SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission file number: 0-25858

DAVE & BUSTER’S, INC.

(Exact Name of Registrant as Specified in Its Charter)

Registrant’s telephone number, including area code:
(214) 357-9588

     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

     The number of shares of the Issuer’s common stock, $.01 par value, outstanding as of December 7, 2004 was 13,755,116 shares.

Dave & Buster’s, Inc.

Form 10-Q

TABLE OF CONTENTS

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Part I. FINANCIAL INFORMATION

Item 1. CONSOLIDATED FINANCIAL STATEMENTS

DAVE & BUSTER’S, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(unaudited)

See accompanying notes to consolidated financial statements.

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DAVE & BUSTER’S, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)

See accompanying notes to consolidated financial statements.

4

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
DAVE & BUSTER’S, INC.
(In thousands)

See accompanying notes to consolidated financial statements.

5

DAVE & BUSTER’S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

See accompanying notes to consolidated financial statements.

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DAVE & BUSTER’S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2004

(unaudited)
(dollars in thousands, except per share amounts and number of complexes)

Note 1: Organization and Description of Business

Dave and Buster’s, Inc., a Missouri corporation, is a leading operator of large format, high-volume regional entertainment complexes. Our one industry segment is the ownership and operation of restaurant/entertainment complexes under the name “Dave and Buster’s” which are located in the United States and Canada.

Note 2: Summary of Significant Accounting Policies

Basis of Presentation - The consolidated financial statements include the accounts of Dave & Buster’s, Inc. and all wholly-owned subsidiaries (the “Company”). All material intercompany accounts and transactions have been eliminated in consolidation. The Company’s one industry segment is the ownership and operation of restaurant/entertainment complexes (a “Complex” or “Store”) under the name “Dave & Buster’s,” which are principally located in the United States and Canada. In our opinion, all adjustments (consisting solely of normal recurring adjustments) necessary for a fair statement of the results for the interim periods presented have been included. Our quarterly financial data should be read in conjunction with our consolidated financial statements for the year ended February 1, 2004 (including the notes thereto), set forth in Dave & Buster’s, Inc.’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 14, 2004.

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.

Inventories -Food, beverage and merchandise inventories are reported at the lower of cost or market determined on a first-in, first-out method. Smallware supplies inventories, consisting of china, glassware and kitchen utensils are capitalized at the store opening date, or when additions to the smallware inventory are necessary due to changes in our menu, and are reviewed periodically for valuation. Smallware replacements are expensed as incurred. Inventories consist of the following:

Preopening Costs -All start-up and preopening costs are expensed as incurred.

Property and Equipment - Property and equipment are recorded at cost. Expenditures that substantially increase the useful lives of the property and equipment are capitalized, whereas costs incurred to maintain the appearance and functionality of such assets are charged to repair and maintenance expense. Interest costs capitalized during the construction of facilities in the third quarter of 2004 and 2003 were $494 and $115, respectively. Property and equipment, excluding most games are depreciated on the straight-line method over the estimated useful life of the assets. Games are depreciated on an accelerated method over the estimated useful life of the assets. Reviews are performed regularly to determine whether facts or circumstances exist that indicate the carrying values of our property and equipment are impaired. We assess the recoverability of our property and equipment by comparing the projected future undiscounted net cash flows associated with these assets to their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the estimated fair market value of the assets.

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Depreciable lives - Expenditures for new facilities and those that substantially increase the useful lives of the property, including interest during construction, are capitalized along with equipment purchases at cost. These costs are depreciated over various methods based on an estimate of the depreciable life, resulting in a charge to the operating results of the Company. The actual results may differ from these estimates under different assumptions or conditions. The depreciable lives are as follows:

Income Taxes - We use 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 are recognized in the financial statements and as measured by the provisions of enacted tax laws.

Stock-Based Compensation - At October 31, 2004, we had two stock-based compensation plans covering employees and directors. We have elected to follow recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), in accounting for stock-based awards to our employees and directors. Under APB No. 25, if the exercise price of an employee’s stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized.

Although SFAS No. 123, Accounting for Stock-Based Compensation, allows us to continue to follow APB No. 25 guidelines, we are required to disclose pro forma net income (loss) and net income (loss) per share as if we had adopted the fair value based method prescribed by SFAS No. 123. Our pro forma information is as follows:

Foreign Currency Translation - The financial statements related to the operations of our Toronto complex are prepared in Canadian dollars. Income statement amounts are translated at average exchange rates for each period, while the assets and liabilities are translated at period-end exchange rates. Translation adjustments are included as a component of stockholders’ equity. Total currency adjustments recorded for the quarter and the year ended October 31, 2004 were $86 and $3, respectively.

Revenue Recognition - Food, beverage and amusement revenues are recorded at point of service. Foreign license revenues are deferred until the Company fulfills its obligations under license agreements, which is upon the opening of the complex or upon resolution of any outstanding accounts receivable from the licensee. The license agreements provide for continuing royalty fees based on a percentage of gross revenues, which are recognized when realization is assured. Revenue from international licensees for the third quarter of 2004 and 2003 was $200 and $47, respectively. Revenue from international licensees for year-to-date 2004 and 2003 was $479 and $284, respectively.

