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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 January 30, 2005 Commission File No. 0-
DAVE & BUSTER’S, INC.
(Exact name of registrant as specified in its charter) Missouri 43- (State or other jurisdiction of incorporation or organization) (I.R.S. employer identification number) 2481 Manana Drive, Dallas, Texas (Address of principal executive offices)
(Zip Code) Registrant’s telephone number, Including area code (214) 357- Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Common Stock, $0.01 par value Securities registered pursuant to Section 12(g) of the Act: None 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 þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations 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. o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ No o The aggregate market value of the voting common stock held by non-affiliates of the registrant at August 1, 2004 (the last business day of the registrant’s second fiscal quarter) was $207,488,957. The number of shares of common stock outstanding at April 12, 2005 was 14,022,267 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s Proxy Statement for its 2005 Annual Meeting of Stockholders are incorporated by reference into Part III hereof, to the extent indicated herein. FORM 10-K TABLE OF CONTENTS PART I Item 1. Business 1 Item 2. Properties 9 Item 3. Legal Proceedings 10 Item 4. Submission of Matters to a Vote of Security Holders 10 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 11 Item 6. Selected Financial Data 11 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 12 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 21 Item 8. Financial Statements and Supplementary Data 21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 21 Item 9A. Controls and Procedures 21 Item 9B. Other Information 23 Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting 24
PART III
Item 10. Directors and Executive Officers of the Registrant 26 Item 11. Executive Compensation 26 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 26 Item 13. Certain Relationships and Related Transactions 26 Item 14. Principal Accountant Fees and Services 26 PART IV Item 15. Exhibits and Financial Statement Schedules 26 Ratio of Earnings to Fixed Charges Subsidiaries Consent of Registered Public Accounting Firm Rule 13a-14(a)/15d-14(a) Certifications Section 1350 Certifications i
Revenues in the amusement component of our business were weaker than the food and beverage components. We were able to offset these revenue declines by maintaining operating margins. This enabled us to improve our net income to $12.9 million compared to $10.9 million last year. Acquisition of Certain Assets of Jillian’s Entertainment Holdings, Inc. On November 1, 2004, we completed the acquisition of nine Jillian’s locations pursuant to an asset purchase agreement. The cash requirements of the acquisition were funded from borrowings under our amended senior bank credit facility described below. The nine Jillian’s complexes acquired are located in the metropolitan areas of: Minneapolis, Minnesota; Philadelphia, Pennsylvania; Concord, North Carolina; Farmingdale, New York; Nashville, Tennessee; Houston, Texas; Arundel, Maryland; Scottsdale, Arizona and Westbury, New York. The assets acquired consist principally of the leasehold interests, as well as the related improvements, furniture, fixtures and equipment and the Jillian’s trade name and related trademarks. Amendment to Senior Bank Credit Facility. On November 1, 2004, we closed on the second amendment to our restated senior bank credit facility. The amended facility includes a $60 million revolving credit facility and a $55 million term debt facility. The revolving credit facility is secured by all assets of the Company and may be used for borrowings or letters of credit. On January 30, 2005, borrowings under the revolving credit facility and term debt facility were $6 million and $53 million, respectively. Competition Dave & Buster’s is a regional Entertainment Complex (“EC”). Regional ECs offer multiple entertainment options designed to appeal to a broad, regional customer base. Regional ECs, such as Dave & Buster’s and theme parks, compete for customers’ discretionary entertainment dollars with each other, as well as with other providers of out-of-home entertainment, including localized single attraction facilities such as movie theaters, bowling alleys, nightclubs and restaurants. In addition, regional and localized complexes would compete with more national ECs such as Walt Disney World and Universal Studios. These three types of entertainment offerings can be distinguished from each other by factors such as:
- cost;
- breadth of attractions;
- the geographic range from which they draw customers; and
- frequency and duration of customer visits. Visits to destination ECs may include airfare and hotel costs, which may make them more costly than regional ECs to visit. Regional ECs and localized single attraction facilities typically cost significantly less per visit and draw a majority of their customers from within a local or extended local radius. Although our competitors may include any EC located within the same region as one of our Dave & Buster’s entertainment complexes, we believe that we compete primarily against localized single attraction facilities. Single attraction venues offer a limited entertainment package. To the extent that regional ECs offer multiple entertainment options that appeal to a broad spectrum of customers, they are distinguishable from single attraction venues. We believe that the regional EC market is underdeveloped relative to other entertainment concepts and that attractive, un-penetrated geographic markets remain available. Seasonality The fourth quarter of our fiscal year achieves the highest revenue and profitability, primarily as a result of the significant special event business during the period. This special event business is impacted by the number of holiday parties held during this time of the year. The third quarter is normally the lowest producing quarter in terms of revenue and profitability with first and second quarter being somewhat similar in results.
