UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K10-K/A
Amendment No. 1
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| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 30, 201829, 2019
OR
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| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 1-13687
CEC ENTERTAINMENT, INC.
(Exact name of registrant as specified, in its charter)
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| Kansas | | 48-0905805 |
| (State or other jurisdiction of incorporation or organization) | | (IRS Employer Identification No.) |
1707 Market Place Blvd, Suite 200 Irving, Texas | | 75063 |
| (Address of principal executive offices) | | (Zip Code) |
(972) 258-8507
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | | Name of each exchange on which registered |
| None | | None |
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company”in Rule 12b-2 of the Exchange Act:
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| Large accelerated filer | | ¨ | | Accelerated filer | | ¨ |
| Non-accelerated filer | | x | | Smaller reporting company | | ¨ |
| Emerging growth company | | £x | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange ActAct. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
As of July 1, 2018,June 30, 2019, the last business day of the registrant’s most recently completed second fiscal quarter, no voting or non-voting common equity of the registrant wasis held by non-affiliates.
As of February 25, 2019,March 2, 2020, an aggregate of 200 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
CEC ENTERTAINMENT, INC.
TABLE OF CONTENTS
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PART I | | |
ITEM 1. | | |
ITEM 1A. | | |
ITEM 1B. | | |
ITEM 2. | | |
ITEM 3. | | |
ITEM 4. | | |
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PART II | | |
ITEM 5. | | |
ITEM 6. | | |
ITEM 7. | | |
ITEM 7A. | | |
ITEM 8. | | |
ITEM 9. | | |
ITEM 9A. | | |
ITEM 9B. | | |
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| PART III | | |
ITEM 10. | | |
ITEM 11. | | |
ITEM 12. | | |
ITEM 13. | | |
ITEM 14. | | |
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| PART IV | | |
| ITEM 15. | | |
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Explanatory Note
CEC Entertainment, Inc. (the “Company”) is filing this Amendment No. 1 on Form 10-K/A (the “Amendment”) to its Annual Report on Form 10-K for the year ended December 29, 2019, as filed with the Securities and Exchange Commission (“SEC”) on March 12, 2020 (the “Original Form 10-K”), in accordance with General Instruction G(3) to Form 10-K in order to provide the information required by Part III, Item 11 of Form 10-K.
In addition, as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, new certifications by our principal executive officer and principal financial officer are filed as exhibits to this Amendment under Item 15 of Part IV hereof.
Except for the information described above, the Amendment does not amend or otherwise update any other information in the Original Form 10-K, including without limitation, the consolidated financial statements, and speaks of the filing date of our Original Form 10-K. Events occurring after the date of the Original Form 10-K or other disclosures necessary to reflect subsequent events have been or will be addressed in other reports filed with the SEC subsequent to the date of the Original Form 10-K.
As used inthroughout this report,Amendment, the terms “CEC Entertainment,” “we,” “Company,” “us,” and “our”“our,” refer to CEC Entertainment, Inc. and its subsidiaries.
Cautionary Statement Regarding Forward-Looking Statements
This report contains forward-looking statements, which involve risks and uncertainties. These forward-looking statements are generally identified by the use of forward-looking terminology, including the terms “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would” and, in each case, their negative or other various or comparable terminology. All statements other than statements of historical facts contained in this report, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. The forward-lookingForward-looking statements are contained principallymade based on management’s current expectations and beliefs concerning future events and, therefore, involve a number of assumptions, risks and uncertainties, including the risk factors described in Part I, Item 1. “Business”, Part 1, Item 1A. “Risk Factors” and Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report onthe Company’s Original Form 10-K and include, among other things,filed with the SEC on March 12, 2020. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ from those anticipated, estimated or expected. There are a number of important factors that could cause actual results or events to differ materially from those indicated by such forward-looking statements, relatingincluding but not limited to:
our strategy, outlook and growth prospects;
our operational and financial targets and dividend policy;
our planned expansion of the venue base and the implementation of the new design in our existing venues;
general economic trends and trends in the industry and markets; and
the competitive environment in which we operate.
These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Important factors that could cause our results to vary from expectations include, but are not limited to:
negative publicity and changes in consumer preference;
our ability to successfully expand and update our current venue base;
our ability to successfully implement our marketing strategy;
our ability to compete effectively in an environment of intense competition;
our ability to weather economic uncertainty and changes in consumer discretionary spending;
increases in food, labor and other operating costs;
the impact of labor scheduling legislation;
the impact of public health issues, including the novel coronavirus that has disrupted the Company’s operations since February 2020;
our ability to successfully open international franchises and to operate under the United StatesU.S. and foreign anti-corruption laws that govern those international ventures;
risks related to our substantial indebtedness;
failure of our information technology systems to support our current and growing businesses;
disruptions to our commodity distribution system;
our dependence on third-party vendors to provide us with sufficient quantities of new entertainment-related equipment, prizes and merchandise at acceptable prices;
risks from product liability claims and product recalls;
the impact of governmental laws and regulations and the outcomes of legal proceedings;
potential liability under certain state property laws;
fluctuations in our financial results due to new venue openings;
local conditions, natural disasters, terrorist attacks and other events and public health issues;issues, including those outside the United States;
the seasonality of our business;
inadequate insurance coverage;
labor shortages and immigration reform;
loss of certain personnel;
our ability to adequately protect our trademarks or other proprietary rights;
our ability to pay our fixed rental payments;
our ability to successfully integrate the operations of companies we acquire;
impairment charges for goodwill, indefinite-lived intangible assets or other long-lived assets;
our ability to successfully integrate the operations of companies we acquire;
our failure to maintain adequate internal controls over our financial and management systems; and
other risks, uncertainties and factors set forth in Part I, Item 1A. “Risk Factors.”Factors” of the Company’s Original Form 10-K filed with the SEC on March 12, 2020 and updated in Item 8.01 “Other Events - Risk Factor Update” of the Company’s Form 8-K filed with the SEC on March 27, 2020.
The forward-looking statements made in this report reflect our views with respect to future events as of the date of this report and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, undue reliance should not be placed on these forward-looking statements. These forward-looking statements represent our estimates and assumptions only as of the date of this report and, except as required by law, we undertake no obligation to update or review publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this report. We anticipate that subsequent events and developments will cause our views to change. This report should be read completely and with the understanding that our actual future results may be materially different from what we expect. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may undertake. We qualify all of our forward-looking statements by these cautionary statements.
PART IITEM 11. Executive and Director Compensation
ITEM 1. Business.
Company Overview
We believe we are a leading family entertainment and dining company, focused on providing an exciting, fun-filled play and food experience for children and parents alike.We develop, operate and franchise family dining and entertainment centers (also referred to“emerging growth company” as “venues”)defined under the names “Chuck E. Cheese’s” (“Where A Kid Can Be A Kid”) and “Peter Piper Pizza”(“Pizza Made Fresh, Families Made Happy”).Jumpstart Our venues deliver a lively, kid-friendly atmosphere and feature a broad array of entertainment offerings including arcade-style and skill-oriented games, rides, live entertainment shows, and other attractions, with the opportunity for our guests to win tickets that they can redeem for prizes. We combine this memorable entertainment experience with a broad and creative menu that combines kid-friendly classics as well as a selection of sophisticated options for adults. We offer families a highly compelling value proposition, where a family of four, for as little as $9 per person, can dine at Chuck E. Cheese's for food, drinks and entertainment, which we believe to be significantly lower than comparable offerings at both casual dining and entertainment alternatives. We believe the combination of wholesome entertainment, family dining and a strong value proposition creates a highly differentiated experience, which appeals to our diverse customer base.We operate 554 venues and have 196 venues operating under franchise arrangements across 47 states and 14 foreign countries and territories as of December 30, 2018.
In Fiscal 2018, we generated $896.1 million in revenue, $20.5 million of net loss and $175.2 million in Adjusted EBITDA. See Item 6. “Selected Financial Data - Non-GAAP Financial Measures” for additional information about Adjusted EBITDA, a reconciliation of net income to Adjusted EBITDA and the calculation of Adjusted EBITDA Margin.
We have developed iconic brands and a highly loyal customer base through our more than 40-year commitment to being a family-fun and entertainment company. Over the last few years,Business Startups (JOBS) Act. As such, we have invested in revitalizing our guest experience, revamping our menu offering, modifying our marketing message, and reinvigorating our corporate culture. We have made corresponding investments in technology, staff training, and our physical assets. We believe these significant investments position our Company for sustained growth inopted to meet the future.
Our Brands
Chuck E. Cheese's: Where A Kid Can Be A Kid. Chuck E. Cheese's was founded in 1977 and is a highly recognized brand that uniquely appeals to our primary customer basedisclosure requirements of families with children between 2 and 12 yearsItem 402 of age. Chuck E. Cheese, our iconic, energetic mouse mascot, performs music and entertainment shows along with his friends,Regulation S-K by providing free entertainment to our guests and driving strong brand recognition. Chuck E. Cheese's venues feature an open and bright setting, which creates an inviting atmosphere for kids and a good line of sight for parents. Showrooms include approximately 75 games, rides and attractions for kids of all ages, including classic skill games, such as arcade basketball, Skee-Ball and Whack-a-Mole, as well as the Ticket Blaster machine where birthday guests can grab as many tickets as possible in 30 seconds. In the third quarter of 2018 we launched All You Can Play (“AYCP”), a first-of-its-kind gaming experience that allows kids access to play every game at Chuck E. Cheese’s as many times as they want on any day, without any restrictions, in all our domestic Company-operated Chuck E. Cheese’s venues. Our menu features fresh, hand-made pizza, sandwiches, boneless and bone-in chicken wings, desserts and beverages, including beer and wine. We also offer high-energy musical entertainment and live performances featuring our iconic Chuck E. Cheese character with frequent appearances on our showroom and gameroom floor. As of December 30, 2018, there were 606 Chuck E. Cheese's locations in 47 states and 14 foreign countries and territories, of which 515 are Company-operated.
Peter Piper Pizza: Pizza Made Fresh, Families Made Happy. Peter Piper Pizza serves fresh, high-quality handcrafted food, craft beer and wine, and offers state-of-the-art games for all ages. Venues feature a bold design and contemporary layout, with open kitchens revealing much of the handcrafted food preparation, such as fresh mozzarella being shredded off the block, vegetables being hand-chopped, wings being hand-tossed and our Certified Dough Masters crafting pizzas with made-from-scratch dough. Our large, open dining areas provide an enjoyable atmosphere for families and group events, with attentive staff dedicated to providing an enjoyable and memorable experience to each guest. As of December 30, 2018, there were 144 Peter Piper Pizza locations in the United States (also referred to as “U.S.”) and Mexico, of which 39 are Company-operated.
We believe Peter Piper Pizza is complementary to Chuck E. Cheese's, offering guests a pizza-anchored menu and entertainment in ways that create very different experiences from Chuck E. Cheese's. Peter Piper Pizza is a food-first experience with more sophisticated food offerings (e.g., sriracha pizzas) and a décor/layout package that creates morereduced disclosures required of a neighborhood pizzeria feel for guests. While“smaller reporting company”as such term is defined under the venues offer games, the game packages target older children and are generally
placed in the backSecurities Act of the restaurant behind a glass wall to protect the dining experience for adults. With this approach, Peter Piper Pizza is not only popular with families, but also attracts a guest base that includes many adults without children. In addition to everyday visits for the excellent food, adults without families are common customers for the day-time buffet on their weekday lunch break and frequently choose Peter Piper Pizza's carryout option, which can also be ordered online.
During the fiscal year ended December 30, 2018, approximately 57% and 27% of our Company-operated venue revenue for Chuck E. Cheese's and Peter Piper Pizza, respectively, was from entertainment and merchandise. For the same period, food and beverage made up 43% and 73% of company venue revenue for Chuck E. Cheese's and Peter Piper Pizza, respectively.
Our Company has benefited from the 2014 acquisition of Peter Piper Pizza through the implementation of best corporate practices and synergies from both brands. Peter Piper Pizza has benefited from lower procurement costs under CEC Entertainment's ownership,1933, as Chuck E. Cheese's is one of the largest purchasers of arcade games in the United States. We believe the combination of Chuck E. Cheese's and Peter Piper Pizza positions our brands for sustained growth through the realization of synergies and further implementation of best corporate practices across our brands.amended.
Although these brands are complementary in many ways, we believe that these are distinct concepts that do not directly compete. Peter Piper Pizza operates smaller venues with a primary emphasis on food, resulting in an older customer demographic with higher frequency visits.Summary Compensation Table
Our Competitive Strengths
We attribute our success in large part to our established recognized brands, our unique and differentiated experience, our value-oriented family experience, our diversified and resilient business model and our experienced management team. Our venues are unique in that we combine a wholesome family dining offering with distinctive family-oriented games, rides, activities, shows and other entertainment alternatives, all under one roof and within convenient driving distance from our guests’ homes. Many of our high quality entertainment offerings, including all of our live and interactive shows in Chuck E. Cheese’s venues, guest Wi-Fi in all our venues, and live television in our Peter Piper Pizza venues, can be experienced free of charge. We also offer our guests packaged offerings whereby they can receive a combination of food, drinks and game credits, time blocks or tokens at discounted prices. We believe that we benefit from strong and consistent demand for our entertainment offerings from families who desire high quality, safe, clean, convenient and affordable ways to spend time with their children outside of the home. Our executive management team has significant experience in the leisure, hospitality, entertainment and family dining industries and has significant expertise in operating complex, themed family entertainment businesses.
Our Strategic Plan
Our strategic plan is focused on increasing comparable venue sales, improving profitability and margins and expanding our venues domestically and internationally.
Increase Comparable Venue Sales. Our core strategy to grow comparable venue sales is achieved by protecting and
enhancing the service provided to children through a lively, kid-friendly atmosphere, while improving the experience for adults. During 2018, we delivered experience enhancements through technology investments, attractive game-play packages, new games, remodels of our venues, and menu innovation.
Recent technology investments allow us to offer more compelling offerings to a wider variety of guests:
Play Pass card system: In 2018, we completed the deployment of our proprietary Play Pass card system at all Company-operated Chuck E. Cheese’s venues. Guests can purchase “points” on reloadable plastic cards and use these cards to play our games.
AYCP: In the third quarter of 2018, we completed the roll-out of AYCP at all of our domestic Company-operated Chuck E. Cheese’s venues. This product leverages our Play Pass card system and allows guests the option to play unlimited games within a specified period of time. As of December 30, 2018, AYCP accounted for approximately 50% of our entertainment revenues.
More Tickets: We believe our guests enjoy the thrill of winning tickets and redeeming them for our merchandise. During the third quarter of 2018, we completed the roll-out of higher ticket payouts at our redemption games, coupled with a smaller adjustment to the ticket “prices” of our merchandise.
Gameplay promotions: Play Pass technology allows us to vary pricing and offerings by geography and day part within a venue. During 2018, we began offering guests promotions that included discounts during slow school days, surge pricing on select weekends and holidays, and traffic-driving deals like discounted AYCP.
Other initiatives designed to grow sales:
Remodeling our venues to provide a modern, fresh look: In 2017, we began testing a redesigned concept at seven of our Chuck E. Cheese’s venues which carefully targeted areas to improve family experience and comfort. Changes included a new exterior and signage, brighter interiors, art décor on the walls, digital menu boards, a new star dance stage, and pizza windows that allow guests to view the pizza being made. In 2018, we completed 25 remodels and have plans for 60 in 2019.
Refreshing and improving our marketing: We focus on connecting with kids via national television, gaming and promotional opportunities. We also focus on connecting with moms through national television advertising, digital advertising, cross-promotional coupons, social media, public relations and e-mail.
Improved menu offerings and birthday reservations: We continue to enhance the guest experience by introducing new menu items, attractive packaging, promotional programs and simplifying our online birthday ordering system.
“More Cheese” customer loyalty program: In the first quarter of 2018, we launched our first customer loyalty program where guests can earn awards and discounts based on purchases.
Finally, we believe that we can modify pricing, couponing and packaging in select markets across the United States while still continuing to provide our guests with a strong value proposition when compared to other family dining-entertainment options.
Improve Profitability and Margins. Our business model benefits from substantial operating leverage, enabling us to drive margin improvement. We continuously focus on delivering financial performance through expense rationalization across all of our venues and functions. We believe that the deployment of best corporate practices across each of our brands and our corporate functions will yield continued margin improvement. Our general managers at our venues and our corporate management staff typically have revenue, profit and customer satisfaction incentives, which foster a strict focus on both providing a high-quality experience for our guests and expense control. Additionally, we have implemented several new technology investments over the past three years that we believe will drive continued cost savings. These investments include our enhanced labor management tool, a system-wide upgrade of our point-of-sale terminals and an improved venue inventory management system that provides additional visibility into food cost measurements and automates our replenishment cycles. These initiatives have generated cost efficiencies in a number of key areas, including labor, supplies, food and general and administrative expenses, and we expect these cost efficiencies to continue in the future.
Finally, in 2018 we re-aligned the activities of our corporate office in order to more efficiently serve our operators. We expect these efforts to result in approximately $2.5 million in annual savings.
Pursue New Venue Growth Domestically and Internationally. We have a long track record of successful new venue development and will continue to pursue a disciplined venue growth strategy in both new and existing markets where we can achieve strong cash-on-cash returns. For new venue openings, we follow a rigorous due diligence and site selection process and strategically locate our venues within convenient driving distance to large metropolitan areas. Our venues generate strong cash flow and perform consistently well across geographic regions, which demonstrates the portability of our concept to new domestic and international markets. We have a successful track record of opening new Company-operated Chuck E. Cheese's venues at attractive rates of return and believe our existing markets can support additional venues.
As of December 30, 2018, we have 109 international venues operating under franchise arrangements. We plan to grow internationally with existing and new franchise partners. In 2018, we opened 8 new venues collectively in five countries, with one new franchised Chuck E. Cheese venue and one new franchised Peter Piper Pizza venue in the United States and six new franchised Chuck E. Cheese's venues in four other countries.
See Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition, Liquidity and Capital Resources – Capital Expenditures” for more information regarding our capital initiatives and expenditures.
Overview of Operations
Food and Beverage
Each Chuck E. Cheese’s and Peter Piper Pizza venue offers a variety of pizzas, wings, appetizers, salads and desserts, as well as certain gluten-free options. Soft drinks, coffee and tea are also served, along with beer and wine in many locations. Chuck E. Cheese’s venues also offer sandwiches, and most Chuck E. Cheese’s and Peter Piper Pizza venues offer lunch buffet
options with unlimited pizza, salad, breadsticks and dessert. We continuously focus on delivering a quality-driven product and believe the quality of our food compares favorably with that of our competitors.
Food and beverage sales represented 45.3%, 47.3% and 45.8% of our Company-operated venue sales during Fiscal 2018, Fiscal 2017 and Fiscal 2016, respectively.
Entertainment and Merchandise
Each of our Chuck E. Cheese’s and Peter Piper Pizza venues has a gameroom area, which includes an array of amusement and entertainment options. These options range from classic arcade, redemption and skill games, such as air hockey, skee-ball and basketball, to rides, such as mini trains, motorcycles and various driving games. At Chuck E. Cheese’s, we also offer musical and comical entertainment that features our iconic Chuck E. Cheese character with live performances and frequent appearances on our showroom and gameroom floor, as well as ongoing entertainment featuring music videos and televised skits. Each Peter Piper Pizza venue also offers flat-screen televisions located throughout the dining area. In the first quarter of 2018, we completed the implementation of Play Pass, a new proprietary game card system, in all of our Chuck E. Cheese’s Company-operated venues. Play Pass is similar to a stored value gift card and allows guests to activate games and rides with their own personal card. In addition, in July 2018 we launched AYCP in all of our domestic Chuck E. Cheese’s Company-operated venues. AYCP, a time based play option, allows guests to play unlimited games within a block of time, increasing the number of games, tickets and prizes over Play Pass. More Tickets provides the thrill of winning a greater number of tickets on redemption games. A number of games dispense tickets that can be redeemed by guests for prize merchandise such as toys and plush items. Our guests can also purchase this merchandise directly for cash.
Entertainment and merchandise sales represented 54.7%, 52.7% and 54.2% of our Company-operated venue sales during Fiscal 2018, Fiscal 2017 and Fiscal 2016, respectively.
Franchising
As of December 30, 2018, we franchised a total of 91 Chuck E. Cheese’s venues, with 26 venues located in the United States and 65 venues located in 14 foreign countries and territories, and a total of 105 Peter Piper Pizza venues, with 61 venues located in the United States and 44 venues located in Mexico. We have 18 active development and franchise agreements to open 78 Chuck E. Cheese’s venues in 16 countries, and four signed development and franchise agreements with rights to open another 19 Peter Piper Pizza venues in Texas and one signed development and franchise agreement with rights to open another four venues in Mexico. See Part I, Item 1A. “Risk Factors” for moreThe Summary Compensation Table sets forth information regarding the risks associated with franchise development agreements.
Our standard franchise agreements grant the franchisee the rightcompensation paid to, construct and operate a venue and useawarded to, or earned by our associated trade names, trademarks and service marks in accordance with our standards and guidelines. Most of our existing Chuck E. Cheese’s franchise agreements have an initial term of 15 to 20 years and include a 10-year renewal option. Peter Piper Pizza’s franchise agreements are for a 10-year term and include a 10-year successor agreement on Peter Piper Pizza’s then standard form of agreement. The standard franchise agreement provides us with a right of first refusal should a franchisee decide to sell a venue. We also enter into area development agreements, which grant franchisees exclusive rights to open a specified number of venues in a designated geographic area within a specified period of time. In addition to initial franchise and area development fees, the franchisee is charged a continuing monthly royalty fee equal to a percentage of its gross monthly sales, generally up to 6%, which varies by location and brand.
In 1985, weChief Executive Officer and our Chuck E. Cheese’s franchisees formed the International Association of CEC Entertainment, Inc. (the “Association”) to discuss and consider matters of common interest relating to the operation of Company-operated and franchised Chuck E. Cheese’s venues. Routine business matters of the Association are conducted by a board of directors, composed of five members appointed by us and five members elected by the franchisees. The Association serves as an advisory council that, amongtwo other responsibilities, oversees expenditures, including (a) the costs of development, purchasing and placement of advertising programs, including websites; (b) the costs to develop and improve audio-visual and animated entertainment attractions, as well as the development and implementation of new entertainment concepts; and (c) the purchase of national network television advertising.
The franchise agreements governing existing franchised Chuck E. Cheese’smost highly compensated executive officers in the United States currently require each franchisee to pay to the Association a monthly contribution equal to a certain percentage of its gross monthly sales. Additionally, under these franchise agreements, we are required, with respect to Chuck E. Cheese’s Company-operated venues, to contribute at the same rates, or at higher ratesFiscal 2019 for services rendered in certain instances, as our franchisees. We and our franchisees are also required to spend minimum amounts on local advertising and could be required to make additional contributions to fund any deficits that may be incurred by the Association. Certain franchise agreements governing existing franchised Chuck E. Cheese’s outside of the United States currently require each franchisee to pay a certain percentage of their gross monthly sales to the Association to fund various advertising, media, and entertainment costs.
We do not currently have any advertising co-ops or a franchise advisory council with our Peter Piper Pizza franchisees, but we reserve the right to require the formation, merger or dissolution of either or both. Franchisees are required to contribute (a) 5% of weekly gross sales to be used to develop, produce, distribute and administer specific advertising, public relations and promotional programs that promote the services offered by system franchisees; and (b) 0.5% of weekly gross sales to be used to research, develop, produce, and support creative ideas and materials for use in commercial advertisements, public relations, and promotional campaigns in the United States and Mexico. We may elect at any time not to collect or maintain all or any portion of the amount contributed to fund advertising related programs and activities and, during such time that we have made such election, the monies not collected must be expended by the franchisees in their own markets. In addition, we are required, with respect to Company-operated Peter Piper Pizza restaurants, to contribute funds on the same basis as our franchisees.
Royalties, franchise and area development fees and other miscellaneous franchise income represented 2.3%, 2.0% and 2.0% of our total consolidated revenuescapacities during Fiscal 2018, Fiscal 20172019 and Fiscal 2016, respectively.
Foreign Operations
As of December 30, 2018, we operated a total of 11 Company-operated venues in Canada. Our Canadian venues generated total revenues of $15.8 million, $16.6 million, and $15.6 million during the fiscal years ended December 30, 2018, December 31, 2017 and January 1, 2017, respectively, representing 1.8%, 1.9% and 1.7% of our total consolidated revenues, respectively. All of our other international venues are franchised.
These foreign activities, along with our international franchisees, are subject to various risks of conducting business in a foreign country, including fluctuations in foreign currency exchange rates, laws and regulations and economic and political stability. See “Risk Factors” for more information regarding the risks associated with operations located in foreign markets.
Third-Party Suppliers
We use a network of 15 distribution centers operated by a single company to distribute most of the food products and supplies used in our domestic Chuck E. Cheese’s branded venues, five distribution centers for our Canadian Chuck E. Cheese’s branded venues, and four distribution centers for our Peter Piper Pizza branded venues. We believe that alternative third-party distributors are available for our products and supplies, but we may incur additional costs if we are required to replace our distributors or obtain the necessary products and supplies from other suppliers.
We have not entered into any hedging arrangements to reduce our exposure to commodity price volatility; however, we typically enter into short-term purchasing arrangements, which may contain pricing designed to minimize the impact of commodity price fluctuations.
We procure games, rides and other entertainment-related equipment from a limited number of suppliers, some of which are located in China. The number of suppliers from which we purchase games, rides and other entertainment-related equipment, redemption prizes and merchandise has declined due to industry consolidation over the past several years. See Part I, Item 1A. “Risk Factors” for more information regarding the risks associated with our third-party suppliers.
Competition
The family dining and entertainment industries are highly competitive, with a number of major national and regional chains operating in each of these markets. In this regard, we compete for customers on the basis of (a) our name recognition; (b) the price, quality, variety, and perceived value of our food and entertainment offerings; (c) the quality of our customer service; and (d) the convenience and attractiveness of our venues. Although there are other concepts that presently utilize the combined family dining and entertainment format, these competitors primarily operate on a regional or market-by-market basis. To a lesser extent, we also compete directly and/or indirectly with other dining and entertainment formats, including full-service and quick-service restaurants appealing to families with young children, the quick service pizza segment, movie theaters, themed amusement attractions, and other entertainment facilities for children.
Intellectual Property
We own various trademarks and proprietary rights, including Chuck E. Cheese’s®, Where A Kid Can Be A Kid®, Peter Piper Pizza® and the Chuck E. Cheese character image used in connection with our business, which have been registered with the appropriate patent and trademark offices. The duration of such trademarks is unlimited, subject to continued use and renewal. We believe that we hold the necessary rights for protection of the trademarks considered essential to conduct our business. We believe our trade names and our ownership of trademarks and proprietary rights in the names and character likenesses featured in the operation of our venues provide us with an important competitive advantage, and we actively seek to protect our interests in such property.
Seasonality
Our operating results fluctuate seasonally. We typically generate our highest sales volumes during the first quarter of each fiscal year due to the timing of school vacations, holidays and changing weather conditions. School operating schedules, holidays and weather conditions may also affect our sales volumes in some operating regions differently than others. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for our full fiscal year.
Government Regulation
We and our franchisees are subject to various federal, state and local laws and regulations affecting the development and operation of Chuck E. Cheese’s and Peter Piper Pizza venues. For a discussion of government regulation risks to our business, see Part I, Item 1A. “Risk Factors.”
Employees
As of December 30, 2018, we employed approximately 16,800 employees, including approximately 16,400 in the operation of our Company-operated venues and approximately 400 in our corporate offices. Our employees do not belong to any union or collective bargaining group. We believe that our employee relations are satisfactory, and we have not experienced any work stoppages at any of our venues.
Each Chuck E. Cheese’s and Peter Piper Pizza venue typically employs a general manager, senior assistant manager, one or more assistant managers, an electronics specialist who is responsible for repair and maintenance of the show, games and rides, and approximately 25 to 45 food preparation and service employees, many of whom work part-time. Our staffing requirements are seasonal, and the number of people we employ at our venues will fluctuate throughout the year.
Available Information
We make financial information, news releases and other information available on our corporate website at www.chuckecheese.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website as soon as reasonably practicable after we electronically file these reports and amendments, or furnish them to, the United States Securities and Exchange Commission (“SEC”). The information on our website is not, and shall not be deemed to be, part of this report or incorporated into any other filings we make with the SEC. The reports and the other documents we file with the SEC are available on the SEC’s website at www.sec.gov.
ITEM 1A. Risk Factors.
Our business operations and the implementation of our business strategy are subject to significant risks inherent in our business, including, without limitation, the risks and uncertainties described below. The occurrence of any one or more of the risks or uncertainties described below and elsewhere in this Annual Report on Form 10-K could have a material effect on our consolidated financial condition, results of operations and cash flows. Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be materially different.
Risks Related to Our Business and Industry
Negative publicity concerning food quality, health, general safety or other issues, and changes in consumer preferences, could negatively affect our brand image and reputation and adversely affect our consolidated financial results.
Food service businesses can be adversely affected by litigation and complaints from guests, consumer groups, or government authorities, resulting from food quality, illness, injury or other health concerns, or operating issues stemming from one venue or a limited number of venues. Publicity concerning food-borne illnesses, injuries caused by food tampering, and general safety issues could negatively affect our operations, reputation and brand. Families with young children may be highly sensitive to adverse publicity that may arise from an actual or perceived negative event within one or more of our venues. We have, from time to time, received negative publicity related to altercations and other safety-related incidents in certain of our venues. There can be no assurance that in the future we will not experience negative publicity regarding one or more of our venues, and the existence of negative publicity could adversely affect our brand image and reputation with our guests and our consolidated financial results.
