NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Description of Business and Summary of Significant Accounting Policies:
Description of Business
The use of the terms “CEC Entertainment,” the “Company,” “we,” “us” and “our” throughout these unaudited notes to the interim Consolidated Financial Statements refer to CEC Entertainment, Inc. and its subsidiaries.
We currently operate and franchise Chuck E. Cheese’s and Peter Piper Pizza family dining and entertainment venues in
47
states and
14
foreign countries and territories. As of
March 31, 2019
we and our franchisees operated a total of
748
venues, of which
554
were Company-operated venues located in
44
states and Canada. Our franchisees operated a total of
194
venues located in
15
states and
13
foreign countries and territories, including Chile, Colombia, Guam, Guatemala, Honduras, Mexico, Panama, Peru, Puerto Rico, Saudi Arabia, Trinidad & Tobago, and the United Arab Emirates. As of
March 31, 2019
, a total of
181
Chuck E. Cheese's venues are located in California, Texas, and Florida (
178
are Company-operated and
three
are franchised locations), and a total of
133
Peter Piper Pizza venues are located in Arizona, Texas, and Mexico (
33
are Company-operated and
100
are franchised locations).
All of our venues utilize a consistent restaurant-entertainment format that features both family dining and entertainment areas with a mix of food, entertainment and merchandise. The economic characteristics, products and services, preparation processes, distribution methods and types of customers are substantially similar for each of our venues. Therefore, we aggregate each venue’s operating performance into one reportable segment for financial reporting purposes.
Basis of Presentation
The Company has a controlling financial interest in International Association of CEC Entertainment, Inc. (the “Association”), a variable interest entity (“VIE”). The Association primarily administers the collection and disbursement of funds (the “Association Funds”) used for advertising, entertainment and media programs that benefit both us and our Chuck E. Cheese’s franchisees. We and our franchisees are required to contribute a percentage of gross sales to these funds and could be required to make additional contributions to fund any deficits that may be incurred by the Association. We include the Association in our Consolidated Financial Statements, as we concluded that we are the primary beneficiary of its variable interests because we (a) have the power to direct the majority of its significant operating activities; (b) provide it unsecured lines of credit; and (c) own the majority of the venues that benefit from the Association’s advertising, entertainment and media expenditures. We eliminate the intercompany portion of transactions with VIEs from our financial results. The assets, liabilities and operating results of the Association are not material to our Consolidated Financial Statements.
The Association Funds are required to be segregated and used for specified purposes. Cash balances held by the Association are restricted for use in our advertising, entertainment and media programs, and are recorded as “Restricted cash” on our Consolidated Balance Sheets. Contributions to the advertising, entertainment and media funds from our franchisees were
$0.8 million
and
$0.7 million
for the
three months ended
March 31, 2019
and
April 1, 2018
, respectively. Our contributions to the Association Funds are eliminated in consolidation.
The preparation of these unaudited Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our unaudited Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Interim Financial Statements
The accompanying Consolidated Financial Statements as of and for the
three months ended
March 31, 2019
and
April 1, 2018
are unaudited and are presented in accordance with the requirements for quarterly reports on Form 10-Q and, consequently, do not include all of the information and footnote disclosures required by GAAP. In the opinion of management, the Consolidated Financial Statements include all adjustments (consisting solely of normal recurring adjustments) necessary for the fair statement of its consolidated results of operations, financial position and cash flows as of the dates and for the periods presented in accordance with GAAP and the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). All intercompany accounts have been eliminated in consolidation.
Consolidated results of operations for interim periods are not necessarily indicative of results for the full year. The unaudited Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended
December 30, 2018
, filed with the SEC on
March 12, 2019
.
Recently Adopted Accounting Guidance
Effective
December 31, 2018
, the beginning of our
Fiscal 2019
year, we adopted Accounting Standards Update (“ASU”) ASU 2016-02
,
Leases (Topic 842)
(“ASU 2016-02”) and subsequent amendment ASU 2018-11,
Leases (Topic 842): Target Improvements
(“ASU 2018-11”). This new standard introduces a new lease model that requires the recognition of lease right-of-use assets and operating lease liabilities on the balance sheet and the disclosure of key information about leasing arrangements. While this new standard retains most of the principles of the existing lessor model under U.S. GAAP, it aligns many of those principles with
Accounting Standards Codification (“ASC”) 606: Revenue from Contracts with Customers
. ASU 2018-11 provides for another transition method in addition to the modified retrospective approach required by ASU 2016-02. This option allows for entities to initially apply the new leases standard at the adoption date and recognize a cumulative adjustment to the opening balance sheet of retained earnings in the period of adoption. The cumulative impact of adopting the new lease guidance did not require us to record an adjustment to opening accumulated deficit as of
December 31, 2018
in our Consolidated Balance Sheet.
Upon adoption of ASU 2016-02, we applied the package of practical expedients included therein, which eliminated the requirements to reassess prior conclusions about lease identification, lease classification, and initial direct costs. We did not elect the hindsight practical expedient, which permits the use of hindsight when determining lease term. Further, we elected a short-term lease exception policy, permitting us to not apply the recognition requirements of this standard to short-term leases (i.e. leases with terms of
1 year
or less) and an accounting policy to account for lease and non-lease components as a single component for real estate operating leases. We also utilized the transition method included in ASU 2018-11. By applying ASU 2016-02 at the adoption date, as opposed to at the beginning of the earliest period presented, the presentation of financial information for periods prior to December 31, 2018 remained unchanged and in accordance with
Leases (Topic 840).
The adoption of the guidance in ASU 2016-02 resulted in the recognition as of
December 31, 2018
of Right-of-Use assets related to our operating leases of
$557.1 million
and lease liabilities related to our operating leases of
$590.8 million
. In addition, as a result of electing to account for lease and non-lease components as a single component for certain classes of assets, lease costs for the
three months ended March 31, 2019
includes
$3.5 million
of common area maintenance charges, which was previously included in “Other venue operating expenses” in our Consolidated Statement of Earnings. Other venue operating expenses in our Consolidated Statement of Earnings for the
three months ended April 1, 2018
includes common area maintenance charges of
$3.6 million
. The adoption of the guidance did not have a material impact on our Consolidated Statement of Cash Flows.
Note 2. Unearned Revenue:
Liabilities relating to unused game credits, gift card liabilities and deferred franchise and development fees are included in “Unearned revenues” on our Consolidated Balance Sheets. The following table presents changes in the Company’s Unearned revenue balances during the
three months ended
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
Balance at
|
|
December 31, 2018
|
|
Revenue Deferred
|
|
Revenue Recognized
|
|
March 31, 2019
|
|
(in thousands)
|
PlayPass related deferred revenue
|
$
|
5,561
|
|
|
$
|
14,346
|
|
|
$
|
(12,455
|
)
|
|
$
|
7,452
|
|
Gift card related deferred revenue
|
5,253
|
|
|
1,926
|
|
|
(2,882
|
)
|
|
4,297
|
|
Unearned franchise and development fees
|
6,321
|
|
|
2,572
|
|
|
(29
|
)
|
|
8,864
|
|
Other unearned revenues
|
989
|
|
|
9,101
|
|
|
(7,997
|
)
|
|
2,093
|
|
Total unearned revenue
|
$
|
18,124
|
|
|
$
|
27,945
|
|
|
$
|
(23,363
|
)
|
|
$
|
22,706
|
|
Note 3. Intangible Assets, Net:
The following table presents our indefinite and definite-lived intangible assets at
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Life (Years)
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
|
|
(in thousands)
|
Chuck E. Cheese's tradename
|
Indefinite
|
|
$
|
400,000
|
|
|
|
|
$
|
400,000
|
|
Peter Piper Pizza tradename
|
Indefinite
|
|
26,700
|
|
|
|
|
26,700
|
|
Franchise agreements
|
25
|
|
53,300
|
|
|
(9,758
|
)
|
|
43,542
|
|
|
|
|
$
|
480,000
|
|
|
$
|
(9,758
|
)
|
|
$
|
470,242
|
|
In connection with the adoption of ASU 2016-02 effective
December 31, 2018
, we reclassified $6.3 million related to the net carrying amount of our favorable lease definite-lived intangible asset from “Intangible Assets, Net” to “Operating lease right-of-use assets, net” on our Consolidated Balance Sheets. See Note 1. “Description of Business and Summary of Significant Accounting Policies - Recently Adopted Accounting Guidance” and Note 4. “Leases” for further discussion on the adoption of ASU 2016-02.
Amortization expense related to favorable lease agreements was $
0.4 million
for the
three months ended
April 1, 2018
, and is included in “Lease costs” in our Consolidated Statements of Earnings. As described above, in connection with the adoption of ASU 2016-02 at the beginning of Fiscal 2019, our favorable lease definite-lived intangible asset from “Intangible Assets, Net” to “Operating lease right-of-use assets, net” and therefore we no longer have any amortization expense related to favorable lease agreements. Amortization expense related to franchise agreements was
$0.5 million
for both the
three months ended
March 31, 2019
and
April 1, 2018
, respectively, and is included in “Depreciation and amortization” in our Consolidated Statements of Earnings.
Note 4. Leases:
We lease certain venues, warehouses, office space and equipment. The leases generally require us to pay minimum rent, property taxes, insurance, and other maintenance costs. Certain lease agreements include rental payments based on a percentage of retail sales over contractual levels and others include rental payments adjusted periodically for inflation. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants
Most leases generally have initial terms of 10 to 20 years and include one or more options to renew. The exercise of lease renewal options is at our sole discretion and based on our history of exercising renewal lease options, our operating lease liabilities typically assume the exercise of two lease renewal options. The depreciable life of assets and leasehold improvements are limited by the expected lease term.
|
|
|
|
|
|
|
|
March 31, 2019
|
|
Balance Sheet Classification
|
(in thousands)
|
Assets
|
|
|
Operating
|
Operating lease right-of-use assets, net
|
$
|
544,592
|
|
Finance
|
Property and equipment, net
(1)
|
9,839
|
|
Total leased assets
|
|
$
|
554,431
|
|
|
|
|
Liabilities
|
|
|
Current
|
|
|
Operating
|
Operating lease liability, current portion
|
$
|
47,509
|
|
Finance
|
Other current liabilities
|
735
|
|
Noncurrent
|
|
|
Operating
|
Operating lease obligations, less current portion
|
529,972
|
|
Finance
|
Other noncurrent liabilities
|
12,104
|
|
Total leased liabilities
|
|
$
|
590,320
|
|
__________________
(1)
Finance lease assets are recorded net of accumulated amortization of $5.2 million as of March 31, 2019.
As most of our leases do not provide an implicit rate, we use our estimated incremental borrowing rate based on the current cost of debt on our secured credit facilities at commencement date in determining the present value of lease payments.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31, 2019
|
|
|
Statement of Earnings Classification
|
|
(in thousands)
|
Operating lease cost
|
|
Lease costs
|
|
$
|
27,027
|
|
Operating lease cost
(2)
|
|
General and administrative
|
|
323
|
|
Finance lease cost
|
|
|
|
|
Amortization of leased assets
|
|
Depreciation and amortization
|
|
248
|
|
Interest on lease liabilities
|
|
Net interest expense
|
|
381
|
|
Net lease cost
|
|
|
|
$
|
27,979
|
|
__________________
(1)
Includes common area maintenance charges of
$3.5 million
.
(2)
Represents the lease cost associated with operating leases relating to our corporate offices and warehouse facilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity of Lease Liabilities
|
|
Operating
Leases
(1)
|
|
Finance
Leases
(2)
|
|
Total
|
|
|
(in thousands)
|
Remainder of 2019
|
|
$
|
69,565
|
|
|
$
|
2,192
|
|
|
$
|
71,757
|
|
2020
|
|
91,300
|
|
|
2,204
|
|
|
93,504
|
|
2021
|
|
89,249
|
|
|
2,181
|
|
|
91,430
|
|
2022
|
|
87,383
|
|
|
2,147
|
|
|
89,530
|
|
2023
|
|
84,958
|
|
|
1,920
|
|
|
86,878
|
|
After 2023
|
|
451,203
|
|
|
13,216
|
|
|
464,419
|
|
Total lease payments
|
|
873,658
|
|
|
23,860
|
|
|
897,518
|
|
Less: interest
|
|
296,177
|
|
|
11,021
|
|
|
307,198
|
|
Present value of lease liabilities
|
|
$
|
577,481
|
|
|
$
|
12,839
|
|
|
$
|
590,320
|
|
__________________
(1)
Operating lease payments include payments related to options to extend lease terms that are reasonably certain of being exercised and exclude legally binding minimum lease payments for leases signed but not yet commenced.
(2)
Finance lease payments include payments related to options to extend lease terms that are reasonably certain of being exercised and exclude legally binding minimum lease payments for leases signed but not yet commenced.
|
|
|
|
|
Lease Term and Discount Rate
|
March 31,
2019
|
Weighted average remaining lease term (years):
|
|
Operating leases
|
|
10.3
|
|
Finance leases
|
|
11.4
|
|
Weighted average discount rate:
|
|
|
Operating leases
|
|
8.0
|
%
|
Finance leases
|
|
13.6
|
%
|
The following table includes supplemental cash flow information related to leases:
|
|
|
|
|
|
|
March 31,
2019
|
|
|
(in thousands)
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Operating cash flows for operating leases
|
$
|
23,398
|
|
Operating cash flows for finance leases
|
381
|
|
Financing cash flows for finance leases
|
168
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
Operating lease liabilities
|
|
234
|
|
Finance lease liabilities
|
|
—
|
|
The following table illustrates the Company’s future minimum rental payments for non-cancelable leases as of
December 30, 2018
:
|
|
|
|
|
|
|
|
|
Financing
|
|
Operating
|
Fiscal Years
|
(in thousands)
|
2019
|
2,182
|
|
|
92,435
|
|
2020
|
2,214
|
|
|
90,983
|
|
2021
|
2,201
|
|
|
88,914
|
|
2022
|
2,184
|
|
|
87,183
|
|
2023
|
1,956
|
|
|
84,806
|
|
Thereafter
|
13,266
|
|
|
457,277
|
|
Future minimum lease payments
|
24,003
|
|
|
901,598
|
|
Less amounts representing interest
|
(10,996
|
)
|
|
|
Present value of future minimum lease payments
|
13,007
|
|
|
|
Less current portion
|
(677
|
)
|
|
|
Finance lease liability, net of current portion
|
$
|
12,330
|
|
|
|
Note 5. Accounts Payable:
Accounts payable consisted of the following as of the dates presented:
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 30, 2018
|
|
(in thousands)
|
Trade and other amounts payable
|
$
|
26,962
|
|
|
$
|
20,685
|
|
Book overdraft
|
11,886
|
|
|
10,725
|
|
Accounts payable
|
$
|
38,848
|
|
|
$
|
31,410
|
|
The book overdraft balance represents checks issued but not yet presented to banks.
Note 6. Indebtedness and Interest Expense:
Our long-term debt consisted of the following as of the dates presented:
|
|
|
|
|
|
|
|
|
|
March 31,
2019
|
|
December 30,
2018
|
|
(in thousands)
|
Term loan facility
|
$
|
722,000
|
|
|
$
|
723,900
|
|
Senior notes
|
255,000
|
|
|
255,000
|
|
Total debt outstanding
|
977,000
|
|
|
978,900
|
|
Less:
|
|
|
|
Deferred financing costs, net
|
(7,667
|
)
|
|
(8,633
|
)
|
Unamortized original issue discount
|
(1,018
|
)
|
|
(1,153
|
)
|
Current portion of term loan facility
|
(7,600
|
)
|
|
(7,600
|
)
|
Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion
|
$
|
960,715
|
|
|
$
|
961,514
|
|
We were in compliance with the debt covenants in effect as of
March 31, 2019
for both the secured credit facilities and the senior notes.
Secured Credit Facilities
Our secured credit facilities include (i) a
$760.0 million
term loan facility with a maturity date of February 14, 2021 (the “term loan facility”) and (ii) a
$95.0 million
senior secured revolving credit facility with a maturity date of
November 16, 2020
(as discussed in more detail below,
$95.0 million
of our original
$150.0 million
revolving credit facility maturing on February 14, 2019, was extended to
November 16, 2020
). The revolving credit facility includes a letter of credit sub-facility and a
$30.0 million
swingline loan sub-facility (the “revolving credit facility” and together with the term loan facility, the “secured credit facilities”). The term loan facility requires scheduled quarterly payments equal to 0.25% of the original principal amount from
July 2014
to
December 2020
, with the remaining balance paid at maturity,
February 14, 2021
.
As of
March 31, 2019
, we had no borrowings outstanding and an
$8.5 million
letter of credit issued but undrawn under the revolving credit facility, and a
$9.0 million
letter of credit issued but undrawn under the revolving credit facility, as of
December 30, 2018
. On
May 8, 2018
we entered into an incremental assumption agreement with certain of our revolving credit facility lenders to extend the maturity on
$95.0 million
of the revolving credit facility through
November 16, 2020
. In connection with the extension of the maturity date, we agreed to the following covenants for the benefit of the revolving credit facility lenders: (a) with respect to each fiscal year (commencing with the fiscal year ending December 30, 2018), to the extent we have excess cash flow (as defined in the secured credit facilities agreement),
we are required to make a mandatory prepayment of term loan principal to the extent that 75% times our excess cash flow (as defined in the secured credit facilities agreement and subject to step-downs based on our net first lien senior secured leverage ratio) exceeds $10 million with any such required mandatory payment reduced by any optional prepayments of principal that may have occurred during the fiscal year, and
(b) we shall not incur additional first lien debt in connection with certain acquisitions, mergers or consolidations unless our net first lien senior secured leverage ratio is greater than 3.65 to 1.00 on a pro forma basis. The remaining
$55.0 million
of the original revolving credit facility matured on
February 14, 2019
with no borrowing thereunder outstanding thereunder. All borrowings under our revolving credit facility are subject to the satisfaction of customary conditions, including the absence of a default and the accuracy of representations and warranties.
The term loan was issued net of
$3.8 million
of original issue discount. We also paid
$17.8 million
and
$3.8 million
in debt financing costs related to the term loan facility and revolving credit facility (inclusive of costs incurred in connection with the
May 8, 2018
incremental assumption agreement), respectively. All debt financing costs were capitalized in “Bank indebtedness and other long-term debt, net of deferred financing costs” on our Consolidated Balance Sheets. The original issue discount and deferred financing costs related to the term loan facility are amortized over the life of the term loan facility, and the deferred financing costs related to the revolving credit facility are being amortized through
November 16, 2020
, and are included in “Interest expense” on our Consolidated Statements of Earnings.
Borrowings under the secured credit facilities bear interest at a rate equal to, at our option, either (a) a London Interbank Offered Rate (“LIBOR”) determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowings, adjusted for certain additional costs, subject to a
1.00%
floor in the case of term loans or (b) a base
rate determined by reference to the highest of (i) the federal funds effective rate plus
0.50%
; (ii) the prime rate of Deutsche Bank AG New York Branch; and (iii) the one-month adjusted LIBOR plus
1.00%
, in each case plus an applicable margin. The base applicable margin is
3.25%
with respect to LIBOR borrowings and
2.25%
with respect to base rate borrowings under the
term loan facility and base rate borrowings and swingline borrowings under the revolving credit facility. The applicable margin
for LIBOR borrowings under the term loan facility is subject to one step-down from
3.25%
to
3.00%
based on our net first lien senior secured leverage ratio and the applicable margin for LIBOR borrowings under the revolving credit facility is subject to two step-downs from
3.25%
to
3.00%
and
2.75%
based on our net first lien senior secured leverage ratio. During the
three months ended
March 31, 2019
, the applicable margin for LIBOR borrowings under both the term loan facility and the revolving credit facility was
3.25%
.
In addition to paying interest on outstanding principal under the secured credit facilities, we are required to pay a commitment fee to the lenders under the revolving credit facility with respect to the unutilized commitments thereunder. The base applicable commitment fee rate under the revolving credit facility is
0.50%
per annum and is subject to one step-down from
0.50%
to
0.375%
based on our net first lien senior secured leverage ratio. During the
three months ended
March 31, 2019
and
April 1, 2018
the commitment fee rate was
0.50%
. We are also required to pay customary agency fees, as well as letter of credit participation fees computed at a rate per annum equal to the applicable margin for LIBOR rate borrowings on the dollar equivalent of the daily stated amount of outstanding letters of credit, plus such letter of credit issuer’s customary documentary and processing fees and charges and a fronting fee computed at a rate equal to
0.125%
per annum on the daily stated amount of such letter of credit.
During the
three months ended
March 31, 2019
, the federal funds rate ranged from
2.40%
to
2.43%
, the prime rate was
5.50%
and the one-month LIBOR ranged from
2.48%
to
2.52%
.
The weighted average effective interest rate incurred on our borrowings under our secured credit facilities was
6.2%
and
5.5%
for the
three months ended
March 31, 2019
and
April 1, 2018
, respectively, which includes amortization of deferred financing costs related to our secured credit facilities, amortization of our term loan facility original issue discount and commitment and other fees related to our secured credit facilities.
Obligations under the secured credit facilities are unconditionally guaranteed by Queso Holdings Inc. (“Parent”) on a limited-recourse basis and each of our existing and future direct and indirect material, wholly-owned domestic subsidiaries, subject to certain exceptions. The obligations are secured by a pledge of our capital stock and substantially all of our assets and those of each subsidiary guarantor, including capital stock of the subsidiary guarantors and
65%
of the capital stock of the first-tier foreign subsidiaries that are not subsidiary guarantors, in each case subject to exceptions. Such security interests consist of first priority liens with respect to the collateral.
The secured credit facilities also contain customary affirmative and negative covenants, and events of default, which limit our ability to, among other things: incur additional debt or issue certain preferred shares; create liens on certain assets; make certain loans or investments (including acquisitions); pay dividends on or make distributions with respect to our capital stock or make other restricted payments; consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; sell assets; enter into certain transactions with our affiliates; enter into sale-leaseback transactions; change our lines of business; restrict dividends from our subsidiaries or restrict liens; change our fiscal year; and modify the terms of certain debt or organizational agreements.
Our revolving credit facility includes a springing financial maintenance covenant that requires our net first lien senior secured leverage ratio not to exceed
6.25
to
1.00
(the ratio of consolidated net debt secured by first-priority liens on the collateral to the last twelve months’ EBITDA, as defined in the senior credit facilities). The covenant will be tested quarterly if the revolving credit facility is more than
30%
drawn (excluding outstanding letters of credit) and will be a condition to drawings under the revolving credit facility that would result in more than
30%
drawn thereunder.
Senior Unsecured Debt
Our senior unsecured debt consists of
$255.0 million
aggregate principal amount borrowings of
8.0%
Senior Notes due 2022 (the “senior notes”). The senior notes bear interest at a rate of
8.0%
per year payable February 15th and August 15th each year and mature on February 15, 2022. We may call some or all of the senior notes at
102%
on or after
February 15, 2019
and at
100%
on or after
February 15, 2020
as set forth in the indenture governing the senior notes (the “indenture”).
We paid
$6.4 million
in debt issuance costs related to the senior notes, which we capitalized in “Bank indebtedness and other long-term debt, net of deferred financing costs” on our Consolidated Balance Sheets. The deferred financing costs are being amortized over the life of the senior notes and are included in “Interest expense” in our Consolidated Statements of Earnings.