Strategy Continue to improve revenues and profitability. We have implemented a number of strategic initiatives aimed at increasing cash flow including maximizing capacity utilization, optimizing game contribution and reducing expenses. In addition, in February 2004 we introduced a new marketing program with a new advertising agency that we anticipate will, over time, have some positive impact on revenues. By continuing our operational reviews, we expect to continue to discover more efficient ways to run our business, and to improve our profitability and our cash flow. Continue focus on product enhancement. We will continue to emphasize guest satisfaction and promote guest loyalty by seeking to provide quality food, beverage and entertainment offerings in each of our complexes. We anticipate:
- Introducing new and exciting game offerings by remaining on the leading edge of technology in concert with the game manufacturers.
- Continuing the assimilation of the Jillian’s stores with emphasis on product improvement in food, beverage and amusements.
- Continuing our progress in reducing amusements costs through our program of direct purchase of merchandise from Asia.
- Continuing our emphasis on a well-rounded, quality, food and beverage menu by routine updates, which reflect current trends and guest favorites. Pursue A Disciplined Growth Strategy. As a pioneer in the regional EC market, we will continue to evaluate attractive site opportunities. We typically select new sites on the basis of demographic and transportation trends. We opened one Dave & Buster’s complex in 2004 in Arcadia, CA. We also expanded our reach through the acquisition of nine Jillian’s complexes. We anticipate returning to more normal growth patterns by opening a minimum of three complexes in 2005 and up to four annually thereafter. Products Entertainment Traditional Entertainment. Each Dave & Buster’s entertainment complex offers a number of traditional entertainment options. These traditional offerings include pocket billiards, shuffleboard tables, and the Show Room or other special event rooms, which are designed for hosting private social parties and business gatherings, as well as our sponsored events. Traditional entertainment games, such as pool and shuffleboard, are rented by the hour. Million Dollar Midway Games. The largest area in each Dave & Buster’s complex is the “Million Dollar Midway”, which is designed to provide high-energy entertainment through a broad selection of electronic, skill and sports-oriented games. A Power Card activates most midway games and can be recharged for additional play. The Power Card enables guests to activate games more easily and encourages extended play of games. By replacing coin-activation, the Power Card eliminated the technical difficulties and maintenance issues associated with coin activated equipment. Furthermore, the Power Card feature increased our flexibility in pricing and promoting our games. The “Million Dollar Midway” includes both fantasy/high technology games and classic midway entertainment. High-technology attractions vary among the entertainment complexes and may include large-screen interactive electronic games, such as Madden Football, Derby Owners Club, and state-of-the-art golf simulators. 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 entertainment complex. 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
Marketing, Advertising And Promotion We operate our marketing, advertising, and promotional programs through our corporate marketing department with the assistance of an external advertising agency and a national public relations firm. Our corporate marketing department is also responsible for controlling media and production costs. During fiscal 2004, our expenditures for advertising and promotions were approximately 3.4 percent of our revenues. We anticipate maintaining this level of expenditures in fiscal 2005. In order to expand our guest base, we focus marketing efforts in three key areas:
- advertising and system-wide promotions;
- field marketing and local promotions; and
- special events for corporate and group guests. We continue to conduct market research to better understand the brand, our guests and to develop engaging messages and promotional programs. In addition, we develop marketing and media plans that are highly localized and designed to support individual market opportunities and local store marketing initiatives. We continue to utilize in-store promotions, emails and customer communications to increase visit frequency and check average. Our corporate and group sales programs are initiated and controlled by our Sales Department, which provides direction, training, and support to our Special Events Managers and their team within each entertainment complex. Primary focus for the Special Events Sales team is to identify and contact corporations, associations, organizations, and community groups within the team’s marketplace for the purposes of booking group events. The Special Events Sales teams pursue corporate and social group bookings through a variety of sales initiatives including outside sales calls and cultivation of repeat business. We develop and maintain a database of corporate and group bookings. Each Dave & Buster’s location hosts events for many multi-national, national and regional businesses. Many of our corporate and group guests schedule repeat events. A significant number of our guests are introduced to the Dave & Buster’s concept through these special events. Foreign Operations As of October 6, 2003, we acquired the operations of Funtime Hospitality Corp, our former Canadian licensee located in Toronto for $4.1 million. This acquisition generated revenue of $8.8 million in fiscal 2004, representing approximately 2.3% of our consolidated revenue. As of January 30, 2005 we had approximately 1.6% of our long-lived assets located outside the United States. Our foreign activities are subject to various risks of doing business in a foreign country, including currency fluctuations, political changes, changes in laws and regulations and economic stability. We do not believe there is any material risk associated with the Canadian operations or any dependence by our domestic business upon the Canadian operations. Suppliers The principal goods used by us are games, prizes and food and beverage products, which are available from a number of suppliers. We have also expanded our contacts with amusement merchandise suppliers through our direct import program. Federal and state mandated increases in the minimum wage could have the repercussion of increasing our expenses, as our suppliers may be severely impacted by higher minimum wage standards. Intellectual Property We have registered the trademarks “Dave & Buster’s” and “Power Card” with the United States Patent and Trademark Office and in various foreign countries. We have also registered and/or applied for certain additional trademarks with the United States Patent and Trademark Office and in various foreign countries. We consider our trade name and our signature “bulls-eye” logo to be important features of our goodwill and seek to actively monitor and protect our interest in this property in the various jurisdictions where we operate.
In connection with our acquisition of nine Jillian’s locations, we also acquired the Jillian’s tradename and certain other related marks. Government Regulation And Environmental Matters We are subject to various federal, state, and local laws affecting our business. Each entertainment complex 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, county or municipality in which the entertainment complex is located. Each entertainment complex 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 entertainment complex, including minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, and storage and dispensing of alcoholic beverages. We have not encountered any material problems relating to alcoholic beverage licenses to date. The failure to receive or retain a liquor license, or any other required permit or license, in a particular location, or to continue to qualify for, or renew our licenses, could materially adversely affect our operations and our ability to obtain such a license or permit in other locations. The failure to comply with other applicable federal, state or local laws, such as federal and state wage and hour laws, may also adversely affect our business. We are also subject to “dram-shop” statutes in certain states in which our entertainment complexes are located. These statutes generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated individual. We carry liquor liability coverage as part of our existing comprehensive general liability insurance, which we believe is consistent with coverage carried by other entities in our industry. Although we are covered by insurance, a judgment against us under a “dram- shop” statute in excess of our liability coverage could have a material adverse effect on our operations. As a result of operating certain entertainment games and attractions, including operations that offer redemption prizes, we are subject to amusement licensing and regulation by the states, counties and municipalities in which we have entertainment complexes. Certain entertainment attractions are heavily regulated and such regulations vary significantly between communities. From time to time, existing entertainment 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. We have, in the past, had to seek changes in state or local regulations to enable us to open a given location. To date, we have been successful in obtaining all such regulatory changes. We are subject to federal and state environmental regulations, but these have not had a materially negative effect on our operations. More stringent and varied requirements of local and state governmental bodies with respect to zoning, land use, and environmental factors could delay or prevent development of new complexes in particular locations. We are subject to the Fair Labor Standards Act, which governs such matters as minimum wages, overtime and other working conditions, along with the Americans With Disabilities Act and various family-leave mandates. Although we expect increases in payroll expenses as a result of federal and state mandated increases in the minimum wage, such increases are not expected to be material. However, we are uncertain of the repercussion, if any, of increased minimum wages on our other expenses, as our suppliers may be more severely impacted by higher minimum wage standards. Employees As of January 30, 2005, we employed approximately 7,400 persons, approximately 175 of whom served in administrative or executive capacities, approximately 600 of whom served as entertainment complex management personnel, and the remainder of whom were hourly entertainment complex personnel. None of our employees are covered by collective bargaining agreements, and we have never experienced an organized work stoppage, strike, or labor dispute. We believe our working conditions and compensation
to November 1994, Mr. Smith served in operating positions of increasing responsibility for the Company and its predecessors. Bryan L. Spain, 57, has served as Senior Vice President — Procurement and Development of the Company since December 2002. Previously, he served as Vice President of Real Estate from March 1997 to December 2002. From 1993 until joining the Company in March 1997, Mr. Spain managed the Real Estate Acquisition and Development Program for Incredible Universe and Computer City Divisions of Tandy Corporation. In addition, from 1991 to 1993, Mr. Spain served as Director, Real Estate Financing for Tandy Corporation. Risk Factors Our results of operations are dependent upon consumer discretionary spending. Our results of operations are dependent upon discretionary spending by consumers, particularly by consumers living in communities in which the entertainment complexes are located. A significant weakening in any of the local economies in which we operate may cause our guests to curtail discretionary spending, which in turn could materially affect our profitability. The ongoing conflict in Iraq, potential for future terrorist attacks, the national and international responses, and other acts of war or hostility may create economic and political uncertainties that could materially adversely affect our business, results of operations and financial condition in ways we currently cannot predict. In addition, seasonality is a factor in our results of operations due to typically lower third quarter revenues in the fall season and higher fourth quarter revenues associated with the year-end holidays. We operate a limited number of entertainment complexes and new entertainment complexes require significant investment. As of January 30, 2005, we operated 43 entertainment complexes. The combination of the relatively limited number of locations and the significant investment associated with each new entertainment complex may cause our operating results to fluctuate significantly. Due to this relatively limited number of locations, poor results of operations at any single entertainment complex could materially affect our profitability. Historically, new entertainment complexes experience a drop in revenues after their first year of operation, and we do not expect that, in subsequent years, any increases in comparable revenues will be meaningful. Additionally, because of the substantial up-front financial requirements to open new entertainment complexes, the investment risk related to any single entertainment complex is much larger than that associated with most other companies’ restaurant or entertainment venues. We may not be able to compete favorably in the highly competitive out-of-home entertainment market. The out-of-home entertainment market is highly competitive. There are a great number of businesses that compete directly and indirectly with us. Many of these entities are larger and have significantly greater financial resources and a greater number of units than we have. Although we believe most of our competition comes from localized single attraction facilities that offer a limited entertainment package, we may encounter increased competition in the future, which may have an adverse effect on our profitability. In addition, the legalization of casino gambling in geographic areas near any current or future entertainment complex would create the possibility for entertainment alternatives, which could have a material adverse effect on our business. Our operations are subject to many government regulations that could affect our operations. Various federal, state and local laws and permitting and license requirements affect our business, including alcoholic beverage control, amusement, health and safety and fire agencies in the state, county or municipality in which each entertainment complex is located. For example, each entertainment complex 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. The failure to receive or retain a liquor license, or any other required permit or license, in a particular location, or to continue to qualify for or renew our licenses, could
adversely affect our operations and our ability to obtain such a license or permit in other locations. The failure to comply with other applicable federal, state or local laws, such as federal and state minimum wage and overtime pay laws, may also adversely affect our business. We may face difficulties in attracting and retaining qualified employees for our entertainment complexes. The operation of our business requires qualified executives, managers and skilled employees. From time to time there may be a shortage of skilled labor in certain of the communities in which our entertainment complexes are located. While we believe that we will continue to be able to attract, train and retain qualified employees, shortages of skilled labor will make it increasingly difficult and expensive to attract, train and retain the services of a satisfactory number of qualified employees. Our growth depends upon our ability to open new entertainment complexes. We opened a new Dave & Buster’s entertainment complex in Arcadia, California and acquired 9 Jillian’s entertainment complexes in fiscal
- Our ability to expand depends upon our access to sufficient capital, locating and obtaining appropriate sites, hiring and training additional management personnel, and constructing or acquiring, at reasonable cost, the necessary improvements and equipment for these complexes. We intend to open three new complexes in fiscal 2005. Based on our current liquidity and capital resources and operating performance, we may not be able to generate sufficient cash flow or obtain sufficient additional funding to open any new complexes in fiscal 2006 or thereafter. In particular, the capital resources required to develop each new entertainment complex are significant. There is no assurance that we will be able to expand or that new entertainment complexes, if developed, will perform in a manner consistent with our most recently opened entertainment complexes or make a positive contribution to our operating performance. Local conditions, events and natural disasters could adversely affect our business. Certain of the regions in which our entertainment complexes are located, including six in California, have been, and may in the future be, subject to adverse local conditions, events or natural disasters, such as earthquakes. Depending upon its magnitude, a natural disaster could severely damage our entertainment complexes, which could adversely affect our business and operations. We currently maintain property and business interruption insurance through our aggregate property policy for each of our entertainment complexes. However, there is no assurance that our coverage will be sufficient if there is a major disaster. In addition, upon the expiration of our current policies, we cannot assure you that adequate coverage will be available at economically justifiable rates, if at all. Available Information. We post on our website at www.daveandbusters.com our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Item 2. Properties The Company operates a total of 34 Dave & Buster’s and 9 Jillian’s entertainment complexes located in 18 states and in Toronto, Canada. We are currently utilizing all available land at our owned locations. Our real estate leases are with unaffiliated third parties except as noted in “Certain relationships and related transactions.” Of these, we lease the building for 37 sites, own the building and lease the land for two sites and own the land and building for four sites. Our leases generally have an initial term of 10 to 20 years, with renewal terms that range from 5 to 20 years, and provide for a fixed rental plus, in certain instances, percentage rentals based on gross sales. In addition, our leases in many instances include escalation of rent payments during the initial term and/or during the renewal terms.