The speed at which negative publicity can be disseminated has increased dramatically with electronic communication, including social media. Many social media platforms allow for users to immediately publish content without checking the accuracy of the content posted. If we are unable to quickly and effectively respond to such
information, we may suffer declines in guest traffic, which could adversely impact our consolidated financial results.
In addition, our industry is affected by consumer preferences and perceptions. Changes in prevailing health or dietary preferences and perceptions may cause consumers to avoid certain products we offer in favor of alternative or healthier foods. If consumer eating habits change significantly and we are unable to respond with appropriate menu offerings, it could adversely affect our brand image and consolidated financial results.
Our business may also be impacted by certain public health issues including epidemics, pandemics and the rapid spread of certain illnesses and contagious diseases. To the extent that extensive publicity relating to such events causes our guests to feel uncomfortable visiting or taking their children to public locations, particularly locations with a large number of children, due to a perceived risk of exposure to a public health issue, we could experience a reduction in guest traffic, which could adversely affect our consolidated financial results.
If we are unable to successfully open new venues or appropriately update and evolve our current venue base, our business and our consolidated financial results could be adversely affected.
Our ability to increase revenues and improve financial results depends, to a significant degree, on our ability to successfully implement and refine our long-term growth strategy. As part of our long-term growth strategy, we plan to upgrade the games, rides and entertainment in most of our existing venues, remodel certain of our existing venues and open additional new venues in selected markets.
The opening and success of new Chuck E. Cheese's and Peter Piper Pizza venues is dependent on various factors, including but not limited to the availability of suitable sites, the negotiation of acceptable lease terms for such locations, our ability to meet construction schedules, our ability to manage such expansion and hire and train personnel to manage the new venues, our ability to obtain, for acceptable cost, building and other permits and approvals including liquor licenses, the potential cannibalization of sales at any adjacent venues located in the market, as well as general economic and business conditions. Our ability to successfully open new venues or remodel, expand or upgrade the entertainment at existing venues will also depend upon the availability of sufficient capital for such purposes, including operating cash flow, our existing credit facility, future debt financings, future equity offerings, or a combination thereof. There can also be no assurance that we will be successful in opening and operating the number of anticipated new venues on a timely or profitable basis. There can be no assurance that we can continue to successfully remodel or expand our existing facilities or upgrade the games and entertainment or obtain a reasonable return on such investments.
Our growth is also dependent on our ability to continually evolve and update our business model to anticipate and respond to changing customer preferences and competitive conditions. There can be no assurance that we will be able to successfully anticipate changes in competitive conditions or customer preferences or that the market will accept our business model. If revenues and/or operating results are lower than our current estimates, we may incur additional charges for asset impairments in the future, which could adversely impact our consolidated financial results. Additionally, we incur significant costs each time we open a new venue and other expenses when we relocate or remodel existing venues. The expenses of opening, relocating, or remodeling any of our venues may be higher than anticipated. If we are unable to open or are delayed in opening new or relocated venues, we may incur significant costs, which could adversely affect our consolidated financial results. If we are unable to remodel or are delayed in remodeling venues, we may incur significant costs, which could adversely affect our business and our consolidated financial results.
We may not be successful in the implementation of our marketing strategy, which could adversely affect our business and our consolidated financial results.
Our long-term growth is dependent on the success of strategic initiatives to effectively market and advertise our concept to our target audience. In recent years, we have made significant changes to our marketing and advertising strategy, including (a) the introduction of an updated Chuck E. Cheese character; (b) a change in the mix of our media expenditures; (c) an increase in advertising directed to parents; and (d) promoting our brand and reasons to visit on television and online. There can be no assurance that these changes to our traditional media strategy, which was heavily weighted towards kids' television advertising, free-standing inserts in newspapers, and significant couponing, will be effective at reaching customers or be accepted by customers. If we are not effective in reaching our target audience with our new marketing and advertising strategy or if these changes are not accepted by guests, we may incur additional advertising costs, and our business and our consolidated financial results could be adversely affected.
The restaurant and entertainment industries are highly competitive, and that competition could harm our business and our consolidated financial results.
We believe that our combined restaurant and entertainment center concept puts us in a niche, which combines elements of both the restaurant and entertainment industries. As a result, we compete with entities in both industries. The family dining industry and the entertainment industry are highly competitive, with a number of major national and regional
chains operating in each of these spaces. Although other restaurant brands presently utilize the concept of combined family dining-entertainment operations, we believe these competitors operate primarily on a local, regional or market-by-market basis. Within the traditional restaurant sector, we compete with other casual dining restaurants on a nationwide basis with respect to price, quality, and speed of service; type and quality of food; personnel; the number and location of restaurants; attractiveness of facilities; effectiveness of advertising; and marketing programs and new product development. To a lesser extent, our competition also includes quick service restaurants with respect to pricing, service, experience, and perceived value. Within the entertainment sector, we compete with movie theaters, bowling alleys, theme parks, and other family-oriented concepts on a nationwide basis with respect to perceived value and overall experience. Additionally, children's interests and opportunities for entertainment continue to expand. If we are unable to successfully evolve our concept, including new food and entertainment offerings, we may lose market share to our competition. These competitive market conditions, including the emergence of significant new competition, could adversely affect our business and our consolidated financial results.
Economic uncertainty and changes in consumer discretionary spending could reduce sales at our venues and have an adverse effect on our business and our consolidated financial results.
Purchases at our venues are discretionary for consumers; therefore, our consolidated results of operations are susceptible to economic slowdowns and recessions. We are dependent in particular upon discretionary spending by consumers living in the communities in which our venues are located. A significant portion of our venues are clustered in certain geographic areas. As of December 30, 2018, 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 135 Peter Piper Pizza venues are located in Arizona, Texas, and Mexico (34 are Company-operated and 101 are franchised locations). A significant weakening in the local economies of these geographic areas, or any of the areas in which our venues are located, may cause consumers to curtail discretionary spending, which in turn could reduce our Company venue sales and have an adverse effect on our business and our consolidated financial results.
The future performance of the United States and global economies is uncertain and is directly affected by numerous national and global financial, political and other factors that are beyond our control. Our target market of families with young children can be highly sensitive to adverse economic conditions, which may impact their desire to spend discretionary dollars, resulting in lower customer traffic levels in our venues. Increases in credit card debt, home mortgage and other borrowing costs and declines in housing values could further weaken the United States, Mexican or Canadian economies, leading to a further decrease in discretionary consumer spending. In addition, reduced consumer confidence as a result of a recession, job losses, home foreclosures, investment losses in the financial markets, personal bankruptcies, and reduced access to credit may also result in lower levels of traffic to our venues. Moreover, our customer traffic may be impacted by major changes in United States fiscal policy. Also, while the current administration’s policies in many areas are still uncertain at this time, certain types of policies regarding immigration, development and investment could adversely affect our business. While there is currently a substantial lack of clarity and uncertainty around the likelihood, timing and details of any such policies and reforms, such policies and reforms may materially and adversely affect customer confidence and our business. We believe that consumers generally are more willing to make discretionary purchases, including at our venues, during periods in which favorable economic conditions prevail. Further, fluctuations in the retail price of gasoline and the potential for future increases in gasoline and other energy costs may affect consumers' disposable incomes available for entertainment and dining. Changes in consumer spending habits as a result of a recession or a reduction in consumer confidence are likely to reduce our customer traffic and sales performance, which could have an adverse effect on our business and our consolidated financial results. In addition, these economic factors could affect our level of spending on planned capital initiatives at our venues, and thereby impact our future sales, and could also result in potential asset impairments and venue closures.
Increases in food, labor, and other operating costs could adversely affect our consolidated financial results.
For the 2018 fiscal year, 45.3% of company venue sales revenue came from food and beverage sales as compared to the 54.7% of company venue sales revenue resulting from entertainment and merchandise sales. As a result, the performance of our venues is affected by changes in the costs for food products we purchase, including but not limited to cheese, dough, produce, chicken, and beef. The commodity prices for these food products vary throughout the year and may be affected by changes in supply, demand, and other factors beyond our control. We have not entered into any hedging arrangements to reduce our exposure to commodity price volatility associated with commodity prices; however, we typically enter into short-term purchasing arrangements, which may contain pricing designed to minimize the impact of commodity price fluctuations. An increase in our food costs could negatively affect our profit margins and adversely affect our consolidated financial results.
Several states and cities in which we operate venues have established a minimum wage higher than the federally-mandated minimum wage. There may be similar increases implemented in other jurisdictions in which we operate or seek to operate. Additionally, a number of our employees could be subject to changes in federal or state rules and regulations concerning increases to salary and compensation levels necessary for white collar workers to be classified as exempt in 2019 and beyond, as well as state-specific laws governing relative pay for male and female employees and/or employees of different
races and/or ethnicities and policies to establish more predictable work schedules. Such changes in the minimum wage and other wage or salary requirements could increase our labor costs and could have an adverse effect on our profit margins and our consolidated financial results.
The performance of our venues could also be adversely affected by increases in the price of utilities on which the venues depend, such as electricity and natural gas, whether as a result of inflation, shortages or interruptions in supply, or otherwise. Our business also incurs significant costs for, among other things, insurance, marketing, taxes, real estate, borrowing, and litigation, all of which could increase due to inflation, rising interest rates, changes in laws, competition, or other events beyond our control, which could have an adverse effect on our consolidated financial results.
Our strategy to open international franchised venues may not be successful and may subject us to unanticipated conditions in foreign markets, which could adversely impact our business and our ability to operate effectively in those markets.
Part of our growth strategy depends on our ability to attract new international franchisees and the ability of these franchisees to open and operate new venues on a profitable basis. As we do not have a long history of significant international growth experience, there can be no assurance that we will be able to successfully execute this strategy in the future. Delays or failures in identifying desirable franchise partners and opening new franchised venues could adversely affect our planned growth. Moreover, our franchisees depend on the availability of financing to construct and open new venues. If these franchisees experience difficulty in obtaining adequate financing, our growth strategy and franchise revenues could be adversely affected. Additionally, our growth strategy depends on the ability of our international franchisees to learn and implement our business strategy, while adapting to the local culture. There can be no assurance that the Chuck E. Cheese's and Peter Piper Pizza concepts will be accepted in targeted international markets.
Currently, our international franchisees operate venues in 14 countries. We and our franchisees are subject to the regulatory, economic, and political conditions of any foreign market in which our franchisees operate venues. Any change in the laws, regulations, and economic and political stability of these foreign markets could adversely affect our consolidated financial results. Changes in foreign markets that could affect our consolidated financial results include, but are not limited to, taxation, inflation, currency fluctuations, political instability, economic instability, war or conflicts, increased regulations and quotas, tariffs, and other protectionist measures. Additionally, our long-term growth strategy includes adding franchisees in additional foreign markets in the future. To the extent unfavorable conditions exist in the foreign markets we plan to expand into or we are unable to secure intellectual property rights sufficient to operate in such foreign markets, we and our international franchise partners may not be successful in opening the number of anticipated new venues on a timely and profitable basis. Delays or failures in opening new foreign market venue locations could adversely affect our planned growth and result in increased attendant costs.
Our business dealings with foreign franchisees and vendors are subject to United States and foreign anti-corruption law, and investigations or enforcement actions brought under such law could adversely impact our business and our ability to operate effectively in those markets.
As a business that regularly enters into negotiations and contractual relationships with franchisees and vendors located in foreign countries, we are subject to the requirements of the United States Foreign Corrupt Practices Act and other domestic and foreign laws and regulations governing such activities. Although we have a strong compliance program that includes regular training and reinforcement of our employees who represent us in dealings with foreign individuals and entities on the laws impacting such dealings, we may be faced with investigations or enforcement actions by the United States or foreign governments arising from such dealings. Responding to such investigations or enforcement actions would be costly and may divert management's attention and resources from the regular operation of our business, and together with any fines, penalties, or other actions ordered by governmental authorities, could adversely affect our business and consolidated financial results.
If we are unable to maintain and protect our information technology systems and technologies, we could suffer disruptions in our business, damage our reputation with customers, and incur substantial costs.
The operation of our business is heavily dependent upon the implementation, integrity, security, and successful functioning of our computer networks and information systems, including the point-of-sales systems in our venues, data centers that process transactions, the enterprise resource planning system, the Chuck E. Cheese and Peter Piper Pizza brand websites, the birthday reservation system, and various software applications used in our operations. In the ordinary course of our business, we also collect and store on our computer networks and information systems sensitive data, including intellectual property, our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our customers and employees. A failure of our systems to operate effectively as a result of a cyber-attack, damage to, interruption, or failure of any of these systems could result in a failure to meet our reporting obligations, material misstatements in our financial statements, or losses due to the disruption of our business operations.
These adverse situations could also lead to loss of sales or profits or cause us to incur additional development costs. While we purchase insurance coverage related to network security and privacy to limit the cost of any such failure or cyber-attack our coverage may not be sufficient to reimburse us for all of the costs we may incur in the event of a cyber-attack. Despite our efforts to secure our computer networks and information systems, security could be compromised or confidential information could be misappropriated, resulting in a loss of customers' or employees' personal information, negative publicity or harm to our business and reputation that could cause us to incur costs to reimburse third parties for damages or to pay governmental fines, or cause a decrease in guest traffic.
Any disruption of our commodity distribution system could adversely affect our business and our consolidated financial results.
We use a network of 15 distribution centers operated by a single company to distribute most of the food products and supplies used in our domestic Chuck E. Cheese's branded venues, five distribution centers for our Canadian Chuck E. Cheese’s branded venues and four distribution centers for our Peter Piper Pizza branded venues. Any failure by these distributors to adequately distribute products or supplies to our venues could increase our costs and have an adverse effect on our business and our consolidated financial results. Although we believe that alternative third-party distributors are available for our products and supplies, we may incur additional costs if we are required to replace our distributors or obtain the necessary products and supplies from other suppliers, and there can be no assurance that our business would not be disrupted.
Our procurement of games, rides, entertainment-related equipment, redemption prizes, and merchandise is dependent upon a few global providers, the loss of any of which could adversely affect our business and our consolidated financial results.
Our ability to continue to procure new games, rides, entertainment-related equipment, redemption prizes and merchandise is important to our business strategy. The number of suppliers from which we can purchase these items is limited due to industry consolidation over the past several years. To the extent that the number of suppliers continues to decline, we could be subject to risks of distribution delays, pricing pressure and lack of innovation, among other things. Furthermore, some of our suppliers are located in China, and continuing and increasing tension between the United States and Chinese governments could also result in interruptions in our ability to procure these products, which could adversely affect our business and our consolidated financial results.
We face risks with respect to product liability claims and product recalls, which could adversely affect our reputation, business and consolidated financial results.
We purchase merchandise from third parties and offer this merchandise to customers in exchange for prize tickets or for sale. This merchandise could be subject to recalls and other actions by regulatory authorities. Changes in laws and regulations could also impact the type of merchandise we offer to our customers. We have experienced, and may in the future experience, issues that result in recalls of merchandise. In addition, individuals may in the future assert claims or file lawsuits alleging that they have sustained injuries from third-party merchandise offered by us. There is a risk that these claims or liabilities may exceed, or fall outside of the scope of, our insurance coverage. Any of the issues mentioned above could result in damage to our reputation, diversion of development and management resources, or reduced sales and increased costs, any of which could adversely affect our business and our consolidated financial results.
We are subject to various government regulations, which could adversely affect our business and our consolidated financial results.
The development and operation of our venues are subject to various federal, state, and local laws and regulations in many areas of our business, including but not limited to those that impose restrictions, levy a fee or tax, or require a permit, license or other regulatory approval, and those that relate to the operation of redemption, video, and arcade games and rides, the preparation of food and beverages, the sale and service of alcoholic beverages, and building and zoning requirements. Difficulties or failure in obtaining required permits, licenses, or other regulatory approvals could delay or prevent the opening of a new venue, remodel or expansion, and the suspension of, or inability to renew, a license or permit could interrupt operations at an existing venue.
We are also subject to laws and regulations governing our relationship with our employees, including those related to minimum wage requirements, exempt status, overtime, health insurance mandates, working and safety conditions, immigration status requirements, child labor, non- discrimination, and scheduling practices. Additionally, changes in federal labor laws, including card verification regulations, could result in portions of our workforce being subjected to greater organized labor influence, which could result in an increase to our labor costs. A significant portion of our venue personnel are paid at minimum wage rates established by federal, state and municipal law. Increases in the minimum wage result in higher labor costs, which may be only partially offset by price increases and operational efficiencies. We are also subject to certain laws and regulations that govern our handling of customers' personal information. A failure to protect the integrity and security of our customers' personal information could expose us to litigation and regulatory enforcement action, as well as materially damage
our reputation.
We are also subject to the rules and regulations of the Federal Trade Commission and various state laws regulating the offer and sale of franchises. The Federal Trade Commission and various state laws require that we furnish a franchise disclosure document containing certain information to prospective franchisees, and a number of states require registration of the franchise disclosure document with state authorities. State laws that regulate the franchisor-franchisee relationship presently exist in a substantial number of states, and bills have been introduced in Congress from time to time that would provide for federal regulation of the franchisor-franchisee relationship. The state laws often limit, among other things, the duration and scope of non-competition provisions, the ability of a franchisor to terminate or refuse to renew a franchise and the ability of a franchisor to designate sources of supply. We believe that our franchise disclosure document, together with any applicable state versions or supplements, and franchising procedures, comply in all material respects with both the Federal Trade Commission guidelines and all applicable state laws regulating franchising in those states in which we have offered franchises.
While we endeavor to comply with all applicable laws and regulations, governmental and regulatory bodies may change such laws and regulations in the future, which may require us to incur substantial cost increases. If we fail to comply with applicable laws and regulations, we may be subject to various sanctions, penalties, fines and/or lawsuits, or may be required to cease operations until we achieve compliance, which could have an adverse effect on our business and our consolidated financial results.
We may face litigation risks from customers, employees, franchisees and other third parties in the ordinary course of business, which could adversely affect our business and our consolidated financial results.
Our business is subject to the risk of litigation by customers, current and former employees, franchisees, suppliers, governmental entities, stockholders, or others, through private actions, class actions, administrative proceedings, regulatory actions, or other litigation. The outcome of litigation, particularly class action lawsuits and regulatory actions, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to such lawsuits may remain unknown for substantial periods of time. The cost to defend future litigation may be significant. There may also be adverse publicity associated with litigation that could decrease customer acceptance of our food or entertainment offerings, regardless of whether the allegations are valid or whether we are ultimately found liable. From time to time, we are also involved in lawsuits with respect to alleged infringement of third party intellectual property rights, as well as challenges to our intellectual property.
We are also subject to risks from litigation and regulatory action regarding advertising to our market of children between the ages of two and 12 years old. In addition, since certain of our venues serve alcoholic beverages, we are subject to “dram shop” statutes. These statutes generally allow a person injured by an intoxicated person to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. Although we believe we are adequately protected against such losses by insurance, a judgment against us under a “dram shop” statute in excess of the liability covered by insurance could have an adverse effect on our business and our consolidated financial results.
We face potential liability with our gift cards and Play Pass cards under the property laws of some states.
Our gift cards are used in our venues to purchase food, beverages, merchandise, game credits and time blocks, and our Play Pass cards are loaded with game credits purchased by our guests. These cards may be considered stored value cards by certain states in accordance with their abandoned and unclaimed property laws. These laws may require us to remit cash amounts equal to all or a designated portion of the unredeemed balance of stored value cards based on certain criteria and the length of time that the cards are inactive or dormant. Our gift cards and Play Pass cards do not expire and do not incur service fees. We recognize income from unredeemed cards when we determine that the likelihood of the cards being redeemed is remote, and we believe remittance pursuant to abandoned and unclaimed property laws is not required.
The analysis of the potential application of the abandoned and unclaimed property laws to our gift cards and Play Pass cards is complex and involves an analysis of constitutional issues, statutory provisions, case law and factual matters. In the event that one or more states change their existing abandoned and unclaimed property laws or successfully challenges our position on the application of its abandoned and unclaimed property laws or if the estimates that we use in projecting the likelihood of the cards being redeemed prove to be inaccurate, our liabilities for deferred revenue and revenue recognition with respect to unredeemed gift cards and Play Pass cards may materially differ from the amounts reported in our financial statements and our net income could be materially and adversely affected.
Our business may be adversely affected by local conditions, natural disasters, terrorist attacks and other events.
Certain regions in which our facilities (including our support center, venues, and warehouses) are located may be subject to adverse local conditions, natural disasters, terrorist attacks and other events. Severe weather, such as heavy snowfall,
ice, or extreme temperatures, may discourage or restrict customers in affected regions from traveling to our venues or prevent employees from performing their work in our facilities, which could adversely affect our sales. If severe weather conditions occur during the first quarter of the year, the adverse impact to our sales and profitability could be even greater than at other times during the year because we typically generate our highest sales and profits during the first quarter. Natural disasters including tornadoes, hurricanes, floods and earthquakes may damage our facilities, which may adversely affect our business and our consolidated financial results.
Our business is seasonal, and quarterly results may fluctuate significantly as a result of this seasonality.
We have experienced, and in the future could experience, quarterly variations in our consolidated revenues and profitability as a result of a variety of factors, many of which are outside our control, including the timing of school vacations, holidays, and changing weather conditions. We typically generate our highest sales volumes and earnings in the first quarter of each fiscal year. If there is a material decrease in the customer traffic in our venues during the first quarter of the year due to unusually cold or inclement weather or other circumstances outside of our control, our operating results could be materially, adversely affected for that quarter and further, may have an adverse effect on our consolidated financial results for the fiscal year.
Public health issues could adversely affect our consolidated financial results.
Our business may be impacted by certain public health issues including epidemics, pandemics and the rapid spread of certain illnesses and contagious diseases. To the extent that our customers feel uncomfortable visiting public locations, particularly locations with a large number of children, due to a perceived risk of exposure to a public health issue, we could experience a reduction in customer traffic, which could adversely affect our consolidated financial results.
Our current insurance policies may not provide adequate levels of coverage against all claims, and we could incur losses that are not covered by our insurance, which could adversely affect our business and our consolidated financial results.
We have procured and maintain insurance coverage at levels that we believe are typical for a business of our type and size. However, we could experience a loss that either cannot be insured against or is not commercially reasonable to insure. For example, insurance covering liability for violations of wage and hour laws is generally not available. Under certain circumstances, plaintiffs may file certain types of claims that may not be covered by insurance, or by sufficient insurance to cover the entire amount of a judgment. In some cases, plaintiffs may seek punitive damages, which may also not be covered by insurance. Losses such as these, if they occur, could adversely affect our business and our consolidated financial results.
We may face labor shortages that could slow our growth and adversely impact our ability to operate our venues.
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 venues 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 venues or adversely impact our existing venues. Any such delays, material increases in employee turnover rates in existing venues 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.
Immigration reform continues to attract significant attention in the public arena and the United States Congress. If new immigration legislation is enacted, such laws may contain provisions that could increase our costs in recruiting, training and retaining employees. Also, although our hiring practices comply with the requirements of federal law in reviewing employees' citizenship or authority to work in the United States, increased enforcement efforts with respect to existing immigration laws by governmental authorities may disrupt a portion of our workforce or our operations at one or more of our venues, thereby negatively impacting our business.
We are dependent on the service of certain key executives, and the loss of any of these personnel could harm our business.
Our success significantly depends on the continued employment and performance of our key executives. We have employment agreements with certain of our key executives. However, we cannot prevent our key executives from terminating their employment with us. Losing the services of any of our key executives could harm our business until a suitable replacement is hired, and such replacement may not have equal experience or capabilities. Additionally, economic conditions or concerted overtures by competitors may lead to resignations of significant numbers of members of our operations management team, which may also negatively impact our consolidated financial results in the short term.
Failure to establish and maintain effective internal control over financial reporting could have a material adverse effect on our business and operating results.
Maintaining effective internal control over financial reporting is necessary for us to produce reliable financial reports and is important in helping to prevent mistakes in our financial statements and 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 management or 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. Any such failure could result in a loss of investor confidence in the reliability of our financial statements, have a material adverse effect on our business, financial condition and results of operations and the fair value of our common stock.
We may not be able to adequately protect our trademarks or other proprietary rights, which could have an adverse effect on our business and our consolidated financial results.
We own certain common law trademark rights and a number of federal and international trademark and service mark registrations, internet domain name registrations and other proprietary rights relating to our operations. We believe that our trademarks and other proprietary rights are important to our success and our competitive position. We therefore devote appropriate resources to the protection of our trademarks and proprietary rights. However, the protective actions that we take may not be enough to prevent unauthorized usage or imitation by others, which could harm our image, brand, or competitive position, and if we commence litigation to enforce our rights, we may incur significant legal fees.
There can be no assurance that third parties will not claim that our trademarks, menu offerings, or advertising claims infringe upon their proprietary rights or constitute unfair competition. Any such claim, whether or not it has merit, may result in costly litigation, cause delays in introducing new menu items in the future, interfere with our international development agreements, lead to delays or cancellation of pre-paid marketing campaigns, or require us to enter into royalty or licensing agreements. Additionally, we may be subject to infringement claims by purported patent holders that relate to software or systems that are critical to our operations. As a result, any such claim could have an adverse effect on our business and our consolidated financial results.
We are subject to risks in connection with owning and leasing real estate, which could adversely affect our consolidated financial results.
As an owner or lessee of the land and/or buildings for our Company-operated venues, we are subject to all of the risks generally associated with owning and leasing real estate, including changes in the supply and demand for real estate in general and the supply and demand for the use of the venues. We may be compelled to continue to operate a non-profitable venue due to our obligations under lease agreements, or we may close a non-profitable venue and continue making rental payments with respect to the lease, which could adversely affect our consolidated financial results. Furthermore, economic instability may inhibit our landlords from securing financing and maintaining good standing in their existing financing arrangements, which could result in their inability to keep existing tenants or attract new tenants, thereby reducing customer traffic to our venues. The lease terms for our leased facilities vary, and some have only a short term remaining. Most - but not all - of our leased facilities have renewal terms. When a lease term expires, the Company may not be able to renew such lease on reasonable economic and commercial terms, or at all. Such failure to renew leases on reasonable economic and commercial terms could adversely affect our business and consolidated financial results.
We also may not be able to renew real property leases on favorable terms, or at all, which may require us to close a venue or relocate, either of which could have a material adverse effect on our business, results of operations or financial condition. Of the 515 Company-operated Chuck E. Cheese's venues as of December 30, 2018, 506 are leased. All of the 39 Company-operated Peter Piper Pizza venues as of December 30, 2018 are leased premises. The leases typically provide for a base rent and, in some instances additional rent based on a percentage of the revenue generated by the venues on the leased premises once certain thresholds are met. A decision not to renew a lease for a venue could be based on a number of factors, including an assessment of the area in which the venue 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 venues 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 venues to remain profitable as their terms expire, the number of such venues may decrease, resulting in lower revenue from operations, or we may relocate a venue, 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 cash 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 (excluding rental payments on our sale leaseback properties) 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 venues, under operating leases were approximately $93.9 million, or 10.5% of our Total revenues, in fiscal 2018. In addition, as of December 30, 2018, we were a party to operating leases requiring future minimum lease payments aggregating approximately $183.4 million through the next two years and approximately $718.2 million thereafter. We expect that we will lease any new venues 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.
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 the CEC revolving credit facility 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 effect on us.
We may not be successful in integrating the operations of companies we acquire, which could have an adverse effect on our business and results of operations.
We have engaged in acquisition activity in the past and in the future we may engage in acquisitions or other strategic transactions, such as investments in other entities. Strategic transactions, such as the Peter Piper Pizza acquisition completed in October 2014, involve risks, including those associated with integrating operations or maintaining operations as separate (as applicable); financial reporting; disparate technologies and personnel of acquired companies; the diversion of management's attention from other business concerns; unknown risks; and the potential loss of key employees, customers, and strategic partners of acquired companies or companies in which we may make strategic investments. We may not successfully integrate any businesses or technologies we may acquire or strategically develop in the future and may not achieve anticipated revenue and cost benefits relating to any such strategic transactions. Strategic transactions may be expensive and time consuming, and may strain our resources. Strategic transactions may not be accretive and may negatively impact our results of operations as a result of, among other things, the incurrence of debt, write-offs of goodwill and amortization expenses of other intangible assets.
We are involved in litigation relating to the Merger Agreement that could divert management's attention and harm our business.
As described in Part 1, Item 3 of this report, “Legal Proceedings,” following the January 16, 2014 announcement that we had entered into a merger agreement (the ‘‘Merger Agreement’’), pursuant to which an entity controlled by Apollo Global Management, LLC (“Apollo”) and its subsidiaries merged with and into CEC Entertainment Inc., with CEC Entertainment Inc. surviving the merger (the ‘‘Merger’’), four putative class actions were filed by 29 shareholders in the District Court of Shawnee County, Kansas, on behalf of our purported stockholders, against us, our directors, Apollo, Queso Holdings Inc. (“Parent”) 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 in March 2014. On July 21, 2015, a consolidated class action petition was filed as the operative consolidated complaint, asserting claims against CEC and its former directors, adding The Goldman Sachs Group (‘‘Goldman Sachs’’) as a defendant, and removing all Apollo entities as defendants (‘‘Consolidated Class Action Petition’’). The Consolidated Class Action Petition alleges that our directors breached their fiduciary duties to our 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 our board who also served as our senior managers 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. 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 in its entirety. On September 9, 2018, the Plaintiff in the Consolidated Shareholder Litigation filed a notice of appeal of the District Court’s decision. Although CEC Entertainment and its former directors are no longer defendants in the lawsuit, we assumed the defense of the Consolidated Shareholder Litigation on behalf of CEC’s named former directors and Goldman Sachs pursuant to existing indemnity agreements, and continuing to fund Goldman Sach’s defense of this action is expensive and may divert management’s attention and resources, which could adversely affect our business.
Risks Related to Our Capital Structure
Our substantial indebtedness could adversely affect our ability to raise additional capital or to fund our operations, expose us to interest rate risk to the extent of our variable rate debt, limit our ability to react to changes in the economy, and prevent us from making debt service payments.
We are a highly leveraged company. As of December 30, 2018, we had $978.9 million face value of outstanding indebtedness (excluding capital lease and sale leaseback obligations), in addition to $141.0 million available for borrowing under the revolving credit facility at that date. For the fiscal year ended December 30, 2018, we made total debt service payments of $68.0 million (excluding capital leases, sale leaseback, and fees to extend our revolving credit facility).
Our substantial indebtedness could have important consequences for us, including, but not limited to, the following:
limit, along with the financial and other restrictive covenants in our indebtedness, among other things, our ability to borrow additional funds or dispose of assets; limit our ability to repurchase shares and pay cash dividends;
limit our ability to borrow money for our working capital, capital expenditures, debt service requirements, strategic initiatives or other purposes;
make it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under the indenture and the agreements governing other indebtedness;
require us to dedicate a substantial portion of our cash flow from operations to the repayment of our indebtedness, thereby reducing funds available to us for other purposes;
limit our flexibility in planning for, or reacting to, changes in our operations or business;
make us more highly leveraged than some of our competitors, which may place us at a competitive disadvantage;
impact our rent expense on leased space, which could be significant;
make us more vulnerable to downturns in our business or the economy;
restrict us from making strategic acquisitions, engaging in development activities, introducing new technologies, or exploiting business opportunities;
cause us to make non-strategic divestitures; and
expose us to the risk of increased interest rates, as certain of our borrowings are at variable rates of interest.
In addition, our credit agreement contains restrictive covenants that will limit our ability to engage in activities that may be in our long-term best interest. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of substantially all of our indebtedness.
We may be able to incur substantial additional indebtedness in the future, subject to the restrictions contained in our revolving credit facility. If new indebtedness is added to our current debt levels, the related risks described above could intensify.
We may not be able to generate sufficient cash to service all of our indebtedness, and we may be forced to take other actions to satisfy our obligations under our indebtedness that may not be successful.
Our ability to pay principal and interest on our debt obligations will depend upon, among other things, (a) our future financial and operating performance (including the realization of any cost savings described herein), which will be affected by prevailing economic, industry and competitive conditions and financial, business, legislative, regulatory and other factors, many of which are beyond our control; and (b) our future ability to borrow under our revolving credit facility, the availability of which depends on, among other things, our complying with the covenants in the credit agreement governing such facility.
We cannot assure you that our business will generate cash flow from operations, or that we will be able to draw under our revolving credit facility or otherwise, in an amount sufficient to fund our liquidity needs, including the payment of principal and interest on our debt. If our cash flows and capital resources are insufficient to service our indebtedness, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital, or restructure or refinance our indebtedness, including the senior notes (as defined in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Liquidity and Capital Resources - Debt Financing”). These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. 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 covenants, which could further restrict our business operations. In addition, the terms of existing or future debt agreements may restrict us from adopting some of these alternatives. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions for fair market value or at all. Furthermore, any proceeds that we could realize from any such dispositions may not be adequate to meet our debt service obligations then due. Apollo and its affiliates have no future obligation to provide us with debt or equity financing. Our inability to generate sufficient cash flow to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, could have a material adverse effect on our business, results of operations, and financial condition, and could negatively impact our ability to satisfy our debt obligations.
If we cannot make scheduled payments on our indebtedness, we will be in default, and holders of our senior notes could declare all outstanding principal and interest to be due and payable, the lenders under the secured credit facilities could terminate their commitments to loan money, our secured lenders could foreclose against the assets securing their loans, and we could be forced into bankruptcy or liquidation.
ITEM 1B. Unresolved Staff Comments.
None.
ITEM 2. Properties.
Chuck E. Cheese’s and Peter Piper Pizza venues are typically located in densely populated locations and are predominantly situated in shopping centers or in free-standing buildings near shopping centers. On average, Chuck E. Cheese’s
existing venues are approximately 12,700 square feet, with table and chair seating generally averaging between 400 to 450 guests per venue, and include approximately 75 games, rides and attractions. On average, Peter Piper Pizza existing venues are approximately 10,100 square feet, with table and chair seating generally averaging between 350 to 400 guests per venue, and include approximately 40 games, rides and attractions.
The following tables summarize information regarding the number and location of venues we and our franchisees operated as of December 30, 2018:
|
| | | | | | | | |
| Domestic | Company-operated venues | | Franchised venues | | Total |
| Chuck E. Cheese’s | 504 |
| | 26 |
| | 530 |
|
| Peter Piper Pizza | 39 |
| | 61 |
| | 100 |
|
| Total domestic | 543 |
| | 87 |
| | 630 |
|
| International | | | | | |
| Chuck E. Cheese’s | 11 |
| | 65 |
| | 76 |
|
| Peter Piper Pizza | — |
| | 44 |
| | 44 |
|
| Total international | 11 |
| | 109 |
| | 120 |
|
| Total venues in operation | 554 |
| | 196 |
| | 750 |
|
|
| | | | | | | | | | | | | |
| Name and Principal Position | Year | Salary | Stock Awards (3) | Option Awards (4) | Non-Equity Incentive Plan Compensation (5) | All Other Compensation (6) | Total |
| | | ($) | ($) | ($) | ($) | ($) | ($) |
Thomas Leverton (1) | 2019 | 550,000 |
| 667,221 |
| 128,954 |
| — |
| — |
| 1,346,175 |
|
| Former Chief Executive Officer | 2018 | 550,000 |
| — |
| — |
| 300,728 |
| 24,000 |
| 874,728 |
|
| J. Roger Cardinale | 2019 | 485,000 |
| 63,363 |
| 85,971 |
| 441,350 |
| — |
| 1,075,684 |
|
| President | 2018 | 485,000 |
| — |
| — |
| 260,337 |
| 18,000 |
| 763,337 |
|
James Howell (2) | 2019 | 404,652 |
| 515,527 |
| 597,275 |
| — |
| 82,440 |
| 1,599,894 |
|
| Executive Vice President and Chief Financial Officer | 2018 | 100,000 |
| — |
| — |
| 121,532 |
| — |
| 221,532 |
|
|
| | | | | | | | |
| Domestic | Company-
Owned venues | | Franchised
venues | | Total |
| Alabama | 8 |
| | 1 |
| | 9 |
|
| Alaska | 1 |
| | — |
| | 1 |
|
| Arizona | 33 |
| | 15 |
| | 48 |
|
| Arkansas | 6 |
| | — |
| | 6 |
|
| California | 81 |
| | 4 |
| | 85 |
|
| Colorado | 9 |
| | — |
| | 9 |
|
| Connecticut | 4 |
| | — |
| | 4 |
|
| Delaware | 2 |
| | — |
| | 2 |
|
| Florida | 33 |
| | — |
| | 33 |
|
| Georgia | 15 |
| | — |
| | 15 |
|
| Hawaii | — |
| | 3 |
| | 3 |
|
| Idaho | 1 |
| | — |
| | 1 |
|
| Illinois | 21 |
| | — |
| | 21 |
|
| Indiana | 13 |
| | — |
| | 13 |
|
| Iowa | 4 |
| | — |
| | 4 |
|
| Kansas | 4 |
| | — |
| | 4 |
|
| Kentucky | 5 |
| | — |
| | 5 |
|
| Louisiana | 10 |
| | 2 |
| | 12 |
|
| Maryland | 14 |
| | — |
| | 14 |
|
| Massachusetts | 10 |
| | — |
| | 10 |
|
| Michigan | 16 |
| | — |
| | 16 |
|
| Minnesota | 8 |
| | — |
| | 8 |
|
| Mississippi | 3 |
| | 2 |
| | 5 |
|
| Missouri | 8 |
| | — |
| | 8 |
|
| Montana | — |
| | 1 |
| | 1 |
|
| Nebraska | 2 |
| | — |
| | 2 |
|
| Nevada | 8 |
| | — |
| | 8 |
|
| New Hampshire | 1 |
| | — |
| | 1 |
|
| New Jersey | 14 |
| | — |
| | 14 |
|
| New Mexico | 7 |
| | 3 |
| | 10 |
|
| New York | 21 |
| | — |
| | 21 |
|
| North Carolina | 13 |
| | 2 |
| | 15 |
|
| North Dakota | — |
| | 1 |
| | 1 |
|
| Ohio | 19 |
| | 1 |
| | 20 |
|
| Oklahoma | 6 |
| | — |
| | 6 |
|
| Oregon | 1 |
| | 2 |
| | 3 |
|
| Pennsylvania | 20 |
| | — |
| | 20 |
|
| Rhode Island | 1 |
| | — |
| | 1 |
|
| South Carolina | 7 |
| | — |
| | 7 |
|
| South Dakota | 2 |
| | — |
| | 2 |
|
| Tennessee | 12 |
| | — |
| | 12 |
|
| Texas | 66 |
| | 46 |
| | 112 |
|
| Utah | 2 |
| | — |
| | 2 |
|
| Virginia | 12 |
| | 3 |
| | 15 |
|
| Washington | 10 |
| | 1 |
| | 11 |
|
| West Virginia | 1 |
| | — |
| | 1 |
|
| Wisconsin | 9 |
| | — |
| | 9 |
|
| Total domestic | 543 |
| | 87 |
| | 630 |
|
|
| | | | | | | | |
| International | Company-
Owned venues | | Franchised
venues | | Total |
| Canada | 11 |
| | — |
| | 11 |
|
| Chile | — |
| | 7 |
| | 7 |
|
| Colombia | — |
| | 2 |
| | 2 |
|
| Costa Rica | — |
| | 1 |
| | 1 |
|
| Guam | — |
| | 1 |
| | 1 |
|
| Guatemala | — |
| | 2 |
| | 2 |
|
| Honduras | — |
| | 2 |
| | 2 |
|
| Mexico | — |
| | 63 |
| | 63 |
|
| Panama | — |
| | 2 |
| | 2 |
|
| Peru | — |
| | 3 |
| | 3 |
|
| Puerto Rico | — |
| | 3 |
| | 3 |
|
| Trinidad | — |
| | 2 |
| | 2 |
|
| Saudi Arabia | — |
| | 18 |
| | 18 |
|
| United Arab Emirates | — |
| | 3 |
| | 3 |
|
| Total international | 11 |
| | 109 |
| | 120 |
|
| Total venues in operation | 554 |
| | 196 |
| | 750 |
|
Company-operated Venue Leases
Of the 515 Company-operated Chuck E. Cheese’s venues as of December 30, 2018, nine are owned premises and 506 are leased. All of the 39 Company-operated Peter Piper Pizza venues as of December 30, 2018 are leased premises.
The terms of our venue leases vary in length from lease to lease, although generally a lease provides for an initial primary term of 10 years, with two additional five-year options to renew. As of December 30, 2018, seven of our leases were month-to-month and 37 of our leases were set to expire in 2019. Of those set to expire in 2019, 12 have no available renewal options and the remainder have available renewal options expiring between 2020 and 2039. Our remaining leases are set to expire at various dates through 2037, with available renewal options that expire at various dates through 2054.
These leases generally require us to pay the cost of repairs, other maintenance costs, insurance and real estate taxes and, in some instances, may provide for additional rent equal to the amount by which a percentage of revenues exceed the minimum rent. It is common for us to take possession of leased premises prior to the commencement of rent payments for the purpose of constructing leasehold improvements.
Corporate Offices and Warehouse Facilities
We lease 55,257 square feet of space in an office building in Irving, Texas, which serves as our corporate office and support services center. This lease expires in July 2026 with options to renew through July 2036. Peter Piper Pizza leased a 5,243 square foot office building in Phoenix, Arizona through September 2018, which served primarily as its corporate office. Upon expiration of the lease in September 2018, we relocated our Peter Piper Pizza corporate office to an adjoining office space located at a Peter Piper Pizza venue in Phoenix, Arizona. We also lease a 166,432 square foot warehouse building in Topeka, Kansas, which primarily serves as a storage, distribution and refurbishing facility for our venue fixtures and game equipment. The lease expires in August 2024 with options to renew through August 2034.
ITEM 3. 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. 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.
ITEM 4. Mine Safety Disclosures.
None.
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information and Dividends
As of December 30, 2018, all of our outstanding common stock was privately held and there was no established public trading market for our common stock.
We did not declare any dividends in 2016, 2017, and 2018.
Our ability to pay and declare dividends is restricted by our secured credit facilities and senior notes. See further discussion of the secured credit facilities and senior notes in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Liquidity and Capital Resources - Debt Financing” and Part II, Item 8. “Financial Statements and Supplementary Data - Note 10. Indebtedness and Interest Expense” of this Annual Report on Form 10-K. See Part I, Item 1A. “Risk Factors” for a discussion of factors that might affect our financial performance and compliance with debt covenants, including covenants that affect our ability to pay dividends.
Issuer Purchases of Equity Securities
There were no repurchases of our common stock during Fiscal 2018.
ITEM 6. Selected Financial Data.
The following selected financial data presented below should be read in conjunction with Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements included in Part II, Item 8. “Financial Statements and Supplementary Data” (in thousands, except percentages and venue number amounts):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year 2018 | | Fiscal Year 2017 | | Fiscal Year 2016 | | Fiscal Year 2015 (1) | | For the 317 Day Period Ended December 28, 2014 (6) | | | For the 47 Day Period Ended February 14, 2014 (7) |
| | Successor (7) | | Successor (7) | | Successor (7) | | Successor (7) | | Successor (7) | | | Predecessor (7) |
| | | | | | | | | | | | | |
| | (in thousands, except percentages and venue number amounts) |
| Statements of Earnings Data: | | | | | | | | | | | | |
| Company venue sales | $ | 875,334 |
| | $ | 868,888 |
| | $ | 905,314 |
| | $ | 905,110 |
| | $ | 712,098 |
| | | $ | 113,556 |
|
| Total revenues | $ | 896,066 |
| | $ | 886,771 |
| | $ | 923,653 |
| | $ | 922,589 |
| | $ | 718,581 |
| | | $ | 114,243 |
|
| Operating income (loss) | $ | 50,801 |
| | $ | 47,890 |
| | $ | 61,452 |
| | $ | 55,131 |
| | $ | (32,259 | ) | | | $ | 2,873 |
|
| Interest expense | $ | 76,283 |
| | $ | 69,115 |
| | $ | 67,745 |
| | $ | 70,582 |
| | $ | 60,952 |
| | | $ | 1,151 |
|
| Income taxes | $ | (5,021 | ) | | $ | (74,291 | ) | | $ | (2,626 | ) | | $ | (2,941 | ) | | $ | (31,123 | ) | | | $ | 1,018 |
|
| Net income (loss) | $ | (20,461 | ) | | $ | 53,066 |
| | $ | (3,667 | ) | | $ | (12,510 | ) | | $ | (62,088 | ) | | | $ | 704 |
|
| | | | | | | | | | | | | |
| Statement of Cash Flow Data: | | | | | | | | | | | | |
| Operating activities | $ | 86,790 |
| | $ | 104,297 |
| | $ | 118,955 |
| | $ | 100,613 |
| | $ | 48,091 |
| | | $ | 22,314 |
|
| Investing activities | $ | (79,284 | ) | | $ | (93,712 | ) | | $ | (98,439 | ) | | $ | (78,191 | ) | | $ | (1,124,285 | ) | | | $ | (9,659 | ) |
| Financing activities | $ | (11,547 | ) | | $ | (5,030 | ) | | $ | (10,095 | ) | | $ | (81,599 | ) | | $ | 1,168,448 |
| | | $ | (13,844 | ) |
| Non-GAAP Financial Measures: | | | | | | | | | | | | |
Adjusted EBITDA (3) | $ | 175,166 |
| | $ | 180,800 |
| | $ | 207,924 |
| | $ | 220,936 |
| | $ | 170,456 |
| | | $ | 24,967 |
|
Adjusted EBITDA Margin (4) | 19.5 | % | | 20.4 | % | | 22.5 | % | | 23.9 | % | | 23.7 | % | | | 21.9 | % |
| Venue-level Data: | | | | | | | | | | | | |
| Number of venues (end of period): |
| | | | | | | | | | | |
| Company-operated | 554 |
| | 562 |
| | 559 |
| | 556 |
| | 559 | | | NM |
|
| Franchised | 196 |
| | 192 |
| | 188 |
| | 176 |
| | 172 | | | NM |
|
| | 750 |
| | 754 |
| | 747 |
| | 732 |
| | 731 | | | NM |
|
Comparable venues (end of period) (2) | 526 |
| | 531 |
| | 529 |
| | 489 |
| | 485 | | | NM |
|
Comparable venue sales change (2) | (0.0 | )% | | (4.8 | )% | | 2.8 | % | | (0.4 | )% | | NM | | | NM |
|
| | | | | | | | | | | | | |
| | As of | | As of | | As of | | As of | | As of | | | As of |
| | December 30, 2018 | | December 31, 2017 | | January 1, 2017 | | December 28, 2015 | | December 28, 2014 | | | February 14, 2014 |
| Balance Sheet Data: | | | | | | | | | | | | |
| Total assets | $ | 1,666,165 |
| | $1,695,044 | | $1,710,112 | | $1,733,035 | | $1,836,113 | | | NM |
|
Total debt (5) | 982,121 |
| | 986,419 |
| | 989,948 |
| | 994,448 |
| | 999,783 |
| | | NM |
|
| Stockholders’ equity | 242,571 |
| | 262,148 |
| | 206,005 |
| | 208,546 |
| | 292,586 |
| | | NM |
|
| Dividends declared | — |
| | — |
| | — |
| | 70,000 |
| | — |
| | | — |
|
_________________________________________________
| |
(1) | We operateMr. Leverton stepped down from his position as Chief Executive Officer of CEC Entertainment on a 52 or 53 week fiscal year ending onJanuary 21, 2020. |
| |
(2) | Mr. Howell began his employment with CEC Entertainment in September 2018. |
| |
(3) | This column represents the Sunday nearest December 31. Fiscal year 2015 was 53 weeksgrant date fair value of stock bonus awards approved by the Compensation Committee in length, which resulted in our fourth quarter consistingeach of 14 weeks. All otherthe fiscal years presented were 52 weeks.computed in accordance with the Financial Accounting Standards Board’s ASC 718 - Compensation - Stock Compensation (“ASC 718”) . For further discussion on the valuation assumptions used with respect to the stock awards granted in 2019, refer to “-Narrative Disclosure To Summary Compensation Table,” below and Note 17. “Stock-Based Compensation Arrangements” included in Part II, Item 8. “Financial Statements and Supplementary Data” of the Original Form 10-K. |
| |
(4) | This column represents the grant date fair value of stock options approved by the Compensation Committee and awarded to executive officers in each of the fiscal years presented, computed in accordance with ASC 718. For further discussion on the valuation assumptions used with respect to the option awards granted in 2019, refer to Note 17. “Stock-Based Compensation Arrangements” included in Part II, Item 8. “Financial Statements and Supplementary Data” of the Original Form 10-K. Option Award amounts reported in the table above for 2019 consist of the following items: |
|
| | | | | | | | | | | | |
| Option Award Component | | Mr. Leverton | | Mr. Cardinale | | Mr. Howell |
| Stock options - Tranche A: | | | | | | |
| Fair value on grant date ($) | | $ | 128,954 |
| | $ | 85,971 |
| | $ | 234,266 |
|
| Options granted (#) | | 38,725 |
| | 25,817 |
| | 70,350 |
|
| Stock options - Tranche B: | | | | | | |
| Fair value on grant date ($) | | $ | — |
| | $ | — |
| | $ | 213,161 |
|
| Options granted (#) | | — |
| | — |
| | 70,350 |
|
| Stock options - Tranche C: | | | | | | |
| Fair value on grant date ($) | | $ | — |
| | $ | — |
| | $ | 149,848 |
|
| Options granted (#) | | — |
| | — |
| | 70,351 |
|
| Stock options - Total: | | | | | | |
| Fair value on grant date ($) | | $ | 128,954 |
| | $ | 85,971 |
| | $ | 597,275 |
|
| Options granted (#) | | 38,725 |
| | 25,817 |
| | 211,051 |
|
| |
(2)(5) | We define “comparable venue sales” as sales for our domestic owned company-operated venues that have been openSee “-Narrative Disclosure To Summary Compensation Table - Non Equity Incentive Plan Compensation,” below for more than 18 months asinformation about the terms of the beginning of each respective fiscal year or for acquired venues we have operated for at least 12 months as of the beginning of each respective fiscal year. these awards. |
(6)See the table below for additional information about the compensation included under “All Other Compensation” for 2019 and 2018. |
| | | | | | | | | | | | | | |
| Name | | Year | | Car Allowance/Car Insurance | | Car Insurance Reimbursement | | Moving Expense Reimbursement | | Total |
| | | | | ($) | | ($) | | ($) | | ($) |
| Thomas Leverton | | 2019 | | 24,000 |
| | — |
| | — |
| | 24,000 |
|
| | | 2018 | | 24,000 |
| | — |
| | — |
| | 24,000 |
|
| J. Roger Cardinale | | 2019 | | 18,000 |
| | 1,322 |
| | — |
| | 19,322 |
|
| | | 2018 | | 18,000 |
| | — |
| | — |
| | 18,000 |
|
| James Howell | | 2019 | | — |
| | — |
| | 82,440 |
| | 82,440 |
|
| | | 2018 | | — |
| | — |
| | — |
| | — |
|
Narrative Disclosure to Summary Compensation Table
Employment Agreements with Named Executive Officers
On July 30, 2014, CEC Entertainment entered into employment agreements with Messrs. Leverton and Cardinale, and on December 20, 2018, CEC Entertainment entered into an employment agreement with Mr. Howell. Each of these agreements contains substantially similar terms and conditions of employment, including a five-year term. The employment agreements provide for an annual base salary of $550,000 for Mr. Leverton, $485,000 for Mr. Cardinale, and $406,720 for Mr. Howell. The agreements also provide for maximum annual bonus opportunities equal to 150% of the named executive’s respective base salary. Finally, all of our named executive officers are entitled to receive, pursuant to the terms of their employment agreements, employee benefits provided to senior executives of the Company, as quantified in the table included in footnote 6 to the Summary Compensation Table above.
Under each employment agreement, if the executive is terminated by the Company without “cause” or resigns for “good reason” during the “employment period” (each as defined in the employment agreement), then, subject to his execution, delivery, and non‑revocation of a release of claims in favor of the Company, the executive will be entitled to receive a lump-sum payment of cash severance equal to the sum of his base salary and the annual bonus paid or to be paid with respect to the fiscal year completed most recently prior to the employment termination date. Each employment agreement also provides for certain restrictive covenants, including 12-month post-termination noncompetition and nonsolicitation covenants.
The employment agreements also (a) required that each named executive officer purchase common stock of Parent having an aggregate value as of the date of purchase equal to $1,500,000, in the case of Mr. Cardinale; $500,000, in the case of Mr. Leverton; and $300,000, in the case of Mr. Howell, to be made as an initial investment of $150,000 and up to $150,000 of Mr. Howell’s annual bonus, net of applicable taxes, until such amount reaches $150,000; (b) provided for a one‑time grant of stock options to purchase common stock of Parent representing a percentage of the fully diluted shares of common stock of Parent equal to 1.50% (580,875 shares), in the case of Mr. Leverton; 1.00% (387,249 shares), in the case of Mr. Cardinale; and 0.545% (211,051 shares), in the case of Mr. Howell (which stock options were granted on January 30, 2019); and (c) for Mr. Leverton only, provided for a one‑time award of restricted shares of Parent having an aggregate grant date value equal to $550,000, prorated for the number of days he served during 2014 (which reduced, dollar-for-dollar, his annual bonus for 2014). All such equity awards were granted pursuant to the terms of the Queso Holdings Inc. 2014 Equity Incentive Plan (the “Equity Incentive Plan”) and award agreements. Mr. Howell purchased his initial investment of common stock of Parent on December 21, 2018 and invested his 2018 incentive compensation payout, net of applicable taxes, of $89,393 in March 2019. In March 2020, Mr. Howell received his 2019 incentive payment in stock of Parent, satisfying in full the required investment in common stock of Parent pursuant to his employment agreement.
The awards of stock options to each of our named executive officers remain subject to certain service- and performance-based vesting criteria, and are eligible for accelerated vesting in the event of certain terminations of employment within a specified period following a sale of Parent. (See “Potential Payments Upon Termination or Change in Control: Accelerated Vesting of Stock Options: Option to Repurchase Stock,” below.) The award of restricted shares granted to Mr. Leverton vested in full on March 10, 2015.
On October 12, 2018, CEC Entertainment entered into an “Amendment to Employment Agreement” with each of Messrs. Leverton and Cardinale, which provided for (a) an extensionfor an additional term of one year, to be automatically extended thereafter for successive one-year terms unless either party gives notice of an intention not to further extend the term at least 90 days before the applicable renewal date of the agreement; (b) stock bonus grants valued at $70,140 for Mr. Leverton and $63,263 for Mr. Cardinale, which were granted on January 1, 2019; (c) certain obligations of the Company to the named executive officers
in the event the Employment Period defined in their agreements expires as a result of either (i) the Company’s non-extension of the Agreement without Cause, or (ii) the Executive’s non-extension of the Agreement for Good Reason; and (d) updated Notice provisions.
In connection with the purchase of the shares of Parent and the grant of stock options, each of our named executive officers became a party to an investor rights agreement among CEC Entertainment, AP VIII CEC Holdings, LP f/k/a AP VIII Queso Holdings, L.P., an affiliate of our sponsor, and other shareholder parties. The shares purchased by the executive or received by the executive upon exercise of a vested option or lapse of forfeiture conditions on restricted shares are subject to repurchase by Parent under certain circumstances.
Non-Equity Incentive Plan Compensation
For 2019, the Compensation Committee determined that growth in comparable venue sales, revenues, free cash flow, and
pro forma Adjusted EBITDA (as defined in the 2019 Incentive Bonus Plan (the “Incentive Bonus Plan”), referred to herein as “Adjusted EBITDA”) were appropriate quantitative measures of CEC Entertainment’s performance for purposes of determining the incentive compensation to be awarded to each of our named executive officers under the Incentive Bonus Plan. The Compensation Committee also determined that the Incentive Bonus Plan should have a discretionary component to reward individual performance. In no event would a cash bonus be paid under the Incentive Bonus Plan with respect to any given performance
measure unless certain minimum targets for the fiscal year as predetermined by the Compensation Committee were attained.
For 2019, the actual bonus that could have been earned by an eligible employee was equal to the employee’s gross base earnings for the year (which was equal to the gross salary paid to the employee during Fiscal 2019), multiplied by his or her target bonus percentage, multiplied by the sum of the multipliers for each of the two measurable components of the Incentive Bonus Plan, each measured for the Company: (i) Adjusted EBITDA, (ii) free cash flow, (iii) comparable venue sales
change, (iv) revenues, and (v) a portion that was based on the employee’s achievement of individual performance goals. The five components were weighted as follows:
|
| | |
| Metric | | Total Bonus % |
| Adjusted EBITDA | | 40% |
Free cash flow (1) | | 20% |
Comparable venue sales excludes saleschange | | 10% |
Revenues (2) | | 10% |
| Individual Performance | | 20% |
| Total | | 100% |
_______________
| |
(1) | Free cash flow represents Adjusted EBITDA less total capital expenditures as reported in the Company’s Statement of Cash Flows for our domestic Company-owned venues that are expected to be temporarily closed for more than three months primarily as a result of natural disasters, fires, floods2019 included in Part II, Item 8. “Financial Statements and property damage. We define “comparable venue sales change” as the percentage change in comparable venue sales for each respective period. We believe comparable venue sales change to be a key performance indicator within our industry; it is a critical factor in evaluating our performance, as it is indicative of acceptance of our strategic initiatives and local economic and consumer trends. Our comparable venue sales for Fiscal 2015, and the Successor 2014 period exclude the Peter Piper Pizza venues that were acquired in October 2014 as we had operated them for less than 12 months at the beginning of each respective fiscal year. As a resultSupplementary Data” of the 53 week fiscal year in 2015, our 2016 fiscal year began one calendar week later than our 2015 fiscal year. . The comparable venue sales change in the table above is presented on a calendar week basis, excluding the additional week of operations in 2015. On a fiscal basis, excluding the additional week of operations in 2015, comparable venue sales change would have been 3.0% in 2016.Original Form 10-K, adjusted for all approved capital projects and new store completions. |
| |
(3)(2) | For our definitionRevenues represents the Company’s Total revenues of Adjusted EBITDA, see the “Non-GAAP Financial Measures” section below. |
| |
(4) | Adjusted EBITDA Margin is defined by us as Adjusted EBITDA as a percentage of Total revenues. |
| |
(5) | Total debt includes our senior notes, our outstanding borrowings under the term loan facility and the revolving credit facility, net of deferred financing costs, capital leases, and the Predecessor Facility. |
| |
(6) | Results$912.9 million, adjusted for the Successor 2014 period include the revenues and expenses for Peter Piper Pizza for the 73 day period from October 17, 2014 through December 28, 2014. |
| |
(7) | As a result of the Merger, we applied the acquisition method of accounting and established a new basis of accounting on February 15, 2014. The period presented for the period December 29, 2013 through February 14, 2014 represent the operations of the predecessor company (“Predecessor”) and the periods presented after February 14, 2014 represent the operations of the successor company (“Successor”). The financial results for the period December 29, 2013 through February 14, 2014 represent the 47 day Predecessor period. |
Non-GAAP Financial Measures
Adjusted EBITDA, a measure used by management to assess operating performance, is defined as Net income (loss) plus interest expense, income tax expense (benefit), depreciation and amortization expense, impairments, gains and losses on asset disposals, unrealized gains and losses on foreign exchange, and stock based compensation. In addition, Adjusted EBITDA excludes other items we consider unusual or non-recurring and other adjustments required or permitted in calculating covenant compliance under our secured credit facilities and the indenture governing our senior notes (see discussion of our senior notes in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Liquidity and Capital Resources - Debt Financing”).
Adjusted EBITDA is presented because we believe that it provides useful information to investors regarding our operating performance and our capacity to incur and service debt and fund capital expenditures. We believe that Adjusted EBITDA is used by many investors, analysts and rating agencies as a measure of performance. We also present Adjusted EBITDA because it is substantially similar to Credit Agreement EBITDA, a measure used in calculating financial ratios and other calculations under our debt agreements, except for excluding the annualized full year effect of Company-operated and franchised venues that were opened and closed during the year. By reporting Adjusted EBITDA, we provide a basis for comparison of our business operations between current, past and future periods by excluding items that we do not believe are indicative of our core operating performance.
Our definition of Adjusted EBITDA allows for the exclusion of certain non-cash and other income and expense items that are used in calculating net income from continuing operations. However, these are items that may recur, vary greatly and can be difficult to predict. They can represent the effect of long-term strategies as opposed to short-term results. In addition, certain of these items can represent the reduction of cash that could be used for other corporate purposes. These measures should not be considered as alternatives to operating income, cash flows from operating activities or any other performance measures derived in accordance with GAAP as measures of operating performance, or cash flows as measures of liquidity. These measures have important limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. Because of these limitations, we rely primarily on our U.S. GAAP results and use Adjusted EBITDA and Adjusted EBITDA Margin, only supplementally.
The following table sets forth a reconciliation of net income (loss) to Adjusted EBITDA and Adjusted EBITDA Margin for the periods presented: |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal 2018 | | Fiscal 2017 | | Fiscal 2016 | | Fiscal 2015 (1) | | For the 317 Day Period Ended December 28, 2014 | | | For the 47 Day Period Ended February 14, 2014 |
| | Successor | | Successor | | Successor | | Successor | | Successor | | | Predecessor |
| | | | (in thousands, except percentages) |
| Total revenues | $ | 896,066 |
| | $ | 886,771 |
| | $ | 923,653 |
| | $ | 922,589 |
| | $ | 718,581 |
| | | $ | 114,243 |
|
| | | | | | | | | | | | | |
| Net income (loss) as reported | $ | (20,461 | ) | | $ | 53,066 |
| | $ | (3,667 | ) | | $ | (12,510 | ) | | $ | (62,088 | ) | | | $ | 704 |
|
| Interest expense | 76,283 |
| | 69,115 |
| | 67,745 |
| | 70,582 |
| | 60,952 |
| | | 1,151 |
|
| Income tax expense (benefit) | (5,021 | ) | | (74,291 | ) | | (2,626 | ) | | (2,941 | ) | | (31,123 | ) | | | 1,018 |
|
| Depreciation and amortization | 100,720 |
| | 109,771 |
| | 119,569 |
| | 119,294 |
| | 118,556 |
| | | 9,883 |
|
Non-cash impairments, gain or loss on disposal (2) | 10,371 |
| | 9,241 |
| | 10,070 |
| | 8,934 |
| | 9,841 |
| | | 294 |
|
Unrealized gain on foreign exchange (3) | 1,255 |
| | — |
| | — |
| | — |
| | — |
| | | — |
|
Non-cash stock-based compensation (4) | 324 |
| | 606 |
| | 689 |
| | 838 |
| | 703 |
| | | 12,639 |
|
Rent expense book to cash (5) | 6,982 |
| | 5,655 |
| | 7,852 |
| | 9,100 |
| | 10,665 |
| | | (1,190 | ) |
Franchise revenue, net cash received (6) | 1,632 |
| | — |
| | 113 |
| | 1,217 |
| | 2,585 |
| | | — |
|
Impact of purchase accounting (7) | — |
| | 817 |
| | 1,380 |
| | 995 |
| | 1,496 |
| | | — |
|
Venue pre-opening costs (8) | 183 |
| | 904 |
| | 1,591 |
| | 792 |
| | 1,166 |
| | | 131 |
|
One-time and unusual items (9) | 2,898 |
| | 5,916 |
| | 5,146 |
| | 22,448 |
| | 55,060 |
| | | (165 | ) |
Cost savings initiatives (10) | — |
| | — |
| | 62 |
| | 2,187 |
| | 2,643 |
| | | 502 |
|
Adjusted EBITDA (11) | $ | 175,166 |
| | $ | 180,800 |
| | $ | 207,924 |
| | $ | 220,936 |
| | $ | 170,456 |
| | | $ | 24,967 |
|
| Adjusted EBITDA Margin | 19.5 | % | | 20.4 | % | | 22.5 | % | | 23.9 | % | | 23.7 | % | | | 21.9 | % |
__________________ | |
(1) | We operate on a 52 or 53 week fiscal year ending on the Sunday nearest December 31. Fiscal year 2015 was 53 weeks in length, which resulted in our fourth quarter consisting of 14 weeks. All other fiscal years presented were 52 weeks. |
| |
(2) | Relates primarily to (i) the impairment of Company-operated venues or impairments of long lived assets; (ii) gains or losses upon disposal of property or equipment; and (iii) inventory obsolescence charges in 2015 outside of the ordinary course of business. |
| |
(3) | Relates to unrealized gains on the revaluation of our indebtedness with our Canadian subsidiary. Effective January 1, 2018, we no longer consider undistributed income from our Canadian subsidiary to be permanently invested. |
| |
(4) | Represents non-cash equity-based compensation expense. |
| |
(5) | Represents (i) the removal of the non-cash portion of rent expense relating to the impact of straight-line rent and the amortization of cash incentives and allowances received from landlords, plus (ii) the actual cash received from landlords incentives and allowances in the period in which it was received. |
| |
(6) | Represents the actual cash received for franchise fees received in the period for post-acquisition franchise development agreements, which we do not start recognizing into revenue until the franchise venue is opened. |
| |
(7) | Represents revenue related to unearned gift cards and unearned franchise fees that were removed in purchase accounting, and therefore were not recorded as revenue. |
| |
(8) | Relates to start-up and marketing costs incurred prior to the openingopened, of new Company-operated venues and generally consists of payroll, recruiting, training, supplies and rent incurred prior to venue opening. |
| |
(9) | Represents non-recurring income and expenses primarily related to (i) accounting, investment banking, legal and other costs incurred in connection with the Merger, the sale leaseback transaction we completed on August 25, 2014 and the acquisition of Peter Piper Pizza (“PPP Acquisition”); (ii) severance expense, executive termination benefits and executive search fees; (iii) one-time integration costs, including consulting fees, accounting service fees, IT system integration costs and travel expenses incurred in connection with the integration of Peter Piper Pizza; (iv) legal fees, claims and settlements related to litigation in respect of the Merger; (v) legal claims and settlements related to employee class action lawsuits and settlements; (vi) one-time costs incurred in connection with the 2015 relocation of our corporate offices; (vii) cash landlord incentives received in 2015 on our new corporate offices; (viii) sales and use tax refunds that relate to prior periods; (ix) professional fees incurred in connection with one-time strategic corporate and tax initiatives, such as accounting and consulting service fees incurred to obtain sale and use tax refunds from prior periods, to enhance transfer pricing and implement Play Pass, initial fees incurred in connection with the overseas outsourcing of our accounts payable and payroll functions, and costs related to the transition in 2015 to new advertising agencies whereby we were under contract for duplicate advertising costs$2.0 million, for a periodgrand total of time; (x) removing the initial recognition of gift card breakage revenue related to prior years on unredeemed Chuck E. Cheese's gift card balances sold by third parties; (xi) removing insurance recoveries relating to prior year business interruption losses at certain v$914.9 million. |
enues, primarily relating to natural disasters, fires and floods; (xii) removing proceeds received related toFor 2019, the early termination of a venue lease by the property landlord pursuant to a decision by the landlord to demolish the shopping mall where the venue was located; (xiii) one-time costs related to the early termination of a supplier contract in connection with the transition to a new supplier; (xiv) one-time training and travel-related costs incurred in connection with training venue employees in connection with the implementation of our Play Pass initiative and the re-imaging effort of the venues in our Chuck E. Cheese portfolio; (xv) one-time marketing expenses related to the grand openings of our re-imaged Chuck E. Cheese venues; and (xv) non-recoverable account balances written off outside of the ordinary course of business.
| |
(10) | Relates to estimated net cost savings primarily from (i) cost savings related to our change from public to private ownership and the elimination of public equity securities upon the closing of the Merger, including reductions in investor relations activities, directors fees, and certain legal and other securities and filing costs; (ii) estimated full-year effect of venue-level cost savings initiatives implemented in 2013, such as the installation of advanced thermostat systems, the replacement of helium-filled balloons with table top balloons, the consolidation of parts suppliers, and the increase in tickets required to redeem prizes; (iii) estimated effect of cost savings following the Merger from participation in Sponsor-leveraged purchasing programs, including various supplies, travel, and communications purchasing categories; (iv) labor cost savings associated with the elimination of certain management positions in connection with the Merger; (v) the full period impact of reduced occupancy costs associated with the relocation of our corporate offices in 2015; (vi) estimated cost savings associated with the integration of Peter Piper Pizza following its acquisition in October 2014, including labor cost savings associated with headcount reductions implemented in 2015; (vii) the full year effect of cost savings associated with upgrades to our telephone communication systems in 2015; and (viii) the estimated incremental costs associated with the new ERP system we implemented at the beginning of Fiscal 2015, net of system optimization costs, and post-Merger insurance arrangements. |
| |
(11) | With the continued evolution of our games business from tokens to game play credits and now towards time-based play packages following the implementation of All You Can Play (“AYCP”) in Fiscal 2018, the impact on our financial results of the fluctuation of the deferred revenue liability related to unused credits on Play Pass cards begins to lessen in importance in understanding our Adjusted EBITDA. Customers continue to see the value of time based play and game play credits continue to decline as a percentage of overall game play. As a result, the change in the deferred revenue liability relating to unused Play Pass cards has been removed from Adjusted EBITDA for all periods presented. |
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
As used in this report, the terms “CEC Entertainment,” “CEC”, the “Company,” “we,” “us” and “our” refer to CEC Entertainment, Inc. and its subsidiaries.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide the readers of our Consolidated Financial Statements with a narrative from the perspective of our management on our consolidated financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A should be read in conjunction with our Consolidated Financial Statements and related notes included in Part II, Item 8. “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
Our MD&A includesCompensation Committee set the following sub-sections:
Presentation of Operating Results;
Executive Summary;
Key Measures of Our Financial Performanceinitial target, minimum, and Key Non-GAAP Measures;
Key Income Statement Line Item Descriptions;
Results of Operations;
Financial Condition, Liquidity and Capital Resources;
Off-Balance Sheet Arrangements and Contractual Obligations;
Inflation;
Critical Accounting Policies and Estimates; and
Recently Issued Accounting Guidance.
Presentation of Operating Results
We operate on a 52 or 53 week fiscal year that ends on the Sunday nearest to December 31. Each quarterly period has 13 weeks, exceptmaximum levels for a 53 week year, when the fourth quarter has 14 weeks. The fiscal years ended December 30, 2018, December 31, 2017 and January 1, 2017 each consisted of 52 weeks. References to 2018, 2017 and 2016 are for the fiscal years ended December 30, 2018, December 31, 2017 and January 1, 2017, respectively.
Executive Summary
General
We develop, operate and franchise family entertainment and dining centers (also referred to as “venues”)payout eligibility under the names “Chuck E. Cheese's” (“Where A Kid Can Be A Kid”) and “Peter Piper Pizza” (“The Solution to the Family Night Out”). Our venues deliver a lively, kid-friendly atmosphere that feature a broad arrayIncentive Bonus Plan’s performance measure of entertainment offerings including arcade-style and skill-oriented games, rides, live entertainment shows, and other attractions, with the opportunity for kids to win tickets that they can redeem for prizes. We combine this memorable entertainment experience with a broad and creative menu that combines kid-friendly classics as well as a new selection of sophisticated options for adults. We operate 554 venues and have an additional 196 venues operating under franchise arrangements across 47 states and 14 foreign countries and territories as of December 30, 2018.
The following table summarizes information regarding the number of Company-operated and franchised venues for the periods presented:
|
| | | | | | | | | |
| | | Twelve Months Ended |
| | | December 30,
2018 | | December 31,
2017 | | January 1,
2017 |
| Number of Company-operated venues: | | | | | | |
| Beginning of period | | 562 |
| | 559 |
| | 556 |
|
| New | | 1 |
| | 6 |
| | 6 |
|
| Acquired from franchisee | | — |
| | 2 |
| | — |
|
| Closed | | (9 | ) | | (5 | ) | | (3 | ) |
| End of period | | 554 |
| | 562 |
| | 559 |
|
| Number of franchised venues: | | | | | | |
| Beginning of period | | 192 |
| | 188 |
| | 176 |
|
| New | | 8 |
| | 8 |
| | 16 |
|
| Acquired from franchisee | | — |
| | (2 | ) | | — |
|
| Closed | | (4 | ) | | (2 | ) | | (4 | ) |
| End of period | | 196 |
| | 192 |
| | 188 |
|
| Total number of venues: | | | | | |
|
|
| Beginning of period | | 754 |
| | 747 |
| | 732 |
|
| New | | 9 |
| | 14 |
| | 22 |
|
| Closed | | (13 | ) | | (7 | ) | | (7 | ) |
| End of period | | 750 |
| | 754 |
| | 747 |
|
__________________
| |
(1) | The number of new and closed Company-operated and Total venues during 2018 included one venue that was relocated. |
Our Strategic Plan
Our strategic plan is focused on increasing comparable venue sales, improving profitability and growing new venues domestically and internationally. See discussion of our strategic plan included in Part I, Item 1. “Business - Our Strategic Plan.”
Key Measures of Our Financial Performance and Key Non-GAAP Measures
Comparable venue sales. We define “comparable venue sales” as the sales for our domestic Company-operated venues that have been open for more than 18 months as of the beginning of each respective fiscal year or for acquired venues we have operated for at least 12 months as of the beginning of each respective fiscal year. Comparable venue sales excludes sales for our domestic Company-operated venues that are expected to be temporarily closed for more than three months primarily as a result of natural disasters, fires, floods and property damage. We define “comparable venue sales change” as the percentage change in comparable venue sales for each respective fiscal year. We believe comparable venue sales change to be a key performance indicator used within our industry; it is a critical factor when evaluating our performance, as it is indicative of acceptance of our strategic initiatives and local economic and consumer trends.
Average Sales per Comparable Venue. Average sales per comparable venue is calculated based on the average annual sales of our comparable venue base. Average sales per comparable venue cannot be used to compute year-over year comparable venue sales increases or decreases due to the change in the comparable venue base.
|
| | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | December 30, 2018 | | December 31, 2017 | | January 1, 2017 |
| | | (in thousands, except venue number amounts) |
| Average sales per comparable venue | | $ | 1,587 |
| | $ | 1,561 |
| | $ | 1,636 |
|
| Number of venues included in our comparable venue base | | 526 |
| | 531 |
| | 529 |
|
Adjusted EBITDA and Margin. We defineAdjusted EBITDA, a measure used by management to assess operating performance, as net income (loss) plus interest expense, income tax expense (benefit), depreciation and amortization expense, impairments, gains and losses on asset disposals, and stock based compensation. In addition, Adjusted EBITDA excludes other items we consider unusual or non-recurring and other adjustments required or permitted in calculating covenant compliance under the indenture governing our senior notes and/or secured credit facilities. Adjusted EBITDA Margin represents Adjusted EBITDA as a percentage of total revenues.
Key Income Statement Line Item Descriptions
Revenues. Our primary source of revenues is sales at our Company-operated venues (“company venue sales”), which consist of the sale of food, beverages, game-play credits, unlimited game-play time blocks, and merchandise. A portion of our company venue salesfollows (all dollar figures are from sales of value-priced combination packages generally comprised of food, beverage, and through the end of the second quarter of 2018 game plays and/or time blocks, which we promote through in-venue menu pricing, our website and coupon offerings. Beginning in the third quarter of 2018, we offer combination packages comprised of food and beverage only (“Package Deals”), with game plays and/or time blocks available for purchase separately. Prior to the bifurcation of the “Food and beverage sales” and “Entertainment and merchandise sales” components of combination packages, we allocated the revenues recognized from the sale of combination packages and coupons between “Food and beverage sales” and “Entertainment and merchandise sales” based upon the price charged for each component when it is sold separately, or in limited circumstances, our best estimate of selling price if a component is not sold on a stand-alone basis, which we believe approximates each component’s fair value.
Food and beverage sales include all revenues recognized with respect to stand-alone food and beverage sales, and through the end of the second quarter of 2018, the portion of revenues allocated from combination packages and coupons that relate to food and beverage sales. Entertainment and merchandise sales include all revenues recognized with respect to stand-alone sales of game-play credits and unlimited game-play time blocks, and through the end of the second quarter of 2018, a portion of revenues allocated from combination packages and coupons that relate to entertainment and merchandise.
Franchise fees and royalties are another source of revenues. We earn monthly royalties from our franchisees based on a percentage of each franchise venue’s sales. We also receive development and initial franchise fees to establish new franchised venues, as well as earn revenues from the sale of equipment and other items or services to franchisees. Historically, we recognized development and franchise fees as revenues when the franchise venue had opened and we had substantially completed our obligations to the franchisee relating to the opening of a venue. Effective January 1, 2018, with the adoption of Accounting Standards Update 2016-10 Revenues from Contracts with Customers (Topic 606) (“ASU 606”), we recognize initial and renewal development and franchise fees as revenues on a straight-line basis over the life of the franchise agreement starting when the franchise venue has opened. In addition, our national advertising fund receipts from members of the Association are now accounted for on a gross basis as revenue from franchisees, when historically they have been netted against advertising expense.
Company venue operating costs. Certain of our costs and expenses relate only to the operation of our Company-operated venues. These costs and expenses are listed and described below:
Cost of food and beverage includes all direct costs of food, beverages and costs of related paper and birthday supplies, less rebates from suppliers;
Cost of entertainment and merchandise includes all direct costs of prizes provided and merchandise sold to our customers, and the cost of Play Pass and AYCP cards and writsbands, as well as the cost of tickets dispensed to customers;
Labor expenses consist of salaries and wages, bonuses, related payroll taxes and benefits for venue personnel;
Rent expense includes lease costs for Company-operated venues, excluding common occupancy costs (e.g., common area maintenance (“CAM”) charges and property taxes); and
Other venue operating expenses primarily include utilities, repair and maintenance costs, liability and property insurance, CAM charges, property taxes, credit card processing fees, licenses, preopening expenses, venue asset disposal gains and losses and all other costs directly related to the operation of a venue.
“Cost of food and beverage” and “Cost of entertainment and merchandise” mentioned above, as a percentage of company venue sales, are influenced both by the cost of products and the overall mix of our Package Deals and coupon offerings. “Entertainment and merchandise sales” have higher margins than “Food and beverage sales.”
Advertising expense. Advertising expense includes production costs for television commercials, newspaper inserts, Internet advertising, coupons, media expenses for national and local advertising, consulting fees and other forms of advertising such as social media. Historically, prior to the adoption of ASU 606 on January 1, 2018, advertising expense was partially offset by contributions from our franchisees. Contributions from franchisees are now recognized as revenue from franchisees.
General and administrative expenses. General and administrative expenses represent all costs associated with operating our corporate office, including regional and district management and corporate personnel payroll and benefits, back-office support systems, costs of outsourced functions, and other administrative costs not directly related to the operation of our Company-operated venues.
Depreciation and amortization. Depreciation and amortization includes expenses that are directly related to our Company-operated venues’ property and equipment, including leasehold improvements, game and ride equipment, furniture, fixtures and other equipment, and depreciation and amortization of corporate assets and intangibles.
Asset impairments. Asset impairments represent non-cash charges to reduce the carrying amount of certain long-lived assets within our venues to their estimated fair value, when a venue’s operation is not expected to generate sufficient projected future cash flows to recover the current net book value of the long-lived assets within the venue. We believe our assumptions in calculating the fair value of our long-lived assets are similar to those used by other marketplace participants.
Results of Operations
The following table summarizes our principal sources of Total company venue sales expressed in dollars and as a percentage of Total company venue sales for the periods presented:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | December 30, 2018 | | December 31, 2017 | | January 1, 2017 |
| | | (in thousands, except percentages) |
| Food and beverage sales | | $ | 396,658 |
| | 45.3 | % | | $ | 410,609 |
| | 47.3 | % | | $ | 415,059 |
| | 45.8 | % |
| Entertainment and merchandise sales | | 478,676 |
| | 54.7 | % | | 458,279 |
| | 52.7 | % | | 490,255 |
| | 54.2 | % |
| Total company venue sales | | $ | 875,334 |
| | 100.0 | % | | $ | 868,888 |
| | 100.0 | % | | $ | 905,314 |
| | 100.0 | % |
The following table summarizes our revenues and expenses expressed in dollars and as a percentage of Total revenues (except as otherwise noted) for the periods presented:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | December 30, 2018 | | December 31, 2017 | | January 1, 2017 |
| | | (in thousands, except percentages) |
| Total company venue sales | | $ | 875,334 |
| | 97.7 | % | | $ | 868,888 |
| | 98.0 | % | | $ | 905,314 |
| | 98.0 | % |
| Franchise fees and royalties | | 20,732 |
| | 2.3 | % | | 17,883 |
| | 2.0 | % | | 18,339 |
| | 2.0 | % |
| Total revenues | | 896,066 |
| | 100.0 | % | | 886,771 |
| | 100.0 | % | | 923,653 |
| | 100.0 | % |
| Company venue operating costs (excluding Depreciation and amortization): | | | | | | | | | | | | |
Cost of food and beverage (1) | | 94,319 |
| | 23.8 | % | | 97,570 |
| | 23.8 | % | | 104,315 |
| | 25.1 | % |
Cost of entertainment and merchandise (2) | | 36,650 |
| | 7.7 | % | | 29,948 |
| | 6.5 | % | | 32,014 |
| | 6.5 | % |
Total cost of food, beverage, entertainment and merchandise (3) | | 130,969 |
| | 15.0 | % | | 127,518 |
| | 14.7 | % | | 136,329 |
| | 15.1 | % |
Labor expenses (3) | | 256,327 |
| | 29.3 | % | | 248,061 |
| | 28.5 | % | | 251,426 |
| | 27.8 | % |
Rent expense (3) | | 96,484 |
| | 11.0 | % | | 95,917 |
| | 11.0 | % | | 96,006 |
| | 10.6 | % |
Other venue operating expenses (3) | | 150,255 |
| | 17.2 | % | | 149,462 |
| | 17.2 | % | | 148,869 |
| | 16.4 | % |
Total Company venue operating costs (3) | | 634,035 |
| | 72.4 | % | | 620,958 |
| | 71.5 | % | | 632,630 |
| | 69.9 | % |
Other costs and expenses: | | | | | | | | | | | | |
| Advertising expense | | 48,198 |
| | 5.4 | % | | 48,379 |
| | 5.5 | % | | 46,142 |
| | 5.0 | % |
| General and administrative expenses | | 54,850 |
| | 6.1 | % | | 56,482 |
| | 6.4 | % | | 61,011 |
| | 6.6 | % |
| Depreciation and amortization | | 100,720 |
| | 11.2 | % | | 109,771 |
| | 12.4 | % | | 119,569 |
| | 12.9 | % |
| Transaction, severance and related litigation costs | | 527 |
| | 0.1 | % | | 1,448 |
| | 0.2 | % | | 1,299 |
| | 0.1 | % |
| Asset impairments | | 6,935 |
| | 0.8 | % | | 1,843 |
| | 0.2 | % | | 1,550 |
| | 0.2 | % |
| Total operating costs and expenses | | 845,265 |
| | 94.3 | % | | 838,881 |
| | 94.6 | % | | 862,201 |
| | 93.3 | % |
| Operating income | | 50,801 |
| | 5.7 | % | | 47,890 |
| | 5.4 | % | | 61,452 |
| | 6.7 | % |
| Interest expense | | 76,283 |
| | 8.5 | % | | 69,115 |
| | 7.8 | % | | 67,745 |
| | 7.3 | % |
| Loss before income taxes | | $ | (25,482 | ) | | (2.8 | )% | | $ | (21,225 | ) | | (2.4 | )% | | $ | (6,293 | ) | | (0.7 | )% |
__________________
| |
(1) | Percent amount expressed as a percentage of Food and beverage sales. |
| |
(2) | Percent amount expressed as a percentage of Entertainment and merchandise sales. |
| |
(3) | Percent amount expressed as a percentage of Company venue sales. |
| |
(4) | Due to rounding, percentages presented in the table above may not sum to total. The percentage amounts for the components of Cost of food and beverage and the Cost of entertainment and merchandise may not sum to total due to the fact that Cost of food and beverage and Cost of entertainment and merchandise are expressed as a percentage of related Food and beverage sales and Entertainment and merchandise sales, as opposed to Total Company venue sales. |
Fiscal 2018 Compared to Fiscal 2017
Revenues
Company venue sales were $875.3 million and $868.9 million for Fiscal 2018 and Fiscal 2017, respectively. The increase in Company venue sales was primarily attributable to the favorable impact of approximately $6.6 million in net breakage related to Play Pass for Fiscal 2018 compared to $2.2 million of net deferral for Fiscal 2017. The favorable impact of the reduction in deferred revenue related to Play Pass was partially offset by a $3.6 million decrease in revenue due to temporary venue closures, and a $2.6 million net decrease in revenue from venues closed in Fiscal 2018 and 2017.
Franchise fees and royalties increased from $17.9 million to $20.7 million primarily due to the impact of new revenue recognition guidance in 2018 which resulted in $3.5 million of national advertising fund contributions from franchisees being recorded as revenue, rather than netted against advertising expense (see “Advertising Expense” below), partially offset by a $0.3 million decrease in revenue recognized from franchise and development fee agreements which as a result of the new revenue recognition guidance are now recognized on a straight-line basis over the life of the related franchise agreement beginning at the time a new franchised location is opened. Historically we recognized revenue from initial franchise and development fees upon the opening of a franchised location. Additionally, Franchise fees and royalties were impacted by a $0.3 million reduction in revenue from the shipment of games to franchisees.
Company Venue Operating Costs
The cost of food, beverage, entertainment and merchandise, as a percentage of Total company venue sales, was 15.0% and 14.7% for Fiscal 2018 andFiscal 2017, respectively, as a sales shift towards higher margin entertainment and merchandise sales from food and beverage sales was offset by an increase in redemptions for merchandise, primarily related to the impact of More Tickets, one of the new initiatives launched by the Company in 2018.
The cost of food and beverage as a percentage of food and beverage sales, was 23.8% for both Fiscal 2018 and Fiscal 2017, as a change in sales mix and increased beverage costs in 2018 offset favorability in commodity prices and volume, primarily related to cheese and pepperoni compared to 2017.
The cost of entertainment and merchandise, as a percentage of Entertainment and merchandise sales, was 7.7% and 6.5% for Fiscal 2018 and Fiscal 2017, respectively. The cost of entertainment and merchandise, as a percentage of Entertainment and merchandise in 2018 compared to 2017 primarily reflects a combination of the impact of AYCP and More Tickets which were launched nationally during the third quarter of 2018. Also impacting the cost of entertainment and merchandise, as a percentage of Entertainment and merchandise sales, was an increase in Play Pass related supplies such as cards and wristbands, as a result of Play Pass being deployed to all of our Company-operated venues in 2018 compared to 268 at the beginning of 2017.
Labor expenses, as a percentage of Total company venue sales, were 29.3% and 28.5% for Fiscal 2018 and Fiscal 2017, respectively. Increased minimum wage rates in several states fully offset a decrease in labor hours in Fiscal 2018 compared to Fiscal 2017. Our sales per man hour improved approximately 1.7% in Fiscal 2018 from Fiscal 2017.
Other venue operating expenses, as a percentage of Total company venue sales, were flat at 17.2% for both Fiscal 2018 and Fiscal 2017. Fiscal 2018 reflects higher property taxes and common area and utility costs, as well as expenses related to the production and deployment of new menu boards and panels in connection with the launch of AYCP. Fiscal 2017 reflects losses incurred in connection with Hurricanes Harvey and Irma, as well as higher IT and technology support costs related primarily to the completion in 2017 of the deployment of Play Pass in all of our domestic Company-owned venues.
Advertising Expense
Advertising expense was $48.2 million and $48.4 million for Fiscal 2018 and Fiscal 2017, respectively. Advertising expense for Fiscal 2018 was impacted by the adoption of a new revenue recognition standard effective January 1, 2018 that requires us to account for our national advertising fund contributions as revenues, rather than netted against Advertising expense. Including the impact of netting national advertising fund revenues against Advertising expense, Advertising expense for Fiscal 2018 would have been $45.0 million (see “Revenues” above). Advertising expense for Fiscal 2018 reflects a decrease in national media costs and local venue marketing, as well as a decrease in advertising for our Peter Piper Pizza venues as we shifted away from television and print advertising to digital advertising.
General and Administrative Expenses
General and administrative expenses were$54.9 millionand$56.5 millionforFiscal 2018 and Fiscal 2017, respectively. The decrease in General and administrative expenses is primarily due to cost savings initiatives implemented in 2018 and a decrease in labor related litigation, partially offset by an increase in incentive compensation as a result of improved operating results in the latter part of the year.
Depreciation and Amortization
Depreciation and amortization was$100.7 million and $109.8 million for Fiscal 2018 and Fiscal 2017, respectively. The decrease in depreciation and amortization is primarily due to the impact of certain property plant and equipment having reached the end of their depreciable lives, and impairments recorded on certain venues.
Transaction, Severance and Related Litigation Costs
Transaction, severance and related litigation costs were $0.5 million and $1.4 million for Fiscal 2018 and Fiscal 2017, respectively. The Transaction, severance and related litigation costs for Fiscal 2018 and Fiscal 2017 relate primarily to $0.3 million and $1.0 million, respectively, in legal fees and settlements incurred in connection with Merger related litigation, and severance payments of $0.2 million and $0.5 million, respectively.
Asset Impairments
InFiscal 2018, we recognized an asset impairment charge of $6.9 million primarily related to eight venues. In Fiscal 2017 we recognized an asset impairment charge of $1.8 million primarily related to five venues, of which two were previously impaired. We continue to operate all but two of these venues. The impairment charges were based on the determination that the financial performance of these venues was adversely impacted by various competitive and economic factors in the market in which the venues are located.
Interest Expense
Interest expense was $76.3 million and $69.1 million for Fiscal 2018 and Fiscal 2017, respectively. Our weighted average effective interest rate 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 6.4% and 5.6% for Fiscal 2018 and Fiscal 2017, respectively.
Income Taxes
Our effective income tax rates for Fiscal 2018 and Fiscal 2017 were 16.9% and 36.0%, respectively (excluding the adjustment to our deferred tax liability resulting from the decrease in the federal income tax rate from 35% to 21% enacted on December 22, 2017, as part of the Tax Cuts and Jobs Act (the “TCJA”)). Our effective income tax rate for Fiscal 2018 was favorably impacted by employment-related federal income tax credits and a one-time adjustment to deferred tax (the tax effect of the cumulative foreign currency translation adjustment existing as of January 1, 2018) resulting from the change in our intent to no longer indefinitely reinvest monies previously loaned to our Canadian subsidiary recorded in the first quarter, offset by:
(i) nondeductible litigation costs related to the Merger;
(ii) nondeductible penalties;
(iii) an increase in our state income tax expense for the year which in large part was caused by state tax legislation enacted during the second quarter that increased the amount of income subject to state taxation;
(iv) foreign income taxes withheld (not offset by foreign tax credits due to the foreign tax credit limitation);
(v) an increase in the reserve for uncertain tax positions, and
(vi) an increase in a valuation allowance for deferred tax assets associated with a carryforward of certain state tax credits and deferred tax assets relating to our Canadian operations that could expire before they are utilized.
Our effective income tax rate for Fiscal 2018 was also favorably impacted by adjustments to the provisional estimates provided in Fiscal 2017 to account for the impact of the TCJA pursuant to Staff Accounting Bulletin No. 118 (“SAB 118”). Under SAB 118, we included a provisional estimate of $66.6 million tax benefit in our consolidated financial statements for the fiscal year ended December 31, 2017, relating to the enactment of TJCA, which primarily related to the re-measurement of our
deferred tax liability. In the second quarter of Fiscal 2018, we recorded an adjustment to the provisional estimate of $0.2 million tax benefit, and in the third quarter of Fiscal 2018, we recorded an incremental adjustment to the provisional estimate of $0.5 million tax benefit. The measurement period relating to the enactment of the TCJA ended during our fourth quarter, and the tax effects thereof have been completed as of the end of Fiscal 2018.
Fiscal 2017 Compared to Fiscal 2016
Revenues
Company venue sales were $868.9 million and $905.3 million for Fiscal 2017 and Fiscal 2016, respectively, the decrease was primarily attributable to a 4.8% decrease in comparable venue sales, offset partially by revenue from new venue openings. Company venue sales for Fiscal 2017 were also negatively impacted by an increase of approximately $2.2 million in Play Pass related deferred revenue compared to Fiscal 2016.
Franchise fees and royalties decreased from $18.3 million to $17.9 million due to a reduction in shipping revenue from the shipment of games to franchisees as a result of fewer unit openings in Fiscal 2017 compared to Fiscal 2016, offset partially by an increase in sales at our franchised units, and additional revenue from new franchise units opened in 2017, net of franchise units closed.
Company Venue Operating Costs
The cost of food, beverage, entertainment and merchandise, as a percentage of Total company venue sales, was 14.7% and 15.1% for Fiscal 2017 andFiscal 2016, respectively, as food and beverage costs benefited from the implementation of our new inventory management system offset by higher Entertainment and merchandise costs related to an increase in Play Pass related supplies.
The cost of food and beverage as a percentage of Food and beverage sales, was 23.8% and 25.1% for Fiscal 2017 and Fiscal 2016, respectively. The decrease in the cost of food and beverage on a percentage basis in Fiscal 2017 was driven by benefits realized from the implementation of our inventory management system late in the third quarter of 2016, as well as price increases taken in our food and beverage menu in the fourth quarter of 2016, partially offset by an increase in our commodity prices, primarily cheese, pepperoni and chicken wings.
The cost of entertainment and merchandise, as a percentage of Entertainment and merchandise sales, was 6.5% for both Fiscal 2017 and Fiscal 2016. The cost of entertainment and merchandise, as a percentage of Entertainment and merchandise sales reflects an increase in Play Pass related supplies in 2017 as a result of Play Pass being deployed to more venues compared to 2016, and an increase in the amount of revenue deferred in connection with the implementation of our Play Pass card system. The cost of Entertainment and merchandise sales, excluding the impact of supplies and deferred revenue related to Play Pass, was 5.7% for Fiscal 2017 compared to 6.2% for Fiscal 2016.
Labor expenses were $248.1 million and $251.4 million for Fiscal 2017 and Fiscal 2016, respectively. A decease in labor hours as a result of lower sales volumes in Fiscal 2017 compared to Fiscal 2016 mostly offset increased minimum wage rates in several states.
Other venue operating expenses were $149.5 million and $148.9 million for Fiscal 2017 and Fiscal 2016, respectively, the increase was primarily due to losses incurred in connection with Hurricanes Harvey and Irma, and an increase in IT and technology support costs related primarily to the completion in 2017 of the deployment of Play Pass in all of our domestic Company-owned venues, partially offset by a decrease in start up and marketing costs related to new venue openings.
Advertising Expenses
Advertising expenses were $48.4 million and $46.1 million for Fiscal 2017 and Fiscal 2016, respectively. As a percentage of Total revenues, advertising expenses were 5.5% and 5.0%, respectively, for Fiscal 2017 and Fiscal 2016. Fiscal 2017 reflects an increase in radio advertising and digital and social media costs.
General and Administrative Expenses
General and administrative expenses were$56.5 million and $61.0 million forFiscal 2017 and Fiscal 2016, respectively. General and administrative expenses in Fiscal 2017 reflect a decrease in incentive compensation as a result of lower sales and operating performance and a decrease in labor related litigation costs, partially offset by an increase in subscription service fees related to corporate IT initiatives.
Depreciation and Amortization
Depreciation and amortization was$109.8 million and $119.6 million for Fiscal 2017 and Fiscal 2016, respectively. The decrease in depreciation and amortization is primarily due to the impact of certain property plant and equipment having reached the end of their depreciable lives.
Transaction, Severance and Related Litigation Costs
Transaction, severance and related litigation costs were $1.4 million and $1.3 million for Fiscal 2017 and Fiscal 2016, respectively. The Transaction, severance and related litigation costs for Fiscal 2017 and Fiscal 2016 relate primarily to $1.0 million and $1.2 million, respectively, in legal fees and settlements incurred in connection with Merger related litigation, and severance payments of $0.5 million and $0.1 million, respectively.
Interest Expense
Interest expense was $69.1 million and $67.7 million forFiscal 2017 and Fiscal 2016, respectively. Our weighted average effective interest rate 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 5.6% and 5.5% for Fiscal 2017 and Fiscal 2016, respectively.
Income Taxes
Our effective income tax rate for Fiscal 2017, excluding the adjustment to our deferred taxes resulting from the enactment of the TCJA, was 36.0% as compared to 41.7% for Fiscal 2016. Our effective income tax rate for Fiscal 2017 differs from the statutory tax rate primarily due to the favorable impact of employment-related federal income tax credits which were partially offset by the true-up of the prior year’s estimate of employment-related tax credits versus actuals. Our effective income tax rate for Fiscal 2017 was negatively impacted by non-deductible litigation costs related to the Merger, non-deductible Canadian interest expense, and adjustments recorded in Fiscal 2017 to state tax credit carryforwards that we estimate will expire. In addition, our Fiscal 2017 effective income tax rate was favorably impacted by a reorganization of our Canadian structure, partially offset by the impact of a valuation allowance recorded in connection with our Canadian subsidiary.
The reduction in the federal corporate tax rate resulting from the TCJA significantly impacted our Fiscal 2017 income taxes. U.S. GAAP requires deferred tax assets and liabilities to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled, and further requires the effect of a change in tax law to be recorded discretely as a component of the income tax provision related to continuing operations in the period of enactment. This accounting requirement resulted in a $66.6 million nonrecurring reduction of our net deferred tax liability and a corresponding $66.6 million benefit to deferred federal income taxes.
Financial Condition, Liquidity and Capital Resources
Overview of Liquidity
We finance our business activities through cash flows provided by our operations.
The primary components of working capital are as follows:
our guests pay for their purchases in cash or credit cards at the time of the sale and the cash from these sales is typically received before our related accounts payable to suppliers and employee payroll becomes due;
frequent inventory turnover and the use of fresh ingredients results in a limited investment required in inventories; and
our accounts payable are generally due within five to 30 days.
As a result of these factors, our requirement for working capital is not significant and we are able to operate with a net working capital deficit (current liabilities in excess of current assets), similar to other companies in the restaurant industry.
The following tables present summarized consolidated financial information that we believe is helpful in evaluating our liquidity and capital resources as of the periods presented:
|
| | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | December 30,
2018 | | December 31,
2017 | | January 1,
2017 |
| | | (in thousands) |
| Net cash provided by operating activities | | $ | 86,790 |
| | $ | 104,297 |
| | $ | 118,955 |
|
| Net cash used in investing activities | | (79,284 | ) | | (93,712 | ) | | (98,439 | ) |
| Net cash used in financing activities | | (11,547 | ) | | (5,030 | ) | | (10,095 | ) |
| Effect of foreign exchange rate changes on cash | | 50 |
| | 466 |
| | 216 |
|
| Change in cash and cash equivalents | | $ | (3,991 | ) | | $ | 6,021 |
| | $ | 10,637 |
|
| Cash paid for interest | | $ | 72,966 |
| | $ | 64,675 |
| | $ | 64,614 |
|
| Cash paid for income taxes, net | | $ | 1,054 |
| | $ | 7,136 |
| | $ | 10,728 |
|
|
| | | | | | | | |
| | | December 30,
2018 | | December 31,
2017 |
| | | (in thousands) |
| Cash and cash equivalents | | $ | 63,170 |
| | $ | 67,200 |
|
| Restricted cash | | $ | 151 |
| | $ | 112 |
|
| Term loan facility | | $ | 723,900 |
| | $ | 731,500 |
|
| Senior notes | | $ | 255,000 |
| | $ | 255,000 |
|
| Net availability on undrawn revolving credit facility | | $ | 141,000 |
| | $ | 140,100 |
|
Funds generated by our operating activities and available cash and cash equivalents continue to be our primary sources of liquidity. We believe these sources of liquidity will be sufficient to finance our strategic plan and capital initiatives for the next twelve months. However, in the event of a material decline in our sales trends or operating margins, there can be no assurance that we will generate sufficient cash flows at or above our current levels. Our revolving credit facility is also available for additional working capital needs and investment opportunities. Our ability to access our revolving credit facility is subject to our compliance with the terms and conditions of the credit agreement governing such facility, including our compliance with certain prescribed covenants, as more fully described below.
As of December 30, 2018, we had no borrowings outstanding and a $9.0 million of letter of credit issued but undrawn under the revolving credit facility, leaving $141.0 million in borrowing capacity under the revolving credit facility as of December 30, 2018. As of December 31, 2017, we had no borrowings outstanding and $9.9 million of letters of credit issued but undrawn under the revolving credit facility. On May 8, 2018 we extended the maturity on $95.0 million of the revolving credit facility through November 16, 2020 from February 14, 2019, whereas. The remaining $55 million matured on February 14, 2019.
Our primary uses for cash provided by operating activities relate to funding our ongoing business activities, planned capital expenditures, servicing our debt, and the payment of income taxes.
Our strategic plan does not require that we enter into any material development or contractual purchase obligations. Therefore, we have the flexibility necessary to manage our liquidity by promptly deferring or curtailing any planned capital spending.
We monitor the capital markets and our capital structure and make changes from time to time, with the goal of maintaining financial flexibility, preserving or improving liquidity and/or achieving cost efficiency. From time to time we may elect to repurchase our outstanding debt, including repurchases of our senior notes, for cash through open market repurchases or privately negotiated transactions with certain of our debtholders, although there is no assurance we will do so.
Sources and Uses of Cash - Fiscal 2018 Compared to Fiscal 2017
Net cash provided by operating activities was $86.8 million in Fiscal 2018 and $104.3 million in Fiscal 2017. The decrease in net cash provided by operating activities is primarily due to a decrease an increase in our net loss, excluding the adjustment to our deferred taxes resulting from the enactment of the TCJA in Fiscal 2017, and fluctuations in working capital, partially offset by a reduction in income taxes receivable.
Net cash used in investing activities was $79.3 million in Fiscal 2018 and $93.7 million in Fiscal 2017. Net cash used in investing activities in Fiscal 2018 and Fiscal 2017 relates primarily to capital expenditures.
Net cash used in financing activities was $11.5 million in Fiscal 2018 and primarily related to principal payments on our term loan and lease related obligations. Net cash used in financing activities of $5.0 million in Fiscal 2017 related primarily to principal payments on our term loan and lease related obligations,partially offset by sale leaseback proceeds of $4.1 million and a $1.4 million return of capital.
Sources and Uses of Cash - Fiscal 2017 Compared to Fiscal 2016
Net cash provided by operating activities was $104.3 million in Fiscal 2017 and $119.0 million in Fiscal 2016. The decrease in net cash provided by operating activities is primarily due to a decrease in net income, excluding the adjustment to our deferred taxes resulting from the enactment of the TCJA, and fluctuations in working capital.
Net cash used in investing activities was $93.7 million in Fiscal 2017 and $98.4 million in Fiscal 2016. Net cash used in investing activities in Fiscal 2017 and Fiscal 2016 relates primarily to capital expenditures.
Net cash used in financing activities was $5.0 million in Fiscal 2017 and related primarily to principal payments on our term loan and lease related obligations, partially offset by sale leaseback proceeds of $4.1 million and a $1.4 million return of capital. Net cash used in financing activities was $10.1 million in Fiscal 2016 and related primarily to principal payments on our term loan and lease related obligations.
Debt Financing
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 $150.0 million senior secured revolving credit facility with an original maturity date of February 14, 2019, which 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”). 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 facility lenders: (a) with respect to each fiscal year (commencing with the fiscal year ending December 30, 2018), we are required to make a mandatory prepayment of term loan principal to the extent that 75% of 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 and any such required mandatory payment shall be reduced by any optional prepayments of principal that may have occurred during the fiscal year, and (b) we shall not incur additional first lien senior secured debt in connection with certain acquisitions, mergers or consolidations unless our net first lien senior secured leverage ratio is not greater than 3.65 to 1.00 on a pro forma basis. The maturity date of the amount of the revolving credit facility that was not extended remains February 14, 2019. 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.
We may request one or more incremental term loan facilities and/or increase commitments under our revolving credit facility in an aggregate amount of up to the sum of (a) $200.0 million plus (b) such additional amount so long as, (i) in the case of loans under additional credit facilities that rank equally and without preference with the liens on the collateral securing the secured credit facilities, our consolidated net first lien senior secured leverage ratio would be no greater than 4.25 to 1.00 and (ii) in the case of loans under additional credit facilities that rank junior to the liens on the collateral securing the secured credit facilities, our consolidated total net secured leverage ratio would be no greater than 5.25 to 1.00, subject to certain conditions, and receipt of commitments by existing or additional lenders.
The secured credit facilities require scheduled quarterly payments on the term loan facility equal to 0.25% of the original principal amount of the term loan facility from July 2014 to December 2020, with the balance paid at maturity, February 14, 2021. We may voluntarily repay outstanding loans under the secured credit facilities at any time, without prepayment premium or penalty, except in connection with a repricing event subject to customary “breakage” costs with respect to London Interbank Offered Rate (“LIBOR”) loans.
As of December 30, 2018, we had no borrowings outstanding and $9.0 million of letter of credit issued but undrawn under the revolving credit facility leaving $141.0 million in borrowing capacity under the revolving credit facility as of December 30, 2018. As of December 31, 2017, we had no borrowings outstanding and $9.9 million of letter of credit issued but undrawn under the revolving credit facility.
Borrowings under the secured credit facilities bear interest at a rate equal to, at our option, either (a) 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. 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 Fiscal 2018, the applicable margin for LIBOR borrowings under both the term loan facility and revolving credit facility was 3.25% and during Fiscal 2017 the applicable margin was 3.00% under both the term loan facility and the revolving facility until November 16, 2017, when the applicable margin returned to its current rate of 3.25% for both the term loan facility and revolving credit facility. During Fiscal 2018, the federal funds rate ranged from 1.34% to 2.40%, the prime rate ranged from 4.50% to 5.50% and the one-month LIBOR ranged from 1.55% to 2.52%.
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 under the revolving credit facility was 0.5% per annum and was subject to one step-down from 0.5% to 0.375% based on our net first lien senior secured leverage ratio. During Fiscal 2018, the commitment fee rate was 0.5% and for Fiscal 2017, the commitment fee rate was 0.375% until November 16, 2017, when it returned to its current rate of 0.5%. 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 processing and fronting fees computed at a rate equal to 0.125% per annum on the daily stated amount of each letter of credit.
The weighted average effective interest rate incurred on our borrowings under our secured credit facilities was 5.8% for the 2018 fiscal year, 4.7% for the 2017 fiscal year and 4.6% for the 2016 fiscal year, which includes amortization of debt issuance 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 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 65.0% 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 a first-priority lien with respect to the collateral. The secured credit facilities also contain customary covenants and events of default. The covenants 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;
(viii) enter into sale-leaseback transactions;
(ix) change our lines of business;
(x) restrict dividends from our subsidiaries or restrict liens;
(xi) change our fiscal year; and
(xii) 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 last twelve month’s EBITDA, as defined in the Senior Credit Facilities). The covenant will be tested quarterly when the revolving credit facility is more than 30.0% drawn (excluding outstanding letters of credit) and will be a condition to drawings under the revolving credit facility that would result in more than 30.0% drawn thereunder.
Senior Unsecured Notes
Our senior unsecured notes consist of $255.0 million aggregate principal amount borrowings of 8.000% Senior Notes due 2022 (the “senior notes”) and mature on February 15, 2022. The senior notes are registered under the Securities Act, do not
bear legends restricting their transfer and are not entitled to registration rights under our registration rights agreement. As of February 15, 2017, we may redeem some or all of the senior notes at certain redemption prices set forth in the indenture governing the senior notes (the “indenture”).
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 the 2018, 2017 and 2016 fiscal years, which includes amortization of debt issuance costs and other fees related to our senior notes.
Capital Expenditures
We intend to continue to focus our future capital expenditures on reinvestment into our existing Company-operated Chuck E. Cheese’s and PPP venues through various planned capital initiatives and the development or acquisition of additional Company-operated venues. During Fiscal 2018, we completed 268 game enhancements and 31 major remodels, of which 25 related to the re-imaging effort to update Chuck E. Cheese locations to a new look and feel.
We have funded and expect to continue to fund our capital expenditures through existing cash flows from operations. Capital expenditures in 2018 totaled approximately $79.8 million.
The following table reconciles the approximate total capital spend by initiative to our Consolidated Statements of Cash Flows for the periods presented:
|
| | | | | | | | | | | | |
| | Fiscal Year Ended |
| | December 30, 2018 | | December 31, 2017 | | January 1, 2017 |
| | | |
Growth capital spend (1) | | $ | 31,269 |
| | $ | 51,079 |
| | $ | 55,200 |
|
Maintenance capital spend (2) | | 44,656 |
| | 35,678 |
| | 33,838 |
|
| IT capital spend | | 3,919 |
| | 7,309 |
| | 10,058 |
|
| Total Capital Spend | | $ | 79,844 |
| | $ | 94,066 |
| | $ | 99,096 |
|
__________________
| |
(1) | Growth capital spend includes our Play Pass initiative, major remodels, venue expansions, major attractions and new venue development, including relocations and franchise acquisitions. |
| |
(2) | Maintenance capital spend includes game enhancements, general venue capital expenditures and corporate capital expenditures. |
We currently estimate our capital expenditures in 2019 will total approximately $95 million to $105 million, inclusive of maintenance capital, growth capital and IT related capital.
Off-Balance Sheet Arrangements and Contractual Obligations
As of December 30, 2018, we had no off-balance sheet financing arrangements as described in Regulation S-K Item 303(a)(4)(ii).
The following table summarizes our contractual obligations as of December 30, 2018: |
| | | | | | | | | | | | | | | | | | | |
| | | | Payments Due by Period |
| | Total | | Less than
1 Year | | 1-3
Years | | 4-5
Years | | More than
5 Years |
| | (in thousands) |
Operating leases (1) | $ | 901,598 |
| | $ | 92,435 |
| | $ | 179,897 |
| | $ | 171,989 |
| | $ | 457,277 |
|
| Secured credit facilities | 723,900 |
| | 7,600 |
| | 716,300 |
| | — |
| | — |
|
| Sale leaseback obligations | 257,017 |
| | 14,083 |
| | 29,001 |
| | 30,196 |
| | 183,737 |
|
| Senior notes | 255,000 |
| | — |
| | — |
| | 255,000 |
| | — |
|
Interest obligations (2) | 162,399 |
| | 60,001 |
| | 92,198 |
| | 10,200 |
| | — |
|
Purchase Obligations (3) | 40,486 |
| | 31,310 |
| | 8,233 |
| | 943 |
| | — |
|
| Capital leases | 24,002 |
| | 2,182 |
| | 4,415 |
| | 4,139 |
| | 13,266 |
|
Uncertain tax positions (4) | 343 |
| | 343 |
| | — |
| | — |
| | — |
|
| $ | 2,364,745 |
| | $ | 207,954 |
| | $ | 1,030,044 |
| | $ | 472,467 |
| | $ | 654,280 |
|
__________________
| |
(1) | Includes the initial non-cancelable term plus renewal option periods provided for in the lease that can be reasonably assured but excludes contingent rent obligations and obligations to pay property taxes, insurance and maintenance on the leased assets. |
| |
(2) | Interest obligations represent an estimate of future interest payments under our secured credit facilities and senior notes. We calculated the estimate based on the terms of the secured credit facilities and senior notes. Our estimate uses interest rates in effect during Fiscal 2018 and assumes we will not have any amounts drawn on our revolving credit facility. |
| |
(3) | A “purchase obligation” is defined as an agreement to purchase goods or services that is enforceable and legally binding on us and that specifies all significant terms, including (a) fixed or minimum quantities to be purchased; (b) fixed, minimum or variable price provisions; and (c) the approximate timing of the transaction. Our purchase obligations primarily consist of obligations for the purchase of merchandise and entertainment inventory, obligations under fixed price purchase agreements and contracts with “spot” market prices primarily relating to food and beverage products, obligations for the purchase of commercial airtime, and obligations associated with the modernization of various information technology platforms. The above purchase obligations exclude agreements that are cancelable without significant penalty. |
| |
(4) | Due to the uncertainty related to the settlement of uncertain tax positions, only the current portion of the liability for unrecognized tax benefits (including accrued interest and penalties) has been provided in the table above. The non-current portion of $5.1 million is excluded from the table above. |
As of December 30, 2018, unpaid obligations related to capital expenditures totaling $2.4 million were outstanding and included in accounts payable. These amounts are expected to be paid in less than one year.
The total estimate of accrued liabilities for our self-insurance programs was $14.7 million as of December 30, 2018. We estimate that $4.8 million of these liabilities will be paid in fiscal 2018 and the remainder paid in fiscal 2019 and beyond. Due to the nature of the underlying liabilities and the extended period of time often experienced in resolving insurance claims, we cannot make reliable estimates of the timing of cash payments to be made in the future for our obligations related to our insurance liabilities. Therefore, no amounts for such liabilities have been included in the table above.
As of December 30, 2018, we had $9.0 million of letters of credit issued but undrawn under the revolving credit facility. We utilize letters of credit primarily for our self-insurance programs. These letters of credit do not represent additional obligations of the Company since the underlying liabilities are already recorded in accrued liabilities. However, if we were unable to pay insurance claims when due, our insurance carrier could demand for payment pursuant to these letters of credit.
In addition, see further discussion of our indebtedness and future debt obligations above under “Financial Condition, Liquidity and Capital Resources - Debt Financing.”
We enter into various purchase agreements in the ordinary course of business and have fixed price agreements and contracts with “spot” market prices primarily relating to food and beverage products. Other than the purchase obligations included in the above table, we do not have any material contracts (either individually or in the aggregate) in place committing us to a minimum or fixed level of purchases or that are cancelable subject to significant penalty.
Inflation
Our cost of operations, including but not limited to labor, food products, supplies, utilities, financing and rental costs, can be significantly affected by inflationary factors.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amount of our assets and liabilities at the date of our consolidated financial statements, the reported amount of revenues and expenses during the reporting period and the related disclosures of contingent assets and liabilities. The use of estimates is pervasive throughout our consolidated financial statements and is affected by management judgment and uncertainties. Our estimates, assumptions and judgments are based on historical experience, current market trends and other factors that we believe to be relevant and reasonable at the time our consolidated financial statements were prepared. We continually evaluate the information used to make these estimates as our business and the economic environment change. Actual results could differ materially from these estimates under different assumptions or conditions.
The significant accounting policies used in the preparation of our consolidated financial statements are described in Note 1. “Description of Business and Summary of Significant Accounting Policies” included in Part II, Item 8. “Financial Statements and Supplementary Data.” We consider an accounting policy or estimate to be critical if it requires difficult, subjective or complex judgments and is material to the portrayal of our consolidated financial condition, changes in financial condition or results of operations. The selection, application and disclosure of the critical accounting policies and estimates have been reviewed by the Audit Committee of our Board of Directors. Our accounting policies and estimates that our management considers most critical are as follows:
Goodwill and Other Intangible Assets
The excess of the purchase price over fair value of net identifiable assets and liabilities of an acquired business (“goodwill”), trademarks, trade names and other indefinite-lived intangible assets are not amortized, but rather tested quantitatively and qualitatively for impairment, at least annually, and whenever events or circumstances indicate that impairment may have occurred. Events or circumstances that could trigger an impairment review include, but are not limited to, a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, significant changes in competition, a loss of key personnel, significant changes in our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, or significant under-performance relative to expected historical or projected future results of operations. We determined that no triggering events occurred during Fiscal 2018.
Recoverability of the carrying value of goodwill is measured at the reporting unit level. In performing a quantitative analysis, we measure the recoverability of goodwill for our reporting units using a discounted cash flow model incorporating discount rates commensurate with the risks involved, which is classified as a Level 3 fair value measurement. The key assumptions used in the discounted cash flow valuation model include discount rates, growth rates, tax rates, cash flow projections and terminal value rates. Discount rates, growth rates and cash flow projections are the most sensitive and susceptible to change as they require significant management judgment.
We test indefinite-lived intangible assets utilizing the relief from royalty method to determine the estimated fair value for each indefinite-lived intangible asset, which is classified as a Level 3 fair value measurement. The relief from royalty method estimates our theoretical royalty savings from ownership of the intangible asset. Key assumptions used in this model include discount rates, royalty rates, growth rates, tax rates, sales projections and terminal value rates. Discount rates, royalty rates, growth rates and sales projections are the assumptions most sensitive and susceptible to change as they require significant management judgment. Discount rates used are similar to the rates estimated by the weighted average cost of capital considering any differences in company-specific risk factors.
We tested our goodwill, trademarks, trade names and other indefinite-lived intangible assets for impairment as of October 1, 2018. The fair value of our goodwill, trademarks, trade names and other indefinite-lived intangible assets was in excess of the carrying value as of the date of our Fiscal 2018 goodwill impairment test. No indicators of impairment were identified from the date of our impairment test through the end of Fiscal 2018.
Impairment of Long-Lived Assets
We review our property and equipment for indicators of impairment on an ongoing basis at the lowest level of cash flows available, which is on a venue-by-venue basis, to assess if the carrying amount may not be recoverable. Such events or changes may include a significant change in the business climate in a particular market area (for example, due to economic downturn or natural disaster), historical negative cash flows or plans to dispose of or sell the property and equipment before the
end of its previously estimated useful life. If an event or change in circumstances occurs, we estimate the future cash flows expected to result from the use of the property and equipment and its eventual disposition. If the sum of the expected future cash flows, undiscounted and without interest, is less than the asset carrying amount (an indication that the carrying amount may not be recoverable), we may be required to recognize an impairment loss. We estimate the fair value of a venue’s property and equipment by discounting the expected future cash flows of the venue over its remaining lease term using a weighted average cost of capital commensurate with the risk.
The following estimates and assumptions used in the discounted cash flow analysis impact the fair value of a venue’s long-lived assets:
•discount rate based on our weighted average cost of capital and the risk-free rate of return;
•sales growth rates and cash flow margins over the expected remaining lease terms;
•strategic plans, including projected capital spending and intent to exercise renewal options, for the venue;
•salvage values; and
•other risks and qualitative factors specific to the asset or conditions in the market in which the asset is
located at the time the assessment was made.
During Fiscal 2018, the average discount rate, average sales growth rate and average cash flow margin growth rate used were 8.1%, 0.0% and 0.0%, respectively. We believe our assumptions in calculating the fair value of our long-lived assets are similar to those used by other marketplace participants. If actual results are not consistent with our estimates and assumptions, we may be exposed to additional impairment charges, which could be material to our Consolidated Statements of Earnings.
Estimation of Reserves
The liabilities we record for claims related to insurance and tax reserves requires us to make judgments about the amount of expenses that will ultimately be incurred. We use historical experience, as well as other specific circumstances surrounding these contingencies, in evaluating the amount of liability that should be recorded. As additional information becomes available, we assess the potential liability related to various claims and revise our estimates as appropriate. These revisions could materially impact our consolidated results of operations, financial position or liquidity.
Self-Insurance reserves. We are self-insured for certain losses related to workers’ compensation, general liability, property, and company-sponsored employee health plans. Liabilities associated with risks retained by the Company are estimated primarily using historical claims experience, current claims data, demographic and severity factors, other factors deemed relevant by us, as well as information provided by independent third-party actuaries. To limit our exposure for certain losses, we purchase stop-loss or high-deductible insurance coverage through third-party insurers. Our stop-loss limit or deductibles for workers’ compensation, general liability, property, and company-sponsored employee health plans, generally range from $0.2 million to $0.5 million per occurrence. As of December 30, 2018, our total estimate of accrued liabilities for our self-insurance and high deductible plan programs was $14.7 million. We estimate approximately $4.8 million of these liabilities will be paid in fiscal 2019 and the remainder paid in fiscal 2020 and beyond. If actual claims trends or other factors differ from our estimates, our financial results could be significantly impacted.
Income tax reserves. We are subject to audits from multiple domestic and foreign tax authorities. We maintain reserves for federal, state and foreign income taxes when we believe a position may not be fully sustained upon review by taxing authorities. Although we believe that our tax positions are fully supported by the applicable tax laws and regulations, there are matters for which the ultimate outcome is uncertain. We recognize the benefit from an uncertain tax position in our consolidated financial statements when the position is more-likely-than-not (a greater than 50 percent chance of being sustained). The amount recognized is measured using a probability weighted approach and is the largest amount of benefit that is greater than 50 percent likelihood of being realized upon settlement or ultimate resolution with the taxing authority. We routinely assess the adequacy of the estimated liability for unrecognized tax benefits, which may be affected by changing interpretations of laws, rulings by tax authorities and administrative policies, certain changes and/or developments with respect to audits and expirations of the statute of limitations. Depending on the nature of the tax issue, the ultimate resolution of an uncertain tax position may not be known for a number of years; therefore, the estimated reserve balances could be included on our Consolidated Balance Sheets for multiple years. To the extent that new information becomes available that causes us to change our judgment regarding the adequacy of a reserve balance, such a change will affect our income tax expense or benefit in the period in which the determination is made and the reserve is adjusted. Significant judgment is required to estimate our provision for income taxes and liability for unrecognized tax benefits. At December 30, 2018, the reserve for uncertain tax positions (unrecognized tax benefits) was $4.3 million and the related interest and penalties was $1.1 million. Although we believe our approach is appropriate, there can be no assurance that the final outcome resulting from a tax
authority’s review will not be materially different than the amounts reflected in our estimated tax provision and tax reserves. If the results of any audit materially differ from the liabilities we have established for taxes, there would be a corresponding impact to our consolidated financial statements, including the liability for unrecognized tax benefits, current tax provision, effective tax rate, net after tax earnings and cash flows, in the period of resolution.
Accounting for Leases
The majority of our venues are leased. The terms of our venue leases vary in length from lease to lease, although a typical lease provides for an initial primary term of 10 years with two additional five year options to renew. We estimate the expected term of a lease by assuming the exercise of renewal options, in addition to the initial non-cancelable lease term, if the renewal is reasonably assured. Generally, “reasonably assured” relates to our contractual right to renew and the existence of an economic penalty that would preclude the abandonment of the lease at the end of the initial non-cancelable lease term. The expected term is used in the determination of whether a lease is a capital or operating lease and in the calculation of straight-line rent expense. Additionally, the useful life of leasehold improvements is limited by the expected lease term or the economic life of the asset, whichever is shorter. If significant expenditures are made for leasehold improvements late in the expected term of a lease and renewal is reasonably assured, the useful life of the leasehold improvement is limited to the end of the reasonably assured renewal period or economic life of the asset.
The determination of the expected term of a lease requires us to apply judgment and estimates concerning the number of renewal periods that are reasonably assured. If a lease is terminated prior to reaching the end of the expected term, this may result in the acceleration of depreciation or impairment of a venue’s long-lived assets, and it may result in the accelerated recognition of landlord contributions and the reversal of deferred rent balances that assumed higher rent payments in renewal periods that were never ultimately exercised by us.
With the adoption of the new Accounting Standards Update 2016-02, Leases (Topic 842), effective December 31, 2018, we will be required to recognize lease assets and lease liabilities on the balance sheet. The determination of the lease liabilities will require us to estimate the present value of our future lease commitments over their reasonably assured remaining lease term using a weighted average incremental borrowing rate commensurate with the rate of interest we would have to pay to borrow on a collateralized basis over a similar term an amount equal to our future lease payments in a similar economic environment.
Recently Issued Accounting Guidance
Refer to Note 1. “Description of Business and Summary of Significant Accounting Policies” to our consolidated financial statements included in Part II, Item 8. “Financial Statements and Supplementary Data” of this Annual Report for a description of recently issued accounting guidance.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to various types of market risk in the normal course of business, including the impact of interest rates, commodity price changes and foreign currency fluctuation.
Interest Rate Risk
We are exposed to market risk from changes in the variable interest rates related to borrowings under our secured credit facilities. All of our borrowings outstanding under the secured credit facilities, $723.9 million as of December 30, 2018, accrue interest at variable rates. Assuming the revolving credit facility remains undrawn, each 1% change in assumed interest rates, excluding the impact of our 1% interest rate floor, would result in a $7.2 million change in annual interest expense on indebtedness under the secured credit facilities.
Commodity Price Risk
We are exposed to commodity price changes related to certain food products that we purchase, primarily related to the prices of cheese and dough, which can vary throughout the year due to changes in supply, demand and other factors. We have not entered into any hedging arrangements to reduce our exposure to commodity price volatility associated with such commodity prices; however, we typically enter into short-term purchasing contracts, which may contain pricing arrangements designed to minimize the impact of commodity price fluctuations, and derivative instruments such as futures contracts to mitigate our exposure to commodity price fluctuations. For Fiscal 2018 and Fiscal 2017, our average cost of a block of cheese was $1.75 and $1.79, respectively. The estimated increase in our food costs from a hypothetical 10% increase in our average cost of a block of cheese would have been $1.0 million and $1.2 million for Fiscal 2018 and Fiscal 2017, respectively. For Fiscal 2018 and Fiscal 2017, the average cost of dough per pound was $0.48 and $0.45, respectively. The estimated increase in our food costs from a hypothetical 10% increase in the average cost of dough per pound would have been $0.5 million for both Fiscal 2018 and Fiscal 2017.
Foreign Currency Risk
We are exposed to foreign currency fluctuation risk associated with changes in the value of the Canadian dollar relative to the U.S. dollar as we operate a total of 11 Company-operated venues in Canada. For Fiscal 2018, our Canadian venues generated an operating loss of $0.9 million compared to our consolidated operating income of $50.8 million.
Changes in the currency exchange rate result in cumulative translation adjustments and are included in “Accumulated other comprehensive income (loss)” on our Consolidated Balance Sheets and potentially result in transaction gains or losses, which are included in our earnings. The low and high currency exchange rates for a Canadian dollar into a U.S. dollar for the fiscal year ended December 30, 2018 were $0.7326 and $0.8143, respectively. A hypothetical 10% devaluation in the average quoted U.S. dollar-equivalent of the Canadian dollar exchange rate during Fiscal 2018 would have increased our reported consolidated operating results by $0.1 million.
ITEM 8. Financial Statements.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholder and the Board of Directors of CEC Entertainment, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of CEC Entertainment, Inc. (the "Company") as of December 30, 2018 and December 31, 2017, the related consolidated statements of earnings, comprehensive income (loss), changes in stockholder’s equity, and cash flows, for each of the three years in the period ended December 30, 2018, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 30, 2018 and December 31, 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 30, 2018, in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for revenue in 2018 due to the adoption of Accounting Standards Codification No. 606, Revenue from Contracts with Customers.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Dallas, Texas
March 11, 2019
We have served as the Company's auditor since 1987.
CEC ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
|
| | | | | | | | |
|
| December 30,
2018 |
| December 31,
2017 |
| ASSETS |
|
|
|
|
| Current assets: |
|
|
|
|
| Cash and cash equivalents |
| $ | 63,170 |
|
| $ | 67,200 |
|
| Restricted cash | | 151 |
| | 112 |
|
| Accounts receivable |
| 24,020 |
|
| 20,061 |
|
| Income taxes receivable | | 10,160 |
| | 10,960 |
|
| Inventories |
| 23,807 |
|
| 22,000 |
|
| Prepaid expenses |
| 25,424 |
|
| 20,398 |
|
| Total current assets |
| 146,732 |
|
| 140,731 |
|
| Property and equipment, net |
| 539,185 |
|
| 570,021 |
|
| Goodwill |
| 484,438 |
|
| 484,438 |
|
| Intangible assets, net |
| 477,085 |
|
| 480,377 |
|
| Other noncurrent assets |
| 18,725 |
|
| 19,477 |
|
| Total assets |
| $ | 1,666,165 |
|
| $ | 1,695,044 |
|
| LIABILITIES AND STOCKHOLDER’S EQUITY |
| | | |
| Current liabilities: |
| | | |
| Bank indebtedness and other long-term debt, current portion |
| $ | 7,600 |
|
| $ | 7,600 |
|
| Capital lease obligations, current portion |
| 677 |
|
| 596 |
|
| Accounts payable |
| 31,410 |
|
| 31,374 |
|
| Accrued expenses |
| 36,030 |
|
| 36,616 |
|
| Unearned revenues |
| 18,124 |
|
| 21,050 |
|
| Accrued interest |
| 7,463 |
|
| 8,277 |
|
| Other current liabilities |
| 5,278 |
|
| 4,776 |
|
| Total current liabilities |
| 106,582 |
|
| 110,289 |
|
| Capital lease obligations, less current portion |
| 12,330 |
|
| 13,010 |
|
| Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion |
| 961,514 |
|
| 965,213 |
|
| Deferred tax liability, net |
| 107,058 |
|
| 114,186 |
|
| Accrued insurance |
| 9,861 |
|
| 8,311 |
|
| Other noncurrent liabilities |
| 226,249 |
|
| 221,887 |
|
| Total liabilities |
| 1,423,594 |
|
| 1,432,896 |
|
| Stockholder’s equity: |
| | | |
| Common stock, $0.01 par value; authorized 1,000 shares; 200 shares issued as of December 30, 2018 and December 31, 2017 |
| — |
|
| — |
|
| Capital in excess of par value |
| 359,570 |
|
| 359,233 |
|
| Accumulated deficit |
| (115,660 | ) |
| (95,199 | ) |
| Accumulated other comprehensive loss |
| (1,339 | ) |
| (1,886 | ) |
| Total stockholder’s equity |
| 242,571 |
|
| 262,148 |
|
| Total liabilities and stockholder’s equity |
| $ | 1,666,165 |
|
| $ | 1,695,044 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
CEC ENTERTAINMENT, INC
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands)
|
| | | | | | | | | | | |
| Fiscal Year Ended |
| December 30,
2018 |
| December 31,
2017 |
| January 1,
2017 |
| REVENUES: |
|
|
|
|
|
| Food and beverage sales | $ | 396,658 |
|
| $ | 410,609 |
|
| $ | 415,059 |
|
| Entertainment and merchandise sales | 478,676 |
|
| 458,279 |
|
| 490,255 |
|
| Total company venue sales | 875,334 |
|
| 868,888 |
|
| 905,314 |
|
| Franchise fees and royalties | 20,732 |
|
| 17,883 |
|
| 18,339 |
|
| Total revenues | 896,066 |
|
| 886,771 |
|
| 923,653 |
|
| OPERATING COSTS AND EXPENSES: | | | |
| |
| Company venue operating costs (excluding Depreciation and amortization): | | | |
| |
| Cost of food and beverage | 94,319 |
|
| 97,570 |
|
| 104,315 |
|
| Cost of entertainment and merchandise | 36,650 |
|
| 29,948 |
|
| 32,014 |
|
| Total cost of food, beverage, entertainment and merchandise | 130,969 |
|
| 127,518 |
|
| 136,329 |
|
| Labor expenses | 256,327 |
|
| 248,061 |
|
| 251,426 |
|
| Rent expense | 96,484 |
|
| 95,917 |
|
| 96,006 |
|
| Other venue operating expenses | 150,255 |
|
| 149,462 |
|
| 148,869 |
|
| Total company venue operating costs | 634,035 |
|
| 620,958 |
|
| 632,630 |
|
Other costs and expenses: |
|
|
|
| |
| Advertising expense | 48,198 |
|
| 48,379 |
|
| 46,142 |
|
| General and administrative expenses | 54,850 |
|
| 56,482 |
|
| 61,011 |
|
| Depreciation and amortization | 100,720 |
| | 109,771 |
| | 119,569 |
|
| Transaction, severance and related litigation costs | 527 |
|
| 1,448 |
|
| 1,299 |
|
| Asset impairments | 6,935 |
|
| 1,843 |
|
| 1,550 |
|
| Total operating costs and expenses | 845,265 |
|
| 838,881 |
|
| 862,201 |
|
| Operating income | 50,801 |
|
| 47,890 |
|
| 61,452 |
|
| Interest expense | 76,283 |
|
| 69,115 |
|
| 67,745 |
|
| Loss before income taxes | (25,482 | ) |
| (21,225 | ) |
| (6,293 | ) |
| Income tax benefit | (5,021 | ) |
| (74,291 | ) |
| (2,626 | ) |
| Net income (loss) | $ | (20,461 | ) |
| $ | 53,066 |
|
| $ | (3,667 | ) |
The accompanying notes are an integral part of these Consolidated Financial Statements.
CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
|
| | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | December 30,
2018 | | December 31,
2017 | | January 1,
2017 |
| Net income (loss) | | $ | (20,461 | ) | | $ | 53,066 |
| | $ | (3,667 | ) |
Components of other comprehensive income (loss), net of tax: | | | | | | |
| Foreign currency translation adjustments | | 547 |
| | 1,010 |
| | 420 |
|
| Comprehensive income (loss) | | $ | (19,914 | ) | | $ | 54,076 |
| | $ | (3,247 | ) |
The accompanying notes are an integral part of these Consolidated Financial Statements.
CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY
(in thousands, except share amounts)
|
| | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Capital In
Excess of
Par Value | | Accumulated Deficit | | Accumulated
Other
Comprehensive
Income (Loss) | |
|
| Shares | | Amount | | | | | Total |
| | (in thousands, except share information) |
| Balance at January 3, 2016 | 200 |
| | $ | — |
| | $ | 356,460 |
| | $ | (144,598 | ) | | $ | (3,316 | ) | | $ | 208,546 |
|
| Net loss | — |
| | — |
| | — |
| | (3,667 | ) | | — |
| | (3,667 | ) |
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 420 |
| | 420 |
|
| Stock-based compensation costs | — |
| | — |
| | 702 |
| | — |
| | — |
| | 702 |
|
| Tax benefit recognized from stock-based compensation awards | — |
| | — |
| | 4 |
| | — |
| | — |
| | 4 |
|
| Balance at January 1, 2017 | 200 |
| | $ | — |
| | $ | 357,166 |
| | $ | (148,265 | ) | | $ | (2,896 | ) | | $ | 206,005 |
|
| Net income | — |
| | — |
| | — |
| | 53,066 |
| | — |
| | 53,066 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 1,010 |
| | 1,010 |
|
| Stock-based compensation costs | — |
| | — |
| | 620 |
| | — |
| | — |
| | 620 |
|
| Return of capital | — |
| | — |
| | 1,447 |
| | — |
| | — |
| | 1,447 |
|
| Balance at December 31, 2017 | 200 |
| | $ | — |
| | $ | 359,233 |
| | $ | (95,199 | ) | | $ | (1,886 | ) | | $ | 262,148 |
|
| Net loss | — |
| | — |
| | — |
| | (20,461 | ) | | — |
| | (20,461 | ) |
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 547 |
| | 547 |
|
| Stock-based compensation costs | — |
| | — |
| | 337 |
| | — |
| | — |
| | 337 |
|
| Balance at December 30, 2018 | 200 |
| | $ | — |
| | $ | 359,570 |
| | $ | (115,660 | ) | | $ | (1,339 | ) | | $ | 242,571 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONT'D
(in thousands)
CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| December 30,
2018 | | December 31,
2017 | | January 1,
2017 |
| CASH FLOWS FROM OPERATING ACTIVITIES: |
| | |
| Net income (loss) | $ | (20,461 | ) | | $ | 53,066 |
| | $ | (3,667 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 100,720 |
| | 109,771 |
| | 119,569 |
|
| Deferred income taxes | (8,182 | ) | | (71,875 | ) | | (15,521 | ) |
| Stock-based compensation expense | 324 |
| | 606 |
| | 689 |
|
| Amortization of lease-related liabilities | (993 | ) | | (632 | ) | | (448 | ) |
| Amortization of original issue discount and deferred financing costs | 4,344 |
| | 4,546 |
| | 4,546 |
|
| Loss on asset disposals, net | 3,436 |
| | 7,398 |
| | 8,520 |
|
| Asset impairments | 6,935 |
| | 1,843 |
| | 1,550 |
|
| Non-cash rent expenses | 5,372 |
| | 4,884 |
| | 6,873 |
|
| Other adjustments | 768 |
| | 322 |
| | (70 | ) |
| Changes in operating assets and liabilities: | | | | | |
| Accounts receivable | (4,532 | ) | | (809 | ) | | 2,657 |
|
| Inventories | (1,833 | ) | | (3,964 | ) | | (3,413 | ) |
| Prepaid expenses | (686 | ) | | 3,173 |
| | (4,012 | ) |
| Accounts payable | (2,172 | ) | | 3,110 |
| | (7,601 | ) |
| Accrued expenses | 2,534 |
| | (4,744 | ) | | 1,733 |
|
| Unearned revenues | (2,917 | ) | | 5,647 |
| | 5,167 |
|
| Accrued interest | (569 | ) | | (70 | ) | | (1,454 | ) |
| Income taxes (receivable) payable | 2,107 |
| | (9,554 | ) | | 2,169 |
|
| Deferred landlord contributions | 2,595 |
| | 1,579 |
| | 1,668 |
|
| Net cash provided by operating activities | 86,790 |
| | 104,297 |
| | 118,955 |
|
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | |
| Purchases of property and equipment | (77,088 | ) | | (90,958 | ) | | (88,680 | ) |
| Development of internal use software | (2,756 | ) | | (3,243 | ) | | (10,455 | ) |
| Proceeds from sale of property and equipment | 560 |
| | 489 |
| | 696 |
|
| Net cash used in investing activities | (79,284 | ) | | (93,712 | ) | | (98,439 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | |
| Repayments on senior term loan | (7,600 | ) | | (7,600 | ) | | (7,600 | ) |
| Repayments on note payable | — |
| | (13 | ) | | (50 | ) |
| Proceeds from sale leaseback transaction | — |
| | 4,073 |
| | — |
|
| Payment of debt financing costs | (442 | ) | | — |
| | — |
|
| Payments on capital lease obligations | (595 | ) | | (467 | ) | | (421 | ) |
| Payments on sale leaseback obligations | (2,910 | ) | | (2,470 | ) | | (2,028 | ) |
| Excess tax benefit realized from stock-based compensation | — |
| | — |
| | 4 |
|
| Return of Capital | — |
|
| 1,447 |
| | — |
|
| Net cash used in financing activities | (11,547 | ) |
| (5,030 | ) | | (10,095 | ) |
| Effect of foreign exchange rate changes on cash | 50 |
|
| 466 |
| | 216 |
|
Change in cash, cash equivalents and restricted cash
| (3,991 | ) |
| 6,021 |
| | 10,637 |
|
Cash, cash equivalents and restricted cash at beginning of period
| 67,312 |
|
| 61,291 |
| | 50,654 |
|
| Cash, cash equivalents and restricted cash at end of period | $ | 63,321 |
|
| $ | 67,312 |
| | $ | 61,291 |
|
|
|
|
| |
|
| | | | | | |
|
|
|
| |
|
| | | | | | |
| | | | | | |
CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONT'D
(in thousands)
|
| | | | | | | | | | | |
| December 30,
2018 | | December 31,
2017 | | January 1,
2017 |
| SUPPLEMENTAL CASH FLOW INFORMATION: |
|
|
| |
|
| Cash paid for interest | $ | 72,966 |
|
| $ | 64,675 |
| | $ | 64,614 |
|
| Cash paid for income taxes, net | $ | 1,054 |
|
| $ | 7,136 |
| | $ | 10,728 |
|
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | |
|
| | |
| Accrued construction costs | $ | 2,402 |
|
| $ | 1,007 |
| | $ | 1,651 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of Business and Summary of Significant Accounting Policies:
Description of Business: CEC Entertainment, Inc. and its subsidiaries (the “Company”) operate and franchise Chuck E. Cheese’s and Peter Piper Pizza family dining and entertainment centers (also referred to as “venues”) in a total of 47 states and 14 foreign countries and territories. As of December 30, 2018 we and our franchisees operated a total of 750 venues, of which 554 were Company-operated venues located in 44 states and Canada. Our franchisees operated a total of 196 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 December 30, 2018, 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 135 Peter Piper Pizza venues are located in Arizona, Texas, and Mexico (34 are Company-operated and 101 are franchised locations). The use of the terms “CEC Entertainment,” “we,” “us” and “our” throughout these Notes to Consolidated Financial Statements refer to the Company.
All of our venues utilize a consistent restaurant-entertainment format that features both family dining and entertainment areas with the same general mix of food, beverages, 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: All intercompany accounts and transactions have been eliminated in consolidation.
The Company has a controlling financial interest in International Association of CEC Entertainment, Inc. (the “Association”), a 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 VIE’s 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 $2.2 million and $2.1 million for the year ended December 30, 2018 and December 31, 2017, respectively. 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.
Fiscal Year: We operate on a 52 or 53 week fiscal year that ends on the Sunday nearest to December 31. Each quarterly period has 13 weeks, except for a 53 week year when the fourth quarter has 14 weeks. The fiscal years ended December 30, 2018, December 31, 2017 and January 1, 2017 each consisted of 52 weeks.
Use of Estimates and Assumptions: The preparation of these 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 Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents: Cash and cash equivalents are comprised of demand deposits with banks and short-term cash investments with remaining maturities of three months or less from the purchase date.
Concentrations of Credit Risk: We have exposure to credit risk to the extent that our cash and cash equivalents exceed amounts covered by the United States and Canada deposit insurance limits, as we currently maintain a significant amount of our cash and cash equivalents balances with two major financial institutions. The individual balances, at times, may exceed the insured limits. We have not experienced any losses in such accounts. In management’s opinion, the capitalization and operating history of the financial institutions are such that the likelihood of a material loss is considered remote.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Inventories: Inventories of food, beverages, merchandise, paper products and other supplies needed for our food service and entertainment operations are stated at the lower of cost on a first-in, first-out basis or net realizable value. Our cost consists of amounts paid to third party suppliers.
Property and Equipment: Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are charged to operations using the straight-line method over the assets’ estimated useful lives, which are as follows:
|
| |
Buildings | 40 years |
Game and ride equipment | 4 to 12 years |
Non-technical play equipment | 15 to 20 years |
Furniture, fixtures and other equipment | 4 to 20 years |
Leasehold improvements are amortized using the straight-line method over the lesser of the lease term or the estimated useful lives of the related assets. We use a consistent lease period (generally, the initial non-cancelable lease term plus renewal option periods provided for in the lease that can be reasonably assured of being exercised) when estimating the depreciable lives of leasehold improvements, in determining classification of our leases as either operating or capital and in recognizing straight-line rent expense. Interest costs incurred during the construction period are capitalized and depreciated based on the estimated useful life of the underlying asset.
We review our property and equipment for indicators of impairment on an ongoing basis at the lowest level of cash flows available, which is on a venue-by-venue basis, to assess if the carrying amount may not be recoverable. Potential indicators of impairment may include a significant change in the business climate in a particular market area (for example, due to economic downturn or natural disaster), historical negative cash flows or plans to dispose of or sell the property and equipment before the end of its previously estimated useful life. If an event or change in circumstances occurs, we estimate the future cash flows expected to result from the use of the property and equipment and its eventual disposition. If the sum of the expected future cash flows, undiscounted and without interest, is less than the asset carrying amount (an indication that the carrying amount may not be recoverable), we may be required to recognize an impairment loss. We estimate the fair value of a venue’s property and equipment by discounting the expected future cash flows of the venue over its remaining lease term using a weighted average cost of capital commensurate with the risk. Any impairment loss recognized equals the amount by which the asset carrying amount exceeds its estimated fair value. In the event an asset is impaired, its carrying value is adjusted to the estimated fair value, and any subsequent increases in fair value are not recorded. Additionally, if it is determined that the estimated remaining useful life of the asset should be decreased, any periodic depreciation and amortization expense is adjusted based on the new carrying value of the asset unless the asset is written down to salvage value, at which time depreciation or amortization ceases. In Fiscal 2018, Fiscal 2017 and Fiscal 2016, we recognized asset impairment charges of $6.9 million, $1.8 million, and $1.6 million, respectively.
Development of Internal Use Software: We capitalize our internal and external costs that are directly attributable to the development, testing and validation of internal use software, such as our enterprise resource planning (ERP) system and corporate and venue related IT system initiatives. Capitalized internal development costs include the compensation, benefits and various office costs primarily related to our IT department. The capitalization of costs related to a software development project ceases once the software is ready for its intended use and the asset is amortized according to our amortization policies. In Fiscal 2018, Fiscal 2017 and Fiscal 2016, we capitalized costs of $2.8 million, $3.2 million and $10.5 million, respectively, related to the development of internal use software.
Capitalized Venue Development Costs: We capitalize our external and internal department costs that are directly attributable to venue development projects, such as the design and construction of a new venue and the remodeling and expansion of our existing venues. Capitalized internal department costs include certain compensation, benefits, travel and overhead costs related to our design, construction, facilities and legal departments. We also capitalize interest costs in conjunction with the construction of new venues. Venue development costs are initially accumulated in our construction in progress account until a project is completed. At the time of completion, the costs accumulated to date are then reclassified to property and equipment and depreciated according to our depreciation policies. In Fiscal 2018, Fiscal 2017 and Fiscal 2016, we capitalized internal costs of $4.6 million, $3.5 million, and $3.4 million, respectively, related to our venue development activities.
Business Combinations:We allocate the purchase price of an acquisition to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. We recognize as goodwill the amount by which the purchase price of an acquired entity exceeds the net of the amounts assigned to the assets acquired and
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
liabilities assumed. Fair value measurements are applied based on assumptions that market participants would use in the pricing of the asset or liability. We initially perform these valuations based upon preliminary estimates and assumptions by management or independent valuation specialists under our supervision, where appropriate, and make revisions as estimates and assumptions are finalized. We record the net assets and results of operations of an acquired entity in our Consolidated Financial Statements from the acquisition date. We expense acquisition-related costs as incurred.
Goodwill and Other Intangible Assets: The excess of the purchase price over fair value of net identifiable assets and liabilities of an acquired business (“goodwill”), trademarks, trade names and other indefinite-lived intangible assets are not amortized, but rather tested for impairment, at least annually. We assess the recoverability of the carrying amount of our goodwill and other indefinite-lived intangible assets either qualitatively or quantitatively annually at the beginning of the fourth quarter of each fiscal year, or whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable.
When assessing the recoverability of goodwill and other indefinite-lived intangible assets, we may first assess qualitative factors. If an initial qualitative assessment indicates that it is more likely than not the carrying amount exceeds fair value, a quantitative analysis may be required. We may also elect to skip the qualitative assessment and proceed directly to the quantitative analysis.
Recoverability of the carrying value of goodwill is measured at the reporting unit level. A reporting unit is an operating segment, or a business unit one level below that operating segment, for which discrete financial information is prepared and regularly reviewed by management. The Company has determined that the operations of Chuck E. Cheese’s and Peter Piper Pizza represent two separate reporting units for purposes of measuring the recoverability of the carrying value of goodwill. In performing a quantitative analysis, we measure the recoverability of goodwill using: (i) a discounted cash flow model incorporating discount rates commensurate with the risks involved, which is classified as a Level 3 fair value measurement, and (ii) a market approach based upon public trading and recent transaction valuation multiples for similar companies. The key assumptions used in the discounted cash flow valuation model include discount rates, growth rates, tax rates, cash flow projections and terminal value rates. Discount rates, growth rates and cash flow projections are the most sensitive and susceptible to change as they require significant management judgment and are material to the financial statements.
If the calculated fair value is less than the current carrying amount, impairment of the reporting unit may exist. When the recoverability test indicates potential impairment, we calculate an implied fair value of goodwill for the reporting unit. The implied fair value of goodwill is determined in a manner similar to how goodwill is calculated in a business combination. If the implied fair value of goodwill exceeds the carrying amount of goodwill assigned to the reporting unit, there is no impairment. If the carrying amount of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment loss is recorded to write down the carrying amount.
In performing a quantitative analysis, recoverability is measured by a comparison of the carrying amount of the indefinite-lived intangible asset over its fair value. Any excess of the carrying amount of the indefinite-lived intangible asset over its fair value is recognized as an impairment loss.
We test indefinite-lived intangible assets utilizing the relief from royalty method to determine the estimated fair value for each indefinite-lived intangible asset, which is classified as a Level 3 fair value measurement. The relief from royalty method estimates our theoretical royalty savings from ownership of the intangible asset. Key assumptions used in this model include discount rates, royalty rates, growth rates, tax rates, sales projections and terminal value rates. Discount rates, royalty rates, growth rates and sales projections are the assumptions most sensitive and susceptible to change as they require significant management judgment. Discount rates used are similar to the rates estimated by the weighted average cost of capital considering any differences in company-specific risk factors.
Intangible assets with finite lives are amortized over their estimated useful lives and are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Estimated weighted average useful lives are 25 years for franchise agreements and 10 years for favorable lease agreements. An impairment loss would be indicated when estimated undiscounted future cash flows from the use of the asset are less than its carrying amount. An impairment loss would be measured as the difference between the fair value (based on discounted future cash flows) and the carrying amount of the asset.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Fair Value Disclosures: Fair value is defined as the price that we would expect to receive to sell an asset or pay to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. In determining fair value, GAAP establishes a three-level hierarchy used in measuring fair value, as follows:
|
| |
Level 1 – | inputs are quoted prices available for identical assets or liabilities in active markets. |
| |
Level 2 – | inputs are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets and liabilities in active markets; or other inputs that are observable or can be corroborated by observable market data. |
| |
Level 3 – | inputs are unobservable and reflect our own assumptions. |
We may also adjust the carrying amount of certain nonfinancial assets to fair value on a non-recurring basis when they are impaired. The fair values of our long-lived assets held and used are determined using Level 3 inputs based on the estimated discounted future cash flows of the respective venue over its expected remaining useful life or lease term. Due to uncertainties in the estimates and assumptions used, actual results could differ from the estimated fair values. See Note 4. “Property and Equipment” for our impairment of long-lived assets disclosures and Note 10. “Fair Value of Financial Instruments” for our fair value disclosures.
Self-Insurance Accruals: We are self-insured up to certain limits for certain losses related to workers’ compensation, general liability, property and our Company sponsored employee health insurance programs. We estimate the accrued liabilities for all risk retained by the Company at the end of each reporting period. This estimate is primarily based on historical claims experience and loss reserves, calculated with the assistance of an independent third-party actuary. Our deductibles generally range from $0.2 million to $0.5 million per occurrence. For claims that exceed the deductible amount, we record a gross liability and a corresponding receivable representing expected recoveries pursuant to the stop-loss coverage, since we are not legally relieved of our obligation to the claimant.
Contingent Loss Accruals: When a contingency involving uncertainty as to a possible loss occurs, an estimate of the loss may be accrued as a charge to income and a reserve established on the Consolidated Balance Sheets. We perform regular assessments of our contingent losses and develop estimates of the degree of probability for and range of possible settlement. We accrue liabilities for losses we deem probable and for which we can reasonably estimate an amount of settlement. We do not record liabilities for losses we believe are only reasonably possible to result in an adverse outcome, but provide disclosure of the reasonably possible range of loss to the extent it is estimable. Reserve balances may be increased or decreased in the future to reflect further developments. However, there can be no assurance that there will not be a loss different from the amounts accrued. Any such loss, if realized, could have a material effect on our consolidated results of operations in the period during which the underlying matters are resolved.
Foreign Currency Translation: Our Consolidated Financial Statements are presented in U.S. dollars. The assets and liabilities of our Canadian subsidiary are translated to U.S. dollars at year-end exchange rates, while revenues and expenses are translated at average exchange rates during the year. Adjustments that result from translating amounts are reported as a component of “Accumulated other comprehensive income (loss)” on our Consolidated Statements of Changes in Stockholder’s Equity and in our Consolidated Statements of Comprehensive Income (Loss). The effect of foreign currency exchange rate changes on cash is reported in our Consolidated Statements of Cash Flows as a separate component of the change in cash and cash equivalents during the period.
Stock-Based Compensation: We expense the fair value of stock-based compensation awards granted to our employees and directors in our Consolidated Financial Statements on a straight-line basis over the period that services are required to be provided in exchange for the award (“requisite service period”), which typically is the period over which the award vests. Stock-based compensation is recognized only for awards that vest, and we record forfeitures as they occur. We measure the fair value of compensation cost related to stock options based on third party valuations.
Stock-based compensation expense is recorded in “General and administrative expenses” in the Consolidated Statements of Earnings, which is the same financial statement caption where the associated salary expense of employees with stock-based compensation awards is recorded. The gross benefits of tax deductions in excess of the compensation cost recognized from the vesting of stock options are tax effected and classified as cash inflows from financing activities in our Consolidated Statements of Cash Flows.
Revenue Recognition – Company Venue Activities: Food, beverage and merchandise revenues are recognized net of discounts, when sold. Game revenues are recognized as game-play tokens, game play credits on game cards, and game play time blocks are used by guests. Prior to the third quarter of 2018, we offered value-priced combination packages, which
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
generally were comprised of food, beverage and game credits (and in some instances, merchandise), and allocated the revenue recognized from the sale of these combination packages, between “Food and beverage sales” and “Entertainment and merchandise sales” based upon the price charged for each component when it is sold separately, or in limited circumstances our best estimate of selling price if a component is not sold on a stand-alone basis, which we believe approximates each component’s fair value. Beginning in the third quarter of 2018, we offer combination packages comprised of food and beverage only, with game plays and/or time blocks available for purchase separately, and recognize revenue for each component at its stand-alone price.
Our entertainment revenue includes customer purchases of game play credits on Play Pass game cards which allow our customers to play the games in our venues and earn tickets that can be redeemed for merchandise. We recognize a liability for the estimated amount of unused game play credits and unredeemed tickets, which we believe our customers will redeem or utilize in the future based on credits remaining on Play Pass cards, utilization patterns, and revenue per game play credit sold. Our total estimate of unearned revenue for unused Play Pass credits and unredeemed tickets as of December 30, 2018 and December 31, 2017 was $5.6 million and $12.0 million, respectively, and is included in “Unearned revenues” in our Consolidated Balance Sheets.
We sell gift cards to our customers in our venues and through certain third-party distributors, which do not expire and do not incur a service fee on unused balances. Gift card sales are recorded as deferred revenue when sold and are recognized as revenue when: (a) the gift card is redeemed by the guest or (b) the likelihood of the gift card being redeemed by the guest is remote (“gift card breakage”) and we determine that we do not have a legal obligation to remit the value of the unredeemed gift card under applicable state unclaimed property escheat statutes. Gift card breakage is determined based upon historical redemption patterns of our gift cards.
Revenue Recognition – Franchise Fees and Royalties: Revenues from franchise activities include area development and initial franchise fees received from franchisees to establish new venues, and once a venue is opened, a franchisee is charged monthly royalties based on a percentage of franchised venues’ sales. These fees are collectively referred to as “Franchise fees and royalties” in our Consolidated Statements of Earnings. We earn monthly royalties from our franchisees based on a percentage of each franchise venue’s sales. We also receive development and initial franchise fees to establish new franchised venues, as well as earn fees from the sale of equipment and other items or services to franchisees. Historically, we recognized development and franchise fees as revenues when the franchise venue had opened and we had substantially completed our obligations to the franchisee relating to the opening of a venue. Effective January 1, 2018, with the adoption of Accounting Standards Update 2016-10 Revenues from Contracts with Customers (Topic 606) (“ASC 606”), we recognize initial and renewal development and franchise fees as revenues on a straight-line basis over the life of the franchise agreement starting when the franchise venue has opened. Continuing royalties and other miscellaneous sales and fees are recognized in the period earned. Continuing royalties and other miscellaneous sales and fees of $20.7 million, $17.9 million and $17.4 million for Fiscal 2018, Fiscal 2017 and Fiscal 2016, respectively, are included in “Franchise fees and royalties” in our Consolidated Statements of Earnings.
We and our franchisees are required to contribute a percentage of gross sales to administer all the national advertising programs that benefit both us and our franchisees. Effective January 1, 2018, with the adoption of ASC 606, our national advertising fund receipts from members of the International Association of CEC Entertainment, Inc. (the “Association”) are accounted for on a gross basis as revenue from franchisees, when historically they were netted against advertising expense (see Advertising Costs). Advertising contributions from our franchisees of $2.2 million for Fiscal 2018 are included in “Franchise fees and royalties” in our Consolidated Statements of Earnings.
Cost of Food, Beverage, Entertainment and Merchandise: Cost of food and beverage includes all direct costs of food and beverage sold to our guests and related paper and birthday supplies used in our food service operations, less “vendor rebates” described below. Cost of entertainment and merchandise includes the direct cost of prizes provided and merchandise sold to our customers, as well as the cost of tickets dispensed to customers and redeemed for prize items, as well as the cost of Play Pass and AYCP cards and wristbands. These amounts exclude any allocation of other operating costs including labor and related costs for venue personnel and depreciation and amortization expense, which are disclosed separately.
Vendor Rebates: We receive rebate payments from certain third-party vendors. Pursuant to the terms of volume purchasing and promotional agreements entered into with the vendors, rebates are primarily provided based on the quantity of the vendors’ products we purchase over the term of the agreement. We record these allowances in the period they are earned as a reduction in the cost of the vendors’ products, and when the related inventory is sold, the allowances are recognized in “Cost of food and beverage” in our Consolidated Statements of Earnings.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Rent Expense: We recognize rent expense on a straight-line basis over the lease term, including the construction period and lease renewal option periods provided for in the lease that can be reasonably assured at the inception of the lease. The lease term commences on the date when we take possession and have the right to control use of the leased premises. The difference between actual rent payments and rent expense in any period is recorded as a deferred rent liability and included in “Other Noncurrent Liabilities” on our Consolidated Balance Sheets. Construction allowances received from the landlord as a lease incentive intended to reimburse us for the cost of leasehold improvements (“Landlord contributions”) are accrued as deferred landlord contributions. Landlord contributions are amortized on a straight-line basis over the lease term, including lease renewal option periods provided for in the lease that can be reasonably assured at the inception of the lease, as a reduction to rent expense.
Advertising Costs: Production costs for commercials and coupons are expensed in the period in which the commercials are initially aired and the coupons are distributed. All other advertising costs are expensed as incurred.
We and our franchisees are required to contribute a percentage of gross sales to administer all the national advertising programs that benefit both us and our franchisees. Prior to the adoption of ASC 606, effective January 1, 2018, our national advertising fund receipts from members the Association were netted against advertising expense. Our advertising contributions for Chuck E. Cheese’s franchise venues are paid to the Association and are eliminated in consolidation. Advertising contributions from our franchisees were $2.1 million in Fiscal 2017 and $2.2 million in Fiscal 2016.
Income Taxes: We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis. A valuation allowance is applied against net deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
We maintain tax reserves for federal, state and foreign income taxes when we believe a position may not be fully sustained upon review by taxing authorities. Although we believe that our tax positions are fully supported by the applicable tax laws and regulations, there are matters for which the ultimate outcome is uncertain. We recognize the benefit from an uncertain tax position in our Consolidated Financial Statements when the position is at least more-likely-than-not (a greater than 50 percent chance of being sustained). The amount recognized is measured using a probability weighted approach and is the largest amount of benefit that is greater than 50 percent likelihood of being realized upon settlement or ultimate resolution with the taxing authority. We routinely assess the adequacy of the estimated liability for unrecognized tax benefits, which may be affected by changing interpretations of laws, rulings by tax authorities and administrative policies, certain changes and/or developments with respect to audits and expirations of the statute of limitations. In our Consolidated Statements of Earnings, we include interest expense related to unrecognized tax benefits in “Interest expense” and include penalties in “General and administrative expenses.” On our 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.”
Recently Issued Accounting Guidance:
Accounting Guidance Adopted:
Effective January 1, 2018, we adopted the following Accounting Standards Updates:
(i) ASU 2016-04, Liabilities—Extinguishments of Liabilities (Subtopic 405-20). This amendment provides a narrow scope exception to Liabilities—Extinguishment of Liabilities (Subtopic 405-20) that requires breakage for those liabilities to be accounted for in accordance with the breakage guidance in ASU 2014-09 Revenue From Contracts With Customers (Topic 606). Under the new guidance, if an entity expects to be entitled to a breakage amount for a liability resulting from the sale of a prepaid stored-value product, the entity shall derecognize the amount related to the expected breakage in proportion to the pattern of rights expected to be exercised by the product holder only to the extent that it is probable that a significant reversal of the recognized breakage amount will not subsequently occur. If an entity does not expect to be entitled to a breakage amount for a prepaid stored-value product, the entity shall derecognize the amount related to the breakage when the likelihood of the product holder exercising its remaining rights becomes remote. The adoption of this amendment did not have a significant impact on our Consolidated Financial Statements.
(ii) ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”)andASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”). ASU 2014-09 replaces the historical U.S. GAAP revenue recognition guidance and establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics, and expands and improves disclosure about revenues. ASU 2016-10 updates the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
revenue guidance on identifying performance obligations and accounting for licenses of intellectual property, changing the FASB's previous proposals on right-of-use licenses and contractual restrictions. We elected the modified retrospective method to apply these standards. Under the modified retrospective method, results for reporting periods beginning on or after January 1, 2018 are presented under the revenue guidance in these amendments, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting treatment. The cumulative impact of adopting this amendment was not material, and as such we did not record an adjustment to our opening accumulated deficit in our Consolidated Balance Sheet as of January 1, 2018. For further details, see Note 2. “Revenue.”
(iii) ASU 2016-15, Statement of Cash Flows (Topic 230) and ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash on a retrospective basis. Amounts generally described as restricted cash and restricted cash equivalents are now presented with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Accordingly, as a result of the adoption of these amendments, we reclassified $0.1 million of restricted cash into cash, cash equivalents and restricted cash as of December 31, 2017 for a total balance of $67.3 million, which resulted in a reduction in net cash provided by operating activities of less than $0.1 million in the Consolidated Statement of Cash Flows for the year ended December 31, 2017. The adoption of these amendments did not impact net cash used in investing or financing activities for the year ended December 30, 2018.
The adoption of these amendments also requires us to reconcile our cash balance on our Consolidated Statements of Cash Flows to the cash balance on our Consolidated Balance Sheets, as well as make disclosures about the nature of restricted cash balances. A reconciliation of “Cash and cash equivalents” and “Restricted cash” as presented in our Consolidated Balance Sheets for the periods presented and “Cash, cash equivalents and restricted cash” as presented in our Consolidated Statements of Cash Flows for the years ended December 30, 2018 and December 31, 2017 is as follows:
|
| | | | | | | | | | | |
| | December 30, 2018 | | December 31, 2017 | | January 1, 2017 |
| | (in thousands) |
| Cash and cash equivalents | $ | 63,170 |
| | $ | 67,200 |
| | $ | 61,023 |
|
Restricted cash(1) | 151 |
| | 112 |
| | 268 |
|
| Cash, cash equivalents and restricted cash | $ | 63,321 |
| | $ | 67,312 |
| | $ | 61,291 |
|
__________________
| |
(1) | Restricted cash represents cash balances held by the Association that are restricted for use in our advertising, entertainment and media programs (see “Basis of Presentation” above for further discussion of the Association Funds). |
(iv) ASU 2017-04, Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment on a prospective basis.This amendment eliminates Step 2 from the goodwill impairment test, which measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. We early adopted this amendment on January 1, 2018. The adoption of this amendment did not have a significant impact on our Consolidated Financial Statements.
Accounting Guidance Not Yet Adopted:
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02,Leases (Topic 842) (“ASU 2016-02”). This new standard introduces a new lease model that requires the recognition of lease assets and 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. Subsequent to ASU 2016-02, the FASB issued related ASUs, including ASU 2018-11 (“ASU 2018-11”), Leases (Topic 842): Targeted Improvements, which provides for another transition method in addition to the modified retrospective approach required by ASU 2016-02. This option allows 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.
We will adopt ASU 2016-02 on December 31, 2018, the first day of Fiscal 2019, and apply the package of practical expedients included therein, which among other things, allows us to carryforward our historical lease classification. We will also utilize 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
will remain unchanged and in accordance with Leases (Topic 840). The most significant impact of adopting the new guidance will be the recognition of Right of Use assets and lease liabilities for operating leases, while our accounting for capital leases will remain substantially unchanged. As of December 31, 2018, we expect to recognize additional Right-of-Use assets related to our operating leases between $520 million and $620 million and lease liabilities related to our operating leases of between $550 million and $650 million, respectively, with the difference recognized in accumulated deficit. We do not believe the adoption of the standard will have a material impact on our ongoing results of operations and cash flows. In preparation for the adoption, we have designed internal controls and information system functionality to enable the preparation of the necessary financial information.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This amendment changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowances for losses. The amendments in this update are effective for the Company for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Entities may early adopt the amendments in this update as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We do not expect the adoption of this amendment to have a significant impact on our Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business (Topic 805). The amendments in this update clarify the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The definition of a business affects many areas of accounting, including acquisitions, disposals, goodwill and consolidation. This ASU will be effective for us for annual and interim reporting periods beginning on January 1, 2018. We do not expect the adoption of this amendment to have a significant impact on our Consolidated Financial Statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815). This amendment expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. It also includes certain targeted improvements to simplify the application of current guidance related to hedge accounting. This ASU will be effective for us for annual and interim reporting periods beginning on December 31, 2019, with early adoption permitted. We do not expect the adoption of this amendment to have a significant impact on our Consolidated Financial Statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This standard provides companies with an option to reclassify stranded tax effects resulting from enactment of the Tax Cuts and Jobs Act ("TCJA") from accumulated other comprehensive income to retained earnings. This ASU will be effective for us for annual and interim periods beginning on December 31, 2019. Early adoption of this standard is permitted and may be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the tax rate as a result of TCJA is recognized. We do not expect the adoption of this ASU to have a material impact on our results of operations, financial position and cash flows.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This standard will require entities to disclose the amount of total gains or losses for the period recognized in other comprehensive income that is attributable to fair value changes in assets and liabilities held as of the balance sheet date and categorized within Level 3 of the fair value hierarchy. This ASU will be effective for us for annual and interim periods beginning on December 31, 2020. Early adoption of this standard is permitted. We do not expect the adoption of this ASU to have a material impact on our results of operations, financial position and cash flows.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract . Under this standard customers will apply the same criteria for capitalizing implementation costs as they would for an arrangement that has a software license. The adoption of this new guidance prescribes the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense, and additional quantitative and qualitative disclosures. This ASU will be effective for us for annual and interim periods beginning on December 30, 2020. Early adoption of this standard is permitted and may be applied either prospectively to eligible costs incurred on or after the date of the new guidance or retrospectively. We do not expect the adoption of this ASU to have a material impact on our results of operations, financial position and cash flows.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 2. Revenue:
Our venues sell food, beverages, entertainment, and merchandise to customers on a stand-alone basis and through discounted packaged deals. We consider our performance obligations for food and beverages to be separate and distinct from our performance obligations on entertainment and merchandise.
Revenues are recognized net of discounts. Net revenue from each stand-alone purchase is allocated to the performance obligation purchased. Net revenue from each package deal is allocated to each performance obligation purchased pro-rata their stand-alone menu prices. Revenues are recognized at the time we complete the performance obligation, generally on the day of sale. The portion of our entertainment and merchandise revenues representing purchased and unused credits, as well as unredeemed credits, is deferred and subsequently recognized based on credits remaining and utilization patterns.
We also earn revenues from our franchises. Our franchise agreements require the payment of various fixed fees as well as the payment of royalties that are based on a percentage of franchisee sales. In addition, franchisees have the option to purchase games and equipment from our inventory. We consider our performance obligations for the franchise agreement to be separate and distinct from our performance obligations on sales of inventory. Revenue from sales of our inventory is recognized when the franchisee takes possession of the games and equipment. All other payments from franchisees are allocated to the franchise agreement, where royalties are recognized as revenue on a monthly basis and the fixed fees are recognized as revenue on a straight-line basis over the life of the franchise agreement, beginning when the first venue opens.
We sell gift cards to our customers in our venues and through certain third-party distributors, which do not expire and do not incur a service fee on unused balances. Gift card sales are recorded as deferred revenue when sold and are recognized as revenue when: (a) the gift card is redeemed by the guest or (b) the likelihood of the gift card being redeemed by the guest is remote (“gift card breakage”) and we determine that we do not have a legal obligation to remit the value of the unredeemed gift
card under applicable state unclaimed property escheat statutes. Gift card breakage is determined based upon our historical redemption patterns.
On January 1, 2018 we adopted the revenue guidance set forth in ASU 2016-10. Under the new guidance, there is a five-step model to apply to revenue recognition. The five-steps consist of: (i) the determination of whether a contract, an agreement between two or more parties that creates legally enforceable rights and obligations, exists; (ii) the identification of the performance obligations in the contract; (iii) the determination of the transaction price; (iv) the allocation of the transaction price to the performance obligations in the contract; and (v) recognition of revenue when (or as) the performance obligation is satisfied.
ASU 2016-10 requires us to recognize initial and renewal franchise and development fees on a straight-line basis over the life of the related franchise agreement or the renewal period. Historically, we recognized revenue from initial franchise and development fees upon the opening of a franchised restaurant when we completed all of our material obligations and initial services. Additionally, our national advertising fund receipts from Association members are now accounted for on a gross basis as “Franchise fees and royalties,” when historically they were netted against “Advertising expense.” Revenue related to advertising contributions from our franchisees was $3.6 million the twelve months ended December 30, 2018 and is recorded in “Franchise fees and royalties” in our Consolidated Statement of Earnings.
Liabilities relating to unused game credits, unredeemed tickets, 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 twelve months ended December 30, 2018:
|
| | | | | | | | | | | | | | | |
| | Balance at | | | | | | Balance at |
| | January 1, 2018 | | Revenue Deferred | | Revenue Recognized | | December 30, 2018 |
| | (in thousands) |
| Game credit and unredeemed ticket related deferred revenue | $ | 12,035 |
| | $ | 58,496 |
| | $ | (64,970 | ) | | $ | 5,561 |
|
| Gift card related deferred revenue | 3,868 |
| | 8,392 |
| | (7,007 | ) | | 5,253 |
|
| Unearned franchise and development fees | 4,274 |
| | 2,131 |
| | (84 | ) | | 6,321 |
|
| Other unearned revenues | 873 |
| | 25,918 |
| | (25,802 | ) | | 989 |
|
| Total unearned revenue | $ | 21,050 |
| | $ | 94,937 |
| | $ | (97,863 | ) | | $ | 18,124 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 3. Accounts Receivable:
Accounts receivable consisted of the following at the dates presented:
|
| | | | | | | |
| | December 30, 2018 | | December 31, 2017 |
| | (in thousands) |
| Trade receivables | $ | 11,185 |
| | $ | 8,863 |
|
| Vendor rebates | 6,651 |
| | 6,525 |
|
| Other accounts receivable | 6,184 |
| | 4,673 |
|
| Total Accounts receivable | $ | 24,020 |
| | $ | 20,061 |
|
Trade receivables consist primarily of debit and credit card receivables due from third-party financial institutions. Vendor rebates receivable are based on amounts purchased primarily from one supplier. The other accounts receivable balance consists primarily of lease incentives, amounts due from our franchisees and amounts expected to be recovered from third-party insurers.
Note 4. Inventories:
Inventories consisted of the following at the dates presented:
|
| | | | | | | |
| | December 30, 2018 | | December 31, 2017 |
| | (in thousands) |
| Food and beverage | $ | 5,383 |
| | $ | 5,440 |
|
| Entertainment and merchandise | 18,424 |
| | 16,560 |
|
| Inventories | $ | 23,807 |
| | $ | 22,000 |
|
Food and beverage inventories include food, beverage, paper products and other supplies needed for our food service operations and are procured from a single distributor. Entertainment and merchandise inventories consist primarily of novelty toy items, used as redemption prizes for certain games, sold directly to our guests or used as part of our birthday party packages. In addition, entertainment and merchandise inventories also consist of other supplies used in our entertainment operations.
Note 5. Property and Equipment:
|
| | | | | | | |
| | December 30,
2018 | | December 31,
2017 |
| | (in thousands) |
| Land | $ | 50,135 |
| | $ | 50,135 |
|
| Buildings | 61,378 |
| | 56,415 |
|
| Leasehold improvements | 474,210 |
| | 453,167 |
|
| Game and ride equipment | 263,689 |
| | 250,139 |
|
| Furniture, fixtures and other equipment | 159,560 |
| | 150,505 |
|
| Buildings leased under capital leases | 15,061 |
| | 15,067 |
|
| | 1,024,033 |
| | 975,428 |
|
| Less accumulated depreciation and amortization | (495,125 | ) | | (414,245 | ) |
| Net property and equipment in service | 528,908 |
| | 561,183 |
|
| Construction in progress | 10,277 |
| | 8,838 |
|
| Property and equipment, net | $ | 539,185 |
| | $ | 570,021 |
|
Buildings includes certain venues leased under capital leases. Accumulated amortization related to these assets was $5.0 million and $4.0 million as of December 30, 2018 and December 31, 2017, respectively. Amortization of assets under capital leases is included in “Depreciation and amortization” in our Consolidated Statements of Earnings.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
We procure games, rides and other entertainment-related equipment from a limited number of suppliers, some of which are located in China.
Asset Impairments
During Fiscal 2018, we recognized an asset impairment charge of $6.9 million primarily related to eight venues, of which one was previously impaired. During Fiscal 2017 and Fiscal 2016, we recognized asset impairment charges of $1.8 million and $1.6 million, respectively, primarily related to five venues and five venues, respectively. These impairment charges were the result of a decline in the venues’ financial performance, primarily related to various economic factors in the markets in which the venues are located. As of December 30, 2018, the aggregate carrying value of the property and equipment at impaired venues, after the impairment charges, was $4.5 million for venues impaired in 2018.
Note 6. Goodwill and Intangible Assets, Net:
The following table presents changes in the carrying value of goodwill for the periods ended December 30, 2018 and December 31, 2017:
|
| | | | | | | |
| | December 30, 2018 | | December 31, 2017 |
| | (in thousands) |
| Balance at beginning of period | $ | 484,438 |
| | $ | 483,876 |
|
Goodwill assigned in acquisition of franchisee (1) | — |
| | 562 |
|
| Balance at end of period | $ | 484,438 |
| | $ | 484,438 |
|
__________________
| |
(1) | Represents goodwill related to two franchise venues the Company acquired in the second quarter of 2017. The acquisition did not have a significant impact on our Consolidated Balance Sheet as of December 31, 2017 or on our Consolidated Statements of Earnings for Fiscal 2017. |
The following table presents our indefinite and definite-lived intangible assets at December 30, 2018 and December 31, 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 30, 2018 | | December 31, 2017 |
| | Weighted Average Life (Years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| | | | (in thousands) |
| Chuck E. Cheese's tradename | Indefinite | | $ | 400,000 |
| | $ | — |
| | $ | 400,000 |
| | $ | 400,000 |
| | $ | — |
| | $ | 400,000 |
|
| Peter Piper Pizza tradename | Indefinite | | 26,700 |
| | — |
| | 26,700 |
| | 26,700 |
| | — |
| | 26,700 |
|
Favorable lease agreements (1) | 10 | | 14,880 |
| | (8,550 | ) | | 6,330 |
| | 14,880 |
| | (7,306 | ) | | 7,574 |
|
| Franchise agreements | 25 | | 53,300 |
| | (9,245 | ) | | 44,055 |
| | 53,300 |
| | (7,197 | ) | | 46,103 |
|
| | | | $ | 494,880 |
| | $ | (17,795 | ) | | $ | 477,085 |
| | $ | 494,880 |
| | $ | (14,503 | ) | | $ | 480,377 |
|
__________________
| |
(1) | In connection with the Merger, as defined in Note 19 “Consolidating Guarantor Financial Information”, and the acquisition of Peter Piper Pizza (“PPP”) in October 2014 (the “PPP Acquisition”), we also recorded unfavorable lease liabilities of $10.2 million and $3.9 million, respectively, which are included in “Other current liabilities” and “Other noncurrent liabilities” in our Consolidated Balance Sheets. Such amounts are being amortized over a weighted average life of 10 years, and are included in “Rent expense” in our Consolidated Statements of Earnings. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Our estimated future amortization expense related to the favorable lease agreements and franchise agreements is set forth as follows (in thousands)millions):
|
| | | | | | | | |
| | | Favorable Lease Agreements | | Franchise Agreements |
| Fiscal 2019 | | $ | 1,102 |
| | $ | 2,049 |
|
| Fiscal 2020 | | 1,050 |
| | 2,088 |
|
| Fiscal 2021 | | 846 |
| | 2,049 |
|
| Fiscal 2022 | | 753 |
| | 2,049 |
|
| Fiscal 2023 | | 631 |
| | 2,049 |
|
| Thereafter | | 1,948 |
| | 33,771 |
|
| | | $6,330 | | $44,055 |
|
| | | | | | |
| Metric | | Minimum (1) | | Target | | Maximum (2) |
| | | |
| Adjusted EBITDA | | $178.0 | | $180.0 | | $193.3 |
| Free cash flow | | $75.3 | | $77.3 | | $90.6 |
| Comparable venue sales change | | 2.2% | | 2.8% | | 5.9% |
| Revenues | | $916.2 | | $921.1 | | $938.5 |
Amortization expense related to favorable lease agreements was $1.2 million for Fiscal 2018, $1.6 million for Fiscal 2017 and $2.0 million for Fiscal 2016, respectively, and is included in “Rent expense” in our Consolidated Statements of Earnings. Amortization expense related to franchise agreements was $2.0 million for Fiscal 2018, Fiscal 2017 and Fiscal 2016, respectively, and is included in “Depreciation and amortization” in our Consolidated Statements of Earnings.