Our obligations under the senior notes are fully and unconditionally guaranteed, jointly and severally, by our present and future direct and indirect wholly-owned material domestic subsidiaries that guarantee our secured credit facilities.
The indenture contains restrictive covenants that limit our ability to, among other things: (i) incur additional debt or issue certain preferred shares; (ii) create liens on certain assets; (iii) make certain loans or investments (including acquisitions); (iv) pay dividends on or make distributions in respect of our capital stock or make other restricted payments; (v) consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; (vi) sell assets; (vii) enter into certain transactions with our affiliates; and (viii) restrict dividends from our subsidiaries.
The weighted average effective interest rate incurred on borrowings under our senior notes was
8.2%
for both the
three months ended
March 31, 2019
and
April 1, 2018
, which included amortization of deferred financing costs and other fees related to our senior notes.
Interest Expense
Interest expense consisted of the following for the periods presented:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2019
|
|
April 1, 2018
|
|
(in thousands)
|
Term loan facility
(1)
|
$
|
10,666
|
|
|
$
|
9,119
|
|
Senior notes
|
5,082
|
|
|
5,082
|
|
Finance lease obligations
|
381
|
|
|
428
|
|
Sale leaseback obligations
|
2,695
|
|
|
2,630
|
|
Amortization of deferred financing costs
|
924
|
|
|
1,001
|
|
Other
|
60
|
|
|
297
|
|
Total interest expense
|
$
|
19,808
|
|
|
$
|
18,557
|
|
__________________
(1) Includes amortization of original issue discount.
The weighted average effective interest rate incurred on our borrowings under our secured credit facilities and senior notes (including amortized debt issuance costs, amortization of original issue discount, commitment and other fees related to the secured credit facilities and senior notes) was
6.7%
for the
three months ended
March 31, 2019
and
6.2%
for the
three months ended
April 1, 2018
, respectively.
We were in compliance with the debt covenants in effect as of
March 31, 2019
for both the secured credit facilities and the senior notes.
Note 7. Fair Value of Financial Instruments:
Fair value measurements of financial instruments are determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy) has been established.
The following table presents information on our financial instruments as of the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
December 30, 2018
|
|
|
Carrying Amount
(1)
|
|
Estimated Fair Value
|
|
|
Carrying Amount
(1)
|
|
Estimated Fair Value
|
|
|
(in thousands)
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
Bank indebtedness and other long-term debt:
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
7,600
|
|
|
$
|
7,391
|
|
|
|
$
|
7,600
|
|
|
$
|
7,051
|
|
Long-term portion
(2)
|
|
968,382
|
|
|
929,021
|
|
|
|
970,147
|
|
|
885,212
|
|
Bank indebtedness and other long-term debt:
|
|
$
|
975,982
|
|
|
$
|
936,412
|
|
|
|
$
|
977,747
|
|
|
$
|
892,263
|
|
_________________
(1)
Excluding net deferred financing costs.
(2)
Net of original issue discount.
Our financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, our secured credit facilities and our senior notes. The carrying amount of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximates fair value because of their short maturities. The estimated fair value of our secured credit facilities, term loan facility and senior notes was determined by using the respective average of the ask and bid price of our outstanding borrowings under our term loan facility and the senior notes as of the nearest open market date preceding the reporting period end. The average of the ask and bid price are classified as Level 2 in the fair value hierarchy.
Our non-financial assets, which include long-lived assets, including property, plant and equipment, operating lease right-of-use assets, goodwill and intangible assets, are reported at carrying value and are not required to be measured at fair value on a recurring basis. However, on a periodic basis, or whenever events or changes in circumstances indicate that their carrying value may not be recoverable, we assess our long-lived assets for impairment.
During the
three months ended March 31, 2019
and
April 1, 2018
, there were no significant transfers among Level 1, 2 or 3 fair value determinations.
Note 8. Other Noncurrent Liabilities:
Other noncurrent liabilities consisted of the following as of the dates presented:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 30, 2018
|
|
|
(in thousands)
|
Sale leaseback obligations, less current portion
(1)
|
|
$
|
172,543
|
|
|
$
|
174,520
|
|
Lease related liabilities
(2)
|
|
—
|
|
|
45,195
|
|
Financing lease obligations, less current portion
|
|
12,104
|
|
|
12,330
|
|
Other
|
|
5,863
|
|
|
6,534
|
|
Total other noncurrent liabilities
|
|
$
|
190,510
|
|
|
$
|
238,579
|
|
_________________
|
|
(1)
|
The sale leaseback obligations are accounted for under the financing method, rather than as completed sales. Under the financing method the sales proceeds received are included in other long-term liabilities until our continuing involvement with the properties is terminated. The rental payments related to the sale leaseback properties are recorded as interest expense and a reduction of the sale leaseback obligation.
|
|
|
(2)
|
Lease liabilities totaling
$45.2 million
were reclassified in connection with the adoption of ASU 2016-02 on
December 31, 2018
.See Note 1. “Description of Business and Summary of Significant Accounting Policies - Recently Adopted Accounting Guidance” and Note 4. “Leases” for further discussion on the adoption of ASU 2016-02.
|
Note 9. Income Taxes:
Our income tax expense consists of the following for the periods presented:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2019
|
|
April 1, 2018
|
|
(in thousands)
|
Federal and state income taxes
|
$
|
6,898
|
|
|
$
|
3,535
|
|
Foreign income taxes
(1)
|
280
|
|
|
398
|
|
Income tax expense
|
$
|
7,178
|
|
|
$
|
3,933
|
|
__________________
(1) Including foreign taxes withheld.
Our effective income tax rate for the
three months ended
March 31, 2019
was
25.3%
as compared to
24.3%
for the
three months ended
April 1, 2018
. Our effective income tax rate for the
three months ended
March 31, 2019
and
April 1, 2018
were favorably impacted by employment-related federal income tax credits, offset by state taxes and the negative impact of nondeductible litigation costs related to the Merger, nondeductible penalties, and foreign income taxes (taxes withheld on royalties and franchise fees earned from international franchisees not offset by foreign tax credits due to the foreign tax credit limitation).
For the periods presented herein, we have used the year-to-date effective tax rate (the “discrete method”), as prescribed by ASC 740-270,
Accounting for Income Taxes-Interim Reporting
when a reliable estimate of the estimated annual rate cannot be made. We believe at this time, the use of the discrete method is more appropriate than the annual effective tax rate method due to significant variations in the customary relationship between income tax expense and projected annual pre-tax income or loss which occurs when annual projected pre-tax income or loss nears a relatively small amount in comparison to the differences between income and deductions determined for financial statement purposes versus income tax purposes. Using the discrete method, we have determined our current and deferred income tax expense as if the interim period were an annual period.
Our liability for uncertain tax positions (excluding interest and penalties) was
$4.2 million
as of
March 31, 2019
and
$4.3 million
as of
December 30, 2018
and if recognized would decrease our provision for income taxes by
$3.3 million
. Within the next twelve months, we could settle or otherwise conclude certain ongoing income tax audits and resolve uncertain tax positions as a result of expiring statutes of limitations or payment. As such, it is reasonably possible that the liability for uncertain tax positions could decrease by as much as
$3.7 million
within the next twelve months.
Total accrued interest and penalties related to unrecognized tax benefits was
$1.1 million
as of
March 31, 2019
and
December 30, 2018
. On the Consolidated Balance Sheets, we include current interest related to unrecognized tax benefits in “Accrued interest,” current penalties in “Accrued expenses” and noncurrent accrued interest and penalties in “Other noncurrent liabilities.”
Note 10. Stock-Based Compensation Arrangements:
2014 Equity Incentive Plan
The 2014 Equity Incentive Plan provides Parent authority to grant equity incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, stock bonus awards or performance compensation awards to certain directors, officers or employees of the Company. A summary of the options outstanding under the equity incentive plan as of
March 31, 2019
and the activity for the
three months ended
March 31, 2019
is presented below:
|
|
|
|
|
|
|
|
|
|
Stock Options
|
Weighted Average Exercise Price
(1)
|
Weighted Average Remaining Contractual Term
|
Aggregate Intrinsic Value
|
|
|
($ per share)
|
|
($ in thousands)
|
Outstanding stock options, December 30, 2018
|
1,987,331
|
|
$8.87
|
|
|
Options Granted
|
424,985
|
|
$8.86
|
|
|
Options Forfeited
|
(5,366
|
)
|
$8.58
|
|
|
Outstanding stock options, March 31, 2019
|
2,406,950
|
|
$8.87
|
6.1
|
$
|
2,197
|
|
Stock options expected to vest, March 31, 2019
|
1,624,580
|
|
$9.05
|
6.5
|
$
|
1,182
|
|
Exercisable stock options, March 31, 2019
|
601,862
|
|
$8.31
|
5.0
|
$
|
883
|
|
|
|
|
|
|
__________________
(1) The weighted average exercise price reflects the original grant date fair value per option as adjusted for the dividend payment made in August 2015.
As of
March 31, 2019
, we had
$1.7 million
of total unrecognized share-based compensation expense related to unvested options, which is expected to be amortized over the remaining weighted-average period of
4.4
years.
Stock Awards
During the
first quarter
of
2019
, certain officers of the Company were granted stock bonus awards under the 2014 Equity Incentive Plan. The number of common shares of Parent awarded was based on the fair market value of Parent’s common stock as of
December 31, 2018
. The shares granted to the officers were fully vested immediately on the date that they were granted. In addition, during
2019
, the Company agreed to issue fully vested common shares of Parent to certain officers of the Company in the
first quarter 2020
based on the Company’s financial performance for
Fiscal 2019
.
The following table summarizes stock-based compensation expense and the associated tax benefit recognized in the Consolidated Financial Statements for the periods presented:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
2019
|
|
April 1,
2018
|
|
(in thousands)
|
Stock-based compensation costs related to stock awards
|
$
|
1,031
|
|
|
$
|
—
|
|
Stock-based compensation costs related to incentive stock options
|
126
|
|
|
67
|
|
Portion capitalized as property and equipment
(1)
|
(10
|
)
|
|
(3
|
)
|
Stock-based compensation expense recognized
|
$
|
1,147
|
|
|
$
|
64
|
|
Payroll taxes related to stock awards
|
$
|
15
|
|
|
$
|
—
|
|
__________________
|
|
(1)
|
We capitalize the portion of stock-based compensation costs related to our design, construction, facilities and legal departments that are directly attributable to our venue development projects, such as the design and construction of a new venue and the remodeling and expansion of our existing venues. Capitalized stock-based compensation costs attributable to our venue development projects are included in “Property and equipment, net” in the Consolidated Balance Sheets.
|
Note 11. Stockholder’s Equity:
The following table summarizes the changes in stockholder’s equity during the
three months ended March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Capital In
Excess of
Par Value
|
|
Accumulated Deficit
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
Total
|
|
|
(in thousands, except share information)
|
Balance at December 30, 2018
|
|
200
|
|
|
$
|
—
|
|
|
$
|
359,570
|
|
|
$
|
(115,660
|
)
|
|
$
|
(1,339
|
)
|
|
$
|
242,571
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
21,246
|
|
|
—
|
|
|
21,246
|
|
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(155
|
)
|
|
(155
|
)
|
Stock-based compensation costs
|
|
—
|
|
|
—
|
|
|
126
|
|
|
—
|
|
|
—
|
|
|
126
|
|
Balance March 31, 2019
|
|
200
|
|
|
$
|
—
|
|
|
$
|
359,696
|
|
|
$
|
(94,414
|
)
|
|
$
|
(1,494
|
)
|
|
$
|
263,788
|
|
12. Consolidating Guarantor Financial Information:
On February 14, 2014, CEC Entertainment, Inc. (the “Issuer”) merged with and into an entity controlled by Apollo Global Management, LLC and its subsidiaries, which we refer to as the “Merger.” The senior notes issued by the Issuer, in conjunction with the Merger, are our unsecured obligations and are fully and unconditionally, jointly and severally guaranteed by all of our 100% wholly-owned U.S. subsidiaries (the “Guarantors”). Our wholly-owned foreign subsidiaries and our less-than-wholly-owned U.S. subsidiaries are not a party to the guarantees (the “Non-Guarantors”). The following schedules present the condensed consolidating financial statements of the Issuer, Guarantors and Non-Guarantors, as well as consolidated results, for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CEC Entertainment, Inc.
|
Condensed Consolidating Balance Sheet
|
As of March 31, 2019
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
104,407
|
|
|
$
|
5,065
|
|
|
$
|
2,558
|
|
|
$
|
—
|
|
|
$
|
112,030
|
|
Restricted cash
|
|
—
|
|
|
—
|
|
|
266
|
|
|
—
|
|
|
266
|
|
Accounts receivable
|
|
13,946
|
|
|
5,950
|
|
|
5,834
|
|
|
(4,983
|
)
|
|
20,747
|
|
Inventories
|
|
18,658
|
|
|
5,641
|
|
|
294
|
|
|
|
|
|
24,593
|
|
Prepaid expenses
|
|
8,030
|
|
|
9,740
|
|
|
942
|
|
|
|
|
|
18,712
|
|
Total current assets
|
|
145,041
|
|
|
26,396
|
|
|
9,894
|
|
|
(4,983
|
)
|
|
176,348
|
|
Property and equipment, net
|
|
459,345
|
|
|
68,873
|
|
|
5,392
|
|
|
—
|
|
|
533,610
|
|
Operating lease right-of-use assets, net
|
|
485,766
|
|
|
48,717
|
|
|
10,109
|
|
|
—
|
|
|
544,592
|
|
Goodwill
|
|
433,024
|
|
|
51,414
|
|
|
—
|
|
|
—
|
|
|
484,438
|
|
Intangible assets, net
|
|
8,584
|
|
|
461,658
|
|
|
—
|
|
|
—
|
|
|
470,242
|
|
Intercompany
|
|
57,340
|
|
|
80,658
|
|
|
—
|
|
|
(137,998
|
)
|
|
—
|
|
Investment in subsidiaries
|
|
491,735
|
|
|
—
|
|
|
—
|
|
|
(491,735
|
)
|
|
—
|
|
Other noncurrent assets
|
|
7,104
|
|
|
11,759
|
|
|
20
|
|
|
—
|
|
|
18,883
|
|
Total assets
|
|
$
|
2,087,939
|
|
|
$
|
749,475
|
|
|
$
|
25,415
|
|
|
$
|
(634,716
|
)
|
|
$
|
2,228,113
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
Bank indebtedness and other long-term debt, current portion
|
|
$
|
7,600
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,600
|
|
Operating lease liability, current portion
|
|
42,988
|
|
|
3,399
|
|
|
1,122
|
|
|
—
|
|
|
47,509
|
|
Accounts payable and accrued expenses
|
|
57,215
|
|
|
41,414
|
|
|
5,747
|
|
|
—
|
|
|
104,376
|
|
Other current liabilities
|
|
5,317
|
|
|
—
|
|
|
15
|
|
|
—
|
|
|
5,332
|
|
Total current liabilities
|
|
113,120
|
|
|
44,813
|
|
|
6,884
|
|
|
—
|
|
|
164,817
|
|
Operating lease obligations, less current portion
|
|
463,959
|
|
|
56,689
|
|
|
9,324
|
|
|
—
|
|
|
529,972
|
|
Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion
|
|
960,715
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
960,715
|
|
Deferred tax liability
|
|
91,990
|
|
|
18,037
|
|
|
(1,577
|
)
|
|
—
|
|
|
108,450
|
|
Intercompany
|
|
—
|
|
|
116,598
|
|
|
26,383
|
|
|
(142,981
|
)
|
|
—
|
|
Other noncurrent liabilities
|
|
194,367
|
|
|
5,970
|
|
|
34
|
|
|
—
|
|
|
200,371
|
|
Total liabilities
|
|
1,824,151
|
|
|
242,107
|
|
|
41,048
|
|
|
(142,981
|
)
|
|
1,964,325
|
|
Stockholder's equity:
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Capital in excess of par value
|
|
359,696
|
|
|
466,114
|
|
|
3,241
|
|
|
(469,355
|
)
|
|
359,696
|
|
Retained earnings (deficit)
|
|
(94,414
|
)
|
|
41,254
|
|
|
(17,224
|
)
|
|
(24,030
|
)
|
|
(94,414
|
)
|
Accumulated other comprehensive income (loss)
|
|
(1,494
|
)
|
|
—
|
|
|
(1,650
|
)
|
|
1,650
|
|
|
(1,494
|
)
|
Total stockholder's equity
|
|
263,788
|
|
|
507,368
|
|
|
(15,633
|
)
|
|
(491,735
|
)
|
|
263,788
|
|
Total liabilities and stockholder's equity
|
|
$
|
2,087,939
|
|
|
$
|
749,475
|
|
|
$
|
25,415
|
|
|
$
|
(634,716
|
)
|
|
$
|
2,228,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CEC Entertainment, Inc.
|
Condensed Consolidating Balance Sheet
|
As of December 30, 2018
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
54,775
|
|
|
$
|
6,725
|
|
|
$
|
1,670
|
|
|
$
|
—
|
|
|
$
|
63,170
|
|
Restricted cash
|
|
—
|
|
|
—
|
|
|
151
|
|
|
—
|
|
|
151
|
|
Accounts receivable
|
|
28,421
|
|
|
4,956
|
|
|
4,117
|
|
|
(3,314
|
)
|
|
34,180
|
|
Inventories
|
|
16,896
|
|
|
6,617
|
|
|
294
|
|
|
—
|
|
|
23,807
|
|
Prepaid expenses
|
|
14,264
|
|
|
10,562
|
|
|
598
|
|
|
—
|
|
|
25,424
|
|
Total current assets
|
|
114,356
|
|
|
28,860
|
|
|
6,830
|
|
|
(3,314
|
)
|
|
146,732
|
|
Property and equipment, net
|
|
468,827
|
|
|
64,721
|
|
|
5,637
|
|
|
—
|
|
|
539,185
|
|
Goodwill
|
|
433,024
|
|
|
51,414
|
|
|
—
|
|
|
—
|
|
|
484,438
|
|
Intangible assets, net
|
|
14,716
|
|
|
462,369
|
|
|
—
|
|
|
—
|
|
|
477,085
|
|
Intercompany
|
|
78,402
|
|
|
66,373
|
|
|
—
|
|
|
(144,775
|
)
|
|
—
|
|
Investment in subsidiaries
|
|
477,556
|
|
|
—
|
|
|
—
|
|
|
(477,556
|
)
|
|
—
|
|
Other noncurrent assets
|
|
7,292
|
|
|
11,409
|
|
|
24
|
|
|
—
|
|
|
18,725
|
|
Total assets
|
|
$
|
1,594,173
|
|
|
$
|
685,146
|
|
|
$
|
12,491
|
|
|
$
|
(625,645
|
)
|
|
$
|
1,666,165
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
Bank indebtedness and other long-term debt, current portion
|
|
$
|
7,600
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,600
|
|
Accounts payable and accrued expenses
|
|
56,277
|
|
|
34,429
|
|
|
2,321
|
|
|
—
|
|
|
93,027
|
|
Other current liabilities
|
|
5,429
|
|
|
510
|
|
|
16
|
|
|
—
|
|
|
5,955
|
|
Total current liabilities
|
|
69,306
|
|
|
34,939
|
|
|
2,337
|
|
|
—
|
|
|
106,582
|
|
Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion
|
|
961,514
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
961,514
|
|
Deferred tax liability
|
|
91,049
|
|
|
17,866
|
|
|
(1,857
|
)
|
|
—
|
|
|
107,058
|
|
Intercompany
|
|
—
|
|
|
119,498
|
|
|
28,591
|
|
|
(148,089
|
)
|
|
—
|
|
Other noncurrent liabilities
|
|
229,733
|
|
|
18,191
|
|
|
516
|
|
|
—
|
|
|
248,440
|
|
Total liabilities
|
|
1,351,602
|
|
|
190,494
|
|
|
29,587
|
|
|
(148,089
|
)
|
|
1,423,594
|
|
Stockholder's equity:
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Capital in excess of par value
|
|
359,570
|
|
|
466,114
|
|
|
3,241
|
|
|
(469,355
|
)
|
|
359,570
|
|
Retained earnings (deficit)
|
|
(115,660
|
)
|
|
28,538
|
|
|
(18,691
|
)
|
|
(9,847
|
)
|
|
(115,660
|
)
|
Accumulated other comprehensive income (loss)
|
|
(1,339
|
)
|
|
—
|
|
|
(1,646
|
)
|
|
1,646
|
|
|
(1,339
|
)
|
Total stockholder's equity
|
|
242,571
|
|
|
494,652
|
|
|
(17,096
|
)
|
|
(477,556
|
)
|
|
242,571
|
|
Total liabilities and stockholder's equity
|
|
$
|
1,594,173
|
|
|
$
|
685,146
|
|
|
$
|
12,491
|
|
|
$
|
(625,645
|
)
|
|
$
|
1,666,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CEC Entertainment, Inc.
|
Consolidating Statement of Comprehensive Income (Loss)
|
For the Three Months Ended March 31, 2019
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Food and beverage sales
|
|
$
|
102,113
|
|
|
$
|
14,223
|
|
|
$
|
1,479
|
|
|
$
|
—
|
|
|
$
|
117,815
|
|
Entertainment and merchandise sales
|
|
133,650
|
|
|
13,207
|
|
|
2,820
|
|
|
—
|
|
|
149,677
|
|
Total company venue sales
|
|
235,763
|
|
|
27,430
|
|
|
4,299
|
|
|
—
|
|
|
267,492
|
|
Franchise fees and royalties
|
|
685
|
|
|
4,294
|
|
|
841
|
|
|
—
|
|
|
5,820
|
|
International Association assessments and other fees
|
|
315
|
|
|
11,785
|
|
|
11,319
|
|
|
(23,419
|
)
|
|
—
|
|
Total revenues
|
|
236,763
|
|
|
43,509
|
|
|
16,459
|
|
|
(23,419
|
)
|
|
273,312
|
|
Operating Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
Company venue operating costs (excluding Depreciation and amortization):
|
|
|
|
|
|
|
|
|
|
|
Cost of food and beverage
|
|
22,428
|
|
|
3,734
|
|
|
490
|
|
|
—
|
|
|
26,652
|
|
Cost of entertainment and merchandise
|
|
11,044
|
|
|
443
|
|
|
259
|
|
|
—
|
|
|
11,746
|
|
Total cost of food, beverage, entertainment and merchandise
|
|
33,472
|
|
|
4,177
|
|
|
749
|
|
|
—
|
|
|
38,398
|
|
Labor expenses
|
|
66,240
|
|
|
4,941
|
|
|
1,324
|
|
|
—
|
|
|
72,505
|
|
Lease costs
|
|
24,594
|
|
|
1,861
|
|
|
572
|
|
|
—
|
|
|
27,027
|
|
Other venue operating expenses
|
|
42,811
|
|
|
3,737
|
|
|
849
|
|
|
(12,100
|
)
|
|
35,297
|
|
Total company venue operating costs
|
|
167,117
|
|
|
14,716
|
|
|
3,494
|
|
|
(12,100
|
)
|
|
173,227
|
|
Advertising expense
|
|
11,324
|
|
|
1,600
|
|
|
10,648
|
|
|
(11,319
|
)
|
|
12,253
|
|
General and administrative expenses
|
|
5,106
|
|
|
10,398
|
|
|
(261
|
)
|
|
—
|
|
|
15,243
|
|
Depreciation and amortization
|
|
21,426
|
|
|
2,467
|
|
|
441
|
|
|
—
|
|
|
24,334
|
|
Transaction, severance and related litigation costs
|
|
23
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
23
|
|
Total operating costs and expenses
|
|
204,996
|
|
|
29,181
|
|
|
14,322
|
|
|
(23,419
|
)
|
|
225,080
|
|
Operating income
|
|
31,767
|
|
|
14,328
|
|
|
2,137
|
|
|
—
|
|
|
48,232
|
|
Equity in earnings (loss) in affiliates
|
|
14,386
|
|
|
—
|
|
|
—
|
|
|
(14,386
|
)
|
|
—
|
|
Interest expense
|
|
18,915
|
|
|
711
|
|
|
182
|
|
|
—
|
|
|
19,808
|
|
Income (loss) before income taxes
|
|
27,238
|
|
|
13,617
|
|
|
1,955
|
|
|
(14,386
|
)
|
|
28,424
|
|
Income tax expense
|
|
5,992
|
|
|
903
|
|
|
283
|
|
|
—
|
|
|
7,178
|
|
Net income (loss)
|
|
$
|
21,246
|
|
|
$
|
12,714
|
|
|
$
|
1,672
|
|
|
$
|
(14,386
|
)
|
|
$
|
21,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
(155
|
)
|
|
—
|
|
|
(155
|
)
|
|
155
|
|
|
(155
|
)
|
Comprehensive income (loss)
|
|
$
|
21,091
|
|
|
$
|
12,714
|
|
|
$
|
1,517
|
|
|
$
|
(14,231
|
)
|
|
$
|
21,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CEC Entertainment, Inc.
|
Consolidating Statement of Comprehensive Income (Loss)
|
For the Three Months Ended April 1, 2018
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Food and beverage sales
|
|
$
|
102,648
|
|
|
$
|
13,958
|
|
|
$
|
1,771
|
|
|
$
|
—
|
|
|
$
|
118,377
|
|
Entertainment and merchandise sales
|
|
115,275
|
|
|
12,727
|
|
|
3,115
|
|
|
—
|
|
|
131,117
|
|
Total company venue sales
|
|
217,923
|
|
|
26,685
|
|
|
4,886
|
|
|
—
|
|
|
249,494
|
|
Franchise fees and royalties
|
|
572
|
|
|
4,143
|
|
|
695
|
|
|
—
|
|
|
5,410
|
|
International Association assessments and other fees
|
|
341
|
|
|
9,038
|
|
|
10,562
|
|
|
(19,941
|
)
|
|
—
|
|
Total revenues
|
|
218,836
|
|
|
39,866
|
|
|
16,143
|
|
|
(19,941
|
)
|
|
254,904
|
|
Operating Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
Company venue operating costs
(excluding Depreciation and amortization):
|
|
|
|
|
|
|
|
|
|
|
Cost of food and beverage
|
|
22,884
|
|
|
3,891
|
|
|
585
|
|
|
—
|
|
|
27,360
|
|
Cost of entertainment and merchandise
|
|
8,766
|
|
|
446
|
|
|
170
|
|
|
—
|
|
|
9,382
|
|
Total cost of food, beverage, entertainment and merchandise
|
|
31,650
|
|
|
4,337
|
|
|
755
|
|
|
—
|
|
|
36,742
|
|
Labor expenses
|
|
60,829
|
|
|
5,095
|
|
|
1,425
|
|
|
—
|
|
|
67,349
|
|
Lease costs
|
|
21,797
|
|
|
1,689
|
|
|
563
|
|
|
—
|
|
|
24,049
|
|
Other venue operating expenses
|
|
42,908
|
|
|
3,590
|
|
|
969
|
|
|
(9,405
|
)
|
|
38,062
|
|
Total company venue operating costs
|
|
157,184
|
|
|
14,711
|
|
|
3,712
|
|
|
(9,405
|
)
|
|
166,202
|
|
Advertising expense
|
|
10,985
|
|
|
1,941
|
|
|
11,584
|
|
|
(10,536
|
)
|
|
13,974
|
|
General and administrative expenses
|
|
4,195
|
|
|
8,168
|
|
|
546
|
|
|
—
|
|
|
12,909
|
|
Depreciation and amortization
|
|
23,377
|
|
|
2,732
|
|
|
463
|
|
|
—
|
|
|
26,572
|
|
Transaction, severance and related litigation costs
|
|
313
|
|
|
221
|
|
|
—
|
|
|
—
|
|
|
534
|
|
Total operating costs and expenses
|
|
196,054
|
|
|
27,773
|
|
|
16,305
|
|
|
(19,941
|
)
|
|
220,191
|
|
Operating income (loss)
|
|
22,782
|
|
|
12,093
|
|
|
(162
|
)
|
|
—
|
|
|
34,713
|
|
Equity in earnings (loss) in affiliates
|
|
8,645
|
|
|
—
|
|
|
—
|
|
|
(8,645
|
)
|
|
—
|
|
Interest expense
|
|
17,528
|
|
|
844
|
|
|
185
|
|
|
—
|
|
|
18,557
|
|
Income (loss) before income taxes
|
|
13,899
|
|
|
11,249
|
|
|
(347
|
)
|
|
(8,645
|
)
|
|
16,156
|
|
Income tax expense
|
|
1,676
|
|
|
2,186
|
|
|
71
|
|
|
—
|
|
|
3,933
|
|
Net income (loss)
|
|
$
|
12,223
|
|
|
$
|
9,063
|
|
|
$
|
(418
|
)
|
|
$
|
(8,645
|
)
|
|
$
|
12,223
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
154
|
|
|
—
|
|
|
154
|
|
|
(154
|
)
|
|
154
|
|
Comprehensive income (loss)
|
|
$
|
12,377
|
|
|
$
|
9,063
|
|
|
$
|
(264
|
)
|
|
$
|
(8,799
|
)
|
|
$
|
12,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CEC Entertainment, Inc.
|
Consolidating Statement of Cash Flows
|
For the Three Months Ended March 31, 2019
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
Guarantors
|
|
Non-Guarantors
|
|
Consolidated
|
Cash flows provided by operating activities:
|
|
$
|
64,577
|
|
|
$
|
4,743
|
|
|
$
|
1,158
|
|
|
$
|
70,478
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
(12,602
|
)
|
|
(5,699
|
)
|
|
(71
|
)
|
|
(18,372
|
)
|
Development of internal use software
|
|
421
|
|
|
(703
|
)
|
|
—
|
|
|
(282
|
)
|
Proceeds from sale of property and equipment
|
|
21
|
|
|
—
|
|
|
—
|
|
|
21
|
|
Cash flows used in investing activities
|
|
(12,160
|
)
|
|
(6,402
|
)
|
|
(71
|
)
|
|
(18,633
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Repayments on senior term loan
|
|
(1,900
|
)
|
|
—
|
|
|
—
|
|
|
(1,900
|
)
|
Payments on capital lease obligations
|
|
(165
|
)
|
|
—
|
|
|
(3
|
)
|
|
(168
|
)
|
Payments on sale leaseback transactions
|
|
(803
|
)
|
|
—
|
|
|
—
|
|
|
(803
|
)
|
Cash flows used in financing activities
|
|
(2,868
|
)
|
|
—
|
|
|
(3
|
)
|
|
(2,871
|
)
|
Effect of foreign exchange rate changes on cash
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
Change in cash, cash equivalents and restricted cash
|
|
49,549
|
|
|
(1,659
|
)
|
|
1,085
|
|
|
48,975
|
|
Cash, cash equivalents and restricted cash at beginning of period
|
|
54,775
|
|
|
6,725
|
|
|
1,821
|
|
|
63,321
|
|
Cash, cash equivalents and restricted cash at end of period
|
|
$
|
104,324
|
|
|
$
|
5,066
|
|
|
$
|
2,906
|
|
|
$
|
112,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CEC Entertainment, Inc.