PART II
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities. The Company’s Common Stock trades on the New York Stock Exchange (“NYSE”) under the symbol DAB. The following table summarizes the high and low sales prices per share of Common Stock for the applicable periods indicated, as reported on the Nasdaq National Market and by the NYSE. High Low Fiscal Year 2004 Fourth Quarter $ 20.31 $ 17. Third Quarter 19.19 15. Second Quarter 18.86 16. First Quarter 18.75 12. Fiscal Year 2003 Fourth Quarter $ 14.65 $ 12. Third Quarter 13.15 9. Second Quarter 11.35 9. First Quarter 9.39 7. At April 12, 2005 there were approximately 1,666 holders of record of the Common Stock. The Company has never paid cash dividends on its Common Stock and does not currently intend to do so as cash flows are reinvested into the Company to further pay down debt and fund capital expenditures for the entertainment complex business. Payment of dividends in the future will depend upon the Company’s growth, profitability, financial condition and such other factors that the Board of Directors may deem relevant. 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 Ended January 30, February 1, February 2, February 3, February 4, 2005(2) 2004(1) 2003(1) 2002(1) 2001(1) (As restated) (As restated) (As restated) (As restated) (In thousands, except per share amounts and store data) Statement of Operations Data: Total revenues $ 390,267 $ 362,822 $ 373,752 $ 358,009 $ 332, Operating income 25,391 23,466 14,823 19,178 26, Income before provision for income taxes and cumulative effect of a change in an accounting principle 19,805 16,540 7,680 11,358 18, Cumulative effect of a change in an accounting principle, net of income taxes — — (7,096) — — Net income (loss) $ 12,880 $ 10,921 $ (2,008) $ 7,259 $ 11, Earnings (loss) per share - after cumulative effect of change in an accounting principle: Basic $ 0.97 $ 0.83 $ (0.15) $ 0.56 $ 0. Diluted 0.87 0.79 (0.15) 0.56 0. Weighted average shares outstanding: Basic 13,331 13,128 12,997 12,956 12, Diluted 16,540 14,646 13,404 13,016 12,
Fiscal Year Ended January 30, February 1, February 2, February 3, February 4, 2005(2) 2004(1) 2003(1) 2002(1) 2001(1) (As restated) (As restated) (As restated) (As restated) (In thousands, except per share amounts and store data) Balance Sheet Data: Working capital (deficit) $ (7,656) $ (220) $ (4,231) $ (4,478) $ 5, Total assets 397,408 340,201 338,531 358,316 341, Long-term debt, less current installments 80,351 50,201 59,494 84,896 103, Stockholders’ equity 196,945 179,784 166,585 167,390 159, Other information: Company operated complexes open at end of period 43 33 32 31 27 (1) As more fully described in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Footnote 2 to the Consolidated Financial Statements, the Company has restated the previously issued financial statements for these periods for certain lease accounting issues. (2) On November 1, 2004 we completed the acquisition of nine Jillian’s locations. Item 7. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations (Dollars in thousands, except per share data). General Our fiscal year ends on the Sunday after the Saturday closest to January 31. Fiscal years 2004, 2003 and 2002 each contained 52 weeks. Restatement of Previously Issued Financial Statements On February 7, 2005, the Chief Accountant of the Securities and Exchange Commission issued a letter to the American Institute of Certified Public Accountants, which clarified existing generally accepted accounting principles applicable to leases. The Company has reviewed the principles covered in the letter with its Audit Committee, specifically the accounting for construction allowances and rent holidays. As a result, management and our Audit Committee determined that previously issued financial statements should be restated. Historically, the Company has recognized straight line rent expense for leases beginning on the opening date of our entertainment complexes and other facilities. This had the effect of excluding the construction period of these facilities from the calculation of the period over which it calculates rent. The Company now includes the construction period in the calculations of straight-line rent. Rent incurred during the construction period is capitalized as a component of the cost of the facilities and is amortized over a period equal to the lesser of the initial non-cancelable lease term plus any periods covered by renewal options that the Company considers reasonably assured of exercising, or the useful life of the related assets. Rent incurred during the pre-opening period is included in pre-opening costs. Additionally, the Company has changed its classification of construction allowances in its consolidated balance sheets to include the allowances as a component of deferred lease liabilities, which are being amortized as a reduction to rent expense over the terms of the respective leases. Historically, construction allowances have been recorded as a reduction of property and equipment and the related amortization has been classified as a reduction to depreciation and amortization expense. Furthermore, construction allowances are now presented as a component of cash flows from operating activities in the consolidated statements of cash flows. The Company’s consolidated statements of cash flows have historically reflected construction allowances as a reduction of capital expenditures within investing activities. The cumulative effect of the restatement adjustments through the Company’s February 1, 2004 balance sheet was to increase property and equipment, net and deferred lease liabilities by approximately $44,312 and $49,327, respectively, and to reduce deferred tax liabilities and stockholders’ equity by approximately $1,
standards of product quality. In 2004, we began purchasing a number of our amusement items direct from Asia, which contributed to a reduction in our overall amusement cost of product. Operating payroll and benefits — Operating payroll and benefits were approximately 28 percent of revenue during fiscal 2004. Operating payroll and benefits consist of wages, employer taxes and benefits for our store personnel. We continually review the opportunity for cost reductions principally through variable labor scheduling refinements. Other store operating expenses — Other store operating expenses consist of store-related occupancy, restaurant expenses, utilities, repair and maintenance and marketing costs. Liquidity and cash flows — Our primary source of cash flow is from net income and availability under our revolving 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. We expect seasonality to be a factor in the operation and results of our business in the future with historically anticipated lower third quarter revenues and higher fourth quarter revenues associated with the year-end holidays. The effects of supplier price increases are expected to be partially offset by selected menu price increases where competitively appropriate. We believe that low inflation rates in our market areas have contributed to reasonably stable food and labor costs in recent years. However, there is no assurance that low inflation rates will continue, the cost of our products will remain stable or that the Federal minimum wage rate will not increase. As we look ahead to fiscal 2005, we continue to focus on improving same store revenue, implementing an effective marketing program, the resumption of growth through new store construction and continued improvement in operational cost efficiencies. Results of Operations Revenues The following table sets forth, for the periods indicated, a year-over-year comparison of our revenues: 2004 2003 2004 vs. 2003 2002 2003 vs. 2002 $ % $ % Food and beverage $ 209,689 $ 191,881 $ 17,808 9.3% $ 192,882 $ (1,001) (0.5)% Amusement and other 180,578 170,941 9,637 5.6% 180,870 (9,929) (5.5)% Total revenues $ 390,267 $ 362,822 $ 27,445 7.6% $ 373,752 $ (10,930) (2.9)% Number of comparable stores 32 28 26 Number of non-comparable stores 11 5 6 Revenue from international licensees $ 627 $ 331 $ 564 The acquisition of nine Jillian’s locations in the fourth quarter of fiscal 2004 contributed approximately $11,300 of the food and beverage revenue increase and $8,500 of the increase in amusement and other revenue. Comparable store total revenues for fiscal 2004 were down approximately $800 (0.2%) from results achieved in 2003. Food and beverage revenues were up approximately 0.7% over 2003 driven primarily by a 2.8% increase in comparable beverage revenues. Food revenues were down 0.4% from fiscal 2003 at our comparable stores. Amusement revenues declined by 1.6% from 2003. Management believes this decline results primarily from the impact of the economic conditions on our guests’ discretionary income. Revenue from non-comparable Dave & Buster’s stores (stores not included in the comparable base) increased primarily from the 53 additional store weeks in 2004 at our Toronto location, which was acquired in
2003 and additionally, the opening of a new Dave & Buster’s in Arcadia, California. In 2004, our revenue mix was 54 percent for food and beverage and 46 percent for amusements and other revenue. This compares to 53 percent and 47 percent, respectively, for 2003. Continued emphasis on special events and party business had a positive impact with comparable store party sales at 16.1 percent of total revenues compared to 15.5 percent last year. In 2003, our revenue mix was 53 percent for food and beverage and 47 percent for amusements and other revenue. This compares to 52 percent and 48 percent, respectively, for 2002. Emphasis on our special events and party business had a positive impact with comparable store party sales at 15.5 percent of total revenues compared to 13.6 percent in 2002. Cost of Products The following table sets forth, for the periods indicated, a year-over-year comparison of our cost of product: 2004 2003 2004 vs. 2003 2002 2003 vs. 2002 $ % $ % Food and beverage $ 51,367 $ 46,354 $ 5,013 10.8% $ 46,220 $ 134 (0.3)% Amusement and other 21,704 21,788 (84) (0.4)% 22,532 $ (744) (3.3)% Total cost of product $ 73,071 $ 68,142 $ 4,929 7.2% $ 68,752 $ (610) (0.9)% Percentage of total revenues 18.7% 18.8% 18.4% During 2004 the costs of food and beverage were up approximately 30 basis points driven principally by increases in the price of cooking oil and other groceries. The costs of amusements declined approximately 70 basis points. This reduction was significantly influenced by reduced costs achieved through our direct import of merchandise from Asia. During 2003, amusement costs were up 20 basis points, while food and beverage costs were up 70 basis points. We expanded the beverage component promotional activity resulting in positive comparable store revenue with a corresponding increase in cost as a percentage of revenue. Amusement cost increased primarily as a result of a product mix shift toward higher redemption game play. Operating Payroll and Benefits The following table sets forth, for the periods indicated, a year-over-year comparison of our operating payroll and benefits: 2004 2003 2004 vs. 2003 2002 2003 vs. 2002 $ % $ % Total operating payroll and benefits $ 110,542 $ 105,027 $ 5,515 5.3% $ 114,904 $ (9,877) (8.6)% Percentage of total revenues 28.3% 28.9% 30.7% In 2004 compared to 2003, the increase in absolute dollars was attributed to the addition of Jillian’s approximately 1,600 employees at the acquired Jillian’s locations, the opening of the new store in California and a full year of payroll from the Toronto location. However, as a percentage of revenues, this cost declined due to continued labor control initiatives. During 2003, the decrease in absolute dollars over the prior year and as a percentage of revenues was attributed to cost reduction initiatives, consisting of a reduction in workforce in the fourth quarter of 2002 and scheduling refinements implemented in the first quarter of 2003, partially offset by the addition of the Toronto location.
assets condition and related estimates of useful life. Games are generally depreciated on the 150 percent declining-balance method over the estimated useful life of the assets. Depreciation increased in 2004, primarily as a result of the addition of new stores through acquisition and construction. Depreciation was relatively flat in 2003 compared to 2002, due to one new store opening late in 2002 and the acquisition of the Toronto location late in 2003. Preopening Expenses All start-up and preopening costs related to new store openings are expensed as incurred. Preopening costs totaled $1,295 in 2004. The Company opened one new store (Arcadia, California) in 2004, no new stores were opened in 2003 and one store (Islandia, New York) opened in 2002, which had preopening costs of $1,520. Interest Expenses The following table sets forth, for the periods indicated, a year-over-year comparison of our interest expenses: 2004 2003 2004 vs. 2003 2002 2003 vs. 2002 $ % $ % Interest $ 5,586 $ 6,926 $ (1,340) (19.4)% $ 7,143 $ (217) (3.0)% Percentage of total revenues 1.4% 1.9% 1.9% Debt reductions prior to the Jillian’s acquisition and increased interest capitalization as a result of new store construction and other capital projects contributed to the overall reduction in interest expense in fiscal year 2004 from prior year amounts. Interest expense was essentially flat in 2003 as compared to 2002 in both absolute dollars and as a percentage of revenues. At the end of 2003, our total outstanding debt was $53,500, down $14,300 from the end of 2002. The reduction in outstanding debt was attributed to repayments from cash flows resulting from increased earnings and no new store openings in 2003. Provision for Income Taxes The following table sets forth, for the periods indicated, a year-over-year comparison of our provision for income taxes: 2004 2003 2004 vs. 2003 2002 2003 vs. 2002 $ % $ % Income tax expense $ 6,925 $ 5,619 $ 1,306 23.2% $ 2,592 $ 3,027 116.8% Percentage of total revenues 1.8% 1.6% 0.7% Effective tax rate 35.0% 34.0% 34.0% Our effective tax rate differs from the statutory rate primarily due to state income taxes, offset by the deduction for FICA tip credits. Liquidity and Capital Resources 2004 2003 2004 vs. 2003 2002 2003 vs. 2002 $ % $ % Operating cash flows $ 48,339 $ 45,517 $ 2,822 6.2% $ 41,840 $ 3,723 8.9% The increase in 2004 was attributed primarily to the increase in net income complimented by the changes in the components of our working capital and deferred rent. The increase in 2003 to 2002 is primarily attributed to the higher level of net income.
2004 2003 2004 vs. 2003 2002 2003 vs. 2002 $ % $ % Investing cash flows $ (81,772) $ (27,421) $ (54,351) 198.2% $ (22,206) $ (5,261) 23.7% The investing activities for 2004 included the acquisition of the nine Jillian’s locations, which required cash of $47,876 and $34,234 of other capital expenditures, including the opening of our Arcadia, California store, installation of MICROS point-of-sale systems at all Dave & Buster’s locations, completion of our Winner’s Circle conversion projects and normal capital expenditures. The investing activities for 2003 included over $9,000 in games, the $3,600 acquisition of the Toronto complex from a licensee and normal capital expenditures at previously existing stores. 2004 2003 2004 vs. 2003 2002 2003 vs. 2002 $ % $ % Financing cash flows $ 37,160 $ (16,729) $ 53,889 322.1% $ (21,625) $ 4,896 (22.6)% The 2004 cash provided by financing activity was the result of increased debt used to fund the Jillian’s acquisition, net of debt pay down during the first three quarters of 2004. Cash used in financing activities in fiscal 2003 and 2002 was used to reduce outstanding debt balances and payment of debt fee costs. On November 1, 2004, we amended our current credit facility by entering into a Second Amended and Restated Revolving Credit and Term Loan Agreement with Bank of America, N.A. and certain other lending institutions. This agreement amends certain terms of our previous credit facility described in the Amended and Restated Revolving Credit and Term Loan Agreement dated October 29, 2003. The maximum principal amount of the credit facility was increased to $115,000, comprised of a $60,000 revolving credit facility and a $55, term debt facility. Borrowings on the credit facility bear interest at a floating rate based upon the bank’s prime interest rate (5.25 percent at January 30, 2005) or, at our option, the applicable EuroDollar rate (2.41 percent at January 30, 2005), plus a margin, in either case, based upon financial performance as prescribed in the amended facility. The interest rate on the credit facility at January 30, 2005 was 4.91 percent. The amended credit facility is secured by all of the assets of Dave & Buster’s and its subsidiaries. The facility has certain financial covenants, including a maximum leverage ratio, a minimum fixed charge coverage ratio, a minimum consolidated tangible net worth, and a maximum amount of permitted capital expenditures. Management does not believe that the capital expenditure limits established in the credit facility will be an impediment to future development. The maximum permitted capital expenditures for fiscal year 2005, which excludes amounts to be reimbursed by landlords, is $47,500. The Company currently anticipates that the cash requirements for new locations and normal capital expenditures will be in the range of $32,000 to $36,000 in 2005. Any outstanding borrowings under the revolving credit facility are due at maturity on November 1, 2009. Borrowings under the term debt facility are repayable in 20 consecutive quarterly payments which increase annually to maturity, with the final payment due on November 1, 2009. On January 30, 2005, $47,580 was available under the revolving credit facility. In 2001, we entered into an interest rate swap agreement that expires in 2007, to change a portion of our variable rate debt to fixed-rate debt. Pursuant to the swap agreement, the interest rate on notional amounts aggregating $31,030 at January 30, 2005 is fixed at 5.44 percent. We are exposed to credit losses for periodic settlements of amounts due under the agreements if the LIBOR rate decreases. As a result of the swap agreement, we recorded additional interest expense of $1,577, $1,863, and $1,803 in 2004, 2003 and 2002, respectively. The market risks associated with the amended agreements are mitigated because increased interest payments under the agreement resulting from reductions in the LIBOR rate are partially offset by a corresponding decrease in interest expense under the debt obligation as a result of lower EuroDollar rates. We expect to open three new locations in fiscal 2005, in addition to our otherwise normal expenses for acquiring new games for amusement operations and other normal capital expenditures. We believe that available cash and cash flow from operations, together with borrowings under the credit facility, will be