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Note 3: Long-term Debt

On August 7, 2003 we closed a $30 million private placement of 5.0 percent convertible subordinated notes due 2008 and warrants to purchase 574,691 shares of our common stock at $13.46 per share. The investors may convert the notes into our common stock at any time prior to the scheduled maturity date of August 7, 2008. The conversion price is $12.92 per share, which represents a 20 percent premium over the closing price of our common stock on August 5, 2003. If fully converted, the notes will convert into 2,321,981 shares of our common stock. After August 7, 2006, we have the right to redeem the notes and we may also force the exercise of the warrants if our common stock trades above a specified price during a specific period of time. The convertible subordinated notes have a maximum leverage ratio, which is significantly less restrictive than the senior bank credit facility covenant. And in the event we were to pay a cash dividend to common stockholders, the convertible subordinated notes would be included in the distribution as if converted. The fair value of the warrants of $1,276 was recorded as a discount on the notes and is being amortized over the term of the notes. As a result, the effective annual interest rate on the notes is 7.5 percent. We used the net proceeds of the offering to reduce the outstanding balances of our term and revolving loans under our senior bank credit facility.

On October 29, 2003, we amended our senior bank credit facility. The current facility includes a $45 million revolving credit facility and a $15 million term debt facility. The revolving credit facility may be used for borrowings or letters of credit. At October 31, 2004, we had $5,780 letters of credit outstanding, leaving $26,022 available for additional borrowings or letters of credit. Borrowings under the revolving credit facility and term debt facility bear interest at a floating rate based on the bank’s prime interest rate (4.25 percent at October 31, 2004) or the one-month EuroDollar (1.84 percent at October 31, 2004), plus, in each case, a margin based on financial performance. The interest rate was 3.94 percent at October 31, 2004.

The fair market value of our long-term debt approximates its carrying value. On November 1, 2004, we closed on the second amendment to our restated senior bank credit facility. See Note 6.

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 $33,605 at October 31, 2004 is fixed at 5.44 percent. The agreement has not been designated as a hedge and adjustments are recorded to mark the instrument to its fair market value through current operations. As a result of the swap agreement, we recorded additional interest expense of $394 and $459 in the third quarter of 2004 and 2003, respectively. The recorded additional interest expense was $1,255 for the thirty-nine weeks ended October 31, 2004 compared to $1,393 for the thirty-nine weeks ended November 2, 2003.

Note 4:Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share:

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Note 5: Contingencies

The Company is subject to certain legal proceedings and claims that arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to all actions currently pending and any potential claims of which management has received notice will not materially affect the consolidated results of operations or financial condition of the Company.

On September 30, 2004, we opened a new Dave & Buster’s entertainment complex located at the Santa Anita Mall in Arcadia, California. In addition, on November 1, 2004, we assumed the lease obligations for the nine acquired Jillian’s complexes described in Note 6. The complexes are leased under operating leases. The following table sets forth our operating lease commitments as of November 1. 2004, and reflects the lease obligations for our new Santa Anita complex and the nine acquired Jillian’s complexes.

Note 6: Subsequent Events

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 for $45 million in cash and the assumption of certain liabilities. We also funded an additional $1 million to be held in escrow pending the possible acquisition of the Jillian’s restaurant/entertainment complex in Gwinnett, Georgia. In addition, we expect to incur approximately $3.6 million in transaction costs related to the acquisition. Through October 31, 2004, we had incurred approximately $4.7 million in costs related to this acquisition. The cash requirements of the acquisition were funded from the deposits and 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 intellectual property rights and the leasehold interests, as well as the related improvements and furniture, fixtures and equipment. The results of the acquired complexes will be included in our consolidated results beginning on the date of acquisition. The historical results of operations of the acquired complexes were not significant compared to our historical consolidated results of operations.

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 November 1, 2004, borrowings under the revolving credit facility and term debt facility were $15 million and $55 million, respectively. In addition, at November 1, 2004, we had $7,780 letters of credit outstanding, leaving $7,220 available for additional borrowings or letters of credit. The additional borrowings were utilized to fund the Jillian’s transaction, pay all fees and expenses incurred with the acquisition, and the costs related to the amended facility. Borrowings under the revolving credit facility and term debt facility bear interest at a Eurodollar base rate of 2.08% plus a margin as prescribed in the amended facility of 2.50% for a total rate of 4.58% at November 1, 2004.

The amended facility has certain financial covenants including a maximum leverage ratio, a minimum fixed charge coverage ratio, a minimum consolidated tangible net worth ratio and a maximum capital expenditures ratio. Any outstanding borrowings under the revolving credit facility are due at maturity on September 30, 2009. Borrowings under

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the term debt facility are repayable in 20 consecutive quarterly payments starting at $1.8 million and increasing each calendar year. The fair market value of our long-term debt approximates its carrying value.

Long-term debt consists of the following:

The following table sets forth the Company’s debt payments and convertible debt commitments (excluding interest), as of November 1, 2004: