased facility.
Opening a leased facility reduces the Company's capital investment in a
Complex, because the Company does not incur land and site improvement
costs and might also receive a construction allowance from the landlord
for improvements. The decor and interior design of a small format Dave
& Buster's are flexible and can be readily adapted to new and existing
structures. The Company expects the small format Complexes to be
located in both urban and suburban areas.
International
In August 1995, the Company entered into a license agreement with a
subsidiary of Bass Plc ("Bass") to license the "Dave & Buster's" name
and concept in the United Kingdom. Under this agreement, Bass opened
one Complex in Birmingham, England in May 1997 and has agreed to open a
total of seven Complexes in the United Kingdom by 2005. Bass has
scheduled a second Complex to open in Bristol, England in mid-1998.
Under the license agreement, Bass is required to pay the Company a
royalty based upon gross revenues, net of value added taxes. The
royalty rate paid by Bass is a sliding scale which averages 5% of gross
revenues. The license agreement contains strict operating covenants to
ensure consistency of the menu and entertainment offerings with those
in the Company-operated Complexes.
6
7
In February 1998, the Company entered into a license agreement with the
TaiMall Development Company ("TaiMall") to license the "Dave &
Buster's" name and concept in the Pacific Rim. Under this agreement,
TaiMall expects to open seven Complexes in the Pacific Rim by the year
2006, the first of which it anticipates opening in early 1999. Under
the license agreement, TaiMall is required to pay the Company a 5%
royalty based upon gross revenues. The license agreement contains
strict operating covenants to ensure consistency of the menu and
entertainment offerings with those in the Company operated Complexes.
During 1997, the Company also entered into two letters of intent to
further expand the Dave & Buster's name internationally. In August
1997, the Company entered into a letter of intent to license the "Dave
& Buster's" name and concept in Europe with S.T.A. Salmann Trust. It
proposes to develop seven locations in Germany, Switzerland and
Austria, with the first location targeted to open in a mall currently
under development in Berlin. In October 1997, the Company entered into
a letter of intent to license the "Dave & Buster's" name and concept in
Mexico with ECE S.A. de C.V. It proposes to develop five locations,
with the first location targeted to open in Cancun. There is no
assurance that these letters of intent will result in definitive
agreements. The Company is considering entering into agreements to
license the "Dave & Buster's" name and concept in additional foreign
countries. The Company does not have any current plans to invest its
own capital in any foreign operations.
Operations and Management
The Company's ability to manage a complex operation including both high
volume restaurants and bars and diverse entertainment attractions has
been critical to its overall success. The Company strives to maintain
quality and consistency in each of its Restaurant/Entertainment
Complexes through the careful training and supervision of personnel and
the establishment of, and adherence to, high standards relating to
personnel performance, food and beverage preparation, entertainment
productions and equipment, and facilities maintenance. The Company
believes that it has been able to attract and retain high quality,
experienced restaurant and entertainment management and personnel
through its competitive compensation and bonus programs and its policy
of promoting from within the Company. Staffing levels vary according to
the size of the location, but a prototype Dave & Buster's is managed by
one general manager, two assistant general managers, six line managers
and one business manager.
In general, each prototype Dave & Buster's also employs one purchasing
manager, one amusement manager, one assistant amusement manager, one
Midway auditor, one kitchen manager, two assistant kitchen managers and
two special events sales managers. The Company has experienced
relatively little turnover of managerial employees. On average, the
Company's current general managers possess approximately four and a
third years of experience with the Company. The general manager of each
Dave & Buster's reports to a Regional Manager who reports to the Vice
President, Director of Operations.
All managers, many of whom are promoted from within, must complete an
eleven-week training program during which they are instructed in areas
such as food quality and preparation, customer service, alcoholic
beverage service, entertainment management and employee relations. The
Company has also prepared operations manuals relating to food and
beverage quality and service standards as well as proper operation and
playing conditions of the Company's entertainment
7
8
attractions. New sales staff and entertainment personnel participate in
approximately three weeks of training under the close supervision of
Company management. Management strives to instill enthusiasm and
dedication in its employees, regularly solicits employee suggestions
concerning Company operations and endeavors to be responsive to
employees' concerns. In addition, the Company has extensive and varied
programs designed to recognize and reward employees for superior
performance.
Efficient, attentive and friendly service is integral to the Company's
overall concept. In addition to customer evaluations, the Company uses
a "secret shopper" quality control program to independently monitor
customer satisfaction. "Secret shoppers" are independent persons who,
on a periodic basis, test the Company's food, beverage and service as
customers without the knowledge of restaurant management or personnel,
and report their findings to corporate management.
Each Complex uses a variety of integrated management information
systems. These systems include a computerized point-of-sale system
which facilitates the movement of customer food and beverage orders
between the customer areas and kitchen operations, controls cash,
handles credit card authorizations, keeps track of revenues on a
per-employee basis for incentive awards purposes and provides
management with revenue and inventory data.
Marketing, Advertising and Promotion
The Company operates its marketing, advertising and promotional
programs through an in-house corporate marketing department and employs
a full-time corporate Marketing Director. The Company focuses on three
primary marketing target audiences in its advertising and promotional
programs: (1) local market-area customers; (2) out-of-town visitors;
and (3) corporate and group customers.
Local Market-Area Customers. Management believes that its strongest
marketing tool is customer referrals. In addition, the Company
continually updates its local customer database which is utilized for
specifically targeted marketing and advertising programs to customers
in a 10 to 20 mile radius. Through a mix of marketing techniques such
as direct mailings, point-of-sale materials, outdoor advertising and
local-market print and broadcast media, the Company promotes seasonal
events, in-house promotions, special offers and new entertainment
attractions.
Out-of-Town Visitors. The Company markets aggressively to attract
tourists and business travelers by placing advertisements in local
tourist and special event guides and by otherwise promoting each Dave &
Buster's as a local "must see" attraction. The Company monitors local
tourist and visitors bureaus for convention schedulings, festivals and
special sporting events. Additionally, through the use of local trade
arrangements such as "concierge referral programs," the Company extends
its marketing presence into local high-traffic tourist and business
traveler areas.
Corporate and Group Marketing. The Complex-based special events sales
managers book group events such as business seminars, receptions and
private parties. The Company develops and maintains a database for
corporate and group bookings. Each Dave & Buster's has hosted events
for many large multinational, national and regional businesses. Many of
the Company's corporate and group customers have hosted repeat events.
In addition to the rapport developed
8
9
with these clients, the Company stages and promotes its own local group
marketing opportunities such as "Karaoke Sing-a-Longs", "Murder Mystery
Dinner Theater", televised sporting events and charity benefits. The
corporate marketing department is also responsible for budgeting and
controlling media and production costs. During fiscal 1997, the
Company's expenditures for advertising and promotions were
approximately 2.2% of its revenues.
Competition
The restaurant and entertainment industries are highly competitive.
There are a great number of food and beverage service operations and
entertainment businesses that compete directly and indirectly with the
Company. Many of these entities are larger and have significantly
greater financial resources and a greater number of units than does the
Company. Although there are few other companies presently utilizing the
concept of combining entertainment and restaurant operations to the
same extent as the Company, the Company may encounter increased
competition in the future, which may have an adverse effect on the
profitability of the Company. In addition, the legalization of casino
gambling in geographic areas near any restaurant/entertainment company
would create the possibility for entertainment alternatives, which
could have a material adverse effect on the Company's business.
Employees
At February 1, 1998, the Company employed approximately 3,100 persons,
82 of whom served in administrative or executive capacities, 314 of
whom served as restaurant and entertainment management personnel, and
the remainder of whom were hourly restaurant and entertainment
personnel.
None of the Company's employees are covered by collective bargaining
agreements, and the Company has never experienced an organized work
stoppage, strike or labor dispute. The Company believes its working
conditions and compensation packages are competitive with those offered
by its competitors and considers relations with its employees to be
very good.
Seasonality
As a result of the substantial revenues associated with each new
Restaurant/Entertainment Complex, the timing of new
Restaurant/Entertainment Complex openings will result in significant
fluctuations in quarterly results. The Company expects seasonality to
be a factor in the operation or results of its business in the future
due to expected lower third quarter revenues due to the summer season,
and expects higher fourth quarter revenues associated with the year-end
holidays. The effects of supplier price increases have not been
material. The Company believes low inflation rates in its market areas
have contributed to stable food and labor costs in recent years.
However, the second increment of the Federal minimum wage increase
will, implemented in September 1997, cause future labor costs to
increase and there is no assurance that low inflation rates will
continue.
9
10
Intellectual Property
The Company has registered the servicemark "Dave & Buster's" with the
United States Patent and Trademark Office and in various foreign
countries. The Company has registered certain additional servicemarks
with the United States Patent and Trademark Office and the United
Kingdom.
Government Regulations
The Company is subject to various federal, state and local laws
affecting its business. Each Dave & Buster's is subject to licensing
and regulation by a number of governmental authorities, which may
include alcoholic beverage control, amusement, health and safety and
fire agencies in the state or municipality in which the Complex is
located. Each Dave & Buster's is required to obtain a license to sell
alcoholic beverages on the premises from a state authority and, in
certain locations, county and municipal authorities. Typically,
licenses must be renewed annually and may be revoked or suspended for
cause at any time. Alcoholic beverage control regulations relate to
numerous aspects of the daily operations of each Dave & Buster's,
including minimum age of patrons and employees, hours of operation,
advertising, wholesale purchasing, inventory control and handling, and
storage and dispensing of alcoholic beverages. The Company has not
encountered any material problems relating to alcoholic beverage
licenses to date. The failure to receive or retain a liquor license in
a particular location could adversely affect the Company's ability to
obtain such a license elsewhere.
The Company is subject to "dram-shop" statutes in the states in which
Complexes are located. These statutes generally provide a person
injured by an intoxicated person the right to recover damages from an
establishment which wrongfully served alcoholic beverages to the
intoxicated individual. The Company carries liquor liability coverage
as part of its existing comprehensive general liability insurance which
it believes is consistent with coverage carried by other entities in
the restaurant and entertainment industries. Although the Company is
covered by insurance, a judgment against the Company under a dram-shop
statute in excess of the Company's liability coverage could have a
material adverse effect on the Company.
As a result of operating certain entertainment games and attractions
including operations which offer redemption prizes, the Company is
subject to amusement licensing and regulation by the states and
municipalities in which it has opened Complexes. Certain entertainment
attractions are heavily regulated and such regulations vary
significantly between communities. From time to time, existing
Complexes may be required to modify certain games, alter the mix of
games or terminate the use of specific games as a result of the
interpretation of regulations by state or local officials. The Company
has, in the past, had to seek changes in state or local regulations to
enable it to open in a given location. To date, the Company has been
successful in seeking all such regulatory changes.
The Company's operations are also subject to federal and state laws
governing such matters as wages, working conditions, citizenship
requirements and overtime. Some states have set minimum wage
requirements higher than the federal level, and the federal government
recently increased the federal minimum wage. In September 1997, the
second phase of an increase in the minimum wage was implemented in
accordance with the Federal Fair Labor Standards Act of 1996.
Significant numbers of hourly personnel at the Company's Complexes are
paid at rates related to the federal minimum wage and, accordingly,
increases in the minimum wage have
10
11
increased labor costs at the Company's Complexes. Other governmental
initiatives such as mandated health insurance, if implemented, could
adversely affect the Company as well as the restaurant industry in
general. The Company is also subject to the Americans With Disabilities
Act of 1990, which among other things, may require certain minor
renovations to its Complexes to meet federally mandated requirements.
The cost of these renovations is not expected to be material to the
Company.
RISK FACTORS
The Company hereby cautions stockholders, prospective investors in the
Company and other readers of this report that the following important
factors, among others, could affect the Company's stock price or cause
the Company's actual results of operations to differ materially from
those expressed in any forward-looking statements, oral or written,
made by or behalf of the Company:
Expansion Plans; Capital Resource Requirements
The Company presently plans to open four large format
Complexes during each of fiscal years 1998 and 1999 and at
least five large format Complexes each fiscal year thereafter.
Also, the Company presently plans to open one small format
Complex during fiscal 1998, two in fiscal 1999 and at least
two small format Complexes each fiscal year thereafter.
Accomplishing these expansion goals will depend upon a number
of factors, including the Company's ability to raise
sufficient capital, locate and obtain appropriate sites, hire
and train additional management personnel and construct or
acquire, at reasonable cost, the necessary improvements and
equipment for such Restaurant/Entertainment Complexes. In
particular, the capital resources required to develop each new
Restaurant/Entertainment Complex are significant. The
Company's current prototype for large format Complexes has
required an initial investment, including land, improvements,
and furniture, fixtures and equipment, but excluding
preopening expenses, averaging approximately $10 million per
Complex.
The Company's current prototype for small format Complexes is
estimated to require an initial investment, including land,
improvements, and furniture, fixtures and equipment, but
excluding preopening expenses, of approximately $6 million to
$8 million per Complex.
There can be no assurance that the Company will be able to
complete its planned expansion, that the Company will continue
to be successful in its development of new
Restaurant/Entertainment Complexes or that new
Restaurant/Entertainment Complexes, if completed, will perform
in a manner consistent with the Company's most recently opened
Restaurant/Entertainment Complexes or make a positive
contribution to the Company's operating performance.
11
12
Small Number of Restaurant/Entertainment Complexes
As of February 1, 1998 the Company operated twelve
Restaurant/Entertainment Complexes. The combination of the
relatively small number of locations and the significant
investment associated with each new Restaurant/Entertainment
Complex may cause the operating results of the Company to
fluctuate significantly and adversely affect the profitability
of the Company. Due to this relatively small number of
locations, poor results of operations at any one
Restaurant/Entertainment Complex could materially affect the
profitability of the entire Company. New
Restaurant/Entertainment Complexes have experienced a drop in
revenues after their first year of operation, and the Company
does not expect that in subsequent years, any increases in
comparable Complex revenues will be meaningful.
Future growth in revenues and profits will depend to a
substantial extent on the Company's ability to increase the
number of its Restaurant/Entertainment Complexes. Because of
the substantial up-front financial requirements which are
described above, the investment risk related to any one
Restaurant/Entertainment Complex is much larger than that
associated with most other companies' restaurant or
entertainment venues.
Dependence Upon Senior Management
The Company's future success will depend largely on the
efforts and abilities of its existing senior management,
particularly David O. "Dave" Corriveau and James W. "Buster"
Corley, the Company's Co-Chief Executive Officers and the
founders of the Company's business. The loss of the services
of certain of the Company's management team could have a
material adverse effect on the Company's business. Messrs.
Corriveau and Corley are employed pursuant to employment
agreements which will expire in June 2000.
Edison Brothers' Bankruptcy
In October 1997, an entity owned by the creditors of Edison
Brothers filed a lawsuit against multiple parties, including
former Edison Brothers shareholders and the Company, seeking
recovery in connection with the June 1995 spin-off of the
Company from Edison Brothers and certain related transactions.
Although no assurance can be made with respect to the results
of the litigation, the Company believes that the claims
asserted against the Company are without merit, and the
Company intends to vigorously defend itself.
Geographic Concentration; Dependence on Discretionary Spending
The Company's profits are dependent on discretionary spending
by consumers, particularly by consumers living in the
communities in which the Restaurant/Entertainment Complexes
are located. A significant weakening in any of the local
economies in which the Company operates may cause the
Company's patrons to curtail discretionary spending which, in
turn, could materially affect the profitability of the entire
Company.
12
13
International Expansion; License Agreements
In August 1995 and February 1998, the Company entered into
agreements with Bass and TaiMall to license the "Dave &
Buster's" name and concept in the United Kingdom and Pacific
Rim, respectively. In addition, the Company is considering
entering into agreements to license the "Dave & Buster's" name
and concept in other foreign countries. The Company does not
have any current plans to invest its own capital in any
foreign operations. The Company's concept is untested outside
the United States, and no assurance can be given that any
international location will be successful. In addition, the
Company's continued success is dependent to a substantial
extent on its reputation, and its reputation may be affected
by the performance of licensee-owned Restaurant/Entertainment
Complexes over which the Company will have limited control.
Any international operations of the Company will also be
subject to certain external business risks such as exchange
rate fluctuations, political instability and a significant
weakening of a local economy in which a foreign
Restaurant/Entertainment Complex is located. Certain
provisions in a license agreement for the benefit of the
Company may be subject to restrictions in foreign laws that
limit the Company's ability to enforce such contractual
provisions. In addition, it may be more difficult to register
and protect the Company's intellectual property rights in
certain foreign countries.
Competition
The restaurant and entertainment industries are highly
competitive. There are a great number of food and beverage
service operations and entertainment businesses that compete
directly and indirectly with the Company. Many of these
entities are larger and have significantly greater financial
resources and a greater number of units than does the Company.
Although there are few other companies presently utilizing the
concept of combining entertainment and restaurant operations
to the same extent as the Company, the Company may encounter
increased competition in the future, which may have an adverse
effect on the profitability of the Company. In addition, the
legislation of casino gambling in geographic areas near any
restaurant/entertainment company would create the possibility
for entertainment alternatives, which could have a material
adverse effect on the Company's business.
Government Regulations
Various federal, state and local laws and permit and license
requirements affect the Company's business. Significant
numbers of hourly personnel at the Company's Complexes are
paid at rates related to the federal minimum wage and,
accordingly, legislated increases in the minimum wage will
increase labor costs at the Company's Complexes. Other
governmental initiatives such as mandated health insurance, if
implemented, could adversely affect the Company as well as the
restaurant industry in general.
13
14
Limited Trading History of Common Stock; Stock Price
Volatility
The Company's Common Stock has been trading in the public
market only since June 26, 1995. The price at which the
Company's Common Stock trades is determined in the marketplace
and may be influenced by many factors, including the
performance of the Company, investor expectations for the
Company, the trading volume in the Company's Common Stock,
general economic and market conditions and competition.
The market price of the Common Stock could fluctuate
substantially due to a variety of factors, including quarterly
operating results of the Company or other restaurant or
entertainment companies, changes in general conditions in the
economy, the financial markets or the restaurant or
entertainment industries, natural disasters or other
developments affecting the Company or its competitors. In
addition, in recent years the stock market has experienced
extreme price and volume fluctuations. This volatility has had
a significant effect on the market prices of securities issued
by many companies for reasons unrelated to the operating
performance of these companies.
Quarterly Fluctuations and Seasonality
As a result of the substantial revenues associated with each
new Restaurant/Entertainment Complex, the timing of new
Restaurant/Entertainment Complex openings will result in
significant fluctuations in quarterly results. The Company
expects seasonality to be a factor in the operation or results
of its business in the future due to expected lower third
quarter revenues due to the summer season, and expects higher
fourth quarter revenues associated with the year-end holidays.
The effects of supplier price increases have not been
material. The Company believes low inflation rates in its
market areas have contributed to stable food and labor costs
in recent years. However, the second increment of the Federal
minimum wage increase, implemented in September 1997, will
cause future labor costs to increase and there is no assurance
that low inflation rates will continue.
Item 2. PROPERTIES.
As of February 1, 1998 the Company operated a total of twelve Complexes
located in Texas, Georgia, Pennsylvania, Illinois, Florida, Maryland,
California, Ohio and Colorado. The Company owns the buildings and the
underlying real estate for four Dave & Buster's (Dallas I, Houston,
suburban Atlanta and Addison, Illinois). The Company leases the real
estate and owns the related facilities for the Hollywood, Florida
location. The Company leases the real estate and related facilities for
the Dallas II, Philadelphia, downtown Chicago, North Bethesda,
Maryland, Ontario, California, Cincinnati, Ohio and Denver, Colorado
Dave & Buster's from unrelated third parties. The Company is currently
utilizing all available land at its owned locations. The Dallas II
lease expires in January 2003 and, with renewal options, may be
extended to January 2008. The Philadelphia lease expires in January
2014 and, with a renewal option, may be extended to January 2024. The
Company also leases additional parking facilities for the Philadelphia
Complex under an agreement which expires in January 2014. The downtown
Chicago lease expires in January 2016 and, with renewal options, may be
extended to January 2026. The Hollywood lease expires April 2016 and,
with renewal options, may be extended to April 2031.
14
15
The North Bethesda lease expires January 2017 and, with renewal
options, may be extended to January 2032. The Ontario lease expires
January 2018 and, with renewal options, may be extended to January
2028. The Cincinnati lease expires January 2018 and, with renewal
options, may be extended to January 2038. The Denver lease expires
January 2018 and, with renewal options may be extended to January 2033.
The Company has also signed 20 year leases for Complexes in each of
Utica, Michigan, Irvine, California, Rockland County, New, York, and
Orange, California due to open in fiscal 1998. Third party leases
typically provide for a minimum base rent, additional rent based on a
percentage of revenues and payment of certain operating expenses.
Item 3. LEGAL PROCEEDINGS.
In 1989, Edison Brothers Stores, Inc. ("Edison Brothers") acquired 80%
of the Company's operating business and all of the real estate
interests related to such operating business. In June 1995, Edison
Brothers distributed to its stockholders all of the shares of the
Company's Common Stock owned by Edison Brothers (the "Spin-Off"), which
represented 85% of the shares of the Company's Common Stock then
outstanding. In November 1995, Edison Brothers and its subsidiaries
filed petitions under Chapter 11 of the Federal Bankruptcy Code.
During the pendency of Edison Brothers' bankruptcy, certain of its
creditors and their representatives alleged that the Spin-Off and
related transactions could be voidable under fraudulent conveyance
laws. These claims were assigned to a limited liability corporation
owned by the Edison Brothers' creditors as part of the confirmation of
a reorganization plan of Edison Brothers in September 1997.
In October 1997, the litigation limited liability corporation filed a
lawsuit against multiple parties, including former Edison Brothers
shareholders and the Company, seeking recovery in connection with the
Spin-Off and certain related transactions. The plaintiff's aggregate
recovery in this lawsuit would be limited to the shortfall received by
the creditors in the Edison Brothers bankruptcy, and the Company does
not have access to complete knowledge as to the number of former Edison
Brothers shareholders who have accepted a proposed settlement offer
(which would lessen the amount of the shortfall) and as to which former
Edison Brothers shareholders are included in the purported defendant
class. For these reasons, the Company is unable to quantify any
potential exposure from this lawsuit. The Company believes that the
claims against former Edison Brothers shareholders involve a
substantially greater amount than the claims against the Company.
Although no assurance can be made with respect to the results of the
litigation, the Company believes that the claims asserted against the
Company are without merit, and the Company intends to vigorously defend
itself.
In addition, from time to time, the Company is a defendant in
litigation arising in the ordinary course of its business, including
claims resulting from "slip and fall" accidents, claims under federal
and state laws governing access to public accommodations and
employment-related claims. To date, none of such litigation, some of
which is covered by insurance, has had a material effect on the
Company.
15
16
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has been traded on the Nasdaq National
Market under the symbol DANB since June 26, 1995. The following table
summarizes the high and low sale prices per share of Common Stock for
the periods indicated, as reported on the Nasdaq National Market:
Fiscal Year 1995
----------------
Second Quarter (since June 26, 1995) $14.83 $7.67
Third Quarter 12.67 9.50
Fourth Quarter 10.75 7.42
Fiscal Year 1996
----------------
First Quarter 16.42 9.33
Second Quarter 19.25 12.67
Third Quarter 16.92 12.33
Fourth Quarter 14.50 11.17
Fiscal Year 1997
----------------
First Quarter 16.92 12.67
Second Quarter 21.83 13.58
Third Quarter 22.50 20.17
Fourth Quarter 27.63 18.38
At April 28, 1998, the Company there were 2,317 holders of record.
The Company has never paid cash dividends on its Common Stock and does
not currently intend to do so as profits are reinvested into the
Company to fund future expansion of its restaurant business. Payment of
dividends in the future will depend upon the Company's growth,
profitability, financial condition and other factors which the Board of
Directors may deem relevant.
16
17
Item 6. SELECTED FINANCIAL DATA.
The following table sets forth selected consolidated financial data for the
Company. This data should be read in conjunction with the Consolidated Financial
Statements of the Company and the Notes thereto included in Item 8 hereof and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Item 7 hereof.
Fiscal Year 1997 1996 1995 1994 1993
(in thousands except share and store data)
Income Statement Data:
Food and beverage revenues $ 64,703 $ 48,568 $ 28,554 $ 27,426 $ 18,445
Amusement and other revenues 63,801 40,207 23,990 21,997 14,453
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues 128,504 88,775 52,544 49,423 32,898
Cost of revenues 24,795 18,003 10,945 10,075 6,800
Operating payroll and benefits 36,227 25,483 15,999 14,746 9,716
Other restaurant operating expenses 32,787 20,582 11,481 11,760 7,109
General and administrative expenses 8,489 5,734 3,905 2,724 2,271
Depreciation and amortization expense 8,470 5,647 3,538 2,827 1,927
Preopening cost amortization 3,246 2,605 161 1,128 480
Earn-out and special compensation -- -- 1,607 2,125 2,655
- ---------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 114,014 78,054 47,636 45,385 30,958
Operating income 14,490 10,721 4,908 4,038 1,940
Interest income (expense), net (179) (38) 101 59 36
- ---------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 14,311 10,683 5,009 4,097 1,976
Provision for income taxes 5,414 4,343 2,087 1,733 806
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 8,897 $ 6,340 $ 2,922 $ 2,364 $ 1,170
Basic net income per share (1)(2) $ .77 $ .58 $ .34 $ .30 $ .15
Basic weighted average shares outstanding 11,532 10,901 8,681 7,796 7,796
Diluted net income per share (1)(2) $ .76 $ .58 $ .34 $ .30 $ .15
Diluted weighted average shares outstanding 11,711 10,969 8,681 7,796 7,796
17
18
Balance Sheet Data:
Working capital (deficit) $ 26,408 $ 1,077 $ 5,634 $ (2,637) $ (112)
Total assets 158,989 99,436 76,201 49,030 43,403
Long-term obligations 12,000 14,250 500 9,986 8,252
Stockholders' equity (3) 133,356 75,366 69,008 -- --
Number of Complexes Open at End of Period:
Company operated 12 9 7 5 4
(1) The earnings per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standards No. 128, Earnings Per
Share. For further discussion of earnings per share and the impact of Statement
No. 128, see the notes to the consolidated financial statements.
(2) All share and per share information has been adjusted to give effect to the
three-for-two split in the form of a stock dividend. See the notes to the
consolidated financial statements.
(3) Prior to fiscal 1995, the Company was a subsidiary of Edison Brothers
Stores, Inc.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Fiscal 1997 Compared to Fiscal 1996
Total revenue for fiscal 1997 increased by 45% over fiscal 1996. The increase in
revenues was attributable to the Hollywood, Florida and North Bethesda, Maryland
Complexes being open for 52 weeks in fiscal 1997 and the opening of the Ontario,
California, Cincinnati, Ohio and Denver, Colorado Complexes in the first, third
and fourth quarters of fiscal 1997, respectively. Increased revenues at
comparable stores and the addition of the Power Card also contributed to the
increase in total revenues. Total revenues also increased due to the opening of
the first store under the Bass licensing agreement. Total revenues for the
fiscal 1997 period from the Bass agreement were $251,000. The Company's revenues
are divided into (i) food and beverage revenues and (ii) amusement and other
revenues. For fiscal 1996, food and non-alcoholic beverage revenues were 34.3%
of total revenues, alcoholic beverage revenues were 20.4%, and amusement and
other revenues were 45.3% of total revenues. For fiscal 1997, food and
non-alcoholic beverage revenues were 32.3% of total revenues, alcoholic beverage
revenues were 18.0%, and amusement and other revenues (including royalty
revenues related to the Complex operated by Bass under a license agreement) were
49.7% of total revenues. Food and beverage revenues, as a percentage of total
revenues, have decreased in comparison to prior year levels as a result of the
higher percentage of floor space devoted to entertainment activities within the
Company's newer Restaurant/Entertainment Complexes, the national trend towards
lower alcoholic beverage consumption and the addition of the Power Card.
Cost of revenues, as a percentage of revenues, decreased to 19.3% in fiscal 1997
from 20.3% in fiscal 1996 due to lower food, beverage and amusement costs. The
shift in revenue mix from food and beverage to the higher margin amusement
revenues also attributed to the decrease. Operating payroll and benefits
decreased to 28.2% from 28.7% in the prior comparable period. Operating payroll
and
18
19
benefits were lower due to cost reductions in variable labor and leverage from
increased revenues offset partially by higher fixed labor and employee benefits
costs. Other restaurant operating expenses were 25.5% of revenues in fiscal 1997
as compared to 23.2% of revenues in fiscal 1996. Other restaurant operating
expenses were higher due to increased operating expenses at the Complexes and
higher occupancy costs associated with a full year of revenues in the fiscal
1997 period for the Hollywood, Florida and North Bethesda, Maryland Complexes
and the addition of Ontario, California, Cincinnati, Ohio and Denver, Colorado
Complexes in the first, third and fourth quarters of fiscal 1997, respectively.
General and administrative expenses increased $2,755,000 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 increased to 6.6% in fiscal year 1997 from 6.4% in fiscal year 1996.
Depreciation and amortization expense, as a percentage of revenues, increased to
6.6% from 6.4% for the comparable prior period. The increase was attributable to
the inclusion of the Hollywood, Florida and North Bethesda, Maryland Complexes
for a full year of operation in fiscal year 1997 and the opening of the Ontario,
California, Cincinnati, Ohio and Denver, Colorado Complexes, which opened in the
first, third and fourth quarters of fiscal year 1997, respectively. Power Card
installations completed in the fourth quarter of 1996 and the first quarter of
1997 also contributed to this increase. As a percentage of revenues, preopening
cost amortization decreased to 2.5% compared to 2.9% for the comparable prior
period. The percentage decrease is attributable to the leverage from increased
revenues.
The effective tax rate for fiscal year 1997 was 37.8% as compared to 40.7% in
fiscal year 1996 and was the result of a lower effective state tax rate.
Fiscal 1996 Compared to Fiscal 1995
Total revenues for fiscal 1996 increased by 69% over fiscal 1995. The increase
was attributable to the Chicago locations which were opened at the end of fiscal
1995, the fiscal 1996 openings in Hollywood, Florida and North Bethesda,
Maryland and increased revenues at comparable Complexes. The mix of revenues
moved away from alcoholic beverages which captured 20.4% of the total in fiscal
1996 compared with 21.0% in fiscal 1995.
Cost of revenues, as a percentage of revenues, decreased to 20.3% in fiscal 1996
from 20.8% in fiscal 1995 due to lower food and amusement costs. Operating
payroll and benefits, as a percentage of revenues, decreased to 28.7% in fiscal
1996 as compared to 30.5% in fiscal 1995 due primarily to lower Complex
management costs. Other restaurant operating expenses were 23.2% of revenues in
fiscal 1996 as compared to 21.9% of revenues in fiscal 1995. This increase in
other restaurant operating expense as a percentage of revenues was attributable
to increased marketing costs, equipment rental and higher occupancy costs for
the Company.
General and administrative expenses decreased as a percentage of revenues to
6.4% in fiscal 1996 from 7.4% in fiscal 1995 as a result of increased revenue
leverage. In total dollars, general and administrative costs increased
approximately $1.8 due to the Company operating as an independent public company
for the entire year and the Company's expansion.
19
20
Preopening cost amortization increased approximately $2.4 million due to
amortization of preopening costs associated with four new Complexes in fiscal
1996. The effective tax rate declined for fiscal 1996 to 40.7% of pretax income
from 41.7% for fiscal 1995 was due to the utilization of federal tax credits.
Liquidity and Capital Resources
Cash flows from operations increased from $13.1 million in fiscal 1996 to $15.7
million in fiscal 1997. The increase was a result of the Hollywood, Florida and
North Bethesda Complexes being open for a full year in fiscal 1997 and the
Ontario, California, Cincinnati, Ohio and Denver, Colorado Complexes opened in
the first, third and fourth quarters of fiscal 1997, respectively.
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 (8.8% at February 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, a minimum fixed charge coverage ratio and a maximum level of capital
expenditures on new stores. At February 1, 1998, $34,320,000 was available under
the senior revolving credit facility.
On October 16, 1997 the Company completed a public offering of common stock for
the sale of 1,800,000 shares at $24.75 per share for net proceeds of
$41,857,000, after deducting related offering costs. On October 22, 1997, an
additional 300,000 shares of common stock were sold as a result of the Company's
underwriters exercising an option granted by the Company in connection with the
public offering. These shares were sold at $24.75 per share for net proceeds of
$6,998,000, after deducting related offering costs. A portion of the net
proceeds were used by the Company to reduce bank indebtedness with the remaining
portion being used to open new stores and for general corporate purposes.
The Company's plan is to open a total of four large format Complexes and one
small format Complex in fiscal 1998. In fiscal 1999, the Company's goal is to
open four large format Complexes and two small format Complexes. The Company
estimates that its capital expenditures will be approximately $49.2 million and
$69.5 million for 1998 and 1999, respectively. The Company intends to finance
its capital expenditures with income from operations, the proceeds received from
the secondary offering and the Company's credit facility.
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. The Company expects seasonality to be a factor in the
operation or results of its business in the future due to expected lower third
quarter revenues due to the summer season, and expects higher fourth quarter
revenues associated with the year-end holidays. The effects of supplier price
increases have not been material. The Company believes low inflation rates in
its market areas have contributed to stable food and labor costs in recent
years. However, the second increment of the Federal minimum wage, implemented in
September 1997, increase has caused labor costs to increase and there is no
assurance that low inflation rates will continue.
20
21
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income," which establishes standards for the reporting and display of
comprehensive income and its components (revenue, expenses, gains and losses) in
a separate full set of general-purpose financial statements. The provisions of
this statement are effective for fiscal years beginning after December 15, 1997.
Management believes that the Company currently does not have items of a material
nature that would require presentation in a separate statement of comprehensive
income.
In June 1997, the FASB also issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information," which establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. The provisions of this statement are effective for fiscal years
beginning after December 15, 1997. Management believes that the Company
currently does not have items of a material nature that would require segment
disclosure.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued a Statement of Position ("SOP")
98-5 entitled "Reporting on the Costs of Start-Up Activities." The SOP, which is
effective for fiscal years beginning after December 15, 1998, requires entities
to expense as incurred all start-up and preopening costs that are not otherwise
capitalizable as long-lived assets. Restatement of previously issued annual
financial statements is not permitted by the SOP, and entities are not permitted
to report the pro forma effects of the retroactive application of the new
accounting standard. The Company's adoption of the new accounting standard will
involve the recognition of the cumulative effect of the change in accounting
principle required by the SOP as a one-time charge against earnings, net of any
related income tax effect, retroactive to the beginning of the fiscal year.
Impact of the Year 2000 Issue
The Company has determined that it will need to modify or replace significant
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and beyond. The Company also has
initiated discussions with its significant suppliers and financial institutions
to ensure that those parties have appropriate plans to remediate Year 2000
issues where their systems interface with the Company's systems or otherwise
impact its operations. The Company is assessing the extent to which its
operations are vulnerable should those organizations fail to remediate their
computer systems properly.
The Company's comprehensive Year 2000 initiative is being managed by a team of
internal staff. The team's activities are 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 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. The cost of the
21
22
Year 2000 initiatives is not expected to be material to the Company's results of
operation or financial position.
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995
Certain statements in this Annual Report constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties, and
other factors which may cause the actual results, performance, or achievements
of Dave & Buster's, Inc. to be materially different from any future results,
performance, or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following: general economic
and business conditions; competition; development and operating costs; adverse
publicity; consumer trial and frequency; availability, locations and terms of
sites for Complex development; quality of management; business abilities and
judgement of personnel; availability of qualified personnel; food, labor and
employee benefit costs; changes in, or the failure to comply with, government
regulations; and other risks indicated in this filing.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14 (a)(1).
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set under the caption "Directors and Executive
Officers" in the Company's Proxy Statement dated May 11, 1998, for the
annual meeting of stockholders on June 9, 1998 is incorporated herein
by reference.
Item 11. COMPENSATION INFORMATION.
The information set under the caption "Directors and Executive
Officers" in the Company's Proxy Statement dated May 11, 1998, for the
annual meeting of stockholders on June 9, 1998 is incorporated herein
by reference.
Item. 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set under the caption "Beneficial Ownership of Common
Stock" in the Company's Proxy Statement dated May 11, 1998, for the
annual meeting of stockholders on June 9, 1998 is incorporated herein
by reference.
22
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.,
a Missouri corporation
By: /s/ Charles Michel
------------------------------------
Charles Michel,
Vice President and Chief Financial
Officer
Dated: May 4, 1998
24
24
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons of the registrant and in the
capacities indicated on May 4, 1998.
Name Title
/s/David O. Corriveau Co-Chairman of the Board,
- ------------------------- Co-Chief Executive Officer, President,
David O. Corriveau and Director
(Principal Executive Officer)
/s/James W. Corley Co-Chairman of the Board,
- ------------------------- Co-Chief Executive Officer, Chief
James W. Corley Operating Officer and Director
/s/Charles Michel Vice President and Chief Financial
- ------------------------- Officer
Charles Michel (Principal Financial and Accounting
Officer)
- ------------------------- Director
Allen J. Bernstein
/s/Peter A. Edison Director
- -------------------------
Peter A. Edison
/s/Walter S. Henrion Director
- -------------------------
Walter S. Henrion
/s/ Mark A. Levy Director
- -------------------------
Mark A. Levy
- ------------------------- Director
Andrew E. Newman
- ------------------------- Director
Christopher C. Maguire
- ------------------------- Director
Mark B. Vittert
25
25
INDEX TO EXHIBITS
Exhibit
- -------
3.1 Restated Articles of Incorporation of the Company. (1)
3.2 Bylaws of the Company. (1)
10.2 Tax Sharing Agreement, dated June 16, 1995 (1)
10.3 Merger Agreement, dated June 20, 1995 (1)
10.7 Rights Agreement between the Company and Rights Agent, dated June 16,
1995 (1)
10.8 1995 Stock Option Plan. (2)
10.9 Stock Option Plan for Outside Directors (4)
10.10 Special Distribution Employee Bonus Plan, dated June 20, 1995. (1)
10.11 Employment Agreement for Co-Chief Executive Officers, dated June 16,
1995 (1)
10.12 Form of Indemnity Agreements with Executive Officers and Directors (2)
10.13 Transaction Agreement, dated July 11, 1994, among the Company, Edison
Brothers, D&B Holding and certain other parties and first amendment
thereto (1)
21.1 Subsidiaries of the Company. (3)
23 Independent Auditors' Consent. (3)
27 Financial Data Schedule. (3)
99 Proxy Statement, dated May 11, 1998. (5)
26
26
'
- --------------------------
(1) Filed as an Exhibit to the registrant's Form 10-Q for the 13-week
period ended April 30, 1995 and incorporated herein by reference.
(2) Filed as an Exhibit to the registrant's Form 10 filed April 11, 1995
and incorporated herein by reference.
(3) Filed herewith.
(4) Filed as an Exhibit to the registrant's Form 10-K for the 52-week
period ended February 1, 1997 and incorporated herein by reference.
(5) To be filed with the Commission on or before May 11, 1998.
27
27
Item. 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set under the caption "Certain Transactions" in the
Company's Proxy Statement dated May 11, 1998, for the annual meeting of
stockholders on June 9, 1998 is incorporated herein by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS OF FORM 8-K.
(a) (1) Financial Statements.
Page
----
Consolidated Balance Sheets -
February 1, 1998 and February 2, 1997 F-1
Consolidated Statements of Income -
Fiscal years ended February 1, 1998, February 2, 1997,
and February 4, 1996 F-2
Consolidated Statements of Stockholders' Equity Fiscal years ended
February 1, 1998, February 2, 1997,
and February 4, 1996 F-3
Consolidated Statements of Cash Flows Fiscal years ended February
1, 1998, February 2, 1997,
and February 4, 1996 F-4
Notes to Consolidated Financial Statements F-5-F-11
Report of Independent Auditors F-12
All schedules are omitted as the required information is inapplicable
or the information is presented in the financial statements or related
notes.
(a) (3) Exhibits.
Reference is made to the Exhibit Index preceding the exhibits attached
hereto on page 26 for a list of all exhibits filed as a part of this
Report.
(b) Reports of Form 8-K.
The Company was not required to file a current report on Form 8-K during
the thirteen weeks ended February 1, 1998.
23
28
CONSOLIDATED BALANCE SHEETS
DAVE & BUSTER'S, INC.
February 1, February 2,
in thousands, except share and per share amounts 1998 1997
Assets
Current assets:
Cash and cash equivalents $ 14,309 $ 358
Short-term investments 8,507 --
Inventories 6,222 3,890
Prepaid expenses 1,234 881
Preopening costs 3,415 1,947
Other current assets 2,018 1,019
- --------------------------------------------------------------------------------------------------------------
Total current assets 35,705 8,095
Property and equipment, net (note 2) 114,060 82,037
Goodwill, net of accumulated amortization of $1,121 and $741 8,587 8,920
Other assets 637 384
- --------------------------------------------------------------------------------------------------------------
$158,989 $ 99,436
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 4,075 $ 3,174
Accrued liabilities (note 3) 3,255 1,747
Income taxes payable (note 5) -- 924
Deferred income taxes (note 5) 1,967 1,173
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 9,297 7,018
Deferred income taxes (note 5) 3,530 2,075
Other liabilities 806 727
Long-term debt (note 4) 12,000 14,250
Commitments and contingencies (notes 4, 6 and 11)
Stockholders' equity (note 7):
Preferred stock, 10,000,000 authorized; none issued -- --
Common stock, $0.01 par value, 50,000,000 authorized;
13,019,050 and 10,902,084 shares issued and outstanding
as of February 1, 1998 and February 2, 1997, respectively 130 109
Paid in capital 116,054 66,963
Retained earnings 17,172 8,294
- --------------------------------------------------------------------------------------------------------------
Total stockholders' equity 133,356 75,366
- --------------------------------------------------------------------------------------------------------------
$158,989 $ 99,436
See accompanying notes to consolidated financial statements.
F-1
29
CONSOLIDATED STATEMENTS OF INCOME
DAVE & BUSTER'S, INC.
in thousands, except per share amounts Fiscal Year 1997 1996 1995
Food and beverage revenues $ 64,703 $ 48,568 $ 28,554
Amusement and other revenues 63,801 40,207 23,990
- --------------------------------------------------------------------------------------------
Total revenues 128,504 88,775 52,544
Cost of revenues 24,795 18,003 10,945
Operating payroll and benefits 36,227 25,483 15,999
Other restaurant operating expenses 32,787 20,582 11,481
General and administrative expenses 8,489 5,734 3,905
Depreciation and amortization expense 8,470 5,647 3,538
Preopening cost amortization 3,246 2,605 161
Earn-out and special compensation -- -- 1,607
- --------------------------------------------------------------------------------------------
Total costs and expenses 114,014 78,054 47,636
Operating income 14,490 10,721 4,908
Interest income (expense), net (179) (38) 101
- --------------------------------------------------------------------------------------------
Income before provision for income taxes 14,311 10,683 5,009
Provision for income taxes (note 5) 5,414 4,343 2,087
- --------------------------------------------------------------------------------------------
Net income $ 8,897 $ 6,340 $ 2,922
Basic net income per share (notes 1 and 8) $ .77 $ .58 $ .34
Basic weighted average shares outstanding 11,532 10,901 8,681
Diluted net income per share (notes 1 and 8) $ .76 $ .58 $. .34
Diluted weighted average shares outstanding 11,711 10,969 8,681
See accompanying notes to consolidated financial statements.
F-2
30
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
DAVE & BUSTER'S. INC.
Common Stock
-------------------- Paid in Retained
in thousands Shares Amount Capital Earnings Total
Balance, January 29, 1995 -- $ -- $ -- $ -- $ --
Spin-off and related transactions 7,796 78 38,323 -- 38,401
Issuance of common stock,
net of offering costs 3,105 31 28,622 -- 28,653
Net income since June 29, 1995 -- -- -- 1,954 1,954
- --------------------------------------------------------------------------------------------------------------------
Balance, February 4, 1996 10,901 109 66,945 1,954 69,008
Proceeds from exercising stock option 1 -- 18 -- 18
Net income -- -- -- 6,340 6,340
- --------------------------------------------------------------------------------------------------------------------
Balance, February 2, 1997 10,902 109 66,963 8,294 75,366
Proceeds from exercising stock options 17 -- 203 -- 203
Tax benefit related to stock
option exercises -- -- 54 -- 54
Purchase of fractional shares from
three-for-two stock split -- -- -- (19) (19)
Issuance of common stock,
net of offering costs 2,100 21 48,834 -- 48,855
Net income -- -- -- 8,897 8,897
- --------------------------------------------------------------------------------------------------------------------
Balance, February 1, 1998 13,019 $ 130 $ 116,054 $ 17,172 $ 133,356
See accompanying notes to consolidated financial statements.
F-3
31
CONSOLIDATED STATEMENTS OF CASH FLOWS
DAVE & BUSTER'S, INC.
in thousands Fiscal Year 1997 1996 1995
Cash flows from operating activities
Net income $ 8,897 $ 6,340 $ 2,922
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 11,716 8,252 3,699
Provision for deferred income taxes 2,249 1,241 839
Changes in assets and liabilities
Inventories (2,332) (1,269) (934)
Prepaid expenses (353) (521) (112)
Preopening costs (4,714) (2,606) (2,038)
Other assets (1,311) (198) (135)
Accounts payable 901 718 838
Accrued liabilities 1,508 393 (513)
Income taxes payable (924) 924 --
Other liabilities 79 (149) 385
- -----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 15,716 13,125 4,951
Cash flows from investing activities
Capital expenditures (40,101) (30,860) (19,364)
Purchase of short-term investments (8,507) -- --
- -----------------------------------------------------------------------------------------------------
Net cash used in investing activities (48,608) (30,860) (19,364)
- -----------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net transactions with Edison Brothers -- -- (11,648)
Borrowings under long-term debt 18,519 16,450 16,000
Repayments of long-term debt (20,769) (2,700) (15,500)
Proceeds from issuance of common stock, net 49,093 18 28,653
- -----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 46,843 13,768 17,505
- -----------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 13,951 (3,967) 3,092
Beginning cash and cash equivalents 358 4,325 1,233
- -----------------------------------------------------------------------------------------------------
Ending cash and cash equivalents $ 14,309 $ 358 $ 4,325
Supplemental disclosures of cash flow information:
Cash paid for income taxes $ 4,693 $ 1,815 $ 1,128
Interest, net of amounts capitalized $ 727 $ 118 $ 146
See accompanying notes to consolidated financial statements.
F-4
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DAVE & BUSTER'S, INC.
IN THOUSANDS EXCEPT PER SHARE AMOUNTS
Note 1: Summary of Significant Accounting Policies
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 primary business of the Company is the
ownership and operation of restaurant/entertainment complexes (a "Complex")
under the name "Dave & Buster's" which are located in Texas, Georgia,
Pennsylvania, Illinois, Florida, Maryland, California, Ohio and Colorado.
Spin-off Transaction -- Prior to June 29, 1995, the Company was a subsidiary
of Edison Brothers Stores, Inc. ("Edison Brothers"). On June 29, 1995, Edison
Brothers distributed all of the outstanding shares of common stock of the
Company owned by Edison Brothers to the holders of common stock of Edison
Brothers (the "Distribution"). The consolidated financial statements for the
period prior to the Distribution have been prepared as if the Company had
operated as a free-standing entity for all periods presented. Edison Brothers
provided certain general and administrative services to the Company prior and
subsequent to the Distribution. Edison Brothers charged rent on certain of the
Company's facilities.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
certain estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
Fiscal Year -- The Company's fiscal year ends on the Sunday after the
Saturday closest to January 31. References to 1997, 1996, and 1995 are to the 52
weeks ended February 1, 1998 and February 2, 1997 and the 53 weeks ended
February 4, 1996, respectively.
Cash and Cash Equivalents -- Cash equivalents for 1997 consist of investments
which are readily convertible to cash with maturities of three months or less.
Investments -- Investment securities with original maturities of more than
three months and less than one year on their acquisition date are accounted for
as short-term investments. The Company's investments consisted of a corporate
bond as of February 1, 1998 (there was no difference between cost and estimated
fair value).
Inventories -- Inventories, which consist of food, beverage, merchandise and
supplies, are reported at the lower of cost or market determined on the
first-in, first-out method.
Preopening Costs -- Capitalized preopening costs, consisting of promotional
costs, direct costs related to hiring and training the initial workforce, and
other direct costs associated with opening a Complex, are amortized over the one
year period following the opening of the Complex.
Property and Equipment -- Expenditures for new facilities and those which
substantially increase the useful lives of the property, including interest
during construction, are capitalized. Interest capitalized in 1997, 1996, and
1995 was $851, $377, and $442, respectively. Equipment purchases are capitalized
at cost. Property and equipment lives are estimated as follows: buildings, 40
years; leasehold and building improvements, shorter of 20 years or lease life;
furniture, fixtures and equipment, 5 to 10 years; games, 5 years.