|
Consolidating Statement of Cash Flows
|
For the Three Months Ended April 1, 2018
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
Guarantors
|
|
Non-Guarantors
|
|
Consolidated
|
Cash flows provided by (used in) operating activities:
|
|
$
|
38,848
|
|
|
$
|
18,807
|
|
|
$
|
(5,091
|
)
|
|
$
|
52,564
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
(9,502
|
)
|
|
(7,868
|
)
|
|
(690
|
)
|
|
(18,060
|
)
|
Development of internal use software
|
|
(622
|
)
|
|
107
|
|
|
—
|
|
|
(515
|
)
|
Proceeds from the sale of property and equipment
|
|
316
|
|
|
(158
|
)
|
|
—
|
|
|
158
|
|
Cash flows used in investing activities
|
|
(9,808
|
)
|
—
|
|
(7,919
|
)
|
—
|
|
(690
|
)
|
—
|
|
(18,417
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Repayments on senior term loan
|
|
(1,900
|
)
|
|
—
|
|
|
—
|
|
|
(1,900
|
)
|
Payments on capital lease obligations
|
|
(143
|
)
|
|
—
|
|
|
(2
|
)
|
|
(145
|
)
|
Payments on sale leaseback transactions
|
|
(688
|
)
|
|
—
|
|
|
—
|
|
|
(688
|
)
|
Cash flows used in financing activities
|
|
(2,731
|
)
|
—
|
|
—
|
|
—
|
|
(2
|
)
|
—
|
|
(2,733
|
)
|
Effect of foreign exchange rate changes on cash
|
|
—
|
|
|
—
|
|
|
46
|
|
|
46
|
|
Change in cash, cash equivalents and restricted cash
|
|
26,309
|
|
—
|
|
10,888
|
|
—
|
|
(5,737
|
)
|
—
|
|
31,460
|
|
Cash, cash equivalents and restricted cash at beginning of period
|
|
59,948
|
|
|
410
|
|
|
6,954
|
|
|
67,312
|
|
Cash, cash equivalents and restricted cash at end of period
|
|
$
|
86,257
|
|
|
$
|
11,298
|
|
|
$
|
1,217
|
|
|
$
|
98,772
|
|
13. Related Party Transactions:
We reimburse Apollo Management, L.P. for certain out-of-pocket expenses incurred in connection with travel and Board of Directors related expenses. In addition, CEC Entertainment engages Apollo portfolio companies to provide various services, including security services to its venues, licensed music video content for use in its venues, and employment screening services to its recruiting functions. Included in our Total operating costs and expenses are related expenses totaling
$0.4 million
for both the
three months ended
March 31, 2019
and
April 1, 2018
.
Included in our Accounts Receivable balance are amounts due from Parent totaling
$2.6 million
at both
March 31, 2019
and
December 30, 2018
, primarily related to various general and administrative and transaction related expenses paid on behalf of Parent.
Note 14. Commitments and Contingencies:
Legal Proceedings
From time to time, we are involved in various inquiries, investigations, claims, lawsuits and other legal proceedings that are incidental to the conduct of our business. These matters typically involve claims from customers, employees or other third parties involved in operational issues common to the retail, restaurant and entertainment industries. Such matters typically represent actions with respect to contracts, intellectual property, taxation, employment, employee benefits, personal injuries and other matters. A number of such claims may exist at any given time, and there are currently a number of claims and legal proceedings pending against us.
In the opinion of our management, after consultation with legal counsel, the amount of liability with respect to claims or proceedings currently pending against us is not expected to have a material effect on our consolidated financial condition, results of operations or cash flows. All necessary loss accruals based on the probability and estimate of loss have been recorded.
Litigation Related to the Merger:
Following the January 16, 2014 announcement that CEC Entertainment had entered into an agreement (“Merger Agreement”), pursuant to which an entity controlled by Apollo Global Management, LLC and its
subsidiaries merged with and into CEC Entertainment, with CEC Entertainment surviving the merger (“the Merger”),
four
putative shareholder class actions were filed in the District Court of Shawnee County, Kansas, on behalf of purported stockholders of CEC Entertainment, against A.P. VIII Queso Holdings, L.P., CEC Entertainment, CEC Entertainment's directors, Apollo and Merger Sub (as defined in the Merger Agreement), in connection with the Merger Agreement and the transactions contemplated thereby. These actions were consolidated into one action (the “Consolidated Shareholder Litigation”) in March 2014, and on July 21, 2015, a consolidated class action petition was filed as the operative consolidated complaint, asserting claims against CEC’s former directors, adding The Goldman Sachs Group (“Goldman Sachs”) as a defendant, and removing all Apollo entities as defendants (the “Consolidated Class Action Petition”). The Consolidated Class Action Petition alleges that CEC Entertainment’s directors breached their fiduciary duties to CEC Entertainment’s stockholders in connection with their consideration and approval of the Merger Agreement by, among other things, conducting a deficient sales process, agreeing to an inadequate tender price, agreeing to certain provisions in the Merger Agreement, and filing materially deficient disclosures regarding the transaction. The Consolidated Class Action Petition also alleges that
two
members of CEC Entertainment’s board who also served as the senior managers of CEC Entertainment had material conflicts of interest and that Goldman Sachs aided and abetted the board’s breaches as a result of various conflicts of interest facing the bank. The Consolidated Class Action Petition seeks, among other things, to recover damages, attorneys’ fees and costs. The Company assumed the defense of the Consolidated Shareholder Litigation on behalf of CEC’s named former directors and Goldman Sachs pursuant to existing indemnity agreements. On March 23, 2016, the Court conducted a hearing on the defendants’ Motion to Dismiss the Consolidated Class Action Petition and on March 1, 2017, the Special Master appointed by the Court issued a report recommending to the Court that the Consolidated Class Action Petition be dismissed. On September 9, 2018, the Court accepted the Special Master’s recommendations and dismissed the lawsuit in its entirety. On October 8, 2018, the Plaintiff in the Consolidated Shareholder Litigation filed a notice of appeal of the District Court’s decision. The parties have filed their briefs and are awaiting a setting for oral argument. While no assurance can be given as to the ultimate outcome of the consolidated matter, we currently believe that the final resolution of the action will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.
Note 15. Subsequent Events:
The Company has evaluated subsequent events through
May 14, 2019
, and determined that there have been no events that have occurred that would require adjustments to our disclosures in the consolidated financial statements except for the transaction described below:
Business Combination:
On
April 7, 2019
, Parent and Leo Holdings Corp. (“Leo”), a publicly traded special purpose acquisition company, together with Parent’s controlling stockholder, an entity owned by funds managed by affiliates of Apollo, entered into a Business Combination Agreement (the “Leo Merger Agreement”). Also concurrent with the closing of the transaction, Leo will domesticate as a Delaware corporation, following which Parent will merge with and into Leo with the result that the Company will become a wholly-owned subsidiary of Leo, which will be renamed Chuck E. Cheese Brands Inc. (the “Business Combination”). Concurrent with the consummation of the Business Combination, additional investors will purchase
$100 million
of common stock of Leo in a private placement. After giving effect to any redemptions by the public shareholders of Leo, the balance of the approximately
$200 million
in cash held in Leo Holdings’ trust account, together with the
$100 million
in private placement proceeds, will be used to pay transaction expenses and de-leverage the Company’s existing capital structure by repaying all, or substantially all, of the
$255 million
senior notes (see Note 6. “Indebtedness and Interest Expense -Senior Unsecured Debt”). It is expected that existing shareholders including funds managed by affiliates of Apollo, will hold an approximately
51%
stake in the Company upon completion of the Business Combination.
In connection with the proposed Business Combination, including the domestication of Leo as a Delaware corporation, on
April 29, 2019
Leo filed with the SEC a registration statement on Form S-4 containing a preliminary proxy statement and a preliminary prospectus of Leo. After the registration statement is declared effective, Leo will mail a definitive proxy statement/prospectus relating to the proposed Business Combination and other relevant materials for the proposed Business Combination to its shareholders as of a record date to be established for voting on the proposed Business Combination.