S-4/A 1 ds4a.htm AMENDMENT 1 TO FORM S-4 Amendment 1 to Form S-4
Table of Contents

As filed with the Securities and Exchange Commission on August 30, 2010

Registration Statement No. 333-168759

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Amendment No. 1 to

FORM S-4

 

 

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Dave & Buster’s, Inc.

(Exact name of registrant as specified in its charter)

 

Missouri   5812   43-1532756

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

2481 Mañana Drive

Dallas, Texas 75220

(214) 357-9588

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

*For additional registrants, please see “Table of Additional Registrants” on the following page.

 

 

Jay L. Tobin

Senior Vice President and General Counsel

Dave & Buster’s, Inc.

2481 Mañana Drive

Dallas, Texas 75220

(214) 357-9588

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies of all communications to:

Bruce H. Hallett

Hallett & Perrin

2001 Bryan Street, Suite 3900

Dallas, Texas 75201

(214) 922-4120

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

 

 

If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ¨

   Accelerated filer  ¨

Non-accelerated filer  x (Do not check if smaller reporting company)

   Smaller reporting company  ¨

If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:

Exchange Act Rule 13e-4(i) (Cross-Border Issue Tender Offer)  ¨

Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer)  ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title Of Each Class Of Securities

To Be Registered

 

Amount To

Be

Registered

 

Proposed

Maximum

Offering

Price Per

Unit

 

Proposed

Maximum

Aggregate

Offering

Price(1)

 

Amount Of
Registration

Fee

11% Senior Notes due 2018

  $200,000,000   100%   $200,000,000   $14,260(1)

Guarantees of 11% Senior Notes due 2018

  $200,000,000   (2)   (2)   None
 
 
(1) Previously paid.

 

(2) Pursuant to Rule 457(n) under the Securities Act of 1933, as amended, no separate consideration will be received for the guarantees.

 

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to Section 8(a), may determine.

 

 

 


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The following subsidiaries of Dave & Buster’s, Inc. are guarantors of $200,000,000 aggregate principal amount of 11% Senior Notes due 2018 and are additional registrants:

TABLE OF ADDITIONAL REGISTRANTS*

 

Name

   State or other jurisdiction
of incorporation or
organization
   Primary  Standard
Industrial

Classifications
Code Number
   I.R.S. Employer
Identification
Number

D&B Leasing, Inc.

   Texas    5812    75-2955199

D&B Marketing Company, LLC

   Virginia    5812    36-4633593

D&B Realty Holding, Inc.

   Missouri    5812    43-1532957

DANB Texas, Inc.

   Texas    5812    75-2617801

Dave & Buster’s I, L.P.

   Texas    5812    75-2680048

Dave & Buster’s Management Corporation, Inc.

   Delaware    5812    20-1574573

Dave & Buster’s of California, Inc.

   California    5812    33-0733010

Dave & Buster’s of Colorado, Inc.

   Colorado    5812    84-1420593

Dave & Buster’s of Florida, Inc.

   Florida    5812    58-2223494

Dave & Buster’s of Georgia, Inc.

   Georgia    5812    58-1979705

Dave & Buster’s of Hawaii, Inc.

   Hawaii    5812    75-2915058

Dave & Buster’s of Indiana, Inc.

   Indiana    5812    26-4313913

Dave & Buster’s of Illinois, Inc.

   Illinois    5812    43-1693115

Dave & Buster’s of Kansas, Inc.

   Kansas    5812    20-2089073

Dave & Buster’s of Maryland, Inc.

   Maryland    5812    52-1962723

Dave & Buster’s of Massachusetts, Inc.

   Massachusetts    5812    27-1248194

Dave & Buster’s of Nebraska, Inc.

   Nebraska    5812    20-2089036

Dave & Buster’s of New York, Inc.

   New York    5812    13-3959054

Dave & Buster’s of Oklahoma, Inc.

   Oklahoma    5812    26-3194123

Dave & Buster’s of Oregon, Inc.

   Oregon    5812    27-2570886

Dave & Buster’s of Pennsylvania, Inc.

   Pennsylvania    5812    36-3919848

Dave & Buster’s of Pittsburgh, Inc.

   Pennsylvania    5812    74-2932642

Dave & Buster’s of Virginia, Inc.

   Virginia    5812    26-3839036

Dave & Buster’s of Washington, Inc.

   Washington    5812    27-2874047

Dave & Buster’s of Wisconsin, Inc.

   Wisconsin    5812    26-3807832

Sugarloaf Gwinnett Entertainment Company, L.P.

   Delaware    5812    61-1397960

Tango Acquisition, Inc.

   Delaware    5812    20-1220294

Tango License Corporation

   Delaware    5812    20-1657537

Tango of Arizona, Inc.

   Delaware    5812    20-1209982

Tango of Arundel, Inc.

   Delaware    5812    20-1574690

Tango of Farmingdale, Inc.

   Delaware    5812    20-1574594

Tango of Franklin, Inc.

   Delaware    5812    20-1574645

Tango of Houston, Inc.

   Delaware    5812    20-1574628

Tango of North Carolina, Inc.

   Delaware    5812    20-1209953

Tango of Sugarloaf, Inc.

   Delaware    5812    20-1657553

Tango of Tennessee, Inc.

   Delaware    5812    20-1209923

Tango of Westbury, Inc.

   Delaware    5812    20-1574610

 

* The address, including zip code, and telephone number, including area code, of each of the above registrants’ principal executive offices are the same as those of Dave & Buster’s, Inc.


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The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and it is not soliciting an offer to buy, these securities in any state where the offer or sale is not permitted.

 

Subject to Completion, Dated August 30, 2010

PROSPECTUS

LOGO

Dave & Buster’s, Inc.

Offer to Exchange

$200,000,000 aggregate principal amount of its 11% Senior Notes due 2018, which have been

registered under the Securities Act of 1933 (the “Exchange Notes”), for any and all of its

outstanding unregistered 11% Senior Notes due 2018 that were issued in a private offering

on June 1, 2010 (the “Restricted Notes”).

We are conducting the exchange offer in order to provide you with an opportunity to

exchange your unregistered notes for freely tradable notes that have been registered under

the Securities Act.

Terms of the Exchange Offer:

 

   

The exchange offer expires at 11:59 p.m., New York City time, on                     , 2010, unless extended. We do not currently intend to extend the expiration date.

 

   

We will exchange all Restricted Notes that are validly tendered and not withdrawn before the expiration of the Exchange Offer.

 

   

You may withdraw tenders of Restricted Notes at any time before the expiration of the Exchange Offer.

 

   

The exchange of Restricted Notes should not be a taxable event for U.S. federal income tax purposes.

 

   

We will not receive any proceeds from the Exchange Offer.

 

   

The terms of the Exchange Notes are substantially identical to the Restricted Notes, except that the Exchange Notes are registered under the Securities Act of 1933, as amended, and the transfer restrictions and registration rights applicable to the Restricted Notes do not apply to the Exchange Notes.

 

   

Each of our existing and future restricted subsidiaries that guarantees any of our credit facilities (the “Guarantors”) will unconditionally guarantee the Exchange Notes. If we do not make payments on the Exchange Notes, the Guarantors must make them instead.

 

   

We do not intend to list the Exchange Notes on any securities exchange or to have them approved for quotation through any automated quotation system.

Investment in these securities involves risk. See “Risk Factors” beginning on page 15

Neither the Securities and Exchange Commission nor any state securities commission nor any other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus is                     , 2010.

This prospectus, the letter of transmittal and the notice of guaranteed delivery are first being mailed to all holders of the original notes on                     , 2010.


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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY DAVE & BUSTER’S, INC. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE UNDER ANY CIRCUMSTANCES AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF DAVE & BUSTER’S, INC. AND ITS SUBSIDIARIES SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SECURITIES OTHER THAN THOSE SPECIFICALLY OFFERED HEREBY OR AN OFFER TO SELL ANY SECURITIES OFFERED HEREBY IN ANY JURISDICTION WHERE, OR TO ANY PERSON WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. THE INFORMATION CONTAINED IN THIS PROSPECTUS SPEAKS ONLY AS OF THE DATE OF THIS PROSPECTUS UNLESS THE INFORMATION SPECIFICALLY INDICATES THAT ANOTHER DATE APPLIES.

Table of Contents

 

     Page

Summary

   4

Risk factors

   15

The exchange offer

   30

Use of proceeds

   36

Ratio of earnings to fixed charges

   36

Unaudited pro forma consolidated financial information

   37

Selected historical consolidated financial and other data

   44

Management’s discussion and analysis of financial condition and results of operations

   46

Changes in and disagreements with accountants on accounting and financial disclosure

   67

Business

   68

Management

   78

Principal stockholders

   82

Certain relationships and transactions

   82

Description of other indebtedness

   83

Description of the exchange notes

   86

Book-entry settlement and clearance

   137

Certain United States federal income tax considerations

   139

Certain ERISA considerations

   140

Plan of distribution

   142

Legal matters

   142

Experts

   142

Available information

   143

Index to consolidated financial statements

   F-1


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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes and incorporates by reference statements that are, or may deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements can be identified by the use of forward looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “intends,” “may,” “will” or “should” or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this prospectus and in documents incorporated herein by reference and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this prospectus or in the documents incorporated herein by reference. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this prospectus or in the documents incorporated herein by reference, those results or developments may not be indicative of results or developments in subsequent periods. As a result we caution you against relying on any forward-looking statement.

The following listing represents some, but not necessarily all, of the factors that may cause actual results to differ from those anticipated or predicted:

 

   

the impact of the global economic crisis on our business and financial results;

 

   

our ability to open new stores and operate them profitably;

 

   

changes in consumer preferences, general economic conditions or consumer discretionary spending;

 

   

the effect of competition in our industry;

 

   

potential fluctuations in our quarterly operating results due to seasonality and other factors;

 

   

the impact of potential fluctuations in the availability and cost of food and other supplies;

 

   

the impact of instances of food-borne illness and outbreaks of disease;

 

   

the impact of federal, state or local government regulations relating to our personnel or the sale of food or alcoholic beverages;

 

   

legislative or regulatory changes;

 

   

the continued service of key management personnel;

 

   

our ability to attract, motivate and retain qualified personnel;

 

   

the impact of litigation;

 

   

changes in accounting principles, policies or guidelines;

 

   

changes in general economic conditions or conditions in securities markets or the banking industry;

 

   

a materially adverse change in the financial condition of Dave & Buster’s;

 

   

adverse local conditions, events, terrorist attacks, weather and natural disasters; and

 

   

other economic, competitive, governmental, regulatory, geopolitical and technological factors affecting operations, pricing and services.

 

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You should also read carefully the factors described in the “Risk factors” section of this prospectus to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements.

Any forward-looking statements which we make in this prospectus speak only as of the date of such statements, and we undertake no obligation to update such statements. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.

NON-GAAP FINANCIAL MEASURES

The Securities and Exchange Commission (“SEC”) has adopted rules to regulate the use in filings with the SEC and in public disclosures of “non-GAAP financial measures,” such as net income (loss) before interest expense (net), provision (benefit) for income taxes and depreciation and amortization expense (“EBITDA”), Adjusted EBITDA and the ratios related thereto. These measures are derived on the basis of methodologies other than in accordance with Generally Accepted Accounting Principles (“GAAP”). These rules govern the manner in which non-GAAP financial measures are publicly presented and prohibit in all filings with the SEC, among other things:

 

   

exclusion of charges or liabilities that require, or will require, cash settlement or would have required cash settlement, absent an ability to settle in another manner, from a non-GAAP liquidity measure; and

 

   

adjustment of a non-GAAP financial measure to eliminate or smooth items identified as non-recurring, infrequent or unusual, when the nature of the charge or gain is such that it has occurred in the past two years or is reasonably likely to recur within the next two years.

The non-GAAP financial measures we have included in this prospectus, EBITDA and Adjusted EBITDA do not comply with the SEC rules governing the presentation of non-GAAP financial measures. In addition, some of the adjustments to EBITDA which comprise Adjusted EBITDA, as presented in this prospectus, would not be allowed under Regulation S-X under the Securities Act. See “Summary—Summary historical and pro forma financial and other data” for a description of the calculation of EBITDA and Adjusted EBITDA. Our measurements of EBITDA and Adjusted EBITDA may not be comparable to those of other companies that use similarly titled measures. For a presentation of income before cumulative effect of a change in accounting principle as calculated under GAAP and a reconciliation to our EBITDA and Adjusted EBITDA, see “Summary—Summary historical and pro forma financial and other data” and “Selected historical consolidated financial and other data” in this prospectus.

PRESENTATION OF STORE LEVEL AND CUSTOMER INFORMATION

This prospectus contains information regarding our store-level performance, on a per store basis and average store revenues. Except where the context otherwise indicates, this information is presented using results for stores that have been opened for at least one year and excludes information for our one franchised store located in Canada.

Comparable store sales data represents a period-over-period comparison of stores open at least 18 months as of the beginning of each of the relevant fiscal periods. See “Management’s discussion and analysis of financial condition and results of operations.”

This prospectus also contains information regarding guest feedback, guest satisfaction, guest demographics and other similar items. This information is based upon data collected by us during the periods presented. This

 

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information is reported voluntarily by our guests and thus represents responses from only a portion of the total number of our guests. We have not independently verified any of the demographic information collected from our customers. Over the periods presented, we have also made changes to the questionnaires used to collect this information from customers and to the way in which we encourage customers to respond to them. We use the information collected as one measure of the performance of our stores and use it to assess the success of our initiatives to improve the quality of the product we offer.

 

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SUMMARY

The following summary highlights information contained elsewhere in this prospectus but does not contain all the information that may be important to you. Before making an investment decision, you should read this entire prospectus, including our consolidated financial statements and the related notes included elsewhere herein. You should also carefully consider the information set forth under “Risk factors.” In addition, certain statements include forward-looking information that is subject to risks and uncertainties. See “Cautionary statement regarding forward-looking statements.”

Company overview

We are the leading owner and operator of high-volume venues that combine dining and entertainment in North America. We offer our customers a unique opportunity to “Eat Drink Play®” all in one location, through a full menu of high-quality food and beverage items combined with an extensive assortment of entertainment attractions, including state-of-the-art video games, interactive simulators and other games of skill. We developed this concept in 1982, and remain the only company offering this customer experience under a single brand and on a national basis. We believe we appeal to a diverse customer base by providing a highly customizable experience in a dynamic and fun setting.

As of August 2, 2010, we owned and operated 57 stores in 24 states and Canada. In addition, there is one franchised store operating in Canada. Our stores range in size between 16,000 and 66,000 square feet, are open seven days a week and our average revenues per store were $9.8 million in fiscal 2009.

When our founders opened our first location in Dallas in 1982, they sought to create a unique venue providing interactive entertainment options for adults and families, while serving high-quality food and beverages. Since then we have followed the same principle for each new store, and in doing so have developed a distinctive brand based on a differentiated customer value proposition: Eat Drink Play®. The interplay between entertainment, dining and full-service bar areas is the defining feature of the Dave & Buster’s customer experience, and the layout of each store is designed to maximize crossover between these activities. We believe this creates an experience that cannot be replicated at home or elsewhere without having to visit multiple destinations. Our guests enjoy the flexibility to tailor each visit into a highly customized experience, which we believe further differentiates our brand. Our locations are also designed to be attractive venues for private parties, business functions and other corporate sponsored events.

The transactions

On June 1, 2010, Games Acquisition Corp. (“Holdings”), a newly-formed Delaware corporation owned by Oak Hill Capital Partners III, L.P. and Oak Hill Capital Management Partners III, L.P. (collectively, “Oak Hill”) acquired all of the outstanding capital stock (the “Acquisition”) of Dave & Buster’s Holdings, Inc. (“D&B Holdings”) from Wellspring Capital Partners III, L.P. (“Wellspring”) and HBK Main Street Investors L.P. (“HBK” and, together with Wellspring, the “Sellers”). In connection therewith, Games Merger Corp., a newly-formed Missouri corporation and an indirect wholly-owned subsidiary of Holdings, merged (the “Merger”) with and into D&B Holdings’ wholly-owned, direct subsidiary, Dave & Buster’s, Inc. (with Dave & Buster’s, Inc. being the surviving corporation in the Merger). As a result of the Acquisition, Oak Hill indirectly controls approximately 96% and certain members of our Board of Directors and management control approximately 4% of the outstanding capital stock of Holdings. Subsequent to the transactions described above, Holdings changed its name to Dave & Buster’s Parent, Inc.

On the closing date of the Acquisition, the following events occurred:

 

   

All outstanding shares of D&B Holdings’ common stock, other than shares held by Holdings, were converted into the right to receive the per share acquisition consideration;

 

 

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All vested options to acquire D&B Holdings’ common stock were converted into the right to receive an amount in cash equal to the difference between the per share exercise price and the per share acquisition consideration without interest;

 

   

We retired all outstanding debt and accrued interest related to our existing senior credit facility and senior notes;

 

   

We issued $200,000,000 of the Restricted Notes;

 

   

We entered into a senior secured credit facility which provides for senior secured financing of up to $200,000,000 consisting of:

 

   

a $150,000,000 term loan facility with a maturity on June 1, 2016, and

 

   

a $50,000,000 revolving credit facility, including a sub-facility of up to the U.S. dollar equivalent of $1,000,000 for borrowings in Canadian dollars by our Canadian subsidiary, a letter of credit sub-facility, and a swingline sub-facility, with a maturity on June 1, 2015.

We refer to these events, together with the Merger, in this prospectus as the “Transactions.”

Oak Hill Capital Partners

Oak Hill Capital Partners is a private equity firm with more than $8.4 billion of committed capital from leading entrepreneurs, endowments, foundations, corporations, pension funds and global financial institutions. Over a period of more than 24 years, the professionals at Oak Hill Capital Partners and its predecessors have invested in more than 60 significant private equity transactions. Oak Hill Capital Partners’ equity investment in Dave & Buster’s will be made primarily out of its current fund, Oak Hill Capital Partners III, L.P., a partnership with $3.8 billion of committed capital that had its final close in February 2009. Oak Hill Capital Partners invests across the broad segments of the U.S. and global economies with an industry-focused, theme-based approach. Oak Hill Capital Partners is one of several Oak Hill partnerships, each of which has a dedicated and independent management team. These Oak Hill partnerships comprise over $30 billion of investment capital across multiple asset classes.

Summary description of the exchange offer

On June 1, 2010, we completed the private offering of $200,000,000 aggregate principal amount of the Restricted Notes. As part of that offering, we entered into a registration rights agreement with the initial purchasers of those Restricted Notes in which we agreed, among other things, to offer to exchange up to $200,000,000 aggregate principal amount of Exchange Notes for a like principal amount of Restricted Notes. We sometimes refer to the Restricted Notes and Exchange Notes collectively in this prospectus as the “Notes.” Below is a summary of the exchange offer:

 

Restricted Notes

$200,000,000 aggregate principal amount of 11% Senior Notes due 2018 issued on June 1, 2010.

 

Exchange Notes

$200,000,000 aggregate principal amount of 11% Senior Notes due 2018, the issuance of which has been registered under the Securities Act of 1933, as amended (the “Securities Act”). The form and terms of the Exchange Notes are identical in all material respects to those of the Restricted Notes, except that the transfer restrictions, registration rights and additional interest provisions relating to the Restricted Notes do not apply to the Exchange Notes.

 

 

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Exchange offer

We are offering to issue up to $200,000,000 principal amount of the Exchange Notes, in exchange for a like principal amount of the Restricted Notes, to satisfy our obligations under the registration rights agreement that we entered into when the Restricted Notes were issued in reliance upon the exemptions from registration provided by Rule 144A and Regulation S of the Securities Act.

 

Expiration date; tenders

The exchange offer will expire at 5:00 p.m., New York City time, on                     , 2010, unless the exchange offer is extended in our sole and absolute discretion. By tendering your Restricted Notes in the exchange offer, you represent to us that:

 

   

you are not our “affiliate,” as defined in Rule 405 under the Securities Act;

 

   

you are not engaged in, and do not intend to engage in, and have no arrangement or understanding with any person to participate in, a distribution of the Exchange Notes;

 

   

you are acquiring the Exchange Notes in your ordinary course of business; and

 

   

if you are a broker-dealer, you will receive the Exchange Notes for your own account in exchange for Restricted Notes that were acquired by you as a result of your market-making or other trading activities and you will deliver a prospectus in connection with any resale of the Exchange Notes you receive. For further information regarding resales of the Exchange Notes by participating broker-dealers, see the discussion under the caption “Plan of distribution.”

 

Withdrawal

You may withdraw any Restricted Notes tendered in the exchange offer at any time prior to 5:00 p.m., New York City time on the applicable expiration date.

 

Conditions to the exchange offer

The exchange offer is subject to customary conditions, which we may waive. See the discussion below under the caption “The exchange offer—Conditions to the exchange offer” for more information regarding the conditions to the exchange offer.

 

Procedures for tendering the Restricted Notes

Except as set forth below, a holder of Restricted Notes who wishes to tender notes for exchange must, on or prior to the expiration date of the exchange offer:

 

   

transmit a properly completed and duly executed letter of transmittal, including all other documents required by the letter of transmittal, to the exchange agent, or

 

   

if notes are tendered pursuant to the book-entry procedures set forth below, the tendering holder must transmit an agent’s message to the exchange agent.

 

 

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In addition, either:

 

   

the exchange agent must receive the certificates for the Restricted Notes and the letter of transmittal;

 

   

the exchange agent must receive, prior to the expiration date, a timely confirmation of the book-entry transfer of the notes being tendered into the exchange agent’s account at The Depository Trust Company (“DTC”), along with the letter of transmittal or an agent’s message; or

 

   

the holder must comply with the guaranteed delivery procedures described in the letter of transmittal.

 

Special procedures for beneficial owners

If you are a beneficial owner whose Restricted Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee, and you wish to tender your Restricted Notes in the exchange offer, you should promptly contact the person in whose name the Restricted Notes are registered and instruct that person to tender on your behalf. Any registered holder that is a participant in DTC’s book-entry transfer facility system may make book-entry delivery of the Restricted Notes by causing DTC to transfer the Restricted Notes into the exchange agent’s account.