Goodwill -- Goodwill arose as a result of the Distribution in which the
transaction to issue shares of the Company's common stock to related parties in
exchange for their minority owner's interests in the Company was accounted for
as an acquisition of minority interest. The resulting goodwill of $8,952 is
being amortized over 30 years.
Depreciation and Amortization -- Property and equipment, excluding most
games, are depreciated on the straight-line method over the estimated useful
lives of the assets. Games are generally depreciated on the
150%-double-declining-balance method over the estimated useful lives of the
assets. Intangible assets are amortized on the straight-line method over
estimated useful lives as follows: trademarks over statutory lives; lease rights
over remaining lease terms.
F-5
33
Income Taxes -- The Company uses the liability method which recognizes the
amount of current and deferred taxes payable or refundable at the date of the
financial statements as a result of all events that have been recognized in the
financial statements and as measured by the provisions of enacted tax laws.
Prior to June 29, 1995, the Company was included in the consolidated federal
income tax return of Edison Brothers.
Stock Option Plan -- The Company has elected to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and
related Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under SFAS No. 123, "Accounting
for Stock-Based Compensation," requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, because
the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
Earnings Per Share -- In 1997, the Financial Accounting Standards Board
issued Statement No. 128, Earnings per Share. Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented and, where appropriate, restated to conform to
the Statement 128 requirements.
Stock Dividend -- On August 14, 1997, the Company declared a three-for-two
split in the form of a stock dividend to stockholders of record as of August 25,
1997. The stock dividend was distributed September 15, 1997. All share and per
share information has been adjusted to give effect to the three-for-two split in
the form of a stock dividend.
Revenue Recognition --Foreign license revenues are deferred until the Company
fulfills its obligations under license agreements, which is upon the opening of
the Complex. The license agreements provide for continuing royalty fees based on
percentage of gross revenues and are recognized when assured.
Recent Accounting Pronouncements -- In April 1998, the Accounting Standards
Executive Committee of the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-5 entitled "Reporting on the Costs of
Start-Up Activities." The SOP, which is effective for fiscal years beginning
after December 15, 1998, requires entities to expense as incurred all start-up
and preopening costs that are not otherwise capitalizable as long-lived assets.
Restatement of previously issued annual financial statements is not permitted by
the SOP, and entities are not permitted to report the pro forma effects of the
retroactive application of the new accounting standard. The Company's adoption
of the new accounting standard will involve the recognition of the cumulative
effect of the change in accounting principle required by the SOP as a one-time
charge against earnings, net of any related income tax effect, retroactive to
the beginning of the fiscal year.
Note 2: Property and Equipment
1997 1996
Land ...........................................................................$ 8,192 $ 8,192
Buildings....................................................................... 25,104 20,503
Leasehold and building improvements............................................. 52,680 29,784
Games........................................................................... 23,376 14,831
Furniture, fixtures and equipment............................................... 25,908 17,276
Construction in progress........................................................ 1,536 6,448
- ------------------------------------------------------------------------------------------------------------
Total cost................................................................. 136,796 97,034
Accumulated depreciation........................................................ (22,736) (14,997)
- ------------------------------------------------------------------------------------------------------------
$ 114,060 $ 82,037
F-6
34
Note 3: Accrued Liabilities
Accrued liabilities consist of the following:
1997 1996
Payroll.........................................................................$ 686 $ 735
Sales and use tax............................................................... 1,031 363
Real estate tax................................................................. 545 335
Other........................................................................... 993 314
- --------------------------------------------------------------------------------------------------------
$ 3,255 $ 1,747
Note 4: Long-term Debt
The Company has a secured revolving line of credit which permits borrowing up to
a maximum of $50.0 million. At February 1, 1998, $34.3 million was available
under this facility. Borrowings under this facility bear interest at a floating
rate based on LIBOR or, at the Company's option, the bank's prime rate plus in
each case a margin based upon financial performance (8.8% at February 1, 1998)
and is secured by all capital stock or equity interest in the stock of the
Company and its subsidiaries. The facility, which matures in May 2000, has
certain financial covenants including minimum consolidated tangible net worth,
maximum leverage ratio, minimum fixed charge coverage, maximum level of capital
expenditures for new Complexes and restrictions of dividends as well as other
distributions.
Note 5: Income Taxes
The provision for income taxes for 1997 and 1996 reflects the results of
operations of the Company as a stand-alone entity. The provision for income
taxes for 1995 is calculated on a separate return basis, as provided under the
tax sharing agreement with Edison Brothers. The provision for income taxes
consists of:
1997 1996 1995
Current Expense
Federal.........................................................$ 2,802 $ 2,296 $ 2,800
State and local................................................. 363 806 305
Defferred tax (benefit).............................................. 2,249 1,241 (1,018)
- -----------------------------------------------------------------------------------------------------------------
Total provision for income taxes................................$ 5,414 $ 4,343 $ 2,087
Significant components of the deferred tax liabilities and assets in the
consolidated balance sheets are as follows:
1997 1996 1995
Accelerated depreciation.............................................$ 3,893 $ 2,464 $ 1,832
Preopening costs..................................................... 1,411 813 769
Prepaid expenses..................................................... 112 185 --
Capitalized interest costs........................................... 463 200 --
- -----------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities.................................. 5,879 3,662 2,601
Workers compensation ................................................ 168 235 295
Net asset basis difference at acquisition............................ 25 84 110
Other................................................................ 189 95 189
- -----------------------------------------------------------------------------------------------------------------
Total deferred tax assets............................................ 382 414 594
- -----------------------------------------------------------------------------------------------------------------
Net deferred tax asset (liability)...................................$ (5,497) $ (3,248) $ (2,007)
F-7
35
Reconciliation of federal statutory rates to effective income tax rates:
1997 1996 1995
Federal corporate statutory rate..................................... 35.0% 34.0% 34.0%
State and local income taxes, net
of federal income tax benefit................................... 1.6% 5.0% 4.0%
Goodwill amortization and other
nondeductible expenses ......................................... 1.8% 1.5% 4.9%
Tax credits.......................................................... (1.4)% (2.0)% (1.2)%
Effect of change in deferred tax rate................................ (.5)% .9% --
Other................................................................ 1.3% 1.3% --
- -----------------------------------------------------------------------------------------------------------------
Effective tax rate................................................... 37.8% 40.7% 41.7%
Note 6: Leases
The Company leases certain properties and equipment under operating leases. Some
of the leases include options for renewal or extension on various terms. All
leases require the Company to pay property taxes, insurance and maintenance of
the leased assets. Some leases have provisions for additional percentage rentals
based on revenues; however, payments of percentage rent were minimal during the
three-year period ended February 1, 1998. For 1997, 1996, and 1995, rent expense
for operating leases was $5,404 , $2,751, and $790, respectively. At February 1,
1998, future minimum lease payments required under operating leases are $5,550,
1998; $5,054, 1999; $4,324, 2000; $3,934, 2001; $3,938, 2002; and $57,647,
total.
Note 7: Common Stock
In 1995 the Company adopted the Dave & Buster's, Inc. 1995 Stock Option Plan
(the "Plan") covering 675,000 shares of common stock. In 1997, the Company
increased the shares of common stock covered by the Plan to 1,350,000. The Plan
provides that incentive stock options may be granted at option prices not less
than fair market value at date of grant (110% in the case of an incentive stock
option granted to any person who owns more than 10% of the total combined voting
power of all classes of stock of the Company). Non-qualified stock options may
not be granted for less than 85% of the fair market value of the common stock at
the time of grant and are exercisable 20% per year after one year from the date
of grant.
In connection with the Distribution, the Company granted, on the date of the
Distribution, non-qualified stock options to certain minority shareholders
entitling them to purchase Company common stock equal to 2% of the total Company
common stock outstanding immediately prior to the Distribution (approximately
156,000 shares). The per share exercise price for each such option is $10.00.
Twenty percent of such options were exercisable seven months after the public
offering by the Company of its common stock which was completed in October 1995.
Thereafter, 20% of such options become exercisable on the second, third, fourth
and fifth anniversary of the Distribution.
In 1996 the Company adopted a stock option plan for outside directors (the
"Directors Plan"). A total of 150,000 shares of common stock are subject to the
Directors Plan. The options granted under the Directors Plan vest ratably over a
three year period.