 

Material federal income tax considerations

The exchange of the Restricted Notes for Exchange Notes in the exchange offer will not be a taxable transaction for United States federal income tax purposes. See the discussion under the caption “Certain United States federal income tax considerations” for more information regarding the tax consequences to you of the exchange offer.

 

Use of proceeds

We will not receive any proceeds from the exchange offer.

 

Exchange agent

Wells Fargo Bank, National Association is the exchange agent for the exchange offer. You can find the address and telephone number of the exchange agent below under the caption “The exchange offer—Exchange agent.”

 

Resales

We are registering the exchange offer in reliance on the position enunciated by the SEC in Exxon Capital Holdings Corp., SEC No-Action Letter (April 13, 1988), Morgan Stanley & Co, Inc., SEC No-Action Letter (June 5, 1991), and Shearman & Sterling, SEC No-Action Letter (July 2, 1993). Based on interpretations of the Securities Act by the staff of the SEC, as detailed in a series of no-action letters issued to third parties, we believe that the Exchange Notes issued in the exchange offer may be offered for resale, resold or otherwise transferred by you without compliance with the registration and prospectus delivery requirements of the Securities Act as long as:

 

   

you are acquiring the Exchange Notes in the ordinary course of your business;

 

 

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you are not participating, do not intend to participate and have no arrangement or understanding with any person to participate, in a distribution of the Exchange Notes; and

 

   

you are not an affiliate of ours.

If you are an affiliate of ours, or are engaged in or intend to engage in, or have any arrangement or understanding with any person to participate in, the distribution of the Exchange Notes:

 

   

you cannot rely on the applicable interpretations of the staff of the SEC;

 

   

you will not be entitled to participate in the exchange offer; and

 

   

you must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction.

See the discussion below under the caption “The exchange offer—Consequences of exchanging or failing to exchange Restricted Notes” for more information.

 

Broker-dealer

Each broker or dealer that receives Exchange Notes for its own account in exchange for Restricted Notes that were acquired as a result of market-making or other trading activities must acknowledge that it will comply with the registration and prospectus delivery requirements of the Securities Act in connection with any offer to resell or other transfer of the Exchange Notes issued in the exchange offer, including the delivery of a prospectus that contains information with respect to any selling holder required by the Securities Act in connection with any resale of the Exchange Notes.

This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Restricted Notes which were received by such broker-dealer as a result of market making activities or other trading activities. See “Plan of distribution” for more information.

 

Registration rights agreement

When we issued the Restricted Notes on June 1, 2010, we entered into a registration rights agreement with the initial purchasers of the Restricted Notes. Under the terms of the registration rights agreement, we agreed to file with the SEC, and cause to become effective, a registration statement relating to an exchange of the Restricted Notes for the Exchange Notes.

We also agreed to file a shelf registration statement under certain circumstances. If we fail to satisfy these obligations, we have agreed to pay additional interest to the holders of the Restricted Notes under certain circumstances. See “Description of the Exchange Notes” and “Registration rights.”

 

 

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Consequences of not exchanging Restricted Notes

If you do not exchange your Restricted Notes in the exchange offer, your Restricted Notes will continue to be subject to the restrictions on transfer currently applicable to the Restricted Notes. In general, you may offer or sell your Restricted Notes only:

 

   

if they are registered under the Securities Act and applicable state securities laws;

 

   

if they are offered or sold under an exemption from registration under the Securities Act and applicable state securities laws; or

 

   

if they are offered or sold in a transaction not subject to the Securities Act and applicable state securities laws.

We do not currently intend to register the Restricted Notes under the Securities Act. Under some circumstances, however, holders of the Restricted Notes, including holders who are not permitted to participate in the exchange offer or who may not freely resell Exchange Notes received in the exchange offer, may require us to file, and to cause to become effective, a shelf registration statement covering resales of Restricted Notes by these holders. For more information regarding the consequences of not tendering your Restricted Notes and our obligation to file a shelf registration statement, see “The exchange offer—Consequences of exchanging or failing to exchange Restricted Notes” and “Description of the Exchange Notes—exchange offer; registration rights.”

Summary description of the Exchange Notes

The following summary contains basic information about the Exchange Notes and is not intended to be complete. For a more complete understanding of the Exchange Notes, please refer to the section entitled “Description of the Exchange Notes” in this prospectus.

 

Issuer

Dave & Buster’s, Inc.

 

Securities

$200,000,000 aggregate principal amount of 11% Senior Notes due 2018.

 

Maturity

June 1, 2018.

 

Interest payment dates

June 1 and December 1, commencing December 1, 2010.

 

Optional redemption

The Notes will be redeemable at our option, in whole or in part, at any time on or after June 1, 2014, at the redemption prices set forth in this prospectus, together with accrued and unpaid interest, if any, to the date of redemption.

At any time prior to June 1, 2013, we may redeem up to 40% of the original principal amount of the Notes with the proceeds of one or more equity offerings at a redemption price of 111% of the principal amount of the Notes, together with accrued and unpaid interest, if any, to the date of redemption.

At any time prior to June 1, 2014, we may also redeem some or all of the Notes at a price equal to 100% of the principal amount of the Notes plus accrued and unpaid interest, plus a make-whole premium.

 

 

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Mandatory offers to purchase

The occurrence of a change of control will be a triggering event requiring us to offer to purchase from you all or a portion of your Notes at a price equal to 101% of their principal amount, together with accrued and unpaid interest, if any, to the date of purchase.

Certain asset dispositions will be triggering events which may require us to use the proceeds from those asset dispositions to make an offer to purchase the Notes at 100% of their principal amount, together with accrued and unpaid interest, if any, to the date of purchase, if such proceeds are not otherwise used within the time periods specified herein to, among other things, repay indebtedness of our company or any Restricted Subsidiary, as defined in the section entitled “Description of the Exchange Notes” in this prospectus (other than disqualified stock or any subordinated obligations of our company or any guarantor), to repay indebtedness under our senior secured credit facility (with a corresponding reduction in commitment) or to invest in additional assets related to our business.

 

Guarantees

The Notes are guaranteed on a senior basis by all our domestic subsidiaries. The Notes are also guaranteed on a senior basis by all of our future restricted subsidiaries, other than our foreign subsidiaries. The guarantees are unsecured senior indebtedness of our subsidiary guarantors and have the same ranking with respect to indebtedness of our subsidiary guarantors as the Notes have with respect to our indebtedness.

 

Ranking

The Notes:

 

   

are our general unsecured, unsubordinated obligations;

 

   

rank equally in right of payment with all future senior debt;

 

   

are effectively subordinated to our obligations under our existing and future secured indebtedness, including the senior secured credit facility, to the extent of the collateral securing such indebtedness;

 

   

are senior in right of payment to all our existing and future indebtedness that is expressly subordinated in right of payment to the Notes; and

 

   

are structurally subordinated to all the existing and future liabilities of our subsidiaries that are not guarantors.

Since the Notes are unsecured, in the event of bankruptcy, liquidation, reorganization or other winding up of our company or the guarantors or upon a default in payment with respect to, or the acceleration of, any indebtedness under the senior secured credit facility or other senior secured indebtedness, the assets of our company and the guarantors that secure other senior secured indebtedness will be available to pay obligations on the Notes and the guarantees only after all indebtedness under such other secured indebtedness has been repaid in full from such assets.

 

Covenants

We issued the Notes under an indenture with Wells Fargo Bank, National Association, as trustee. The indenture, among other things,

 

 

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limits our ability and the ability of our restricted subsidiaries (as defined under the heading “Description of the Exchange Notes”) to:

 

   

incur, assume or guarantee additional indebtedness;

 

   

issue redeemable stock and preferred stock;

 

   

repurchase capital stock;

 

   

make other restricted payments, including without limitation, paying dividends and making investments;

 

   

create liens;

 

   

redeem debt that is junior in right of payment to the Notes;

 

   

sell or otherwise dispose of assets, including capital stock of subsidiaries;

 

   

enter into agreements that restrict dividends from subsidiaries;

 

   

enter into mergers or consolidations;

 

   

enter into transactions with affiliates;

 

   

guarantee indebtedness;

 

   

enter into certain sale/leaseback transactions; and

 

   

enter into new lines of business.

These covenants are subject to a number of important exceptions and qualifications. For more details, see “Description of the Exchange Notes.”

Risk factors

In evaluating an investment in the Exchange Notes, prospective investors should carefully consider, along with the other information in this prospectus, the specific factors set forth under “Risk factors” for risks associated with an investment in the Exchange Notes.

 

 

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Summary consolidated historical and pro forma financial and other data

Set forth below are our summary consolidated historical and pro forma and other data. Accounting principles generally accepted in the United States require operating results for Dave & Buster’s, Inc. prior to the Acquisition completed June 1, 2010 to be presented as the results of the “Predecessor” in the historical financial statements. Operating results subsequent to the Merger will be presented as the results of the “Successor” and will include all periods including and subsequent to June 1, 2010.

The statements of operations and cash flows data for each of the three fiscal years in the period ended January 31, 2010 and the balance sheet data as of January 31, 2010 and February 1, 2009 were derived from the Predecessor’s audited consolidated financial statements included elsewhere in this prospectus. The statements of operations and cash flows data for each of the thirteen week periods ended May 2, 2010 and May 3, 2009 and the balance sheet data as of May 2, 2010 were derived from the Predecessor’s unaudited consolidated financial statements included elsewhere in this prospectus and, in the opinion of management, include all normal recurring adjustments necessary to present fairly the data for such periods and as of such dates. This historical consolidated financial data does not reflect the consummation of the Transactions or our capital structure following the Transactions and is not indicative of results that would have been reported had the Transactions occurred, nor is it indicative of our future financial position or operating results.

Also included is unaudited summary pro forma consolidated financial and other data for the fiscal year ended January 31, 2010 and the thirteen weeks in the period ended May 2, 2010. The unaudited pro forma statement of operations data has been prepared assuming the Transactions occurred as of February 2, 2009, and the unaudited pro forma consolidated balance sheet data reflects the financial position of our business as if the Transactions had occurred on May 2, 2010. The summary pro forma data does not purport to represent what our results of operations or financial position would have been had the Transactions occurred at any such date, nor does this data purport to represent the results of operations for any future period. The pro forma adjustments are based upon available information and certain assumptions as discussed in the notes to the unaudited financial information presented under “Unaudited pro forma consolidated financial information.”

 

 

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The “Summary consolidated historical and pro forma consolidated financial and other data” should be read in conjunction with “Unaudited pro forma consolidated financial information,” “Selected historical consolidated financial and other data,” “Management’s discussion and analysis of financial condition and results of operations” and the historical consolidated financial statements of the Predecessor and the notes related thereto, included elsewhere in this prospectus.

 

    Thirteen Weeks Ended     Fiscal year ended  
    May 2,
2010
    May 2,
2010(1)(3)
    May 3,
2009
    January 31,
2010
    January 31,
2010(1)(3)
    February 1,
2009
    February 3,
2008
 
(Dollars in thousands)   (Predecessor)     (Pro forma)     (Predecessor)     (Predecessor)     (Pro forma)     (Predecessor)     (Predecessor)  

Statement of operations data:

             

Revenues:

             

Food and beverage revenues

  $ 71,357      $ 71,357      $ 71,000      $ 269,973      $ 269,973      $ 284,779      $ 293,097   

Amusement and other revenues

    70,218        70,218        67,426        250,810        250,810        248,579        243,175   
                                                       

Total revenues

    141,575        141,575        138,426        520,783        520,783        533,358        536,272   

Operating costs:

             

Cost of products:

             

Cost of food and beverage

    17,277        17,277        17,406        65,349        65,349        70,520        72,493   

Cost of amusement and other

    10,586        10,586        9,549        38,788        38,788        34,218        34,252   
                                                       

Total cost of products

    27,863        27,863        26,955        104,137        104,137        104,738        106,745   

Operating payroll and benefits

    33,468        33,468        34,532        132,114        132,114        139,508        144,920   

Other store operating expenses

    45,605        45,605        42,604        174,685        174,685        174,179        171,627   

General & administrative expenses

    8,617        8,668        7,405        30,437        30,632        34,546        38,999   

Depreciation & amortization expense

    12,501        12,501        12,733        53,658        53,658        49,652        51,898   

Preopening costs

    1,189        1,189        1,146        3,881        3,881        2,988        1,002   
                                                       

Total operating costs

    129,243        129,294        125,375        498,912        499,107        505,611        515,191   
                                                       

Operating income

    12,332        12,281        13,051        21,871        21,676        27,747        21,081   

Interest expense, net

    5,348        8,222        5,549        22,122        32,771        26,177        31,183   
                                                       

Income (loss) before provision (benefit) for income taxes

    6,984        4,059        7,502        (251     (11,095     1,570        (10,102

Provision (benefit) for income taxes

    3,073        3,073        2,335        99        99        (45     (1,261
                                                       

Net income (loss)

  $ 3,911      $ 986      $ 5,167      $ (350   $ (11,194   $ 1,615      $ (8,841
                                                       

Statement of cash flow data:

             

Cash provided by (used in):

             

Operating activities

  $ 9,445        $ 10,903      $ 59,054        $ 52,197      $ 50,573   

Investing activities

    (6,985       (8,177     (48,406       (49,084     (30,899

Financing activities

    (125       (2,125     (2,500       (13,625     (11,000

Balance sheet data (as of end of period):

             

Cash and cash equivalents

  $ 19,017      $ 6,019      $ 9,135      $ 16,682        $ 8,534      $ 19,046   

Working capital (deficit)

    (16,908     (24,856     (30,494     (28,019       (35,196     (30,666

Property & equipment, net

    285,732        285,732        292,478        294,151          296,805        296,974   

Total assets

    482,571        743,210        476,902        483,640          480,936        496,203   

Total debt

    227,125        350,000        227,625        227,250          229,750        243,375   

Stockholders’ equity

    97,004        238,074        97,224        92,646          92,023        90,756   

Other data:

             

Adjusted EBITDA(1)

  $ 26,966      $ 26,915      $ 27,537      $ 83,145      $ 82,950      $ 87,378      $ 84,367   

Cash interest expense(2)

    5,664        7,705        5,871        22,966        30,728        24,682        26,296   

Capital expenditures

    6,988        6,988        8,177        48,423        48,423        49,254        31,355   

Stores open at end of period

    57        57        53        56        56        52        49   

 

(1) “EBITDA” is calculated as net income (loss), plus interest expense (net), provision (benefit) for income taxes and depreciation and amortization expense. “Adjusted EBITDA” represents EBITDA, as defined, excluding loss on asset disposal, gain on acquisition of limited partnership, share-based compensation, currency transaction (gain) loss, preopening costs, reimbursement of affiliate expenses, severance and deferred amusement revenue, ticket liability and other.

Pro forma adjustments related to the unaudited pro forma consolidated statement of operations have been computed assuming the Transactions occurred as of February 2, 2009. See note (3) below and the “Unaudited pro forma consolidated financial information” section and related notes thereto.

 

 

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EBITDA and Adjusted EBITDA are presented because certain investors use them as measures of a company’s historical operating performance and its ability to service and incur debts. We believe Adjusted EBITDA is a more meaningful measure than EBITDA because Adjusted EBITDA excludes certain non-recurring and non-cash items, which are not excluded in the calculation of EBITDA. However, EBITDA and Adjusted EBITDA are not measures prepared in accordance with GAAP. Accordingly, these measures should not be considered in isolation from, as an alternative to or as more meaningful than net income, cash flows or other income data (as calculated in accordance with GAAP) or as a measure of liquidity. EBITDA and Adjusted EBITDA, as presented, may not be comparable to similarly-titled measures reported by other companies.

Our calculation of EBITDA and Adjusted EBITDA for the periods presented is set forth below:

 

    Thirteen Weeks Ended     Fiscal year ended  
    May 2,
2010
    May 2,
2010(3)
    May 3,
2009
    January 31,
2010
    January 31,
2010(3)
    February 1,
2009
    February 3,
2008
 
(Dollars in thousands)   (Predecessor)     (Pro forma)     (Predecessor)     (Predecessor)     (Pro forma)     (Predecessor)     (Predecessor)  

Net income (loss)

  $ 3,911      $ 986      $ 5,167      $ (350   $ (11,194   $ 1,615      $ (8,841

Interest expense, net

    5,348        8,222        5,549        22,122        32,771        26,177        31,183   

Provision (benefit) for income taxes

    3,073        3,073        2,335        99        99        (45     (1,261

Depreciation and amortization expense

    12,501        12,501        12,733        53,658        53,658        49,652        51,898   
                                                       

EBITDA

    24,833        24,782        25,784        75,529        75,334        77,399        72,979   

Loss on asset disposal(a)

    200        200        173        1,361        1,361        1,648        1,369   

Gain on acquisition of limited partnership(b)

    —          —          —          (357     (357     —          —     

Share-based compensation(c)

    251        251        9        722        722        880        1,514   

Currency transaction (gain) loss(d)

    (85     (85     (24     (123     (123     124        —     

Preopening costs(e)

    1,189        1,189        1,146        3,881        3,881        2,988        1,002   

Reimbursement of affiliate expenses(f)

    188        188        188        905        905        1,735        750   

Severance(g)

    —          —          31        295        295        906        3,337   

Deferred amusement revenue, ticket liability & other(h)

    230        230        230        932        932        1,698        3,416   

Transaction costs (i)

    160        160        —          —          —          —          —     
                                                       

Adjusted EBITDA

  $ 26,966      $ 26,915      $ 27,537      $ 83,145      $ 82,950      $ 87,378      $ 84,367   

 

  (a) Represents the net book value of assets disposed of during the year. Primarily relates to assets replaced in ongoing operation of business.
  (b) Represents gain recognized in connection with our acquisition of a 49.9% limited partnership interest in a limited partnership that owns a Jillian’s store in the Discover Mills Mall near Atlanta, Georgia. See “Notes to Consolidated Financials Statements—Note 3: Acquisition of Limited Partnership.”
  (c) Represents historical stock compensation expense resulting from grants under the D&B Holdings 2006 Option Plan. Such grants have been converted into the right to receive the per share acquisition consideration in the Transactions.
  (d) Represents the effect of foreign currency transaction (gains) or losses related to our stores in Canada.
  (e) Represents costs incurred prior to the opening of our new stores or stores that have undergone major conversions.
  (f) Represents amounts paid to Wellspring under our historical expense reimbursement agreement and amounts expected to be paid under an expense reimbursement agreement that we expect to enter into with Oak Hill Capital Management, LLC. See “Certain relationships and transactions—Expense reimbursement agreement.”
  (g) Represents severance costs associated with the departure of key executives and organizational restructuring efforts implemented by the Company.
  (h) Primarily represents adjustments to liabilities established for future amusement game play and the fulfillment of tickets won by guests on our redemption games.
  (i) Represents costs incurred during the transaction process.
(2) “Cash interest expense” represents interest expense for the period less amortization of debt, original issue discount (if any), and issuance costs, less interest capitalized during the period and adjustments to mark our swap contracts to fair value.
(3) The Transactions will be accounted for as a business combination using the purchase method of accounting. As of the date of this prospectus, the valuation studies necessary to estimate the fair values of the assets and the liabilities we will acquire and to allocate the cost of the Acquisition have not been completed. For purposes of computing pro forma adjustments, we have assumed that historical recorded amounts of the assets and liabilities approximate their respective fair values and the excess of the acquisition cost over the historical net assets of Dave & Buster’s has been presented as an adjustment of indefinite lived intangible assets and goodwill. Accordingly, the pro forma balance sheet information does not include any adjustment of the historical recorded amounts of inventories, property and equipment, finite-lived intangible assets, deferred lease liabilities, or other assets or liabilities that may result from the allocation of the acquisition cost based on such valuation studies. The adjustment of the historical recorded amounts of assets and liabilities to their respective fair values may also result in adjustments to depreciation and amortization expense, rent expense and the provision for income taxes which are not reflected in the accompanying pro forma consolidated statements of operations. In addition, the final allocation of the acquisition cost will be based on the actual assets and liabilities of Dave & Buster’s that exist as of the date of the Acquisition. Therefore, the actual allocation of the cost of the Acquisition will differ from the allocation assumed in our pro forma consolidated financial statements. The adjustments arising from the valuation studies will not impact our cash flows, including cash interest. However such adjustments could result in material increases or decreases in our EBITDA and Adjusted EBITDA.

 

 

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RISK FACTORS

An investment in the Exchange Notes involves a high degree of risk. You should carefully consider the risks described below as well as other information and data included in this prospectus before making an investment decision. If any of the events described in the risk factors below occur, these could have a material adverse effect on our business, financial condition, operating results and prospects, which in turn could adversely affect our ability to repay the Exchange Notes.

Risks related to our business

The global economic crisis adversely impacted our business and financial results and a prolonged recession could materially affect us in the future.

Our industry is dependent upon consumer discretionary spending. The global economic crisis has reduced consumer confidence to historic lows impacting the public’s ability and/or desire to spend discretionary dollars as a result of job losses, home foreclosures, significantly reduced home values, investment losses in the financial markets, personal bankruptcies, and reduced access to credit, resulting in lower levels of guest traffic in our stores. If this difficult economic situation continues for a prolonged period of time and/or deepens in magnitude, our business, results of operations and ability to comply with the covenants under our senior secured credit facility could be materially affected and may result in a deceleration of the number and timing of new store openings. Continued deterioration in customer traffic and/or a reduction in the average amount guests spend in our stores will negatively impact our revenues. This will result in sales de-leverage, spreading fixed costs across a lower level of sales, and will, in turn, cause downward pressure on our profitability. This could result in reductions in staff levels, asset impairment charges and potential closures. Future recessionary effects are unknown at this time and could have a potential material adverse effect on our financial position and results of operations. There can be no assurance that the government’s plans to stimulate the economy will restore consumer confidence, stabilize the financial markets, increase liquidity and the availability of credit, or result in lower unemployment.

The current economic crisis could have a material adverse impact on our landlords or other tenants in shopping centers in which we are located, which in turn could negatively affect our financial results.

If the recession continues or increases in severity, our landlords may be unable to obtain financing or remain in good standing under their existing financing arrangements, resulting in failures to pay required construction contributions or satisfy other lease covenants to us. In addition, other tenants at shopping centers in which we are located or have executed leases may fail to open or may cease operations. Decreases in total tenant occupancy in shopping centers in which we are located may affect foot traffic at our stores. All of these factors could have a material adverse impact on our operations.

Our growth strategy depends on our ability to open new stores and operate them profitably.

As of August 2, 2010, there were 57 company locations in the United States and Canada and one franchise location in Canada. A key element of our growth strategy is to open additional stores in locations that we believe will provide attractive returns on investments. We have identified a number of additional sites for potential future Dave & Buster’s stores. Our ability to open new stores on a timely and cost-effective basis is dependent on a number of factors, many of which are beyond our control, including our ability to:

 

   

find quality locations;

 

   

reach acceptable agreements regarding the lease or purchase of locations;

 

   

comply with applicable zoning, land use and environmental regulations;

 

   

raise or have available an adequate amount of money for construction and opening costs;

 

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timely hire, train and retain the skilled management and other employees necessary to meet staffing needs;

 

   

obtain, for acceptable cost, required permits and approvals, including liquor licenses; and

 

   

efficiently manage the amount of time and money used to build and open each new store.

If we succeed in opening new stores on a timely and cost-effective basis, we may nonetheless be unable to attract enough customers to new stores because potential customers may be unfamiliar with our stores or atmosphere, or our entertainment and menu options might not appeal to them. Only a small number of our existing stores are the size of our target 35,000 square foot format for our larger stores and as of August 2, 2010, we operate four small format stores. We cannot provide any assurance that our new format stores will meet or exceed the performance of our existing stores or meet or exceed our performance targets, including target sales to net investment ratios and cash-on-cash returns. New stores may even operate at a loss, which could have a significant adverse effect on our overall operating results. Opening a new store in an existing market could reduce the revenue at our existing stores in that market. In addition, historically, new stores experience a drop in revenues after their first year of operation. Typically, this drop has been temporary and has been followed by increases in comparable store revenue in line with the rest of our comparable store base, but there can be no assurance that this will be the case in the future or that a new store will succeed in the long term.

Our expansion into new markets may present increased risks due to our unfamiliarity with the area.

Some of our new stores will be located in areas where we have little or no meaningful experience. Those markets may have different competitive conditions, consumer tastes and discretionary spending patterns than our existing markets, which may cause our new stores to be less successful than stores in our existing markets. An additional risk of expanding into new markets is the lack of market awareness of the Dave & Buster’s brand. Stores opened in new markets may open at lower average weekly sales volumes than stores opened in existing markets, and may have higher store-level operating expense ratios than stores in existing markets. Sales at stores opened in new markets may take longer to reach average store volumes, if at all, thereby adversely affecting our overall profitability.

We may not be able to compete favorably in the highly competitive out-of-home and home-based entertainment and restaurant markets, which could have material adverse effect on our business, results of operations or financial condition.

The out-of-home entertainment market is highly competitive. We compete for customers’ discretionary entertainment dollars with theme parks, as well as with providers of out-of-home entertainment, including localized attraction facilities such as movie theatres, sporting events, bowling alleys, nightclubs and restaurants. Many of the entities operating these businesses are larger and have significantly greater financial resources, a greater number of stores, have been in business longer, have greater name recognition and are better established in the markets where our stores are located or are planned to be located. As a result, they may be able to invest greater resources than we can in attracting customers and succeed in attracting customers who would otherwise come to our stores. The legalization of casino gambling in geographic areas near any current or future store would create the possibility for entertainment alternatives, which could have a material adverse effect on our business and financial condition. We also face competition from local establishments that offer entertainment experiences similar to ours and restaurants that are highly competitive with respect to price, quality of service, location, ambience and type and quality of food. We also face competition from increasingly sophisticated home-based forms of entertainment, such as internet and video gaming and home movie delivery. Our failure to compete favorably in the competitive out-of-home and home-based entertainment and restaurant markets could have a material adverse affect on our business, results of operations and financial condition.

 

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Our quarterly results of operations are subject to fluctuations due to the seasonality of our business and the timing of new openings and other events.

Our operating results fluctuate significantly from quarter to quarter as a result of seasonal factors. Prior to fiscal year 2008 our revenues were substantially higher in the fourth quarter driven in part by the increased number of holiday parties held during that time of year. Our revenues and profitability have been lower during the third quarter with the first and second quarter being somewhat similar in results. We expect similar trends to continue in the future. We expect seasonality will continue to be a factor in our results of operations. As a result, factors affecting peak seasons could have a disproportionate effect on our results. For example, the number of days between Thanksgiving and New Year’s Day and the days of the week on which Christmas and New Year’s Eve fall affect the volume of business we generate during the December holiday season and can affect our results for the full fiscal year. In addition, adverse weather during the winter holiday season can have a significant impact on our fourth quarter, and therefore our results for the full fiscal year.

Our operating results may also fluctuate significantly because of non-seasonal factors. Due to our relatively limited number of locations, poor results of operations at any single store could significantly affect our overall profitability. Additionally, the timing of new store openings may result in significant fluctuations in quarterly performance. Due to the substantial up-front financial requirements to open new stores, the investment risk related to any single store is much larger than that associated with many other restaurants or entertainment venues. We typically incur most pre-opening costs for a new store within the two months immediately preceding, and the month of, the store’s opening. In addition, the labor and operating costs for a newly opened store during the first three to six months of operation are materially greater than what can be expected after that time, both in aggregate dollars and as a percentage of revenues.

Our operations are susceptible to the availability and cost of food and other supplies, in most cases from a limited number of suppliers, which subject us to possible risks of shortages, interruptions and price fluctuations.

Our profitability depends in part on our ability to anticipate and react to changes in product costs. Cost of food and beverage as a percentage of food and beverage revenue was 24.2% in fiscal 2009, 24.8% in fiscal 2008 and 24.7% in fiscal 2007. Cost of amusement and other costs as a percentage of amusement and other revenue was 15.5% in fiscal 2009, 13.8% in fiscal 2008 and 14.1% in fiscal 2007. If we have to pay higher prices for food or other supplies, our operating costs may increase, and, if we are unable or unwilling to pass such cost increases on to our customers, our operating results could be adversely affected.

We have entered into a long-term contract with U.S. Foodservice, Inc. which provides for the purchasing, warehousing and distributing of a substantial majority of our food, non-alcoholic beverage and chemical supplies. The unplanned loss of this distributor could adversely affect our business by disrupting our operations as we seek out and negotiate a new distribution contract. We also have multiple short-term supply contracts with a limited number of suppliers. If any of these suppliers do not perform adequately or otherwise fail to distribute products or supplies to our stores, we may be unable to replace the suppliers in a short period of time on acceptable terms, which could increase our costs, cause shortages of food and other items at our stores and cause us to remove certain items from our menu. We currently do not engage in futures contracts or other financial risk management strategies with respect to potential price fluctuations in the cost of food and other supplies.

The limited number of amusement suppliers, the availability of new amusement offerings, the cost and availability of redemption items that appeal to guests and the market demand for new games could adversely impact the cost to acquire and operate new amusements. We may not be able to anticipate and react to changing food, beverage and amusement costs by adjusting purchasing practices, menu and game prices, and a failure to do so could have a material adverse effect on our operating results.

 

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Instances of food-borne illness and outbreaks of disease, as well as negative publicity relating thereto, could result in reduced demand for our menu offerings and reduced traffic in our stores and negatively impact our business.

Our business could be severely impacted by a widespread regional, national or global health epidemic. A widespread health epidemic (such as the avian flu) or food-borne illness (such as aphthous fever, which is also known as hoof and mouth disease, as well as hepatitis A, lysteria, salmonella and e-coli), whether or not traced to one of our stores, may cause customers to avoid public gathering places or otherwise change their eating behaviors. Even the prospects of a health epidemic could change consumer perceptions of food safety, disrupt our supply chain and impact our ability to supply certain menu items or staff our stores. Outbreaks of disease, including severe acute respiratory syndrome, which is also known as SARS, as well as influenza, could reduce traffic in our stores. Any of these events would negatively impact our business. In addition, any negative publicity relating to these and other health-related matters may affect consumers’ perceptions of our stores and the food that we offer, reduce guest visits to our stores and negatively impact demand for our menu offerings.

We may not be able to obtain and maintain licenses and permits necessary to operate our stores in compliance with laws, regulations and other requirements, which could adversely affect our business, results of operations or financial condition.

We are subject to various federal, state and local laws affecting our business. Each store 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 store is located. Each store 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. In some states, the loss of a license for cause with respect to one location may lead to the loss of licenses at all locations in that state and could make it more difficult to obtain additional licenses in that state. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of each store, including minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling and storage and dispensing of alcoholic beverages. In certain jurisdictions, a notice or application will need to be filed with the relevant jurisdictions for the transfer of our liquor licenses as a result of the Acquisition. The Acquisition is not conditioned upon the receipt of the approval to transfer any of the liquor licenses. 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 licenses, could have a material adverse effect on operations and our ability to obtain such a license or permit in other locations.

As a result of operating certain entertainment games and attractions, including games that offer redemption prizes, we are subject to amusement licensing and regulation by the states, counties and municipalities in which our stores are located. Certain entertainment attractions are heavily regulated and such regulations vary significantly between communities. Moreover, states and local communities are tending to consider additional regulation regarding redemption games. From time-to-time, existing stores 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, any of which could adversely affect our operations.

Changes in laws, regulations and other requirements could adversely affect our business, results of operations or financial condition.

We are also subject to federal, state and local environmental laws, regulations and other requirements. 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 stores in particular locations. Environmental laws and regulations also govern, among other things, discharges of pollutants into the air and water as well as the presence, handling, release and disposal of and exposure to hazardous substances. These laws provide for significant fines and penalties for noncompliance. Third parties may also make personal injury, property damage

 

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or other claims against us associated with actual or alleged release of or exposure to hazardous substances at our properties. We could also be strictly liable, without regard to fault, for certain environmental conditions at properties we formerly owned or operated as well as at our current properties.

In addition, 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. From time-to-time, the U.S. Congress and the states consider increases in the applicable minimum wage. Several states in which we operate have enacted increases in the minimum wage which have taken effect during the last three years and further increases are anticipated in 2010. 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 other expenses. For example, our suppliers may be more severely impacted by higher minimum wage standards, which could result in increased costs to us. If we are unable to offset these costs through increased costs to our customers, our business, results of operations and financial condition could be adversely affected.

Our sales and results of operations may be adversely affected by the passage of health care reform legislation and climate change and other environmental legislation and regulations. The costs and other effects of new legal requirements cannot be determined with certainty. For example, new legislation or regulations may result in increased costs directly for our compliance or indirectly to the extent that such requirements increase prices charged to us by vendors because of increased compliance costs. At this point, we are unable to determine the impact that health care reform could have on our employer- sponsored medical plans or that climate change and other environmental legislation and regulations could have on our overall business.

We face potential liability with our stored value cards under the property laws of some states.

Our Power Cards and gift cards, which may be used for games and to purchase products in our stores, are stored value cards. We recognize income from unredeemed cards when we determine that the likelihood of the cards being redeemed is remote. Certain states include gift cards under their abandoned property laws, and require companies to remit to the state cash in an amount equal to all or a designated portion of the unredeemed balance on the gift cards after a specified period of time. We do not remit any amounts relating to unredeemed gift cards to states based upon our assessment of applicable laws. The analysis of the potential application of the abandoned property laws to our gift cards is complex, involving an analysis of constitutional, statutory provisions and factual issues. In the event that one or more states successfully challenges our position on the application of its abandoned property law to our gift cards, or if the estimates that we use in projecting the likelihood of the cards being redeemed prove to be inaccurate, our liabilities with respect to unredeemed gift cards may be materially higher than the amounts shown in our financial statements. If we are required to materially increase the estimated liability recorded in our financial statements with respect to unredeemed gift cards, our net income could be materially and adversely affected.

Customer complaints or litigation on behalf of our customers or employees may adversely affect our business, results of operations or financial condition.

Our business may be adversely affected by legal or governmental proceedings brought by or on behalf of our customers or employees. In recent years, a number of restaurant companies, including ours, have been subject to lawsuits, including class action lawsuits, alleging violations of federal and state law regarding workplace and employment matters, discrimination and similar matters, and a number of these lawsuits have resulted in the payment of substantial damages by the defendants. We could also face potential liability if we are found to have misclassified certain employees as exempt from the overtime requirements of the federal Fair Labor Standards Act and state labor laws. In addition, from time-to-time customers file complaints or lawsuits against us alleging that we are responsible for some illness or injury they suffered at or after a visit to a store. We are also subject to a variety of other claims in the ordinary course of business, including personal injury, lease and contract claims. The restaurant industry has also been subject to a growing number of claims that the menus and actions of restaurant chains have led to the obesity of certain of their guests.

 

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We are also subject to “dram shop” statutes in certain states in which our stores 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 are currently the subject of certain lawsuits that allege violations of these statutes. Recent litigation against restaurant chains has resulted in significant judgments and settlements under dram shop statutes. Because these cases often seek punitive damages, which may not be covered by insurance, such litigation could have an adverse impact on our business, results of operations or financial condition. Regardless of whether any claims against us are valid or whether we are liable, claims may be expensive to defend and may divert time and money away from operations and hurt our financial performance. A judgment significantly in excess of our insurance coverage or not covered by insurance could have a material adverse effect on our business, results of operations or financial condition. As approximately 32% of our food and beverage revenues were derived from the sale of alcoholic beverages during fiscal 2009, adverse publicity resulting from these allegations may materially affect us and our stores.

We may face labor shortages that could slow our growth and adversely impact our ability to operate our stores.

The successful operation of our business depends upon our ability to attract, motivate and retain a sufficient number of 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 stores are located. Shortages of skilled labor may make it increasingly difficult and expensive to attract, train and retain the services of a satisfactory number of qualified employees and could delay the planned openings of new stores or adversely impact our existing stores. Any such delays, material increases in employee turnover rates in existing stores or widespread employee dissatisfaction could have a material adverse effect on our business and results of operations. Competition for qualified employees could require us to pay higher wages, which could result in higher labor costs and could have a material adverse effect on our results of operations.

We depend on the services of key executives, the loss of whom could materially harm our business and our strategic direction if we were unable to replace them with executives of equal experience and capabilities.

Our future success significantly depends on the continued service and performance of our key management personnel. We have employment agreements with all members of senior management. However, we cannot prevent members of senior management from terminating their employment with us. Losing the services of members of senior management could materially harm our business until a suitable replacement is found, and such replacement may not have equal experience and capabilities. In addition, we have not purchased key personnel life insurance on any members of our senior management.

Local conditions, events, terrorist attacks, adverse weather conditions and natural disasters could adversely affect our business.

Certain of the regions in which our stores are located have been, and may in the future be, subject to adverse local conditions, events, terrorist attacks, adverse weather conditions or natural disasters, such as earthquakes, floods and hurricanes. In particular, seven of our stores are located in California and are subject to earthquake risk, and our three stores in Florida, our two stores in Houston and our one store in Honolulu are subject to hurricane risk. Depending upon its magnitude, adverse weather or a natural disaster could severely damage our stores, which could adversely affect our business, results of operations or financial condition. We currently maintain property and business interruption insurance through the aggregate property policy for each of the stores. However, such coverage may not be sufficient if there is a major disaster. In addition, upon the expiration of our current insurance policies, adequate insurance coverage may not be available at reasonable rates, or at all.

Our Nashville, Tennessee store was extensively damaged by the recent historic flooding in the Nashville area. The store is covered by up to $25 million in property and business interruption insurance subject to a net

 

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overall deductible of approximately $1,000. We have initiated property insurance claims, including business interruption, with our insurers. We cannot estimate at this time when the store will be back in operation.

Unfavorable publicity relating to one or more of our stores may taint public perception of the Dave & Buster’s brand, which could reduce sales in one or more of our stores and make our brand less valuable.

The strength of our brand is impacted by public perception of the quality of our food and facilities. Multi-store businesses, such as ours, can be adversely affected by unfavorable publicity resulting from poor food quality, illness or health concerns, or a variety of other operating issues stemming from one or a limited number of stores. Adverse publicity involving any of these factors could make our stores less appealing, reduce our guest traffic and/or impose practical limits on pricing. In the future, some of our stores may be operated by franchisees. Any such franchisees will be independent third parties that we do not control. Although our franchisees will be contractually obligated to operate the store in accordance with our standards, we would not oversee their daily operations. If one or more of our stores were the subject of unfavorable publicity, our overall brand could be adversely affected, which could have a material adverse effect on our business, results of operations and financial condition.

We may not be able to renew real property leases on favorable terms, or at all, which may require us to close a store or relocate, either of which could have a material adverse effect on our business, results of operations or financial condition.

Of the 57 stores operated by us as of August 2, 2010, 56 stores are operated on leased premises. The leases typically provide for a base rent plus additional rent based on a percentage of the revenue generated by the stores on the leased premises once certain thresholds are met. A lease on one of our stores is scheduled to expire during late fiscal 2010 and the Company is evaluating whether to seek to extend the term of the lease on this store. A decision not to renew a lease for a store could be based on a number of factors, including an assessment of the area in which the store is located. We may choose not to renew, or may not be able to renew, certain of such existing leases if the capital investment then required to maintain the stores at the leased locations is not justified by the return on the required investment. If we are not able to renew the leases at rents that allow such stores to remain profitable as their terms expire, the number of such stores may decrease, resulting in lower revenue from operations, or we may relocate a store, which could subject us to construction and other costs and risks, and, in either case, could have a material adverse effect on our business, results of operations or financial condition.

Fixed rental payments account for a significant portion of our operating expenses, which increases our vulnerability to general adverse economic and industry conditions and could limit our operating and financial flexibility.

Payments under our operating leases account for a significant portion of our operating expenses. For example, total rental payments, including additional rental payments based on sales at some of our stores, under operating leases were approximately $44,865,000 or 8.6% of our total revenues, in fiscal 2009. In addition, as of May 2, 2010, we were a party to operating leases requiring future minimum lease payments aggregating approximately $136,041,000 through fiscal 2012 and approximately $321,084,000 thereafter. We expect that we will lease any new stores we open under operating leases. Our substantial operating lease obligations could have significant negative consequences, including:

 

   

increasing our vulnerability to general adverse economic and industry conditions;

 

   

limiting our ability to obtain additional financing;

 

   

requiring a substantial portion of our available cash to be applied to pay our rental obligations, thus reducing cash available for other purposes;

 

   

limiting our flexibility in planning for or reacting to changes in our business or the industry in which we compete; and

 

   

placing us at a disadvantage with respect to our competitors.

 

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We depend on cash flow from operations to pay our lease obligations and to fulfill our other cash needs. If our business does not generate sufficient cash flow from operating activities and sufficient funds are not otherwise available to us from borrowings under bank loans or from other sources, we may not be able to service our operating lease obligations, grow our business, respond to competitive challenges or fund our other liquidity and capital needs, which would have a material adverse affect on us.

If we are unable to adequately protect our brand, our business could be harmed significantly.

Our brand is essential to our success and competitive position. We use a combination of intellectual property rights, such as trademarks and service marks, to protect our brand. The success of our business strategy depends, in part, on our continued ability to use our intellectual property rights to increase brand awareness and further develop our branded products in both existing and new markets. If we fail to protect our intellectual property rights adequately, we may lose an important advantage in the markets in which we compete. If third parties misappropriate or infringe our intellectual property, our image, brand and the goodwill associated therewith may be harmed, our brand may fail to achieve and maintain market recognition, and our competitive position may be harmed, any of which could have a material adverse effect on our business. To protect our intellectual property, we may become involved in litigation, which could result in substantial expenses, divert the attention of management, and adversely affect our revenue, financial condition and results of operations.

There can be no assurance that third parties will not assert that our products and services infringe, or may infringe, their proprietary rights. Any such claims, regardless of merit, could lead to litigation, which could result in substantial expenses, divert the attention of management, cause significant delays, materially disrupt the conduct of our business and have a material adverse effect on our financial condition and results of operations. As a consequence of such claims, we could be required to pay a substantial damage award, take a royalty-bearing license, discontinue the use of third party products used within our operations and/or rebrand our business and products.

Failure to establish and maintain effective internal control over financial reporting could have a material adverse effect on our business, operating results, and the Notes.

Maintaining effective internal control over financial reporting is necessary for us to produce reliable financial reports and is important in helping to prevent financial fraud. If we are unable to maintain adequate internal controls, our business and operating results could be harmed. Any failure to remediate deficiencies noted by our independent registered public accounting firm or to implement required new or improved controls or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements. If our management or our independent registered public accounting firm were to conclude in their reports that our internal control over financial reporting was not effective, investors could lose confidence in our reported financial information and the trading price of the Notes could drop significantly.

Disruptions in our information technology systems could have an adverse impact on our operations.

Our operations are dependent upon the integrity, security and consistent operation of various systems and data centers, including the point-of-sale, kiosk and amusement operations systems in our stores, data centers that process transactions, communication systems and various other software applications used throughout our operations. Disruptions in these systems could have an adverse impact on our operations. We could encounter difficulties in developing new systems or maintaining and upgrading existing systems. Such difficulty could lead to significant expenses or to losses due to disruption in our business operations. In 2007, there was an external breach of our credit card processing systems which led to fraudulent credit card activity and resulted in the payment of fines and reimbursements for the fraudulent credit card activity. As part of a settlement with the Federal Trade Commission, we have implemented a series of corrective measures in order to ensure that our computer systems are secure and that our customers’ personal information is protected. Despite our considerable

 

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efforts and investment in technology to secure our computer network, security could still be compromised, confidential information could be misappropriated or system disruptions could occur in the future. This could lead to a loss of sales or profits or cause us to incur significant costs to reimburse third parties for damages.

Our current insurance policies may not provide adequate levels of coverage against all claims and we may incur losses that are not covered by our insurance.

We believe we maintain insurance coverage that is customary for businesses of our size and type. However, there are types of losses we may incur that cannot be insured against or that we believe are not commercially reasonable to insure. For example, we maintain business interruption insurance, but there can be no assurance that the coverage for a severe or prolonged business interruption at one or more of our stores would be adequate. Given the limited number of stores we operate, such a loss could have a material adverse effect on our results of operations. In addition, we do not currently carry insurance for breaches of our computer network security. Moreover, we believe that insurance covering liability for violations of wage and hour laws is generally not available. These losses, if they occur, could have a material adverse effect on our business and results of operations.

Our board of directors may be controlled by a single stockholder, whose interest may not aligned with yours.

As a result of the Transactions, Oak Hill indirectly controls approximately 96% of our outstanding capital stock. Neither Oak Hill nor its affiliates have any obligation to contribute additional funds (directly or indirectly to) the Company.

Accordingly, Oak Hill indirectly beneficially owns a majority of our outstanding shares of common stock and can determine the outcomes of the elections of members of our board of directors and the outcome of corporate actions requiring stockholder approval, including mergers, consolidations and the sale of all or substantially all of our assets. The interests of Oak Hill could conflict with those of our public debt holders. For example, if we encounter financial difficulties or are unable to pay our debts as they come due, the interests of Oak Hill as an equity holder might conflict with the interests of our noteholders. Oak Hill may have an interest in Dave & Buster’s pursuing acquisitions, divestitures or financings or other transactions that, in its judgment could enhance its equity investment, even though such transactions may involve significant risks to our noteholders. In addition, Oak Hill and its affiliates may in the future own interests in businesses that compete with ours.

Risks related to the exchange offer and holding the Notes

Our level of indebtedness could adversely affect our ability to raise additional capital to fund operations, limit our ability to react to changes in the economy or our industry and prevent us from meeting our obligations under the Notes.

After giving effect to the Transactions, including this offering and the applications of the proceeds thereof, we will be significantly leveraged and our total indebtedness will be approximately $350 million based on the amount of debt we will have outstanding on the closing date of the Transactions. The following chart shows our pro forma level of indebtedness and certain other information as of May 2, 2010, after giving effect to the Transactions:

 

      Pro forma
as of
May 2, 2010

(In thousands)

    

Senior secured credit facility

  

Revolving credit facility

   $ —  

Term loan

     150,000

Restricted Notes

     200,000
      

Total debt

     350,000
      

Stockholder’s equity

   $ 238,074

 

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Our substantial indebtedness could have important consequences, including:

 

   

our ability to obtain additional debt or equity financing for working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes may be limited;

 

   

a portion of our cash flows from operations will be dedicated to the payment of principal and interest on the indebtedness and will not be available for other purposes, including operations, capital expenditures and future business opportunities;

 

   

certain of our borrowings are at variable rates of interest, exposing us to the risk of increased interest rates;

 

   

our ability to adjust to changing market conditions may be limited and may place us at a competitive disadvantage compared to less-leveraged competitors; and

 

   

we may be vulnerable in a downturn in general economic conditions or in business, or may be unable to carry on capital spending that is important to our growth.

We may be able to incur substantially more indebtedness, including indebtedness ranking equal to the Notes and the guarantees. This could increase the risks associated with the Notes.

Subject to the restrictions in the indenture and in other instruments governing our other outstanding indebtedness (including our senior secured credit facility), we may incur substantial additional indebtedness (including secured indebtedness) in the future. Although the indenture and the senior secured credit facility contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to waiver and a number of significant qualifications and exceptions, and indebtedness incurred in compliance with these restrictions could be substantial.

If we incur any additional indebtedness that ranks equally with the Notes, the holders of that debt will be entitled to share ratably with you in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding-up of us. This may have the effect of reducing the amount of proceeds paid to you. If debt were added to our existing debt levels, the related risks that we now face would increase. In addition, our senior secured credit facility and the indenture do not prevent us from incurring obligations that do not constitute indebtedness thereunder.

We may not be able to generate sufficient cash to service all of our indebtedness, including the Notes, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments or to refinance our debt obligations depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We cannot assure you that our business will generate sufficient cash flows from operating activities to permit us to pay the principal, premium, if any, and interest on our indebtedness, including the Notes and the senior secured credit facility.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure or refinance our indebtedness, including the Notes and the senior secured credit facility. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous borrowing covenants, which could further restrict our business operations. The terms of existing or future debt instruments, including our senior secured credit facility and the indenture, may restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our

 

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ability to incur additional indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.

Restrictive covenants may adversely affect our operations.

Our senior secured credit facility and the indenture will contain various covenants that limit our ability to, among other things:

 

   

incur additional indebtedness or issue certain preferred shares;

 

   

make certain restricted payments;

 

   

make certain investments;

 

   

sell certain assets;

 

   

create liens;

 

   

enter into certain sale and leaseback transactions;

 

   

make capital expenditures above a certain level;

 

   

prepay or defease specified debt;

 

   

consolidate, merge, sell, or otherwise dispose of all or substantially all of our assets; and

 

   

enter into certain transactions with our affiliates.

In addition, the restrictive covenants in our senior secured credit facility require us to maintain specified financial ratios and satisfy other financial condition tests. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and we cannot assure you that we will meet those tests. A breach of any of these covenants could result in a default under our senior secured credit facility if not waived by the requisite number of lenders. Upon the occurrence of an event of default under our senior secured credit facility, the lenders could elect to declare all amounts then outstanding under our senior secured credit facility to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders under our senior secured credit facility could proceed against the collateral granted to them to secure that indebtedness. We have pledged a significant portion of our assets as collateral under our senior secured credit facility. If the lenders under our senior secured credit facility accelerate the repayment of borrowings, we cannot assure you that we will have sufficient assets to repay our senior secured credit facility and our other indebtedness, including the Notes, or borrow sufficient funds to refinance such indebtedness, if at all. Even if we are able to obtain new financing, it may not be on commercially reasonable terms, or terms that are acceptable to us. See “Description of other indebtedness.”

Variable-rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.

Certain of our borrowings, primarily borrowings under our senior secured credit facility, are, and are expected to continue to be, at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable-rate indebtedness would increase even though the amount borrowed remained the same, and our net income would consequently decrease. Borrowings under the senior secured credit facility will bear interest, at our option, based upon either a base rate (or, in the case of the Canadian revolving credit facility, a Canadian prime rate) or a Eurodollar rate (or, in the case of the Canadian revolving credit facility, a Canadian cost of funds rate) for one-, two-, three- or six-months (or, if agreed by the applicable lenders, nine or twelve months) interest periods chosen by us or the Canadian Borrower, as applicable in each case, plus an applicable margin percentage. Swingline loans will bear interest at the base rate plus the applicable margin.

 

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The Notes and guarantees are not secured by any of our assets. Our senior secured credit facility is secured and our bank lenders have a prior claim on substantially all our assets.

The Notes and the guarantees are general unsecured senior obligations ranking effectively junior to all of our existing and future secured indebtedness, including our obligations under our senior secured credit facility, to the extent of the value of the collateral securing the indebtedness. However, our senior secured credit facility will be secured by a perfected first priority security interest in all of our tangible and intangible assets. If we become insolvent or are liquidated, or if payment under any of the instruments governing our secured debt is accelerated, the lenders under those instruments will be entitled to exercise the remedies available to a secured lender under applicable law and pursuant to the instruments governing such debt. Accordingly, the lenders under our senior secured credit facility will have a prior claim on our assets securing the debt owed to them. In that event, because the Notes and guarantees will not be secured by any of our assets, it is possible that our remaining assets might be insufficient to satisfy your claims in full.

The Notes are structurally subordinated to all indebtedness of our existing or future subsidiaries that do not become guarantors of the Notes.

You will not have any claim as a creditor against our foreign subsidiary that is not guaranteeing the Notes or against any of our future subsidiaries that do not become guarantors of the Notes. Indebtedness and other liabilities, including trade payables, whether secured or unsecured, as well as preferred stock of those subsidiaries will be structurally senior to your claims against those subsidiaries.

If we default on our obligations to pay our indebtedness we may not be able to make payments on the Notes.

Any default under the agreements governing our indebtedness, including a default under our senior secured credit facility that is not waived by the required lenders, and the remedies sought by the holders of such indebtedness, could make us unable to pay principal, premium, if any, and interest on the Notes and substantially decrease the market value of the Notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium (if any) and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness (including covenants in our indenture and our senior secured credit facility), we could be in default under the terms of the agreements governing such indebtedness, including our senior secured credit facility and our indenture. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under our senior secured credit facility could elect to terminate their commitments thereunder and cease making further loans and institute foreclosure proceedings against our assets and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future need to obtain waivers from the required lenders under our senior secured credit facility to avoid being in default. If we breach our covenants under our senior secured credit facility and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under our senior secured credit facility, the lenders could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation. See “Description of other indebtedness” and “Description of the exchange notes.”

We may not be able to repurchase the Notes upon a change of control.

Upon the occurrence of a change of control event, as defined in the indenture, subject to certain conditions, we will be required to offer to repurchase all outstanding Notes at 101% of their principal amount, plus accrued and unpaid interest. The source of funds for that purchase of Notes will be our available cash or cash generated from our subsidiaries’ operations or other potential sources, including borrowings, sales of assets or sales of equity. We cannot assure you that sufficient funds from such sources will be available at the time of any change of control to make required repurchases of Notes tendered. In addition, the terms of our senior secured credit facility will limit our ability to repurchase your Notes and will provide that certain change of control events will constitute an event of default thereunder. Our future debt agreements may contain similar restrictions and provisions. If the holders of the Notes exercise their right to require us to repurchase all the Notes upon a change

 

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of control, the financial effect of this repurchase could cause a default under our other debt, even if the change of control itself would not cause a default. Accordingly, it is possible that we will not have sufficient funds at the time of the change of control to make the required repurchase of our other debt and the Notes or those restrictions in our senior secured credit facility and the indenture will not allow such repurchases.

In addition, the change of control provisions in the indenture may not protect you from certain important corporate events, such as a leveraged recapitalization (which would increase the level of our indebtedness), reorganization, restructuring, merger or other similar transaction, unless such transaction constitutes a “Change of Control” under the indenture. Such a transaction may not involve a change in voting power or beneficial ownership or, even if it does, may not involve a change that constitutes a “Change of Control” as defined in the indenture that would trigger our obligation to repurchase the Notes. Therefore, if an event occurs that does not constitute a “Change of Control” as defined in the indenture, we will not be required to make an offer to repurchase the notes and you may be required to continue to hold your Notes despite the event. See “Description of other indebtedness” and “Description of the Exchange Notes—Change of control.”

Federal and state fraudulent transfer laws permit a court to void the Notes and the guarantees, and, if that occurs, you may not receive any payments on the Notes.

The issuance of the Notes and the guarantees may be subject to review under federal and state fraudulent transfer and conveyance statutes. While the relevant laws may vary from state to state, under such laws the payment of consideration will be a fraudulent conveyance if (i) we paid the consideration with the intent of hindering, delaying or defrauding creditors or (ii) we or any of our guarantors, as applicable, received less than reasonably equivalent value or fair consideration in return for issuing either the Notes or a guarantee and, in the case of (ii) only, one of the following is also true:

 

   

we or any of our guarantors were insolvent or rendered insolvent by reason of the incurrence of the indebtedness;

 

   

payment of the consideration left us or any of our guarantors with an unreasonably small amount of capital to carry on the business; or

 

   

we or any of our guarantors intended to, or believed that we or it would, incur debts beyond our or its ability to pay as they become due.

If a court were to find that the issuance of the Notes or a guarantee was a fraudulent conveyance, the court could void the payment obligations under the Notes or such guarantee or subordinate the Notes or such guarantee to presently existing and future indebtedness of ours or such guarantor, or require the holders of the Notes to repay any amounts received with respect to the Notes or such guarantee. In the event of a finding that a fraudulent conveyance occurred, you may not receive any repayment on the Notes. Further, the voidance of the Notes could result in an event of default with respect to our other debt and that of our guarantors that could result in acceleration of such debt.

Generally, an entity would be considered insolvent if at the time it incurred indebtedness:

 

   

the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all its assets;

 

   

the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts and liabilities, including contingent liabilities, as they become absolute and mature; or

 

   

it could not pay its debts as they become due.

We cannot be certain as to the standards a court would use to determine whether or not we or the guarantors were solvent at the relevant time, or regardless of the standard that a court uses, that the issuance of the Notes and the guarantees would not be subordinated to our or any guarantor’s other debt.

 

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If the guarantees were legally challenged, any guarantee could also be subject to the claim that, since the guarantee was incurred for our benefit, and only indirectly for the benefit of the guarantor, the obligations of the applicable guarantor were incurred for less than fair consideration. A court could void a guarantor’s obligation under its guarantee, subordinate the guarantee to the other indebtedness of a guarantor, direct that holders of the Notes return any amounts paid under a guarantee to the relevant guarantor or to a fund for the benefit of its creditors, or take other action detrimental to the holders of the Notes. In addition, the liability of each guarantor under the indenture will be limited to the amount that will result in its guarantee not constituting a fraudulent conveyance or improper corporate distribution, and there can be no assurance as to what standard a court would apply in making a determination as to what would be the maximum liability of each guarantor.

Your ability to transfer the Notes may be limited by the absence of an active trading market, and there is no assurance that any active trading market will develop for the Notes.

The Notes are a new issue of securities for which there is no established public market. We do not intend to have the Notes or any Exchange Notes listed on a national securities exchange or to arrange for quotation on any automated dealer quotation systems. The initial purchasers have advised us that they intend to make a market in the Notes, and the Exchange Notes, if issued, as permitted by applicable laws and regulations; however, the initial purchasers are not obligated to make a market in the Notes or the Exchange Notes and they may discontinue their market-making activities at any time without notice. In addition, such market-making activities may be limited during the exchange offer or while the effectiveness of a shelf registration statement is pending. Therefore, we cannot assure you as to the development or liquidity of any trading market for the Notes or the Exchange Notes. The liquidity of any market for the Notes will depend on a number of factors, including:

 

   

the number of holders of Notes;

 

   

our operating performance and financial condition;

 

   

our ability to complete the offer to exchange the Notes for the Exchange Notes;

 

   

the market for similar securities;

 

   

the interest of securities dealers in making a market in the Notes; and

 

   

prevailing interest rates.

Historically, the market for non-investment grade debt has been subject to disruptions that have caused substantial volatility in the prices of securities similar to the Notes. We cannot assure you that the market, if any, for the Notes or the Exchange Notes will be free from similar disruptions or that any such disruptions may not adversely affect the prices at which you may sell your Notes or Exchange Notes. Therefore, we cannot assure you that you will be able to sell your Notes or Exchange Notes at a particular time or that the price you receive when you sell will be favorable.

Holders of Restricted Notes who fail to exchange their Restricted Notes in the exchange offer will continue to be subject to restrictions on transfer.

If you do not exchange your Restricted Notes for the Exchange Notes in the exchange offer, you will continue to be subject to the restrictions on transfer applicable to the Restricted Notes. The restrictions on transfer of your Restricted Notes arise because we issued the Restricted Notes under exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws. In general, you may only offer or sell the Restricted Notes if they are registered under the Securities Act and applicable state securities laws, or offered and sold under an exemption from these requirements. We do not plan to register the Restricted Notes under the Securities Act. For further information regarding the consequences of tendering your Restricted Notes in the exchange offer, see the discussions below under the captions “The exchange offer—Consequences of exchanging or failing to exchange Restricted Notes” and “Certain United States federal income tax considerations.”

 

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You must comply with the exchange offer procedures in order to receive new, freely tradable Exchange Notes.

Delivery of the Exchange Notes in exchange for Restricted Notes tendered and accepted for exchange pursuant to the exchange offer will be made in accordance with the procedures described in this prospectus. We are not required to notify you of defects or irregularities in tenders of Restricted Notes for exchange. Restricted Notes that are not tendered or that are tendered but we do not accept for exchange will, following consummation of the exchange offer, continue to be subject to the existing transfer restrictions under the Securities Act and, upon consummation of the exchange offer, certain registration and other rights under the registration rights agreements will terminate. See “The exchange offer—Procedures for tendering Restricted Notes” and “The exchange offer—Consequences of exchanging or failing to exchange Restricted Notes.”

Some holders who exchange their Restricted Notes may be deemed to be underwriters, and these holders will be required to comply with the registration and prospectus delivery requirements in connection with any resale transaction.

If you exchange your Restricted Notes in the exchange offer for the purpose of participating in a distribution of the Exchange Notes, you may be deemed to have received restricted securities and, if so, will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction.

 

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THE EXCHANGE OFFER

Purpose of the exchange offer

When we sold the Restricted Notes on June 1, 2010, we and our guarantors entered into a registration rights agreement with the initial purchasers of those Restricted Notes.

Under the registration rights agreement, we and the guarantors agreed for the benefit of the holders of the Restricted Notes that we will use our reasonable best efforts to file with the SEC and cause to become effective a registration statement relating to an offer to exchange the Restricted Notes for an issue of SEC-registered Exchange Notes with the terms identical to the Restricted Notes (except that the Exchange Notes will not be subject to restrictions on transfer or to any increase in annual interest rate as described below).

Pursuant to the registration rights agreement, we and our guarantors agreed, for the benefit of the holders of the Restricted Notes, to:

 

   

use our reasonable best efforts to file with the SEC and cause to become effective a registration statement relating to an offer to exchange the Restricted Notes for the Exchange Notes with the terms identical terms to the Restricted Notes (except that the Exchange Notes will not be subject to restrictions on transfer or to any increase in annual interest rate as described below); and

 

   

use our reasonable best efforts to cause the exchange offer to be consummated within 210 days of the closing of the offering of the Restricted Notes.

We also agreed to file a shelf registration statement under certain circumstances. If we fail to satisfy these obligations, we have agreed to pay additional interest to the holders of the Restricted Notes under certain circumstances. See “Description of the Exchange Notes—Registration rights.”

The exchange offer is not being made to holders of Restricted Notes in any jurisdiction in which the exchange would not comply with the securities or blue sky laws of such jurisdiction. A copy of the registration rights agreement is filed as an exhibit to the registration statement of which this prospectus is a part.

Terms of the exchange offer

Subject to the terms and the satisfaction or waiver of the conditions detailed in this prospectus, we will accept for exchange Restricted Notes which are properly tendered on or prior to the expiration date and not withdrawn as permitted below. As used herein, the term “expiration date” means 5:00 p.m., New York City time, on                     , 2010. We may, however, in our sole discretion, extend the period of time during which the exchange offer is open. The term “expiration date” means the latest time and date to which the exchange offer is extended.

As of the date of this prospectus, $200,000,000 aggregate principal amount of Restricted Notes are outstanding. This prospectus is first being sent on or about the date hereof to all holders of Restricted Notes known to us.

We expressly reserve the right, at any time prior to the expiration of the exchange offer, to extend the period of time during which the exchange offer is open, and delay acceptance for exchange of any Restricted Notes, by giving oral or written notice of such extension to holders as described below. During any such extension, all Restricted Notes previously tendered will remain subject to the exchange offer and may be accepted for exchange by us. Any Restricted Notes not accepted for exchange for any reason will be returned without expense to an account maintained with DTC as promptly as practicable after the expiration or termination of the exchange offer.

We expressly reserve the right to amend or terminate the exchange offer, and not to accept for exchange any Restricted Notes, upon the occurrence of any of the conditions of the exchange offer specified under “—Conditions to the exchange offer.” In the event of a material change in the exchange offer, including the

 

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waiver of a material condition, we will extend the exchange offer period if necessary to ensure that at least five business days remain in the exchange offer following notice of the material announcement. We will give oral or written notice of any extension, amendment, non-acceptance or termination to the holders of the Restricted Notes as promptly as practicable. Such notice, in the case of any extension, will be issued by means of a press release or other public announcement no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date.

Procedures for tendering Restricted Notes

When a holder of Restricted Notes tenders, and we accept, Restricted Notes for exchange, a binding agreement between us and the tendering holder is created, subject to the terms and conditions described in this prospectus and the letter of transmittal.

Valid Tender. Except as set forth below, a holder of Restricted Notes who wishes to tender notes for exchange must, on or prior to the expiration date:

 

   

transmit a properly completed and duly executed letter of transmittal, including all other documents required by the letter of transmittal, to the exchange agent at the address set forth under the caption “—Exchange Agent;” or

 

   

if Restricted Notes are tendered pursuant to the book-entry procedures set forth below, the tendering holder must transmit an agent’s message to the exchange agent at the address set forth under the caption “—Exchange Agent.”

In addition, either:

 

   

the exchange agent must receive the certificates for the Restricted Notes and the letter of transmittal;

 

   

the exchange agent must receive, prior to the expiration date, a timely confirmation of the book-entry transfer of the notes being tendered into the exchange agent’s account at DTC, along with the letter of transmittal or an agent’s message; or

 

   

the holder must comply with the guaranteed delivery procedures described below.

The term “agent’s message” means a message, transmitted by DTC and received by the exchange agent and forming a part of a book-entry confirmation, which states that DTC has received an express acknowledgment from the tendering holder that the tendering holder has received and agrees to be bound by the letter of transmittal and that we may enforce the letter of transmittal against that holder. In this prospectus, the term “book-entry confirmation” means a timely confirmation of a book-entry transfer of Restricted Notes into the exchange agent’s account at DTC.

If any letter of transmittal, endorsement, bond power, power of attorney or any other document required by the letter of transmittal is signed by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, that person should so indicate when signing and must submit proper evidence satisfactory to us, in our reasonable judgment, of the person’s authority to act.

Any beneficial owner of Restricted Notes that are held by or registered in the name of a broker, dealer, commercial bank, trust company or other nominee or custodian is urged to contact that entity promptly if the beneficial owner wishes to participate in the exchange offer.

The method of delivery of Restricted Notes, the letter of transmittal and all other required documents is at the option and sole risk of the tendering holder, and delivery will be deemed made only when actually received by the exchange agent. Instead of delivery by mail, we recommend that holders use an overnight or hand delivery service. In all cases, holders should allow sufficient time to assure timely delivery to the exchange agent and should obtain proper insurance. No letter of transmittal or Restricted Notes should be sent to us. Holders may request their respective brokers, dealers, commercial banks, trust companies or nominees to effect these

 

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transactions for them. We will not accept any alternative conditional or contingent tenders. Each tendering holder, by execution of the letter of transmittal, waives any right to receive any notice of the acceptance of such tender.

Each broker-dealer that receives Exchange Notes for its own account in exchange for Restricted Notes, where the Restricted Notes were acquired by the broker-dealer as a result of market-making or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of the Exchange Notes. See “Plan of Distribution.”

Book-Entry Transfer. The exchange agent will make a request to establish an account at DTC with respect to Restricted Notes for purposes of the exchange offer within two business days after the date of this prospectus. Subject to the establishment of such accounts, any financial institution that is a participant in DTC’s book-entry transfer facility system may make a book-entry delivery of Restricted Notes by causing DTC to transfer those Restricted Notes into the exchange agent’s account at DTC in accordance with DTC’s procedures for transfers. However, although delivery of Restricted Notes may be effected through book-entry transfer into the exchange agent’s account at DTC, an agent’s message or a duly executed letter of transmittal, including all other documents required by such letter of transmittal, must in any case, be transmitted to and received by the exchange agent at one of the addresses set forth below under the caption “Exchange Agent” on or before the expiration date or the guaranteed delivery procedures described below must be complied with. Delivery of the agent’s message by DTC will satisfy the terms of the exchange offer as to execution and delivery of a letter of transmittal by the participant identified in the agent’s message.

Delivery of documents to DTC does not constitute delivery to the exchange agent.

Guaranteed Delivery. Holders who wish to tender their Restricted Notes and (i) whose Restricted Notes are not immediately available, (ii) who cannot deliver their Restricted Notes, the letter of transmittal or any other required documents to the exchange agent before the expiration date, or (iii) who cannot complete the procedures for delivery by book-entry transfer, may effect a tender if:

(a) the tender is made through an eligible institution;

(b) before the expiration date, the exchange agent receives from an eligible institution a properly completed and duly executed letter of transmittal, or a facsimile of the letter of transmittal, and notice of guaranteed delivery by mail, hand delivery, overnight courier or facsimile transmission setting forth the name and address of the holder of the Restricted Notes, the certificate number or numbers of the Restricted Notes and the amount of Restricted Notes being tendered, stating that the tender is being made and guaranteeing that, within three New York Stock Exchange trading days after the expiration date, the properly completed and duly executed letter of transmittal (or facsimile thereof) together with the certificates for all physically tendered Restricted Notes, in proper form for transfer, or a book-entry confirmation, as the case may be, and any other documents required by the letter of transmittal will be deposited by the eligible institution with the exchange agent; and

(c) a properly completed and executed letter of transmittal (or facsimile thereof), as well as the certificates representing all tendered Restricted Notes in proper form for transfer, or a book-entry confirmation, as the case may be, and all other documents required by the letter of transmittal, are received by the exchange agent within three New York Stock Exchange trading days after the expiration date.

Determination of Validity. All questions as to the form of documents, validity, eligibility, including time of receipt, and acceptance for exchange of any tendered Restricted Notes will be determined by us, in our reasonable judgment, and that determination will be final and binding on all parties. We reserve the right, in our reasonable judgment, to reject any and all tenders that we determine are not in proper form or the acceptance for exchange of which may, in the view of our counsel, be unlawful. We also reserve the right, subject to applicable law, to waive any of the conditions of the exchange offer as set forth under the caption “—Conditions to the Exchange Offer” or any defect or irregularity in any tender of Restricted Notes of any particular holder whether or not we waive similar defects or irregularities in the case of other holders.

 

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Our interpretation of the terms and conditions of the exchange offer, including the letter of transmittal and its instructions, will be final and binding on all parties. No tender of Restricted Notes will be deemed to have been validly made until all defects or irregularities with respect to such tender have been cured or waived. Neither we, any of our affiliates or assigns, the exchange agent or any other person will be under any duty to give any notification of any defects or irregularities in tenders or incur any liability for failure to give any such notification.

Acceptance of Restricted Notes for exchange; delivery of the Exchange Notes

Upon satisfaction or waiver of all of the conditions to the exchange offer, we will accept, promptly after the expiration date, all Restricted Notes properly tendered and will issue the Exchange Notes promptly after acceptance of the Restricted Notes. See “—Conditions to the exchange offer.” For purposes of the exchange offer, we will be deemed to have accepted properly tendered Restricted Notes for exchange if and when we give oral (confirmed in writing) or written notice to the exchange agent.

The holder of each Restricted Note accepted for exchange will receive an Exchange Note in the amount equal to the surrendered Restricted Note. Holders of the Exchange Notes on the relevant record date for the first interest payment date following the consummation of the exchange offer will receive interest accruing from the most recent date to which interest has been paid on the Restricted Notes. Holders of the Exchange Notes will not receive any payment in respect of accrued interest on Restricted Notes otherwise payable on any interest payment date, the record date for which occurs on or after the consummation of the exchange offer.

If any tendered Restricted Notes are not accepted for any reason set forth in the terms and conditions of the exchange offer or if Restricted Notes are submitted for a greater principal amount than the holder desires to exchange, such unaccepted or non-exchanged Restricted Notes will be returned without expense to an account maintained with DTC promptly after the expiration or termination of the exchange offer.

Withdrawal rights

Tenders of Restricted Notes may be withdrawn at any time before 5:00 p.m., New York City time, on the expiration date. For a withdrawal to be effective, the exchange agent must receive a written notice of withdrawal at the address, or in the case of eligible institutions, at the facsimile number, set forth below under the caption “—Exchange Agent” before 5:00 p.m., New York City time, on the expiration date. Any notice of withdrawal must specify the name of the person having tendered the Restricted Notes to be withdrawn, identify the Restricted Notes to be withdrawn (including the certificate number or numbers and the principal amount of the original notes), and (where certificates for Restricted Notes have been transmitted) specify the name in which such Restricted Notes are registered, if different from that of the withdrawing holder. If certificates for Restricted Notes have been delivered or otherwise identified to the exchange agent, then, before the release of such certificates, the withdrawing holder must also submit the serial numbers of the particular certificates to be withdrawn and a signed notice of withdrawal with signatures guaranteed by an eligible institution unless such holder is an eligible institution. If Restricted Notes have been tendered pursuant to the procedure for book-entry transfer described above, any notice of withdrawal must specify the name and number of the account at DTC to be credited with the withdrawn Restricted Notes and otherwise comply with the procedures of such facility. All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by us, and our determination shall be final and binding on all parties. Any Restricted Notes so withdrawn will be deemed not to have been validly tendered for exchange for purposes of the Exchange Offer. Any Restricted Notes which have been tendered for exchange but which are not exchanged for any reason will be returned to the holder thereof without cost to such holder (or in the case of original notes tendered by book-entry transfer into the exchange agent’s account at DTC pursuant to the book-entry transfer procedures described above, such Restricted Notes will be credited to an account maintained with DTC for the Restricted Notes) as soon as practicable after withdrawal, rejection of tender or termination of the Exchange Offer. Properly withdrawn Restricted Notes may be re-tendered by following one of the procedures described above under the caption “—Procedures for Tendering” at any time on or before the expiration date.

 

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Conditions to the exchange offer

Notwithstanding any other provision of the exchange offer, we are not required to accept for exchange, or to issue the Exchange Notes in exchange for, any Restricted Notes and may terminate or amend the exchange offer, if prior to the expiration date, the exchange offer violates any applicable law or applicable interpretation of the staff of the SEC.

The foregoing condition is for our sole benefit and may be asserted by us regardless of the circumstances giving rise to any condition or may be waived by us in whole or in part at any time in our reasonable discretion, except that we will not waive the condition with respect to an individual holder unless we waive such condition with respect to all holders. Our failure at any time to exercise any of the foregoing rights will not be deemed a waiver of any such right, and each such right will be deemed an ongoing right which may be asserted at any time and from time to time prior to the expiration of the exchange offer. The condition to the exchange offer must be satisfied or waived by us prior to the expiration of the exchange offer.

In addition, we will not accept for exchange any Restricted Notes tendered, and no Exchange Notes will be issued in exchange for any such Restricted Notes, if at such time any stop order is threatened or in effect with respect to the Registration Statement, of which this prospectus constitutes a part, or the qualification of the indentures under the Trust Indenture Act.

Exchange agent

We have appointed Wells Fargo Bank, National Association, as the exchange agent for the exchange offer. Questions and requests for assistance, requests for additional copies of this prospectus or of other documents should be directed to the exchange agent addressed as follows:

Wells Fargo Bank, National Association, Exchange Agent

By Registered or Certified Mail:

WELLS FARGO BANK, N.A.

Corporate Trust Operations

MAC N9303-121

PO Box 1517

Minneapolis, MN 55480

By Regular Mail or Overnight Courier:

WELLS FARGO BANK, N.A.

Corporate Trust Operations

MAC N9303-121

Sixth & Marquette Avenue

Minneapolis, MN 55479

By Facsimile

(for Eligible Institutions only):

(612) 667-6282

For Information of Confirmation by Telephone:

(800) 344-5128

In Person by Hand Only:

WELLS FARGO BANK, N.A.

12th Floor-Northstar East Building

Corporate Trust Operations

608 Second Avenue South

Minneapolis, MN 55479

 

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Fees and expenses

The principal solicitation is being made by mail by Wells Fargo Bank, National Association, as exchange agent. We will pay the exchange agent customary fees for its services, reimburse the exchange agent for its reasonable out-of-pocket expenses incurred in connection with the provision of these services and pay other registration expenses, including registration and filing fees, fees and expenses of compliance with federal securities and state blue sky securities laws, printing expenses, messenger and delivery services and telephone, fees and disbursements to our counsel, application and filing fees and any fees and disbursement to our independent certified public accountants. We will not make any payment to brokers, dealers or others soliciting acceptances of the exchange offer.

Additional solicitation may be made by telephone, facsimile or in person by our and our affiliates’ officers and regular employees and by persons so engaged by the exchange agent.

Accounting treatment

We will record the Exchange Notes at the same carrying value as the Restricted Notes, as reflected in our accounting records on the date of the exchange. Accordingly, we will not recognize any gain or loss for accounting purposes. The expenses of the exchange offer will be amortized over the term of the Exchange Notes.

Transfer taxes

You will not be obligated to pay any transfer taxes in connection with the tender of Restricted Notes in the exchange offer unless you instruct us to register the Exchange Notes in the name of, or request that Restricted Notes not accepted in the exchange offer be returned to, a person other than the registered tendering holder. In those cases, you will be responsible for the payment of any applicable transfer tax.

Consequences of exchanging or failing to exchange Restricted Notes

The information below concerning specific interpretations of and positions taken by the staff of the SEC is not intended to constitute legal advice, and prospective purchasers should consult their own legal advisors with respect to those matters.

If you do not exchange your Restricted Notes for Exchange Notes in the exchange offer, your Restricted Notes will continue to be subject to the provisions of the indentures regarding transfer and exchange of the Restricted Notes and the restrictions on transfer of the Restricted Notes imposed by the Securities Act and state securities laws. These transfer restrictions are required because the Restricted Notes were issued under an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws. In general, the Restricted Notes may not be offered or sold unless registered under the Securities Act, except under an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. We do not plan to register the Restricted Notes under the Securities Act.

We are registering the exchange offer in reliance on the position enunciated by the SEC in Exxon Capital Holdings Corp., SEC No-Action Letter (April 13, 1988), Morgan Stanley & Co, Inc., SEC No-Action Letter (June 5, 1991), and Shearman & Sterling, SEC No-Action Letter (July 2, 1993). Based on interpretations by the staff of the SEC, as detailed in a series of no-action letters issued to third parties, we believe that the Exchange Notes issued in the exchange offer may be offered for resale, resold or otherwise transferred by you without compliance with the registration and prospectus delivery requirements of the Securities Act as long as:

 

   

you are acquiring the Exchange Notes in the ordinary course of your business;

 

   

you are not participating, do not intend to participate and have no arrangement or understanding with any person to participate, in a distribution of the Exchange Notes; and

 

   

you are not an affiliate of ours.

If you are an affiliate of ours, are engaged in or intend to engage in or have any arrangement or understanding with any person to participate in the distribution of the Exchange Notes:

 

   

you cannot rely on the applicable interpretations of the staff of the SEC;

 

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you will not be entitled to participate in the exchange offer; and

 

   

you must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction.

We do not intend to seek our own interpretation regarding the exchange offer, and we cannot assure you that the staff of the SEC would make a similar determination with respect to the Exchange Notes as it has in other interpretations to third parties.

Each holder of Restricted Notes who wishes to exchange such Restricted Notes for the related Exchange Notes in the exchange offer represents that:

 

   

it is not our affiliate;

 

   

it is not engaged in, and does not intend to engage in, and has no arrangement or understanding with any person to participate in, a distribution of the Exchange Notes to be issued in the exchange offer;

 

   

it is acquiring the Exchange Notes in its ordinary course of business; and

 

   

if it is a broker-dealer, it will receive the Exchange Notes for its own account in exchange for Restricted Notes that were acquired by it as a result of its market-making or other trading activities and that it will deliver a prospectus in connection with any resale of the Exchange Notes it receives. For further information regarding resales of the Exchange Notes by participating broker-dealers, see the discussion under the caption “Plan of distribution.”

As discussed above, in connection with resales of the Exchange Notes, any participating broker-dealer must deliver a prospectus meeting the requirements of the Securities Act. The staff of the SEC has taken the position that participating broker-dealers may fulfill their prospectus delivery requirements with respect to the Exchange Notes, other than a resale of an unsold allotment from the original sale of the Restricted Notes, with the prospectus contained in the exchange offer registration statement.

USE OF PROCEEDS

We will not receive any proceeds from the exchange offer. Any Restricted Notes that are properly tendered and exchanged pursuant to the exchange offer will be retired and canceled.

RATIO OF EARNINGS TO FIXED CHARGES

The following table sets forth the Predecessor’s ratio of earnings to fixed charges on a historical basis for each of the last five fiscal years ended January 31, 2010, and for the thirteen weeks ended May 2, 2010 and May 3, 2009 and on a pro forma basis for the thirteen week period ended May 2, 2010 and the fiscal year ended January 31, 2010.

 

Thirteen weeks ended   Fiscal year ended   334-day
period from
March 8,
2006 to
February 4,
2007(1)
       37-day
period from
January 30,
2006 to
March 7,
2006(2)
 

Fiscal year

ended
January 29,

2006(2)

May 2,
2010
  May 2,
2010
  May 3,
2009
  January 31,
2010(1)
  January 31,
2010(1)
  February 1,
2009
  February 3,
2008(1)
       
    (Pro forma)           (Pro forma)                         
1.73x   1.32x   1.78x       1.03x           1.46x  

1.32x

 

(1) Earnings for the fiscal year ended January 31, 2010, the pro forma fiscal year ended January 31, 2010, the fiscal year ended February 3, 2008, and the 334-day period ended February 4, 2007 were insufficient to cover fixed charges by approximately $891,000, $11,834,000, $10,253,000, and $20,907,000, respectively.

 

(2) These periods represent operations of the Predecessor prior to acquisition of the Predecessor by the Sellers. The Sellers purchased all of the Predecessor common stock on March 8, 2006.

 

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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The following unaudited pro forma consolidated financial statements are based on our historical consolidated financial statements included elsewhere in this prospectus, and adjusted to give effect to the Transactions that occurred on June 1, 2010. The unaudited pro forma consolidated statements of operations for the thirteen week period ended May 2, 2010 and for the year ended January 31, 2010 give effect to the Transactions as if they had occurred as of February 2, 2009. The unaudited pro forma consolidated balance sheet as of May 2, 2010 gives effect to the Transactions as if they had occurred on that date. The pro forma adjustments are based upon available information, preliminary estimates and certain assumptions that we believe are reasonable based on information currently available, and are described in the accompanying notes. The pro forma consolidated financial statements should not be considered indicative of actual balance sheet data or results that would have been achieved had the Transactions been consummated on the dates indicated and do not purport to indicate balance sheet data or results of operations as of any future date or for any future period. The unaudited pro forma consolidated financial information should be read in conjunction with “Summary—The Transactions,” “Use of proceeds,” “Management’s discussion and analysis of financial condition and results of operations” and our historical consolidated financial statements and the notes thereto included elsewhere in this prospectus.

The Transactions will be accounted for in accordance with accounting guidance for business combinations and, accordingly, will result in the recognition of assets acquired and liabilities assumed at fair value. As of the date of this prospectus, the valuation studies necessary to estimate the fair values of the assets and the liabilities and to allocate the cost of the acquisition have not been completed. For purposes of computing pro forma adjustments, we have assumed that historical recorded amounts of the assets and liabilities approximate their respective fair values and the excess of the acquisition cost over the historical net assets of Dave & Buster’s has been presented as an adjustment of indefinite-lived intangible assets and goodwill. Accordingly, the accompanying pro forma balance sheet does not include any adjustment of the historical recorded amounts of inventories, property and equipment, finite-lived intangible assets, deferred lease liabilities, other assets or liabilities, or the associated adjustments to deferred taxes that may result from the allocation of the acquisition cost based on such valuation studies. The adjustment of the historical recorded amounts of assets and liabilities to their respective fair values may also result in adjustments to depreciation and amortization expense, rent expense and the provision for income taxes which are not reflected in the accompanying pro forma consolidated statements of operations. In addition, the final allocation of the acquisition cost will be based on the actual assets and liabilities of Dave & Buster’s that exist as of the date of the Acquisition. Therefore, the actual allocation of the cost of the acquisition will differ from the allocation assumed in these pro forma consolidated financial statements. The adjustments arising from the valuation studies will not impact our cash flows, including cash interest and rent. However, such adjustments could result in material increases or decreases in our EBITDA and Adjusted EBITDA.

 

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Unaudited pro forma consolidated balance sheet as of May 2, 2010

 

(Dollars in thousands)

   Historical    Pro forma
adjustments
    Pro forma

ASSETS

       

Current Assets:

       

Cash

   $ 19,017    $ (12,998 )(a)    $ 6,019

Inventories

     13,972      —          13,972

Prepaid expense

     10,516      1,703 (b)      12,219

Deferred Income taxes

     5,246      —          5,246

Other current assets

     5,571      —          5,571
                     

Total current assets

     54,322      (11,295     43,027

Property and equipment, net

     285,732      —          285,732

Intangible assets and goodwill

     128,857      262,759 (c)      391,616

Other assets

     13,660      9,175 (d)      22,835
                     

Total assets

   $  482,571    $  260,639      $  743,210
                     

LIABILITIES AND STOCKHOLDERS’ EQUITY

       

Current Liabilities:

       

Current installment of long-term debt

   $ 956    $ 544 (e)    $ 1,500

Accounts payable

     22,559      —          22,559

Accrued liabilities

     42,005      (3,306 )(f)      38,699

Income taxes payable

     5,671      (585 )(g)      5,086

Deferred Income taxes

     39      —    (a)      39
                     

Total current liabilities

     71,230      (3,347     67,883

Deferred income taxes

     9,945      585 (g)      10,530

Deferred occupancy costs

     66,307      —          66,307

Other liabilities

     11,916      —          11,916

Long-term Debt, less current installment

     226,169      (77,669 )(e)      148,500

Notes offered hereby

     —        200,000 (e)      200,000

Total stockholders’ equity

     97,004      141,070 (h)      238,074
                     

Total liabilities and stockholders’ equity

   $ 482,571    $ 260,639      $ 743,210
                     

 

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Notes to unaudited pro forma consolidated balance sheet

 

(a) Represents the pro forma adjustments that adjust Dave & Buster’s cash in accordance with the Transactions:

 

(In thousands)

   As of
May 2, 2010
 

Cash proceeds from:

  

Investment in our common stock by Oak Hill & Management

   $ 245,498   

New senior secured credit facility

     150,000   

Restricted Notes

     200,000   
        
     595,498   

Cash transaction costs associated with new debt and completion of Transactions

     (21,784
        
     573,714   

 

Payment of outstanding Predecessor debt

  

Revolving credit facility

       

Term loan

     (67,125

Senior Notes

     (160,000
        
   $ (227,125

 

Payment of costs associated with Predecessor debt

  

Redemption premium on Senior Notes

   $ (9,000

Redemption period interest payment

     (1,500

Cancellation of interest rate swap contacts

     (1,664

Payment of accrued interest through May 2, 2010

     (2,462
        
   $ (14,626

 

Payments to existing shareholders including payments made to escrow and payment of Seller’s expenses related to Transaction

  

$

(334,156

Payment of available cash balances to Sellers

     (10,805
        
   $ (12,998
        

The pro forma financial statements assume that the Successor’s transaction costs were approximately $22,604 and consisted of:

 

Costs related to new debt financing

   $ 13,477

Costs related to the Merger

     4,424

Bridge loan commitment fees

     3,000

Insurance coverage costs

     1,703
      
   $ 22,604
      

Approximately $21,784 of the above costs were paid upon closing of the Transactions, the remainder of the Successor’s transaction costs are reflected as an adjustment of $820 to accrued liabilities (note f).

No income tax benefit has been provided for the deferred tax assets related to deductible expenses related to the Transactions or the writeoff of historic unamortized debt issuance costs (note d). Such deferred tax assets may be realized as a result of the generation of taxable income in the future.

 

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Table of Contents
(b) Represents the prepaid costs of insurance policies covering Director and Officer liability and Representation and Warranty insurance coverage included in Transaction Costs. The policies obtained provide coverage for insured events over terms that range from one to six years.
(c) Represents the pro forma adjustments to Dave & Buster’s intangible assets and goodwill determined as follows:

 

      As of
May 2, 2010
 

Total payments to Seller’s including payments made to escrow and payments of Predecessor expenses related to the Transactions (note a)

   $ 334,156   

Less

  

Historical net book value of Predecessor as of May 2, 2010

     97,004   

Payment of available cash to Sellers (note a)

     (10,805

Elimination of deferred financing costs

     (4,302

Redemption premium and redemption period interest related to Predecessor Senior Notes (note a)

     (10,500
        
     (71,397
        
   $ 262,759   
        

At the closing date of the Transactions, the Sellers funded all accrued and unpaid interest related to our credit facility and paid fees associated with the cancellation of the interest rate swap agreements. As of May 2, 2010, the accrued and unpaid interest on our credit facility totaled $2,462 and the estimated fees for canceling our interest rate swap agreements were $1,664.

We issued an irrevocable notice of redemption of all of our existing Senior Notes at a redemption price of $1,056.25 per $1,000 principal amount of existing Predecessor Senior Notes on the closing date of the Transactions. The amount of the redemption premium was funded from the payments to Sellers.

The accompanying pro forma balance sheet does not include any adjustment of the historical recorded amounts of inventories, property and equipment, finite-lived intangible assets, deferred lease liabilities or other assets or liabilities or the associated adjustments to deferred taxes that may result from the allocation of the acquisition cost based on such appraisals. In addition, the final allocation of the acquisition cost will be based on the actual assets and liabilities of Dave & Buster’s that exist as of the date of the Transactions. Therefore, the actual allocations of the purchase price and the related impact, if any, on deferred taxes will differ from the allocation of the purchase price assumed in these pro forma consolidated financial statements and the impact of these differences could be significant.

 

(d) Represents the net pro forma adjustment to capitalized debt issuance cost:

 

Write-off of unamortized debt issuance costs on existing debt

   $ (4,302

Capitalization of new debt issuance costs

     13,477   
        

Incremental debt issuance costs

   $ 9,175   
        

 

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(e) Represents the net pro forma adjustment to debt, assuming the following proceeds from new debt, less payment of Predecessor debt:

 

     Historical    Pro forma
adjustments
    Pro forma

Predecessor debt:

       

Revolving credit facility

   $ —      $ —        $ —  

Term loans

     67,125      (67,125     —  

Senior Notes due 2014

     160,000      (160,000     —  

New debt:

       

Revolving credit facility

     —        —          —  

Term loans

     —        150,000        150,000

Restricted Notes

     —        200,000        200,000
                     

Total debt

     227,125      122,750        350,000
                     

Less: current maturities of long-term debt

     956      544        1,500
                     

Total long-term debt

   $ 226,169    $ 122,086      $ 348,500
                     

The pro forma debt obligations set forth above reflect the debt financing for the Transactions, based on the terms of the new debt realized at the close of the Transactions.

 

(f) Represents the pro forma payment of the following accrued expenses from seller funds and the recognition of certain liabilities for Transaction costs incurred that will be paid by the Successor:

 

Payment to terminate interest rate swaps

   $ (1,664

Payment of accrued interest

     (2,462

Accrual of transaction costs

     820   
        
   $ (3,306
        

At May 2, 2010 we held two interest rate swap contracts that expire in 2011. The contracts have not been designated as hedges and adjustments to mark the instruments to their fair value are recorded as interest expense. These contracts were terminated as part of the Transactions.

(g) Represents the impact on deferred taxes as a result of the pro forma adjustments related to the termination of our interest rate swap agreements.
(h) Represents the following pro forma charges to shareholder’s equity:

 

Elimination of Predecessor equity through purchase price adjustment

   $ (97,004

Investment in our common stock by Oak Hill & management

     245,498   

Transaction costs expensed, (note a)

     (7,424
        
   $ 141,070   
        

 

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Unaudited pro forma consolidated statement of operations for the thirteen weeks ended May 2, 2010

 

(Dollars in thousands)

   Historical    Pro forma
adjustments(a)
    Pro forma

Food and beverage revenues

   $ 71,357    $ —        $ 71,357

Amusements and other revenues

     70,218      —          70,218
                     

Total revenues

     141,575      —          141,575

Total cost of products

     27,863      —          27,863

Operating payroll and benefits

     33,468      —          33,468

Other store operating expenses

     45,605      —          45,605

General and administrative expenses

     8,617      51 (b)       8,668

Depreciation and amortization expense

     12,501      —          12,501

Preopening costs

     1,189      —          1,189
                     

Total Operating Costs

     129,243      51        129,294
                     

Operating income

     12,332      (51     12,281

Interest expense, net

     5,348      2,874 (c)      8,222
                     

Income before provision for income taxes

     6,984      (2,925     4,059

Provision (Benefit) for income taxes

     3,073      —   (d)      3,073
                     

Net income (loss)

   $ 3,911    $ (2,925   $ 986
                     

Unaudited pro forma consolidated statement of operations for the year ended January 31, 2010

 

(Dollars in thousands)

   Historical     Pro forma
adjustments(a)
    Pro forma  

Food and beverage revenues

   $ 269,973      $ —        $ 269,973   

Amusements and other revenues

     250,810        —          250,810   
                        

Total revenues

     520,783        —          520,783   

Total cost of products

     104,137        —          104,137   

Operating payroll and benefits

     132,114        —          132,114   

Other store operating expenses

     174,685        —          174,685   

General and administrative expenses

     30,437        195 (b)      30,632   

Depreciation and amortization expense

     53,658        —          53,658   

Preopening costs

     3,881        —          3,881   
                        

Total operating costs

     498,912        195        499,107   
                        

Operating income

     21,871        (195     21,676   

Interest expense, net

     22,122        10,649 (c)      32,771   
                        

Income (loss) before provision for income taxes

     (251     (10,844     (11,095

Provision for income taxes

     99        —   (d)      99   
                        

Net income (loss)

   $ (350   $ (10,844   $ (11,194
                        

 

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Notes to unaudited pro forma consolidated statements of operations

 

(a) The Transactions will be accounted for as a purchase in accordance with accounting guidance for business combinations and, accordingly, will result in the recognition of assets acquired and liabilities assumed at their fair values. The adjustments of the historical recorded amount of assets and liabilities to their respective fair value may also result in adjustments to depreciation and amortization expense, rent expense and the provision for income taxes which are not reflected in these pro forma consolidated statements of operations. See note (c) to the pro forma balance sheet above.

As a direct result of the Transactions, the Company will incur certain material, nonrecurring charges during the 12 months succeeding the transaction. These charges include:

 

(Dollars in thousands)

   Thirteen Weeks ended
May 2, 2010
   Fiscal Year ended
January 31, 2010

Professional fees and charges required to complete Transactions

   $ 4,424    $ 4,424

Bank fees associated with interim financing of Transactions

     3,000      3,000
             

Pro forma transaction expense

   $ 7,424    $ 7,424
             

The above costs are not included in the historical statements of operations but are provided for information purposes. Due to the absence of a continuing impact on our operations, these charges have also been excluded from the pro forma adjustments reflected in this presentation.

 

(b) Represents the pro forma incremental expense resulting from the amortization of prepaid insurance acquired as a result of the Transaction.

 

(c) Represents the pro forma incremental interest expense resulting from the new debt. The pro forma adjustment also includes the amortization of debt issuance costs associated with the new debt. The interest expense pro forma adjustment consists of the following:

 

(Dollars in thousands)

   Thirteen Weeks ended
May 2, 2010
    Fiscal Year ended
January 31, 2010
 

Estimated interest expense on new debt

   $ 7,762      $ 30,969   

Adjust for interest expense on retired debt

     (5,650     (22,916

Amortization of new debt issuance costs

     517        2,068   

Adjust for amortization of debt issuance

     (367     (1,464

Pro forma impact of cancelling interest rate swap agreement

     612        1,992   
                

Total pro forma adjustments to interest expense

   $ 2,874      $ 10,649   
                

The interest expense above is based on the rates and terms in effect at the closing of the Transaction related to our new senior secured credit facility and our new Restricted Notes. On a pro forma basis, a .125% increase in the interest rates applicable to our new senior secured credit facility would have resulted in additional interest expense of approximately $46 in the thirteen weeks ended May 2, 2010 and $187 in the fiscal year ended January 31, 2010.

 

(d) No tax benefit has been provided for the incremental pro forma interest expense. Such tax benefit may be realized as a result of the generation of taxable income in the future.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

Accounting principles generally accepted in the United States require operating results for Dave & Buster’s prior to the Acquisition completed on June 1, 2010 to be presented as Predecessor’s results in the historical financial statements. Operating results for Dave & Buster’s subsequent to the Acquisition will be presented or referred to as Successor’s results in the historical financial statements.

The following table sets forth our selected historical consolidated financial data for each of the five fiscal years in the period ended January 31, 2010 and for the thirteen week periods ended May 2, 2010 and May 3, 2009. The consolidated statement of operations data for each of the three fiscal years in the period ended January 31, 2010 and the consolidated balance sheet data as of January 31, 2010 and February 1, 2009 were derived from the Predecessor’s audited consolidated financial statements included elsewhere in this prospectus. The consolidated statement of operations for the thirteen weeks ended May 2, 2010 and May 3, 2009 and the consolidated balance sheet data as of May 2, 2010 were derived from the Predecessor’s unaudited consolidated financial statements included elsewhere in this prospectus and, in the opinion of management, includes all normal recurring adjustments necessary to present fairly the data for such periods and as of such dates. This historical consolidated financial data does not reflect the consummation of the Transactions or our capital structure following the Transactions and is not indicative of results that would have been reported had the Transactions occurred, nor is it indicative of our future financial position or operating results.

This table should be read in conjunction with “Management’s discussion and analysis of financial condition and results of operations” and the financial statements and related notes included elsewhere in this prospectus. Our historical results are not necessarily indicative of our future results.

 

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Table of Contents
     Thirteen weeks ended     Fiscal year ended     334-day
period
from
March 8,
2006 to

February 4,
2007
          37-day
period from
January 30,
2006 to

March 7,
2006(1)
    Fiscal year
ended

January 29,
2006(1)
 

(Dollars in thousands)

   May 2, 2010     May 3, 2009     January 31,
2010
    February 1,
2009
    February 3,
2008
          
     (Predecessor)     (Predecessor)     (Predecessor)     (Predecessor)     (Predecessor)     (Predecessor)           (Predecessor)     (Predecessor)  

Statement of operations data:

                     

Revenues:

                     

Food and beverage revenues

   $ 71,357      $ 71,000      $ 269,973      $ 284,779      $ 293,097      $ 256,616           $ 27,562      $ 253,996   

Amusement and other revenues

     70,218        67,426        250,810        248,579        243,175        203,176             22,847        209,456   
                                                                     

Total revenues

     141,575        138,426        520,783        533,358        536,272        459,792             50,409        463,452   
                                                                     

Operating costs:

                     

Cost of products:

                     

Cost of food and beverage

     17,277        17,406        65,349        70,520        72,493        64,549             7,111        65,405   

Cost of amusement and other

     10,586        9,549        38,788        34,218        34,252        28,999             3,268        28,723   
                                                                     

Total cost of products

     27,863        26,955        104,137        104,738        106,745        93,548             10,379        94,128   

Operating payroll and benefits

     33,468        34,532        132,114        139,508        144,920        130,123             14,113        130,367   

Other store operating expenses

     45,605        42,604        174,685        174,179        171,627        147,295             15,323        144,066   

General and administrative expenses

     8,617        7,405        30,437        34,546        38,999        35,055             3,829        33,951   

Depreciation and amortization expense

     12,501        12,733        53,658        49,652        51,898        43,892             4,328        42,616   

Preopening costs

     1,189        1,146        3,881        2,988        1,002        3,470             880        5,325   
                                                                     

Total operating costs

     129,243        125,375        498,912        505,611        515,191        453,383             48,852        450,453   
                                                                     

Operating income

     12,332        13,051        21,871        27,747        21,081        6,409             1,557        12,999   

Interest expense, net

     5,348        5,549        22,122        26,177        31,183        27,064             649        6,695   
                                                                     

Income (loss) before provision (benefit) for income taxes

     6,984        7,502        (251     1,570        (10,102     (20,655          908        6,304   

Provision (benefit) for income taxes

     3,073        2,335        99        (45     (1,261     (8,592          422        2,016   
                                                                     

Net income (loss)

     3,911        5,167      $ (350   $ 1,615      $ (8,841   $ (12,063        $ 486      $ 4,288   
                                                                     

Statement of cash flow data:

                     

Cash provided by (used in):

                     

Operating activities

   $ 9,445      $ 10,903      $ 59,054      $ 52,197      $ 50,573      $ 43,678           $ 10,741      $ 65,423   

Investing activities

     (6,985     (8,177     (48,406     (49,084     (30,899     (341,104          (10,600     (63,271

Financing activities

     (125     (2,125     (2,500     (13,625     (11,000     299,986             89        (5,957
 

Balance sheet data (as of end of period):

                     

Cash and cash equivalents

   $ 19,017      $ 9,135      $ 16,682      $ 8,534      $ 19,046      $ 10,372             $ 7,582   

Working capital (deficit)

     (16,908     (30,494     (28,019     (35,196     (30,666     (31,430            (37,206

Property and equipment, net

     285,732        292,478        294,151        296,805        296,974        316,840               351,883   

Total assets

     482,571        476,902        483,640        480,936        496,203        506,813               423,062   

Total debt

     227,125        227,625        227,250        229,750        243,375        254,375               80,175   

Stockholders’ equity

     97,004        97,224        92,646        92,023        90,756        96,705               205,220   

 

(1) These periods represent operations of the Predecessor prior to the acquisition of the Predecessor by the Sellers. The Sellers purchased all of the Predecessor common stock on March 8, 2006.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations covers periods prior to the consummation of the Transactions. Accordingly, the discussion and analysis of historical periods does not reflect the significant impact that the Transactions will have on us, including without limitation, increased leverage, the impact of purchase accounting and debt service requirements. You should read the following discussion of our financial condition and results of operations in conjunction with “Unaudited pro forma consolidated financial information,” “Selected historical consolidated financial and other data” and the historical consolidated financial statements and related notes included elsewhere in this prospectus. All dollar amounts are presented in thousands. This discussion contains forward-looking statements and actual results may differ materially from those suggested by our forward-looking statements for various reasons, including those discussed in the “Risk factors” and “Cautionary statement regarding forward-looking statements” sections of this prospectus. We do not have any intention or obligation to update forward-looking statements included in this prospectus.

General

Our fiscal year ends on the Sunday after the Saturday closest to January 31. All references to the first quarter of 2010 and 2009 relate to the thirteen week periods ending May 2, 2010 and May 3, 2009, respectively. All references to fiscal 2009 relate to the 52 week period ending on January 31, 2010. All references to fiscal 2008 relate to the 52 week period ending on February 1, 2009. All references to fiscal 2007 relate to the 52 week period ending on February 3, 2008.

We are the leading owner and operator of high-volume venues that combine dining and entertainment in North America. We offer our customers a unique opportunity to “Eat Drink Play ®” all in one location, through a full menu of high-quality food and beverage items combined with an extensive assortment of entertainment attractions, including state-of-the-art video games, interactive simulators and other games of skill. We developed this concept in 1982, and remain the only company offering this customer experience under a single brand and on a national basis. We believe we appeal to a diverse customer base by providing a highly customizable experience in a dynamic and fun setting.

As of August 2, 2010, we owned and operated 57 stores in 24 states and Canada. In addition, there is one franchised store operating in Canada. Our stores range in size between 16,000 and 66,000 square feet, and are open seven days a week. See “—Summary historical and pro forma financial and other data” for a reconciliation of Adjusted EBITDA.

In 1982, David “Dave” Corriveau and James “Buster” Corley founded Dave & Buster’s under the belief that there was consumer demand for a combined experience of entertainment, food and drinks. We opened our first two stores in Dallas, Texas in 1982 and 1988 and have subsequently expanded to 57 stores. From 1997 to early 2006, we operated as a public company under the leadership of Dave and Buster. In March 2006, Dave & Buster’s was acquired by D&B Holdings, formerly known as WS Midway Holdings, a holding company controlled by Wellspring and HBK.

Acquisition by Oak Hill Capital Partners

On June 1, 2010, Games Acquisition Corp. (“Holdings”), a newly-formed Delaware corporation owned by Oak Hill Capital Partners III, L.P. and Oak Hill Capital Management Partners III, L.P. (collectively, “Oak Hill”) acquired all of the outstanding capital stock of Dave & Buster’s Holdings, Inc. (“D&B Holdings”) from Wellspring Capital Partners III, L.P. (“Wellspring”) and HBK Main Street Investors L.P. (“HBK” and, together with Wellspring, the “Sellers”) for a total transaction value of $570 million, subject to customary working capital and net indebtedness adjustments as well as adjustments to reflect the cost of obtaining certain third party

 

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consents. In connection therewith, Games Merger Corp., a newly-formed Missouri corporation and an indirect wholly-owned subsidiary of Holdings, merged (the “Merger”) with and into D&B Holdings’ wholly-owned, direct subsidiary, Dave & Buster’s, Inc. (with Dave & Buster’s, Inc. being the surviving corporation in the Merger). After the Acquisition, Oak Hill indirectly controls approximately 96% and certain members of our Board of Directors and management control approximately 4% of the outstanding capital stock of Holdings. Subsequent to the transactions described above, Holdings changed its name to Dave & Buster’s Parent, Inc.

On the closing date of the Acquisition, the following events occurred:

 

   

All outstanding shares of D&B Holdings’ common stock, other than shares held by Holdings, were converted into the right to receive the per share acquisition consideration;

 

   

All outstanding options to acquire D&B Holdings’ common stock were converted into the right to receive an amount in cash equal to the difference between the per share exercise price and the per share acquisition consideration without interest;

 

   

We retired all outstanding debt and accrued interest related to our existing senior credit facility and senior notes;

 

   

We issued $200,000 of 11% senior notes due 2018 (“Notes”);

 

   

We entered into a senior secured credit facility which provides for senior secured financing of up to $200,000 consisting of:

 

   

a $150,000 term loan facility with a maturity on June 1, 2016, and

 

   

a $50,000 revolving credit facility, including a sub-facility of up to the U.S. dollar equivalent of $1,000 for borrowings in Canadian dollars by our Canadian subsidiary, a letter of credit sub-facility, and a swingline sub-facility, with a maturity on June 1, 2015.

The Acquisition will be accounted for in accordance with accounting guidance for business combinations and, accordingly will result in the recognition of assets acquired and liabilities assumed at fair value. As of the date of these financial statements, the valuation studies necessary to estimate the fair value of the assets acquired and liabilities assumed and to allocate the cost of the acquisition have not been completed. Based on the allocation of purchase price, we expect that depreciation of fixed assets and amortization of finite lived intangible assets may change from historical amounts and such changes could be material. Accounting principles generally accepted in the United States require operating results for Dave & Buster’s, Inc prior to the Acquisition completed June 1, 2010 to be presented as the Predecessor’s results in the historical financial statements. Operating results subsequent to the Merger will be presented as the Successor’s results and will include all periods including and subsequent to June 1, 2010.

Overview

We monitor and analyze a number of key performance measures in order to manage our business and evaluate financial and operating performance. These measures include:

Revenues

Revenues consist of food and beverage revenues as well as amusement and other revenues. Our revenues are primarily influenced by the number of stores in operation and comparable store revenue. Comparable store revenue growth reflects the change in year-over- year revenue for the comparable store base. We define the comparable store base to include those stores open for a full 18 months as of the beginning of each fiscal year. Percentage changes in the thirteen week periods ended May 2, 2010 and May 3, 2009 and fiscal 2009 and fiscal 2008 have been calculated based on an equivalent number of weeks in both the current and comparison periods. Comparable store sales growth can be generated by an increase in guest traffic counts or by increases in average dollars spent per customer. In first quarter 2010 we derived 34.6% of our total revenue from food sales, 15.8% from beverage sales, 48.8% from amusement sales and 0.8% from other sources. In fiscal 2009, we derived 35.2% of our total revenue from food sales, 16.6% from beverage sales, 47.1% from amusement sales and 1.1% from other sources.

 

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We continually monitor the success of current food and beverage items, the availability of new menu offerings, the menu price structure and our ability to adjust prices where competitively appropriate. With respect to the beverage component, we operate fully-licensed facilities, which means that we offer full beverage service, including alcoholic beverages throughout each store.

Our stores also offer an extensive array of amusements, including state-of-the-art simulators, high-tech video games, traditional pocket billiards and shuffleboard, as well as a variety of redemption games, which dispense coupons that can be redeemed for prizes in the “Winner’s Circle.” Our redemption games include basic games of skill, such as skee-ball and basketball, as well as competitive racing, and individual electronic games of skill. The prizes in the “Winner’s Circle” range from small-ticket novelty items to high-end electronics, such as flatscreen televisions, MP3 players and game systems. We review the amount of game play on existing amusements in an effort to match amusements availability with guest preferences. We intend to continue to invest in new games as they become available and prove to be attractive to guests. Our unique venue allows us to provide our customers with value driven food and amusement combination offerings such as our “Eat & Play Combo.” The “Eat & Play Combo,” allows customers to purchase a variety of entrée and game card pairings at various fixed price levels. In the fourth quarter of 2008, we introduced “Half-Price Game Play Wednesdays” which allow guests to play virtually all of our games for one-half of the regular price on Wednesdays during targeted periods during the year.

We believe that special events business is a very important component of our revenue because a significant percentage of our guests attending a special event are in a Dave & Buster’s for the first time. This is a very advantageous way to introduce the concept to new guests. Accordingly, a considerable emphasis is placed on the special events portion of our business.

Cost of products

Cost of products includes the cost of food, beverages and the “Winner’s Circle” redemption items. During first quarter 2010, the cost of food products averaged 24.6% of food revenue, the cost of beverage products averaged 23.4% of beverage revenue and our amusement and other cost of products averaged 15.1% of amusement and other revenues. During fiscal 2009, the cost of food products averaged 24.2% of food revenue, the cost of beverage products averaged 24.1% of beverage revenue and our amusement and other cost of products averaged 15.5% as a percentage of amusement and other revenues. The cost of products is driven by product mix and pricing movements from third-party suppliers. We continually strive to gain efficiencies in both the acquisition and use of products while maintaining high standards of product quality.

Operating payroll and benefits

Operating payroll and benefits consist of wages, employer taxes and benefits for store personnel. We continually review the opportunity for efficiencies principally through scheduling refinements.

Other store operating expenses

Other store operating expenses consist of store-related occupancy, store expenses, utilities, repair and maintenance and marketing costs.

Store-level variability, quarterly fluctuations, seasonality, and inflation

We have historically operated stores varying in size from 29,000 to 66,000 square feet and have experienced significant variability among stores in volumes, operating results and net investment costs. Our new locations typically open with sales volumes in excess of their run-rate levels, which we refer to as a “honeymoon” effect. We expect our new store volumes and margins to be lower in the second full year of operations than in their first full year of operations, and to grow in line with the rest of our comparable store base thereafter. As a result of the

 

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substantial revenues associated with each new store, the timing of new store openings will result in significant fluctuations in quarterly results. We also expect seasonality to be a factor in the operation or results of the business in the future with anticipated lower third quarter revenues and higher fourth quarter revenues associated with the year-end holidays. The historically higher revenues during the fourth quarter will continue to be susceptible to the impact of severe weather on customer traffic and sales during that period.

We expect that volatile economic conditions will continue to exert pressure on both supplier pricing and consumer spending related to entertainment and dining alternatives. Although, there is no assurance that our cost of products will remain stable or that federal or state minimum wage rates will not increase beyond amounts currently legislated, the effects of any supplier price increases or minimum wage rate increases are expected to be partially offset by selected menu price increases where competitively appropriate.

 

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Results of operations

The following table and the period to period comparisons set forth selected data in thousands of dollars and as a percentage of total revenues (unless otherwise noted) for the periods indicated. All information is derived from the consolidated statements of operations included in this prospectus.

 

(dollars in thousands)

  Thirteen
weeks ended May 2,
2010
    Thirteen weeks
ended May 3, 2009
    Fiscal year ended
January 31, 2010
    Fiscal year ended
February 1, 2009
    Fiscal year ended
February 3, 2008
 
    (Predecessor)     (Predecessor)     (Predecessor)     (Predecessor)     (Predecessor)  

Food and beverage revenues

  $ 71,357    50.4   $ 71,000    51.3   $ 269,973      51.8   $ 284,779      53.4   $ 293,097      54.7

Amusement and other revenues

    70,218    49.6        67,426    48.7        250,810      48.2        248,579      46.6        243,175      45.3   
                                                                   

Total revenues

    141,575    100.0        138,426    100.0        520,783      100.0        533,358      100.0        536,272      100.0   

Cost of food and beverage (as a percentage of food and beverage revenues)

    17,277    24.2        17,406    24.5        65,349      24.2        70,520      24.8        72,493      24.7   

Cost of amusement and other (as a percentage of amusement and other revenues)

    10,586    15.1        9,549    14.2        38,788      15.5        34,218      13.8        34,252      14.1   
                                                                   

Total cost of products

    27,863    19.7        26,955    19.5        104,137      20.0        104,738      19.6        106,745      19.9   

Operating payroll and benefits

    33,468    23.6        34,532    24.9        132,114      25.4        139,508      26.2        144,920      27.0   

Other store operating expenses

    45,605    32.2        42,604    30.8        174,685      33.6        174,179      32.6        171,627      32.0   

General and administrative expenses

    8,617    6.1        7,405    5.4        30,437      5.8        34,546      6.5        38,999      7.3   

Depreciation and amortization expense

    12,501    8.8        12,733    9.2        53,658      10.3        49,652      9.3        51,898      9.7   

Pre-opening costs

    1,189    0.8        1,146    0.8        3,881      0.7        2,988      0.6        1,002      0.2   
                                                                   

Total operating costs

    129,243    91.2        125,375    90.6        498,912      95.8        505,611      94.8        515,191      96.1   
                                                                   

Operating income

    12,332    8.8        13,051    9.4        21,871      4.2        27,747      5.2        21,081      3.9   

Interest expense, net

    5,348    3.8        5,549    4.0        22,122      4.2        26,177      4.9        31,183      5.8   
                                                           

Income (loss) before provisions for income taxes

    6,984    5.0        7,502    5.4        (251   (0.0     1,570      0.3        (10,102   (1.9

Provision (benefit) for income taxes

    3,073    2.2        2,335    1.7        99      0.0        (45   (0.0     (1,261   (0.2
                                                                   

Net income (loss)

  $ 3,911    2.8   $ 5,167    3.7   $ (350   (0.0 )%    $ 1,615      0.3   $ (8,841   (1.7 )% 
                                                                   

Cash provided by (used in):

                     

Operating activities

    $9,445        $10,903        $59,054        $52,197        $50,573   

Investing activities

    (6,985)        (8,177)        (48,406)        (49,084)        (30,899)   

Financing activities

    (125)        (2,125)        (2,500)        (13,625)        (11,000)   

Change in comparable store sales(1)

    (2.5)%        (7.9)%        (7.8)%        (2.8)%        4.1%     

Stores open at end of period(2)

    57        53        56        52        49   

Comparable stores open at end of period

    49        47        47        46        43   

 

(1) “Comparable store sales” (year-over-year comparison of stores open at least 18 months as of the beginning of each of the fiscal years) is a key performance indicator used within the industry and is indicative of acceptance of our initiatives as well as local economic and consumer trends.
(2) Our new store openings during the last three fiscal years and the first part of the current fiscal year were as follows:

 

Fiscal year to date

2010

  

Fiscal year ended
January 31, 2010

   Fiscal year ended
February 1, 2009
   Fiscal year ended
February 3, 2008

Location

   Opening date   

Location

   Opening date    Location    Opening date    Location    Opening date

Wauwatosa, WI

   03/01/2010    Richmond, VA    04/20/2009    Plymouth Meeting, PA    07/21/2008    Tempe, AZ    09/17/2007

Roseville, CA

   05/03/2010    Indianapolis, IN    06/15/2009    Arlington, TX    11/24/2008      
      Columbus, OH    10/12/2009    Tulsa, OK    01/12/2009      
      Niagara Falls, ON, Canada(3)    06/25/2009            

 

(3) Franchise location.

 

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Thirteen Weeks Ended May 2, 2010 Compared to Thirteen Weeks Ended May 3, 2009

Revenues

Total revenues increased 2.3%, or $3,149 for first quarter of 2010 compared to the first quarter of 2009. Comparable store revenue decreased 2.5%, or $3,356 for first quarter 2010 compared to first quarter 2009. Comparable special events revenues which accounted for 9.6% of consolidated comparable stores revenue for the first quarter of 2010 were flat compared to the first quarter of 2009.

The increased revenues were derived from the following sources:

 

Comparable stores

   $ (3,356

Non comparable stores

     6,768   

Other

     (263
        

Total

   $ 3,149   
        

Comparable store revenues during the first quarter of fiscal year 2010 were adversely impacted by severe February snowstorms on the East Coast. We have estimated that the storms resulted in revenue reductions at our comparable stores of approximately $1,500.

Comparable store revenues were also significantly impacted by the unfavorable macro economic environment affecting the restaurant/entertainment industry in general, and the effects of the global economic environment impacted our store locations as well.

Food sales at comparable stores decreased by $759, or 1.7% from $45,814 in the first quarter of 2009 to $45,055 in the first quarter of 2010. Sales mix at our comparable stores continued to show a shift away from the beverage component of our business towards our amusement offerings. Beverage sales at comparable stores decreased by $2,126, or 9.3% from $22,910 in the first quarter of 2009 to $20,784 in the first quarter of 2010. Comparable store amusement revenue in the first quarter of 2010 decreased by $337, or 0.5% from $63,999 in the first quarter of 2009 to $63,662 in the first quarter of 2010. Downward pressures on amusement sales were partially mitigated by our Half-Price Wednesday promotions and Power Card up-sell initiative which provides greater value to guest in terms of chips per dollar.

Our revenue mix was 34.6% for food, 15.8% for beverage and 49.6% for amusements and other for the first quarter of 2010. This compares to 34.3%, 17.0% and 48.7%, respectively, for the first quarter of 2009.

Cost of products

Cost of food and beverage decreased from $17,406 in the first quarter of 2009 to $17,277 in the first quarter of 2010. Cost of food and beverage declined 30 basis points to 24.2% of revenue for the first quarter of 2010 compared to 24.5% for the first quarter of 2009 primarily due to lower liquor and beer costs.

Cost of amusement and other revenues increased from $9,549 in the first quarter of 2009 to $10,586 in the first quarter of 2010. The costs of amusements and other, as a percentage of amusements and other revenues increased 90 basis points to 15.1% of amusement and other revenue for the first quarter of 2010 compared to 14.2% for the first quarter of 2009. This increase is primarily a result of increased redemption costs driven, in part, by increased game play as a result of our Half-Price Wednesday promotions.

Operating payroll and benefits

Operating payroll and benefits decreased by $1,064, or 3.1%, from $34,532 in the first quarter of 2009 to $33,468 in the first quarter of 2010. Operating payroll and benefits declined 130 basis points to 23.6% of revenue

 

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for the first quarter of 2010 compared to 24.9% for the first quarter of 2009. This decrease was primarily driven by initiatives designed to reduce hourly labor costs through improved scheduling as well as lower management costs resulting from an accounting centralization effort.

Other store operating expenses

Other store operating expenses increased by $3,001, or 7.0%, from $42,604 in the first quarter of 2009 to $45,605 in the first quarter of 2010. Other store operating expenses as a percentage of revenues increased 140 basis points to 32.2% for the first quarter of 2010 compared to 30.8% for the same period of 2009. This increase is primarily driven by the increase in occupancy expenses related to new stores and the increase in media and production costs related to our new marketing campaign, in the first quarter of 2010 compared to the first quarter of 2009.

General and administrative expenses

General and administrative expenses consist primarily of personnel, facilities and professional expenses for the various departments of our corporate headquarters. General and administrative expenses increased by $1,212, or 16.4%, from $7,405 in the first quarter of 2009 to $8,617 in the first quarter of 2010, primarily due to increased salary, benefits, stock based compensation expenses, and professional fees.

Depreciation and amortization expense

Depreciation and amortization expense includes the depreciation of fixed assets and the amortization of trademarks with finite lives. Depreciation and amortization expense decreased by $232, or 1.8%, from $12,733 in the first quarter of 2009 to $12,501 in the first quarter of 2010. Increases in depreciation from new store openings and maintenance capital expenditures was more than offset by depreciation reductions resulting from certain operating assets being fully depreciated subsequent to the first quarter of fiscal 2009.

Pre-opening costs

Pre-opening costs include costs associated with the opening and organizing of new stores or conversion of existing stores, including the cost of feasibility studies, pre-opening rent, staff-training and recruiting, and travel costs for employees engaged in such pre-opening activities. Pre-opening costs increased slightly from $1,146 in the first quarter of 2009 to $1,189 in the first quarter of 2010.

Interest expense

Interest expense includes the cost of our debt obligations including the amortization of loan fees, adjustments to mark the interest rate swap contracts to fair value and any interest income earned. Interest expense decreased by $201 from $5,549 in the first quarter of 2009 to $5,348 in the first quarter of 2010.

Provision for income taxes

Provision for income taxes consisted of an income tax provision of $3,073 in the first quarter of 2010, and an income tax provision of $2,335 in the first quarter of 2009. Our effective tax rate differs from the statutory rate due to changes in the tax valuation allowance, the deduction for FICA tip credits, state income taxes and the impact of certain expenses that are not deductible for income tax purposes.

As a result of our experiencing cumulative losses before income taxes for the three-year period ended May 2, 2010, we have concluded that it is more likely than not that a portion of our federal and state deferred tax assets will not be fully realized. At May 2, 2010, we estimate an increase in our valuation allowance for the year ending January 30, 2011 in the amount of $606 will be required. This increase in valuation allowance is attributable to deductible temporary differences and carryforwards originating during the year and has been included in our calculation of the annual estimated effective tax rate.

 

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Historically, we have had a partial valuation allowance against all state net operating loss carryforwards. At May 2, 2010, we estimate no change in the valuation allowance for the year ending January 30, 2011 related to state net operating loss carryforwards.

As of May 2, 2010, we have accrued approximately $2,046 of unrecognized tax benefits, including an additional amount of approximately $1,049 of penalties and interest. During the thirteen weeks ended May 2, 2010, we decreased our unrecognized tax benefit by $151 and increased our accrual for interest and penalties by $49. During the first quarter, the Internal Revenue Service completed its federal income tax audit for years 2006 and 2007 and one state jurisdiction completed its income tax audit for 2005 thru 2007. As a result of these audits being completed, the Company has released the related reserves. We currently anticipate that approximately $1,020 of unrecognized tax benefits will be recognized as a result of the expiration of the statute of limitations during fiscal 2010. Future recognition of potential interest or penalties, if any, will be recorded as a component of income tax expense. Because of the impact of deferred tax accounting, $2,318 of unrecognized tax benefits, if recognized, would impact the effective tax rate.

We file income tax returns which are periodically audited by various federal, state and foreign jurisdictions. We are generally no longer subject to federal, state, or foreign income tax examinations for years prior to fiscal 2005.

Fiscal 2009 compared to fiscal 2008

Revenues

Total revenues during fiscal 2009 decreased by $12,575, or 2.4%, from $533,358 in fiscal 2008 to $520,783 in fiscal 2009.

The decreased revenues were derived from the following sources:

 

Comparable stores

   $ (40,359

Non comparable stores

     26,907   

Other

     877   
        

Total

   $ (12,575
        

Comparable store revenues were significantly impacted by the unfavorable macro economic environment affecting the restaurant/entertainment industry in general, and the effects of the global economic environment impacted our store locations as well.

Comparable stores revenue decreased by $40,359, or 7.8%, for fiscal 2009 compared to fiscal 2008. Comparable special events revenues which accounted for 12.0% of consolidated comparable stores revenue for fiscal 2009 fell by 24.4% compared to fiscal 2008. The walk-in component of our comparable store sales declined by 5.0% for fiscal 2009.

Food sales at comparable stores decreased by $16,136, or 8.8% from $183,568 in fiscal 2008 to $167,432 in fiscal 2009. Sales at our comparable stores continued to show a shift away from the beverage component of our business towards our amusements offerings. Beverage sales of comparable stores decreased 12.4% or $11,247 to $79,621 in fiscal 2009 from $90,868 in fiscal 2008. Our amusement revenues experienced a somewhat softer 4.7% decline to $224,410 in fiscal 2009 from $235,509 in fiscal 2008. Downward pressures on amusement sales were partially mitigated by our Half-Price Wednesday promotions and Power Card up-sell initiatives which provides greater value to guests in term of chips per dollar.

Our revenue mix was 35.2% for food, 16.6% for beverage and 48.2% for amusement and other for fiscal 2009. This compares to 35.7%, 17.7% and 46.6%, respectively, for fiscal 2008.

 

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Cost of products

Cost of food and beverage revenues decreased from $70,520 in fiscal 2008 to $65,349 in fiscal 2009 principally as a result of lower food and beverage revenue levels in 2009. Cost of food and beverage products, as a percentage of food and beverage revenues, decreased by 60 basis points to 24.2% of revenue for fiscal 2009 compared to 24.8% of revenue for fiscal 2008. A slight increase in beverage cost was offset by reduced costs in our produce and dairy products.

Costs of amusement and other revenues increased from $34,218 in fiscal 2008 to $38,788 in fiscal 2009. As a percentage of amusement and other revenues, these costs increased by 170 basis points to 15.5% in fiscal 2009 compared to 13.8% of revenues in fiscal 2008 primarily as a result of increased redemption costs driven, in part, by increased game play as a result of our Half-Price Wednesday promotions.

Operating payroll and benefits

Operating payroll and benefits decreased by $7,394, or 5.3%, from $139,508 in fiscal 2008 to $132,114 in fiscal 2009. Operating payroll and benefits as a percentage of revenues decreased by 80 basis points to 25.4% in fiscal 2009 compared to 26.2% in fiscal 2008. This decrease was primarily driven by initiatives designed to reduce hourly labor costs through improved scheduling as well as lower management costs resulting from an accounting centralization effort.

Other store operating expenses

Other store operating expenses increased by $506, or 0.3%, from $174,179 in fiscal 2008 to $174,685 in fiscal 2009. Other store operating expenses as a percentage of revenues increased 100 basis points from 32.6% in fiscal 2008 to 33.6% in fiscal 2009.

General and administrative expenses

General and administrative expenses consist primarily of personnel, facilities, and professional expenses for the various departments of our corporate headquarters. General and administrative expenses decreased by $4,109, or 11.9%, from $34,546 in fiscal 2008 to $30,437 in fiscal 2009. General and administrative expenses as a percentage of revenues decreased from 6.5% in fiscal 2008 to 5.8% in fiscal 2009, primarily due to lower labor costs, and the absence of approximately $2,100 incurred in 2008 related to severance and costs associated with a possible public offering of common stock that was terminated.

Depreciation and amortization expense

Depreciation and amortization expense includes the depreciation of fixed assets and the amortization of trademarks with finite lives. Depreciation and amortization expense increased by $4,006, or 8.1%, from $49,652 in fiscal 2008 to $53,658 in fiscal 2009. Depreciation expense increased primarily due to the new stores opened in fiscal 2008 and 2009.

Pre-opening costs

Pre-opening costs include costs associated with the opening and organizing of new stores or conversion of existing stores, including the cost of feasibility studies, pre-opening rent, staff training and recruiting, and travel costs for employees engaged in such pre-opening activities. Pre-opening costs increased from $2,988 in fiscal 2008 to $3,881 in fiscal 2009. The increase of opening costs is primarily attributable to the opening of three new stores in fiscal 2009 and approximately $1,700 of costs incurred related to the opening of two stores in the first half of 2010.

 

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Interest expense

Interest expense includes the cost of our debt obligations including the amortization of loan fees, adjustments to mark the interest rate swap agreements to fair value and any interest income earned. Interest expense decreased by $4,055 from $26,177 in fiscal 2008 to $22,122 in fiscal 2009. The decrease in interest expense is primarily attributed to adjustments to mark the interest rate swap agreements to their fair value and reduced interest costs attributable to the early retirement of $15,000 of our senior notes in September 2008.

Provision for income taxes

Provision for income taxes consisted of an income tax provision of $99 in fiscal 2009 and a tax benefit of $45 in fiscal 2008. Our effective tax rate differs from the federal corporate statutory rate due to the deduction for FICA tip credits, state income taxes and the impact of certain expenses that are not deductible for income tax purposes.

In fiscal 2009, we recorded an additional net valuation allowance of $977 against our deferred tax assets. The valuation allowance was recorded in accordance with accounting guidance for income taxes. As a result of our experiencing cumulative losses before income taxes for the three-year period ending January 31, 2010, we could not conclude that it is more likely than not that our deferred tax asset will be fully realized. The ultimate realization of our deferred tax assets is dependent on the generation of future taxable income during periods in which temporary differences become deductible.

We have adopted the accounting guidance for uncertainty in income taxes. This guidance limits the recognition of income tax benefits to those items that meet the “more likely than not” threshold on the effective date. As of January 31, 2010, we had approximately $2,468 of unrecognized tax benefits, including approximately $269 in potential interest and penalties, net of related tax benefits. During fiscal 2009, we decreased our unrecognized tax benefit by $43. This decrease resulted primarily from tax positions taken in prior periods and the expiration of the statute of limitations. During the second quarter, one state jurisdiction completed its income tax audit. The Company settled and has released the related reserve. We currently anticipate that approximately $1,395 of unrecognized tax benefits will be settled through federal and state audits or is expected to be recognized as a result of the expiration of statute of limitations during fiscal 2010. Future recognition of potential interest or penalties, if any, will be recorded as a component of income tax expense. Because of the impact of deferred tax accounting, $1,809 of unrecognized tax benefits, if recognized, would affect the effective tax rate.

We file income tax returns which are periodically audited by various federal, state and foreign jurisdictions. We are generally no longer subject to federal, state or foreign income tax examinations for years prior to fiscal 2005.

Fiscal 2008 compared to fiscal 2007

Revenues

Total revenues during fiscal 2008 decreased by $2,914, or 0.5%, from $536,272 in fiscal 2007 to $533,358 fiscal 2008.

The decreased revenues were derived from the following sources:

 

Comparable stores

   $ (14,818

Non comparable stores

     12,119   

Other

     (215
        

Total

   $ (2,914
        

 

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Comparable stores revenue decreased by $14,818, or 2.8%, for fiscal 2008 compared to fiscal 2007. Comparable special events revenues accounted for 14.7% of consolidated comparable stores revenue for fiscal 2008 compared to 16.2% for fiscal 2007.

Comparable store revenues were significantly impacted by the unfavorable macro economic environment affecting the restaurant/entertainment industry in general, and the effects of global economic environment impacted our store locations as well. The economic deterioration was most apparent in the latter part of our fiscal year. During the first half of fiscal 2008, our comparable store revenue was 2.5% or $6,550 above fiscal 2007 revenue levels during the similar period. In the second half of fiscal 2008, our comparable sales fell by $21,368 or 8.2% from sales levels achieved during the last six months of fiscal 2007.

During fiscal 2008, we maintained advertising on cable television in all of our markets. Food sales at comparable stores decreased by $7,656, or 4.1% from $188,278 in fiscal 2007 to $180,622 in fiscal 2008. Beverage sales at comparable stores decreased by $7,310, or 7.6% from $96,560 in fiscal 2007 to $89,250 in fiscal 2008. Comparable store amusement revenue in fiscal 2008 increased by $1,118, or 0.5%, from $230,878 in fiscal 2007 to $231,996 in fiscal 2008. Amusement revenue continued to reflect the positive impact of increased points of sale available through the installation of sales kiosks throughout the system and an expansion of available predenominated Power Card alternatives.

Our revenue mix was 35.7% for food, 17.7% for beverage and 46.6% for amusement and other for fiscal 2008. This compares to 36.1%, 18.6% and 45.3%, respectively, for fiscal 2007.

Cost of products

Cost of food and beverage revenues decreased from $72,493 in fiscal 2007 to $70,520 in fiscal 2008 principally as a result of lower food and beverage revenue levels in 2008. Cost of food and beverage products, as a percentage of food and beverage revenues, increased by 10 basis points to 24.8% of revenue for fiscal 2008 compared to 24.7% of revenue for fiscal 2007. Increased food costs resulting from the introduction of certain pre-prepared products were partially offset by reduced costs in our meat, dairy, produce and beverage products.

Costs of amusement and other revenues remained relatively flat at approximately $34,200 year over year. The cost of amusement and other, as a percentage of amusement and other revenues, decreased as a percentage of revenues by 30 basis points to 13.8% in fiscal 2008 compared to 14.1% of revenues in fiscal 2007 primarily as a result of reduced redemption costs.

Operating payroll and benefits

Operating payroll and benefits decreased by $5,412, or 3.7%, from $144,920 in fiscal 2007 to $139,508 in fiscal 2008. Operating payroll and benefits as a percentage of revenues decreased by 80 basis points to 26.2% in fiscal 2008 compared to 27.0% in fiscal 2007. This decrease was primarily driven by initiatives designed to reduce labor costs as well as lower management and hourly employee turnover at our stores and reduced incentive compensation expenses as a result of lower revenues levels.

Other store operating expenses

Other store operating expenses increased by $2,552, or 1.5%, from $171,627 in fiscal 2007 to $174,179 in fiscal 2008. Other store operating expenses as a percentage of revenues increased 60 basis points from 32.0% in fiscal 2007 to 32.6% in fiscal 2008. This increase was driven primarily by additional expenditures related to our national marketing program and guest safety initiatives of several locations.

 

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General and administrative expenses

General and administrative expenses consist primarily of personnel, facilities, and professional expenses for the various departments of our corporate headquarters. General and administrative expenses decreased by $4,453, or 11.4%, from $38,999 in fiscal 2007 to $34,546 in fiscal 2008. General and administrative expenses as a percentage of revenues decreased by 80 basis points from 7.3% in fiscal 2007 to 6.5% in fiscal 2008, primarily due to lower incentive compensation costs, the reduction of severance costs associated with corporate personnel partially offset by increased costs associated with efforts related to the potential sale of Dave & Buster’s.

Depreciation and amortization expense

Depreciation and amortization expense includes the depreciation of fixed assets and the amortization of trademarks with finite lives. Depreciation and amortization expense decreased by $2,246, or 4.3%, from $51,898 in fiscal 2007 to $49,652 in fiscal 2008. Depreciation and amortization expense decreased primarily due to certain fixed assets reaching the end of their depreciable life partially offset by depreciation expense on new assets added subsequent to fiscal 2007.

Pre-opening costs

Pre-opening costs include costs associated with the opening and organizing of new stores or conversion of existing stores, including the cost of feasibility studies, staff training and recruiting, and travel costs for employees engaged in such pre-opening activities. Pre-opening costs increased from $1,002 in fiscal 2007 to $2,988 in fiscal 2008. Pre-opening costs as a percentage of revenues increased from 0.2% in fiscal 2007 to 0.6% in fiscal 2008. The increase in pre-opening costs is primarily attributable to the opening of three new stores in fiscal 2008 compared to one new store opening in fiscal 2007.

Interest expense

Interest expense includes the cost of our debt obligations including the amortization of loan fees, adjustments to mark the interest rate swap agreements to fair value and any interest income earned. Interest expense decreased by $5,006 from $31,183 in fiscal 2007 to $26,177 in fiscal 2008. The decrease in interest expense is primarily attributed to adjustments to mark the interest rate swap agreements to their fair value and reduced interest costs attributable to the early retirement of $15,000 of our senior notes in September 2008.

Provision for income taxes

Provision for income taxes consisted of an income tax benefit of $45 in fiscal 2008 and a tax benefit of $1,261 in fiscal 2007. Our effective tax rate differs from the statutory rate due to the deduction for FICA tip credits, state income taxes and the impact of certain expenses that are not deductible for income tax purposes.

In fiscal 2008, we recorded an additional valuation allowance against our deferred tax assets. The valuation allowance was recorded in accordance with accounting guidance for income taxes. As a result of our experiencing cumulative losses before income taxes for the three-year period ending February 1, 2009, we could not conclude that it is more likely than not that our deferred tax asset will be fully realized. The ultimate realization of our deferred tax assets is dependent on the generation of future taxable income during periods in which temporary differences become deductible.

As of February 1, 2009, we had approximately $2,946 of unrecognized tax benefits, including approximately $704 of potential interest and penalties, net of related tax benefit. During the fifty-two week period ended February 1, 2009, we decreased our unrecognized tax benefit by $96. This decrease resulted primarily from an uncertain tax position taken on the 2005, 2006, and 2007 federal income tax returns. We also recorded net additional interest and penalties related to uncertain tax positions taken in prior years. We do not

 

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currently anticipate any additional material changes in fiscal 2009. Future recognition of potential interest or penalties, if any, will be recorded as a component of income tax expense. The entire balance of unrecognized tax benefits, if recognized, would affect the effective tax rate.

We file income tax returns which are periodically audited by various federal, state and foreign jurisdictions. We are generally no longer subject to federal, state or foreign income tax examinations for years prior to fiscal 2005.

Quarterly results of operations and seasonality

The following table sets forth certain unaudited financial and operating data in each fiscal quarter during fiscal 2009 and fiscal 2008. The unaudited quarterly information includes all normal recurring adjustments that we consider necessary for a fair presentation of the information shown. This information should be read in conjunction with the audited consolidated financial statements and notes thereto appearing elsewhere in this prospectus.

 

    1st  Quarter
2010
    Fiscal 2009—thirteen week period ended     Fiscal 2008—thirteen week period ended  
    May 2,
2010
    Jan 31,
2010
    Nov 1,
2009
    Aug 2,
2009
    May 3,
2009
    Feb 1,
2009
    Nov 2,
2008
    Aug 3,
2008
    May 4,
2008
 

Food and beverage revenues

  $ 71,357      $ 71,833      $ 60,549      $ 66,591      $ 71,000      $ 74,348      $ 63,910      $ 71,856      $ 74,665   

Amusement and other revenues

    70,218        61,812        56,636        64,936        67,426        60,570        55,829        64,382        67,798   
                                                                       

Total revenues

    141,575        133,645        117,185        131,527        138,426        134,918        119,739        136,238        142,463   

Cost of food and beverage

    17,277        17,024        14,768        16,151        17,406        17,876        16,265        17,908        18,471   

Cost of amusement and other

    10,586        10,316        8,868        10,055        9,549        8,546        8,154        8,894        8,624   
                                                                       

Total costs of products

    27,863        27,340        23,636        26,206        26,955        26,422        24,419        26,802        27,095   

Operating payroll and benefits

    33,468        32,502        31,328        33,752        34,532        33,954        33,069        35,613        36,872   

Other store operating expenses

    45,605        42,110        44,514        45,457        42,604        41,846        43,787        45,367        43,179   

General and administrative expense

    8,617        8,158        7,202        7,672        7,405        9,742        7,693        8,629        8,482   

Depreciation and amortization expense

    12,501        13,825        13,932        13,168        12,733        12,866        12,449        11,898        12,439   

Pre-opening costs

    1,189        700        983        1,052        1,146        1,121        625        960        282   
                                                                       

Total operating costs

    129,243        124,635        121,595        127,307        125,375        125,951        122,042        129,269        128,349   
                                                                       

Operating income (loss)

    12,332        9,010        (4,410     4,220        13,051        8,967        (2,303     6,969        14,114   

Interest expense, net

    5,348        5,340        5,598        5,635        5,549        7,224        6,996        5,811        6,146   
                                                                       

Income (loss) before taxes

    6,984        3,670        (10,008     (1,415     7,502        1,743        (9,299     1,158        7,968   

Income taxes

    3,073        3,760        (4,518     (1,478     2,335        382        (3,573     188        2,958   
                                                                       

Net income (loss)

  $ 3,911      $ (90   $ (5,490   $ 63      $ 5,167      $ 1,361      $ (5,726   $ 970      $ 5,010   
                                                                       

Stores open at end of period

    57 (1)      56        56        55        53        52        50        50        49   

Quarterly total revenues as a percentage of annual total revenues

    N/A        25.7     22.5     25.2     26.6     25.3     22.5     25.5     26.7

Change in comparable store sales

    (2.5 )%      (5.8 )%      (7.4 )%      (10.1 )%      (7.9 )%      (10.2 )%      (6.0 )%      1.2     3.8

 

(1) The number of stores includes 56 company-owned stores and one franchised store in Canada.

 

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Liquidity and capital resources

Historically, we have financed our activities through cash flow from operations, our existing senior notes and borrowings under our existing credit facility. As of May 2, 2010, we had cash and cash equivalents of $19,017, a working capital deficit of $16,908 and outstanding debt obligations of $227,125. We also had $54,359 in borrowing availability under our existing credit facility.

Historical indebtedness

As more fully described in the Notes to our Consolidated Financial Statements contained herein, on June 1, 2010, our outstanding debt as described below was fully retired in connection with the acquisition of D&B Holdings by Oak Hill.

Senior credit facility. Our debt structure at May 2, 2010 included a senior credit facility providing for a $100,000 term loan facility with a maturity date of March 8, 2013 and providing for a $60,000 revolving credit facility with a maturity date of March 8, 2011. The $60,000 revolving credit facility includes (i) a $20,000 letter of credit sub-facility, (ii) a $5,000 swingline sub-facility, and (iii) a sub-facility available to the Canadian subsidiary in the Canadian dollar equivalent to U.S. $5,000. The revolving credit facility was available to provide financing for working capital and general corporate purposes. As of May 2, 2010, we had no borrowings under the revolving credit facility, $67,125 of borrowings under the term loan facility and $5,641 in letters of credit outstanding.

Our senior credit facility was secured by all of our assets and is unconditionally guaranteed by D&B Holdings. Borrowings on our senior credit facility bore interest, at our option, based upon either a base rate (or, in the case of the Canadian revolving credit facility, a Canadian prime rate) or a Eurodollar rate (or, in the case of the Canadian revolving credit facility, a Canadian cost of funds rate) for one-, two-, three- or six-month (or, in the case of the Canadian revolving credit facility, 30-, 60-, 90- or 180-day) interest periods chosen by us, in each case, plus an applicable margin percentage. Swingline loans bore interest at the base rate plus the applicable margin. Effective June 30, 2006, we entered into two interest rate swap contracts that expire in 2011, to change a substantial portion of the variable rate debt to fixed rate debt. Pursuant to the swap contracts, the interest rate on notional amounts of $35,000 was fixed at 5.31% plus applicable margin. The weighted average rate of interest on borrowings under our senior credit facility was 5.20% at May 2, 2010.

Interest rates on borrowings under our senior credit facility varied based on the movement of prescribed indexes and applicable margin percentages. On the last day of each calendar quarter, we were required to pay a commitment fee of 0.5% on any unused commitments under the revolving credit facilities or the term loan facility. Our senior credit facility required scheduled quarterly payments of principal on the term loans at the end of each of the fiscal quarters in aggregate annual amounts equal to 1.0 % of the original aggregate principal amount of the term loan with the balance payable ratably over the final four quarters.

Senior notes. Our debt structure at May 2, 2010 also included $160,000 aggregate principal amount of 11.25% senior notes. The notes were general unsecured, unsubordinated obligations of ours and were scheduled to mature on March 15, 2014. Interest on the notes compounded semi-annually and accrued at the rate of 11.25% per annum. On or after March 15, 2010, we could redeem all, or from time-to-time, a part of the senior notes upon not less than 30 nor more than 60 days notice, at redemption prices (expressed as a percentage of principal amount) plus accrued and unpaid interest on the senior notes.

Our senior credit facility and the indenture governing the senior notes contained restrictive covenants that, among other things, limited our ability and the ability of our subsidiaries to, among other things: incur additional indebtedness, make loans or advances to subsidiaries and other entities, make capital expenditures, declare dividends, acquire other businesses or sell assets. In addition, under our senior credit facility, we were required to meet certain financial covenants, ratios and tests, including a minimum fixed charge coverage ratio and a maximum leverage ratio. The indenture under which the senior notes were issued also contained customary covenants and events of defaults.

 

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Indebtedness—after Transactions

In connection with the Transactions, we terminated our existing credit facility and enter into a senior secured credit facility that provides for (i) a five-year $50.0 million revolving credit facility that includes a sub-facility of up to the U.S. dollar equivalent of $1.0 million for borrowings in Canadian dollars by our Canadian subsidiary and (ii) a six-year $150.0 million term loan. Upon consummation of the Transactions, we had $5.6 million in letters of credit outstanding under our new revolving credit facility, leaving approximately $44.4 million available for additional borrowings subject to meeting certain conditions. For a description of our senior secured credit facility, see “Description of other indebtedness—Our senior secured credit facility.”

Our senior secured credit facility is secured by all of our assets and is unconditionally guaranteed by each of our direct and indirect, existing and future, domestic subsidiaries (with certain agreed-upon exceptions) and by us and each of the guarantors with respect to the obligations of the Canadian subsidiary. Borrowings under the senior secured credit facility bear interest, at our option, based upon either a base rate (or, in the case of the Canadian revolving credit facility, a Canadian prime rate) or a Eurodollar rate (or, in the case of the Canadian revolving credit facility, a Canadian cost of funds rate) for one-, two-, three- or six-months (or, if agreed by the applicable lenders, nine or twelve months) or, in relation to the Canadian revolving credit facility, 30-, 60-, 90- or 180-day interest periods chosen by us or the Canadian Borrower, as applicable in each case, plus an applicable margin percentage. Swingline loans will bear interest at the base rate plus the applicable margin.

Interest rates on borrowings under our senior secured credit facility will vary based on the movement of prescribed indexes and applicable margin percentages. On the last day of each calendar quarter, we will be required to pay a commitment fee on the average daily unused portion of the revolving credit facilities (with swingline loans not deemed, for these purposes, to be a utilization of the revolving credit facility). Our senior secured credit facility requires scheduled quarterly payments of principal on the term loans at the end of each of the fiscal quarters in aggregate annual amounts equal to a percentage of the original aggregate principal amount of the term loan with the balance payable on the maturity date.

Our senior secured credit facility and the indenture governing the Notes contain restrictive covenants that, among other things, will limit our ability and the ability of our subsidiaries to: incur additional indebtedness, make loans or advances to subsidiaries and other entities, make initial capital expenditures in relation to new stores, declare dividends, acquire other businesses or sell assets. In addition, under our senior secured credit facility, we will be required to meet certain financial covenants, ratios and tests, including a minimum fixed charge coverage ratio and a maximum total leverage ratio. The indenture under which the senior notes have been issued also contain customary covenants and events of defaults.

We believe the cash flow from operations, together with borrowings under the senior secured credit facility, will be sufficient to cover working capital, capital expenditures, and debt service needs in the foreseeable future. Our ability to make scheduled payments of principal or interest on, or to refinance, the indebtedness, or to fund planned capital expenditures, will depend on future performance, which is subject to general economic conditions, competitive environment and other factors as described in the “Risk factors” section of this prospectus.

 

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Historical cash flows

The following table presents a summary of our net cash provided by (used in) operating, investing and financing activities:

 

     Thirteen
Weeks  Ended
May 2,
2010
    Thirteen
Weeks  Ended
May 3,
2009
    Fiscal year
ended
January 31,
2010
    Fiscal year
ended
February 1,
2009
    Fiscal year
ended
February 3,
2008
 
     (Predecessor)     (Predecessor)     (Predecessor)     (Predecessor)     (Predecessor)  

Net cash provided by (used in):

          

Operating activities

   $ 9,445      $ 10,903      $ 59,054      $ 52,197      $ 50,573   

Investing activities

     (6,985     (8,177     (48,406     (49,084     (30,899

Financing activities

     (125     (2,125     (2,500     (13,625     (11,000

Thirteen weeks ended May 2, 2010 compared to thirteen weeks ended May 3, 2009

Cash provided by operating activities was $9,445 for the thirteen weeks of 2010 compared to cash provided by operating activities of $10,903 for the thirteen weeks of 2009. The decrease in cash flow from operations is primarily due to an increase in net income offset by a increase in working capital components related to new store developments.

Cash used in investing activities was $6,985 for the thirteen weeks of 2010 compared to $8,177 for the thirteen weeks of 2009. The investing activities for the first quarter of 2010 and 2009 consisted of $6,988 and $8,177 in capital expenditures, respectively.

We plan on financing future growth through operating cash flows, debt facilities and tenant improvement allowances from landlords. We expect to spend approximately $48,000 ($45,000 net of cash contributions from landlords) in capital expenditures during fiscal 2010. The fiscal 2010 expenditures are expected to include approximately $29,000 ($26,000 net of cash contributions from landlords) for new store construction and operating improvement initiatives, $8,000 for games (excluding games for new stores) and $11,000 in maintenance capital.

On May 2, 2010, flooding occurred in Nashville, Tennessee causing considerable damage to the city and surrounding area. Our Nashville store sustained significant damage, as did the retail mall where our store is located. The store is covered by up to $25,000 in property and business interruption insurance subject to an overall deductible of one thousand dollars. We have initiated property insurance claims, including business interruption, with our insurers. We cannot estimate at this time when the store will be back in operation.

We anticipate the cost to replace the assets destroyed by the flood will be covered by insurance proceeds, net of the one thousand dollar deductible amount. These costs are not included in the 2010 capital expenditure amounts noted above. We have not recorded any gains or losses resulting from the flood with the exception of the one thousand dollar deductible.

Cash used in financing activities was $125 for the thirteen weeks of 2010 compared to cash used in financing activities of $2,125 in the thirteen weeks of 2009. The financing activities for the first quarter of 2010 include required paydowns under our term loan facility of $125. The financing activities for the first quarter of 2009 include required paydowns under our term loan facility of $125, as well as paydowns on our revolving credit facility of $2,000.

Fiscal 2009 compared to fiscal 2008

Net cash provided by operating activities was $59,054 for fiscal 2009 compared to cash provided by operating activities of $52,197 for fiscal 2008. The increase in cash flow from operations is primarily due to the implementation of cash saving measures such as labor initiatives designed to reduce hourly labor cost and management costs in the stores and reduced labor costs in the corporate headquarters.

 

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Net cash used in investing activities was $48,406 for fiscal 2009 compared to $49,084 for fiscal 2008. The investing activities for fiscal 2009 primarily include $48,423 in capital expenditures. During the 2009 fiscal year, the Company spent approximately $33,827 ($25,484 net of cash contributions from landlords) for new store construction and operating improvement initiatives, $3,894 for games and $10,702 for maintenance capital. The investing activities for fiscal 2008 primarily include $49,254 in capital expenditures.

Net cash used in financing activities was $2,500 for fiscal 2009 compared to $13,625 in fiscal 2008. The financing activities for fiscal 2009 include required principal payments on the term loan facility of $500 and net paydowns under our revolving credit facility of $2,000. The financing activities for fiscal 2008 include required paydowns under our term loan facility of $625, net borrowings under our revolving credit facility of $2,000, and retirement of $15,000 of our senior notes.

Fiscal 2008 compared to fiscal 2007

Net cash provided by operating activities was $52,197 for fiscal 2008 compared to cash provided by operating activities of $50,573 for fiscal 2007. The increase in cash flow from operations is primarily due to a net income increase of $10,456 from fiscal 2007 to fiscal 2008 and in the year-over-year changes in the use of accrued liabilities and other working capital of approximately $9,000 over fiscal 2007. Cash flow from operations in fiscal 2007 was also negatively impacted by the payment of employment agreement costs triggered by the mergers related to our acquisition by Wellspring and HBK in March 2006.

Net cash used in investing activities was $49,084 for fiscal 2008 compared to $30,899 for fiscal 2007. The investing activities for fiscal 2008 primarily include $49,254 in capital expenditures. The investing activities for fiscal 2007 primarily include $31,355 in capital expenditures. The increase in fiscal 2008 capital expenditures over fiscal 2007 expenditure levels is primarily a result of costs associated with the opening of three new stores in fiscal 2008 compared to one new store opening in fiscal 2007. Additionally, fiscal 2008 capital expenditures reflect progress spending related to a new store scheduled to open in early 2009.

Net cash used in financing activities was $13,625 for fiscal 2008 compared to $11,000 in fiscal 2007. The financing activities for fiscal 2008 include required paydowns under our term loan facility of $625, net borrowings under our revolving credit facility of $2,000, and retirement of $15,000 of our senior notes. The financing activities for fiscal 2007 include required paydowns under our term loan facility of $1,000 and an optional pay down of $10,000 on one tranche of the term loan facility.

Contractual obligations and commercial commitments

The following table sets forth the contractual obligations and commercial commitments related to our historical indebtedness as of May 2, 2010:

 

Payment due by period

   Total    1 Year
or Less
   2-3 Years    4-5 Years    After 5 Years

Senior credit facility(1)

   $ 67,125    $ 956    $ 66,169    $ —      $ —  

Senior notes

     160,000      —        —        160,000      —  

Interest requirements(2)

     77,762      21,467      38,295      18,000      —  

Operating leases(3)

     457,126      46,068      89,973      87,802      233,283
                                  

Total

   $ 762,013    $ 68,491    $ 194,437    $ 265,802    $ 233,283
                                  

 

(1) Our existing credit facility includes a $100,000 term loan facility and $60,000 revolving credit facility, with a $20,000 letter of credit sub-facility and a $5,000 revolving sub-facility. As of May 2, 2010, we had no borrowings under the revolving credit facility, borrowings of approximately $67,125 under the term loan facility and $5,641 in letters of credit outstanding.
(2)

The cash obligations for interest requirements consist of (1) interest requirements on our fixed rate debt obligations at their contractual rates, through original maturity dates (2) interest requirements on variable

 

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rate debt obligations not subject to interest rate swaps at rates in effect at May 2, 2010 and (3) interest requirements on variable rate debt obligations subject to interest rate swaps at the fixed rates provided through the swap agreements.

(3) Our operating leases generally provide for one or more renewal options. These renewal options allow us to extend the term of the lease for a specified time at an established annual lease payment. Future obligations related to lease renewal options that have not been exercised are excluded from the table above.

As described above, in connection with the Transactions, on June 1, 2010, we replaced our Historical Indebtedness with a new $200,000 senior secured credit facility and $200,000 in Restricted Notes. The following table sets forth our contractual obligations and commercial commitments on a pro forma basis as of June 1, 2010:

 

Payment due by period

   Total    1 Year
or Less
   2-3 Years    4-5 Years    After 5 Years

Senior credit facility(1)

   $ 150,000    $ 1,500    $ 3,000    $ 3,000    $ 142,500

Restricted notes

     200,000      —        —        —        200,000

Interest requirements(2)

     230,394      19,291      61,859      61,495      87,749

Operating leases(3)

     453,356      46,046      89,830      87,790