Pro forma information regarding net income and earnings per common share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 1997, 1996 and
1995, respectively: risk-free interest rates of 6.09%, 5.75% and 5.89%; dividend
yields of 0.0%; volatility factors of the expected market price of the Company's
common stock of .363, .344 and .344; and a weighted-average life of the option
of 4.4, 4.2 and 5.0 years.
F-8
36
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. For purposes of pro
forma disclosures, the estimated fair value of the options is amortized to
expense over the option's vesting period. Because SFAS 123 requires compensation
expense to be recognized over the vesting period the impact on pro forma net
income and pro forma earnings per common share as reported below may not be
representative of pro forma compensation expense in future years. The Company's
pro forma information follows:
1997 1996 1995
Net income, as reported....................................................$ 8,897 $ 6,340 $ 2,922
Pro forma net income.......................................................$ 8,353 $ 6,057 $ 2,782
Basic net income per share, as reported....................................$ .77 $ .58 $ .34
Pro forma basic net income per share.......................................$ .72 $ .56 $ .32
Diluted net income per share, as reported..................................$ .76 $ .58 $ .34
Pro forma diluted net income per share.....................................$ .71 $ .55 $ .32
A summary of the Company's stock option activity, and related information is as
follows:
1997 1996 1995
Weighted-Average Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price Options Exercise Price
Outstanding - beginning of year........... 534 $ 11.11 383 $ 11.29 -- $ --
Granted................................... 432 $ 19.41 164 $ 10.74 383 $ 11.29
Exercised................................. (17) $ 11.91 (1) $ 12.17 -- $ --
Forfeited................................. --- $ --- (12) $ 11.59 -- $ --
Outstanding end of year................... 949 $ 14.88 534 $ 11.11 383 $ 11.29
Exercisable at end of year................ 174 $ 11.06 75 $ 11.27 -- $ --
Weighted-average fair value of options
granted during the year............... $ 7.48 $ 3.89 $ 4.56
As of February 2, 1997, exercise prices for 724,000 options and 225,000 options
ranged from $10.00 to $14.08 and $20.71 to $24.75, respectively. The
weighted-average remaining contractual life of the options is 8.1 years.
Under a Shareholder Protection Rights Plan adopted by the Company, each share of
outstanding common stock includes a right which entitles the holder to purchase
one one-hundredth of a share of Series A Junior Participating Preferred Stock
for seventy five dollars. Rights attach to all new shares of common stock
whether newly issued or issued from treasury stock and become exercisable only
under certain conditions involving actual or potential acquisitions of the
Company's common stock. Depending on the circumstances, all holders except the
acquiring person may be entitled to 1) acquire such number of shares of Company
common stock as have a market value at the time of twice the exercise price of
each right, or 2) exchange a right for one share of Company common stock or
one-hundredth of a share of the Series A Junior Participating Preferred Stock,
or 3) receive shares of the acquiring company's common stock having a market
value equal to twice the exercise price of each right. The rights remain in
existence until ten years after the Distribution, unless they are redeemed (at
one cent per right).
F-9
37
Note 8: Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
shares:
1997 1996 1995
---- ---- ----
Numerator - Net Income $ 8,897 $ 6,340 $ 2,922
- -----------------------------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic net income per share -
weighted average shares 11,532 10,901 8,681
Effect of dilutive securities - employee stock options 179 68 --
- -----------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share - adjusted
weighted average shares 11,711 10,969 8,681
Basic net income per share $ .77 $ .58 $ .34
Diluted net income per share $ .76 $ .58 $ .34
Options to purchase 210,000 shares of common stock at prices ranging from $23.63
to $24.75 were outstanding during the second half of 1997 but were not included
in the computation of diluted net income per share because the options would be
antidilutive.
Note 9: Related Party Activity
The Company is party to a consulting agreement with Sandell Investments
("Sandell"), a partnership the principals of which are non-management
stockholders of the Company. Sandell advises the Company with respect to
expansion and site selection, market analysis, improvement and enhancement of
the Dave & Buster's concept and other similar and related activities. Annual
fees of $125 were paid to Sandell in 1997, 1996 and 1995, the maximum fee
provided for under the agreement.
Pursuant to employment agreements executed in connection with its initial
acquisition of the Dave & Buster's operations, the Company was obligated to make
payments (the "Earn-out Compensation") to the Co-Chief Executive Officers of the
Company and, under the consulting agreement discussed in the preceding
paragraph, to Sandell. The Earn-out Compensation was based on a multiple of the
Company's after-tax earnings from the first five Complexes during the one-year
period ending August 1, 1995. Pursuant to an agreement dated July 11, 1994 (the
"Transaction Agreement"), the Company paid an aggregate of $10,000 (less prior
advances and loans by the Company to the Co-Chief Executive Officers of the
Company) as a non-refundable advance against the obligation to pay the Earn-out
Compensation.
Note 10: Employee Benefit Plan
The Company sponsors a plan to provide retirement benefits under the provision
of Section 401(k) of the Internal Revenue Code (the 401(k) Plan) for all
employees who have completed a specified term of service. Company contributions
may range from 0% to 100% of employee contributions, up to a maximum 6% of
eligible employee compensation, as defined. Employees may elect to contribute up
to 20% of their eligible compensation on a pretax basis. Benefits under the
401(k) Plan are limited to the assets of the 401(k) Plan.
F-10
38
Note 11: Contingencies
In October 1997, a litigation limited liability corporation owned by the Edison
Brother's creditors filed a lawsuit against multiple parties, including former
Edison Brothers shareholders and the Company, seeking recovery in connection
with the Spin-Off and certain related transactions. The plaintiff's aggregate
recovery in this lawsuit would be limited to the shortfall received by the
creditors in the Edison Brothers bankruptcy, and the Company does not have
access to complete knowledge as to the number of former Edison Brothers
shareholders who have accepted a proposed settlement offer (which would lessen
the amount of the shortfall) and as to which former Edison Brothers shareholders
are included in the purported defendant class. For these reasons, the Company is
unable to quantify any potential exposure from this lawsuit. The Company
believes that the claims against the former Edison Brothers shareholders involve
a substantially greater amount than the claims against the CompanyAlthough no
assurance can be made with respect to the results of the litigation, the Company
believes that the claims asserted against the Company are without merit, and the
Company intends to vigorously defend itself.
The Company is subject to certain legal proceedings in addition to the matter
described above 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 all actions will not
materially affect the consolidated results of operations or financial condition
of the Company.
Note 12: Quarterly Financial Information (unaudited)
First Second Third Fourth
Fiscal 1997
Total revenues............................................$ 28,632 $ 29,671 $ 30,840 $ 39,361
Operating income.......................................... 3,476 3,216 2,655 5,143
Net income................................................ 2,001 1,789 1,535 3,572
Basic net income per share................................$ .18 $ .16 $ .14 $ .27
Basic weighted average shares outstanding ................ 10,902 10,907 11,300 13,018
Diluted net income per share..............................$ .18 $ .16 $ .13 $ .27
Diluted weighted average shares outstanding............... 10,994 11,061 11,541 13,249
First Second Third Fourth
Fiscal 1996
Total revenues.............................................$ 20,217 $ 21,145 $ 20,096 $ 27,317
Operating income........................................... 2,433 2,370 2,354 3,564
Net income................................................. 1,419 1,418 1,419 2,084
Basic net income per share.................................$ .13 $ .13 $ .13 $ .19
Basic weighted average shares outstanding.................. 10,901 10,901 10,902 10,902
Diluted net income per share...............................$ .13 $ .13 $ .13 $ .19
Diluted weighted average shares outstanding................ 10,920 11,008 10,993 10,953
The 1996 and first three quarters of 1997 earnings per share amounts have been
restated to comply with Statement of Financial Accounting Standards No. 128,
Earnings per Share.
F-11
39
REPORT OF INDEPENDENT AUDITORS
STOCKHOLDERS AND BOARD OF DIRECTORS
DAVE & BUSTER'S, INC.
We have audited the accompanying consolidated balance sheets of Dave & Buster's,
Inc. as of February 1, 1998 and February 2, 1997, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended February 1, 1998. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Dave & Buster's,
Inc. at February 1, 1998 and February 2, 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended February 1, 1998, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Dallas, Texas
March 30, 1998
F-12