Note 7. Other Noncurrent Assets:
Other noncurrent assets consisted of the following as of the dates presented: |
| | | | | | | | |
| | | December 30,
2018 | | December 31,
2017 |
| | | (in thousands) |
Internally developed software, net (1) | | $ | 14,756 |
| | $ | 17,167 |
|
Deferred charges (2) | | 1,122 |
| | 24 |
|
| Deposits | | 848 |
| | 1,125 |
|
| Other | | 1,999 |
| | 1,161 |
|
| Total other noncurrent assets | | $ | 18,725 |
| | $ | 19,477 |
|
__________________
| |
(1) | Relates to the costs directly attributable to the development, testing and validation of internally developed software, primarily our ERP system, Play Pass, and IT related security initiatives, net of accumulated amortization of $10.3 million and $6.6 million at December 30, 2018 and December 31, 2017, respectively. The assets are being amortized over a weighted average life of 6 years. See Note 1. “Description of Business and Summary of Significant Accounting Policies - Development of Internal Use Software.” |
| |
(2) | December 30, 2018 includes a commitment to a supplier for IT related services to be paid in January 2020. |
Note 8. Accounts Payable:
Accounts payable consisted of the following as of the dates presented:
|
| | | | | | | |
| | December 30, 2018 | | December 31, 2017 |
| | (in thousands) |
| Trade and other amounts payable | $ | 20,685 |
| | $ | 20,492 |
|
| Book overdraft | 10,725 |
| | 10,882 |
|
| Accounts Payable | $ | 31,410 |
| | $ | 31,374 |
|
Trade and other amounts payable represents amounts payable to our vendors, legal fee accruals and settlements payable. The book overdraft balance represents checks issued but not yet presented to banks.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 9. Accrued Expenses:
Accrued expenses consisted of the following as of the dates presented:
|
| | | | | | | |
| | December 30, 2018 | | December 31, 2017 |
| | (in thousands) |
| Current: |
| |
|
| Salaries and wages | $ | 13,702 |
| | $ | 11,366 |
|
| Insurance | 4,836 |
| | 6,614 |
|
| Taxes, other than income taxes | 13,488 |
| | 13,151 |
|
| Other accrued operating expenses | 4,004 |
| | 5,485 |
|
| Accrued expenses | $ | 36,030 |
| | $ | 36,616 |
|
| Noncurrent: |
| |
|
| Insurance | $ | 9,861 |
| | $ | 8,311 |
|
Accrued current and noncurrent insurance represents estimated claims incurred but unpaid under our self-insurance programs for general liability, workers’ compensation, health benefits and certain other insured risks.
Note 10. Indebtedness and Interest Expense:
Our long-term debt consisted of the following for the periods presented:
|
| | | | | | | |
| | December 30,
2018 | | December 31,
2017 |
| | (in thousands) |
| Term loan facility | $ | 723,900 |
| | $ | 731,500 |
|
| Senior notes | 255,000 |
| | 255,000 |
|
| Total debt outstanding | 978,900 |
| | 986,500 |
|
| Less: | | | |
| Unamortized original issue discount | (1,153 | ) | | (1,694 | ) |
| Deferred financing costs, net | (8,633 | ) | | (11,993 | ) |
| Current portion | (7,600 | ) | | (7,600 | ) |
| Bank indebtedness and other long-term debt, less current portion | $ | 961,514 |
| | $ | 965,213 |
|
We were in compliance with the debt covenants in effect as of December 30, 2018 for both the secured credit facilities and the senior notes. For further discussion regarding the debt covenants, see Secured Credit Facilities and Senior Unsecured Notes sections below.
Secured Credit Facilities
In connection with the Merger on February 14, 2014, we entered into new senior secured credit facilities, which include an initial $760.0 million term loan facility with a maturity date of February 14, 2021 (the “term loan facility”) and a $150.0 million senior secured revolving credit facility with an original maturity date of February 14, 2019, which 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”).
As of December 30, 2018, we had no borrowings outstanding and a $9.0 million letter of credit issued but undrawn under the revolving credit facility and no borrowings outstanding and $9.9 million of letter of credit issued but undrawn under the revolving credit facility as of December 31, 2017. 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 paid fees of $0.4 million and agreed to the following covenants for the benefit of the revolving facility lenders: (a) with respect to each fiscal year (commencing with the fiscal year ending December 30, 2018), 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 and any such required mandatory payment shall be reduced by any optional prepayments of principal that may have occurred during the fiscal year, and (b) we shall not incur additional first lien senior secured debt in connection with certain acquisitions, mergers or consolidations unless our net first lien senior secured leverage ratio is not greater than 3.65 to 1.00 on a pro forma basis. The maturity date of the amount of the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
revolving credit facility that was not extended remains February 14, 2019. 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.
We received net proceeds from the term loan facility of $756.2 million, net of original issue discount of $3.8 million, which were used to fund a portion of the Acquisition. We paid $17.8 million and $3.8 million in debt issuance costs related to the term loan facility and revolving credit facility (including fees related to extending the maturity date), respectively, which we 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 are amortized over the lives of the facilities and are included in “Interest expense” on our Consolidated Statements of Earnings.
We may request one or more incremental term loan facilities and/or increase commitments under our revolving credit facility in an aggregate amount of up to the sum of (a) $200.0 million plus (b) such additional amount so long as, (i) in the case of loans under additional credit facilities that rank equally and without preference with the liens on the collateral securing the secured credit facilities, our consolidated net first lien senior secured leverage ratio would be no greater than 4.25 to 1.00 and (ii) in the case of loans under additional credit facilities that rank junior to the liens on the collateral securing the secured credit facilities, our consolidated total net secured leverage ratio would be no greater than 5.25 to 1.00, subject to certain conditions, and receipt of commitments by existing or additional lenders.
We may voluntarily repay outstanding loans under the secured credit facilities at any time, without prepayment premium or penalty, except in connection with a repricing event as described below, subject to customary “breakage” costs with respect to London Interbank Offered Rate (“LIBOR”) loans.
The secured credit facilities require scheduled quarterly payments on the term loan equal to 0.25% of the original principal amount of the term loan from July 2014 to December 2020, with the remaining balance paid at maturity, February 14, 2021. The secured credit facilities include customary mandatory prepayment requirements based on defined events, such as certain asset sales and debt issuances. In addition (as described above in more detail), we are required to make a mandatory prepayment of term loan principal to the extent that 75% times our excess cash flow exceeds $10.0 million.
Borrowings under the secured credit facilities bear interest at a rate equal to, at our option, either (a) 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 applicable margin for borrowings under the term loan facility is subject to one step down to 3.00% based on our net first lien senior secured leverage ratio, and the applicable margin for borrowings under the revolving credit facility is subject to two step-downs to 3.00% and 2.75% based on our net first lien senior secured leverage ratio. During Fiscal 2018, the applicable margin for LIBOR borrowings under both the term loan facility and the revolving credit facility was 3.25%.
During Fiscal 2018, the federal funds rate ranged from 1.34% to 2.40%, the prime rate ranged from 4.50% to 5.50% and the one-month LIBOR ranged from 1.55% to 2.52%.
The weighted average effective interest rate incurred on our borrowings under our secured credit facilities was 5.8% for the 2018 fiscal year, 4.7% for the 2017 fiscal year and 4.6% for the 2016 fiscal year, which includes amortization of debt issuance 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.
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.
In addition to paying interest on outstanding principal under the secured credit facilities, we are required to pay a commitment fee equal to 0.50% per annum to the lenders under the revolving credit facility in respect of the unutilized commitments thereunder. The applicable commitment fee under the revolving credit facility is subject to one step-down to 0.375% based on our net first lien senior secured leverage ratio. During Fiscal 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 and fronting fees computed at a rate equal to 0.125% per annum on the daily stated amount of each letter of credit.
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
those of each subsidiary guarantor, including capital stock of the subsidiary guarantors and 65.0% 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 a first-priority lien with respect to the collateral.
The secured credit facilities also contain customary covenants and events of default. The covenants 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; enter into certain transactions with our affiliates; (vii) enter into sale-leaseback transactions; (viii) change our lines of business; restrict dividends from our subsidiaries or restrict liens; (ix) change our fiscal year; and (x) modify the terms of certain debt or organizational agreements. The PPP acquisition and the sale leaseback transactions discussed in Note 6. “Goodwill and Intangible Assets, Net” and Note 13. “Sale Leaseback Transactions” were permitted under the secured credit facilities agreement.
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 last twelve month’s EBITDA, as defined in the Senior Credit Facilities). The covenant will be tested quarterly when the revolving credit facility is more than 30.0% drawn (excluding outstanding letters of credit) and will be a condition to drawings under the revolving credit facility that would result in more than 30.0% drawn thereunder.
Senior Unsecured Notes
On February 19, 2014, we issued $255.0 million aggregate principal amount of 8.000% Senior Notes due 2022 which mature on February 15, 2022 (the “senior notes”) in a private offering. On December 2, 2014 we completed an exchange offer whereby the original senior notes were exchanged for new notes (the “exchange notes”) which are identical to the initial senior notes except that the issuance of the exchange notes is registered under the Securities Act, the exchange notes do not bear legends restricting their transfer and they are not entitled to registration rights under our registration rights agreement. We refer to the senior notes and the exchange notes collectively as the “senior notes.” We may redeem some or all of the senior notes at certain redemption prices 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 recorded as an offset to “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 to “Interest expense” on 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 the 2018, 2017, and 2016 fiscal years, which includes amortization of debt issuance costs and other fees related to our senior notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Debt Obligations
The following table sets forth our future debt payment obligations as of December 30, 2018 (in thousands):
|
| | | |
| One year or less | $ | 7,600 |
|
| Two years | 7,600 |
|
| Three years | 708,700 |
|
| Four years | 255,000 |
|
| Five years | — |
|
| | 978,900 |
|
| Less: debt financing costs, net | (8,633 | ) |
| Less: unamortized discount | (1,153 | ) |
| | $ | 969,114 |
|
Interest Expense
Interest expense consisted of the following for the periods presented:
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | December 30,
2018 | | December 31, 2017 | | January 1,
2017 |
| | (in thousands) |
Term loan facility (1) | $ | 39,065 |
| | $ | 31,549 |
| | $ | 30,987 |
|
| Senior notes | 20,330 |
| | 20,330 |
| | 19,774 |
|
| Capital lease obligations | 1,643 |
| | 1,695 |
| | 1,749 |
|
| Sale leaseback obligations | 10,488 |
| | 10,585 |
| | 10,714 |
|
| Amortization of debt issuance costs | 3,803 |
| | 4,005 |
| | 4,005 |
|
| Other | 954 |
| | 951 |
| | 516 |
|
| Total interest expense | $ | 76,283 |
| | $ | 69,115 |
| | $ | 67,745 |
|
__________________
(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 6.4% for the 2018 fiscal year, 5.6% for the 2017 fiscal year, and 5.5% for the 2016 fiscal year.
Note 11. Fair Value of Financial Instruments:
Fair value measurements 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table presents information on our financial instruments as of the dates presented:
|
| | | | | | | | | | | | | | | | |
| | | December 30, 2018 | | December 31, 2017 |
| | | 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 |
| | $ | 7,051 |
| | $ | 7,600 |
| | $ | 7,220 |
|
| Long-term portion | | 970,147 |
| | 885,212 |
| | 977,206 |
| | 937,662 |
|
| Bank indebtedness and other long-term debt: | | $ | 977,747 |
| | $ | 892,263 |
| | $ | 984,806 |
| | $ | 944,882 |
|
__________________
(1) Excluding net deferred financing costs.
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, 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 our 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, 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 Fiscal 2018 and Fiscal 2017, there were no significant transfers among level 1, 2 or 3 fair value determinations.
Note 12. Other Noncurrent Liabilities:
Other noncurrent liabilities consisted of the following as of the dates presented: |
| | | | | | | | |
| | | December 30,
2018 | | December 31,
2017 |
| | | (in thousands) |
Sale leaseback obligations, less current portion (1) | | $ | 174,520 |
| | $ | 177,933 |
|
| Deferred rent liability | | 31,978 |
| | 27,951 |
|
| Deferred landlord contributions | | 7,603 |
| | 6,282 |
|
| Long-term portion of unfavorable leases | | 3,796 |
| | 5,453 |
|
Long-term portion of cease use liabilities (2) | | 1,818 |
| | — |
|
| Other | | 6,534 |
| | 4,268 |
|
| Total other noncurrent liabilities | | $ | 226,249 |
| | $ | 221,887 |
|
_________________
| |
(1) | See Note 13 “Sale Leaseback Transaction” for further discussion on our sale leaseback obligations. |
| |
(2) | In connection with three Peter Piper Pizza venues in Oklahoma that were closed in 2018, we recorded cease use liabilities totaling $1.8 million related to future lease related obligations, net of expected future sublease income, which are included in “Other current liabilities” and “Other noncurrent liabilities” in our Consolidated Balance Sheets at December 30, 2018. The liabilities consisted of $0.9 million related to future rental payments, net of expected future sublease income, and $0.9 million related to future common area maintenance, property tax and insurance expenses, which are included in “Rent expense” and “Other venue operating expenses”, respectively, in our Consolidated Statements of Earnings for Fiscal 2018 . |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 13. Sale Leaseback Transactions:
On August 25, 2014, we completed a sale leaseback transaction (the “Sale Leaseback”) with National Retail Properties, Inc. (“NRP”). Pursuant to the Sale Leaseback, we sold 49 properties located throughout the United States to NRP, and we leased each of the 49 properties back from NRP pursuant to two separate master leases on a triple-net basis for their continued use as Chuck E. Cheese’s family dining and entertainment venues. On April 25, 2017, we completed an additional sale leaseback transaction with NADG NNN Acquisitions, Inc. (“NADG NNN”), pursuant to which we sold our property located in Conyers, Georgia to NADG NNN (the “Conyers Sale Leaseback” and together with the Sale Leaseback, the “Sale Leasebacks”), and we leased the property back from NADG NNN pursuant to a master lease on a triple-net basis for its continued use as Chuck-E-Cheese’s family dining and entertainment venue.
The leases in the Sale Leasebacks have an initial term of 20 years, with four five-year options to renew. For accounting purposes, these sale-leaseback transactions are accounted for under the financing method, rather than as completed sales. Under the financing method, we (i) include the sales proceeds received in other long-term liabilities until our continuing involvement with the properties is terminated, (ii) report the associated property as owned assets, (iii) continue to depreciate the assets over their remaining useful lives, and (iv) record the rental payments as interest expense and a reduction of the sale leaseback obligation. When and if our continuing involvement with a property terminates and the sale of that property is recognized for accounting purposes, we expect to record a gain equal to the excess of the proceeds received over the remaining net book value of the property.
The aggregate purchase price for the properties in connection with the Sale Leaseback was $183.7 million in cash, and the proceeds, net of taxes and transaction costs, realized by the Company were $143.2 million. A portion of the proceeds from the Sale Leaseback was used for the PPP Acquisition. We used the remaining net proceeds from the Sale Leaseback for capital expenditure needs and other general corporate purposes. The aggregate purchase price for the property in connection with the Conyers Sale Leaseback transaction was approximately $4.1 million in cash, and the net proceeds realized were approximately $3.9 million.
The long-term and current portions of our obligations under the Sale Leasebacks were $174.5 million and $3.4 million, respectively, as of December 30, 2018, and are included in “Other noncurrent liabilities” and “Other current liabilities” in our Consolidated Balance Sheets. The net book value of the associated assets, which is included in “Property and equipment, net” in our Consolidated Balance Sheets, was $82.4 million and $79.3 million as of December 30, 2018 and December 31, 2017, respectively.
Our future minimum lease commitments related to the Sale Leasebacks, as of December 30, 2018 for fiscal years 2019, 2020, 2021, 2022, 2023 and thereafter are, in thousands, $14,083, $14,360, $14,641, $14,947, $15,249 and $183,737.
Note 14. Commitments and Contingencies:
Leases
We lease certain venues under operating and capital leases that expire at various dates through 2037 with renewal options that expire at various dates through 2054. The leases generally require us to pay a minimum rent, property taxes, insurance, other maintenance costs and, in some instances, additional rent equal to the amount by which a percentage of the venue’s revenues exceedcertain thresholds as stipulated in the respective lease agreement. The leases generally have initial terms of 10 to 20 years with various renewal options.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The annual future lease commitments under capital lease obligations and non-cancelable operating leases, including reasonably assured option periods but excluding contingent rent, as of December 30, 2018, are as follows:
|
| | | | | | | |
| | Capital | | 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 | ) | | |
| Capital lease obligations, net of current portion | $ | 12,330 |
| | |
Rent expense, including contingent rent based on a percentage of venues’ sales, when applicable, was comprised of the following:
|
| | | | | | | | | | | |
| | Fiscal Year |
| | 2018 | | 2017 | | 2016 |
| | (in thousands) |
| Minimum rentals | $ | 97,598 |
| | $ | 96,927 |
| | $ | 96,953 |
|
| Contingent rentals | 43 |
| | 156 |
| | 217 |
|
| | $ | 97,641 |
| | $ | 97,083 |
| | $ | 97,170 |
|
Rent expense of $1.2 million related to our corporate offices and warehouse facilities was included in “General and administrative expenses” in our Consolidated Statements of Earnings for the fiscal years ended December 30, 2018, December 31, 2017 and January 1, 2017.
Unconditional Purchase Obligations
Our unconditional purchase obligations consist of agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including (a) fixed or minimum quantities to be purchased; (b) fixed, minimum or variable price provisions; and (c) the approximate timing of the transaction. Our purchase obligations with terms in excess of one year totaled $9.2 million at December 30, 2018 and consisted primarily of obligations associated with the modernization of various information technology platforms and information technology data security service agreements, and the fixed price purchase agreements relating to beverage products. These purchase obligations exclude agreements that can be canceled without significant penalty.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 (“Apollo”) 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. 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. Income Taxes:
For financial reporting purposes, income (loss) before income taxes includes the following components:
|
| | | | | | | | | | | | |
| | | Fiscal Year |
| | | 2018 | | 2017 | | 2016 |
| | (in thousands) |
| United States | | $ | (28,731 | ) | | $ | (25,667 | ) | | $ | (11,002 | ) |
| Foreign (including U.S. Possessions) | | 3,249 |
| | 4,442 |
| | 4,709 |
|
| Income (loss) before income taxes | | $ | (25,482 | ) | | $ | (21,225 | ) | | $ | (6,293 | ) |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Our income tax expense (benefit) consists of the following for the periods presented:
|
| | | | | | | | | | | | |
| | | Fiscal Year |
| | | 2018 | | 2017 | | 2016 |
| | (in thousands) |
| Current tax expense (benefit): | | | | | | |
| Federal | | $ | 1,276 |
| | $ | (2,668 | ) | | $ | 8,008 |
|
| State | | 1,090 |
| | (708 | ) | | 3,879 |
|
| Foreign | | 795 |
| | 960 |
| | 1,008 |
|
| | | 3,161 |
| | (2,416 | ) | | 12,895 |
|
| Deferred tax expense (benefit): | |
| | | | |
| Federal | | (8,382 | ) | | (72,829 | ) | | (11,848 | ) |
| State | | 24 |
| | (137 | ) | | (3,274 | ) |
| Foreign | | 176 |
| | 1,091 |
| | (399 | ) |
| | | (8,182 | ) | | (71,875 | ) | | (15,521 | ) |
| Income tax expense (benefit) | | $ | (5,021 | ) | | $ | (74,291 | ) | | $ | (2,626 | ) |
A reconciliation of the federal statutory income tax rate to our effective tax rate is as follows:
|
| | | | | | | | |
| | Fiscal Year |
| | 2018 | | 2017 | | 2016 |
| Federal statutory rate | (21.0 | )% | | (35.0 | )% | | (35.0 | )% |
| State income taxes, net of federal benefit | 2.0 | % | | (4.5 | )% | | 2.5 | % |
| Federal employment related income tax credits, net | (2.9 | )% | | (1.2 | )% | | (21.8 | )% |
| Merger and litigation related costs | 0.4 | % | | 1.6 | % | | 5.8 | % |
| Canadian tax rate difference | — | % | | 0.4 | % | | 2.4 | % |
| Canadian nondeductible interest | — | % | | 0.7 | % | | 1.8 | % |
| Canadian deferred tax valuation adjustment | 0.7 | % | | 5.7 | % | | — | % |
| Canadian tax reorganization | 0.8 | % | | (7.6 | )% | | — | % |
| State tax credit, valuation adjustment | 1.3 | % | | 2.0 | % | | 2.8 | % |
| Foreign taxes withheld | 1.4 | % | | — | % | | — | % |
| Other | 0.4 | % | | 1.9 | % | | (0.2 | )% |
Effective tax rate (before impact of Tax Cuts and Jobs Act of 2017 (1) | (16.9 | )% | | (36.0 | )% | | (41.7 | )% |
Adjustment related to the Tax Cuts and Jobs Act of 2017 (1) | (2.8 | )% | | (314.0 | )% | | — | % |
| Adjusted effective tax rate | (19.7 | )% | | (350.0 | )% | | (41.7 | )% |
_________________
(1) The Tax Cuts and Jobs Act of 2017 (enacted on December 22, 2017) resulted in a $66.6 million decrease of our net deferred tax liability and a corresponding benefit to our deferred federal income taxes for Fiscal 2017.
Our effective income tax rates for Fiscal 2018 and Fiscal 2017 were 16.9% and 36.0%, respectively (excluding the adjustment to our deferred tax liability resulting from the decrease in the federal income tax rate from 35% to 21% enacted on December 22, 2017, as part of tax the Tax Cuts and Jobs Act (the “TCJA”)). The TCJA made broad changes to the U.S. tax code that not only effected 2017 (e.g., one-time transition tax on certain unrepatriated earnings of foreign subsidiaries and bonus depreciation that will allow for full expensing of qualified property) but also impacted 2018 and subsequent years. Changes enacted by the TCJA that impact our 2018 and subsequent years include: (1) the reduction of the U.S. federal c
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
orporate income tax rate from 35% to 21% ; (2) bonus depreciation that will allow for full expensing of certain qualified property in the year acquired and placed in service; (3) elimination of the corporate alternative minimum tax (AMT); (4) a new limitation on the deductibility of interest expense; (5) limitations on the deductibility of certain executive compensation; (6) limitations on the use of foreign tax credits to reduce current U.S. income tax liability; and (7) limitations on net operating losses generated after December 31, 2017, to 80 percent of taxable income.
Our effective income tax rate for Fiscal 2018 was favorably impacted by employment-related federal income tax credits, offset by the negative impact of nondeductible litigation costs related to the Merger, nondeductible penalties, an increase in our state income tax expense for the year which in large part was caused by state tax legislation enacted during the second quarter that increased the amount of income subject to state taxation, foreign income taxes withheld (not offset by a foreign tax credits due to the foreign tax credit limitation), an increase in the reserve for uncertain tax positions, an increase in a valuation allowance for deferred tax assets associated with a carryforward of certain state tax credits and deferred tax assets relating to our Canada operations that could expire before they are utilized, partially offset by a favorable one-time adjustment to deferred tax (the tax effect of the cumulative foreign currency translation adjustment existing as of January 1, 2018) resulting from the change in our intent to no longer indefinitely reinvest monies previously loaned to our Canadian subsidiary recorded in the first quarter.
Our effective income tax rate for Fiscal 2018 was also favorably impacted by adjustments to the provisional estimates provided in Fiscal 2017 to account for the impact of the TCJA pursuant to Staff Accounting Bulletin No. 118 (“SAB 118”). The SEC staff issued SAB 118 on December 22, 2017, which allows a company to recognize provisional amounts during a measurement period when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. SAB 118 further provides that the measurement period for finalizing the provisional estimates should not extend beyond one year from the enactment of the TCJA and that any adjustments made to the provisional amounts under SAB 118 should be recorded as discrete adjustments in the period identified.
Pursuant to SAB 118, we included a provisional estimate of $66.6 million tax benefit in our consolidated financial statements for the fiscal year ended December 31, 2017, relating to the enactment of TJCA, which primarily related to the re-measurement of our deferred tax liability. In the second quarter of Fiscal 2018, we recorded an adjustment to the provisional estimate of $0.2 million tax benefit, in the third quarter of Fiscal 2018, we recorded an incremental adjustment to the provisional estimate of $0.5 million tax benefit. The measurement period relating to the enactment of the TCJA ended during our fourth quarter, and the tax effects thereof have been completed as of the end of Fiscal 2018.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Deferred income tax assets and liabilities consisted of the following at the dates presented:
|
| | | | | | | |
| | December 30, 2018 | | December 31, 2017
|
| | (in thousands) |
| Deferred tax assets: | | | |
| Accrued compensation | $ | 1,523 |
| | $ | 1,231 |
|
| Unearned revenue | 2,360 |
| | 979 |
|
| Deferred rent | 8,272 |
| | 6,914 |
|
| Stock-based compensation | 730 |
| | 639 |
|
| Accrued insurance and employee benefit plans | 3,328 |
| | 3,516 |
|
Unrecognized tax benefits (1) | 377 |
| | 452 |
|
| NOL and other carryforwards | 5,746 |
| | 5,635 |
|
| Loan costs | 394 |
| | 577 |
|
| Other | 722 |
| | 552 |
|
| Gross deferred tax assets | 23,452 |
| | 20,495 |
|
Less: Valuation allowance (2) | 2,896 |
| | $ | 2,424 |
|
| Net deferred tax asset | 20,556 |
| | 18,071 |
|
| Deferred tax liabilities: |
| |
|
| Depreciation and amortization | (5,774 | ) | | (9,492 | ) |
| Prepaid assets | (621 | ) | | (672 | ) |
| Intangibles | (117,025 | ) | | (117,717 | ) |
| Favorable/Unfavorable Leases | (172 | ) | | (65 | ) |
| Internal use software and other | (4,022 | ) | | (4,311 | ) |
| Gross deferred tax liabilities | (127,614 | ) | | (132,257 | ) |
| Net deferred tax liability | $ | (107,058 | ) | | $ | (114,186 | ) |
_________________
| |
(1) | Amount represents the value of future tax benefits that would result if the liabilities for uncertain state tax positions and accrued interest related to uncertain tax positions are settled.
|
| |
(2) | Valuation allowance for deferred tax assets relating to Canada net operating loss and other non-U.S. differences and certain state tax credits. |
As of December 30, 2018, we have $8.1 million of federal net operating loss carryforwards ($5.2 million expiring at the end of tax year 2037 and $2.8 million with an indefinite carryforward period), $14.5 million of state net operating loss carryforwards (expiring at the end of tax years 2022 through 2037), and $2.1 million of Canadian net operating loss carryforwards (expiring at the end of tax years 2034 through 2037). In addition, as of December 30, 2018, we have $12.2 million of interest carryforwards with an indefinite carryforward period, $0.5 million of Alternative Minimum Tax credit carryforwards with an indefinite carryforward period, and state income tax credit carryforwards of $0.5 million net of their related valuation allowance (expiring at the end of 2019 through 2027).
We file numerous federal, state, and local income tax returns in the U.S. and some foreign jurisdictions. As a matter of ordinary course, we are subject to regular examination by various tax authorities. Certain of our federal and state income tax returns are currently under examination and are in various stages of the audit/appeals process. In general, the U.S. federal statute of limitations has expired for our federal income tax returns filed for tax years ended before 2014 with the exception of the Peter Piper Pizza federal income tax returns with net operating losses which have been carried forward to open tax years (whereas, adjustments can be made to these prior returns until the respective statute of limitations expire for the particular tax years the net operating losses are utilized). In general, our state income tax statutes of limitations have expired for tax years ended before 2014. In general, the statute of limitations for our Canada income tax returns has expired for tax years ended before 2014.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
| | | | | | | | | | | |
| | Fiscal Year |
| | 2018 | | 2017 | | 2016 |
| | (in thousands) |
| Balance at beginning of period | $ | 3,853 |
| | $ | 3,119 |
| | $ | 3,288 |
|
| Additions for tax positions taken in the current year | 114 |
| | 1,677 |
| | 74 |
|
| Increases for tax positions taken in prior years | 571 |
| | 16 |
| | 1,479 |
|
| Decreases for tax positions taken in prior years | (48 | ) | | (390 | ) | | (964 | ) |
| Settlements with tax authorities | (5 | ) | | (32 | ) | | (558 | ) |
| Expiration of statute of limitations | (199 | ) | | (537 | ) | | (200 | ) |
| Balance at end of period | $ | 4,286 |
| | $ | 3,853 |
| | $ | 3,119 |
|
Our liability for uncertain tax positions (excluding interest and penalties) was $4.3 million and $3.9 million as of December 30, 2018 and December 31, 2017, respectively, 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. As such, it is reasonably possible that the liability for uncertain tax positions could decrease within the next twelve months by as much as $3.9 million as a result of payments and/or settlements with certain taxing authorities and expiring statutes of limitations within the next twelve months. The total accrued interest and penalties related to unrecognized tax benefits as of December 30, 2018 and December 31, 2017, was $1.1 million and $1.0 million, respectively. On the Consolidated Balance Sheets, we include current accrued interest related to unrecognized tax benefits in “Accrued interest,” current accrued penalties in “Accrued expenses” and non-current accrued interest and penalties in “Other noncurrent liabilities.”
Note 16. 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.
During 2018, 2017 and 2016, Parent granted options to purchase 112,769 shares, 123,603 shares, and 101,110 shares, respectively, of its common stock to certain directors, officers and employees of the Company. The options are subject to certain service and performance based vesting criteria, and were split evenly between Tranches A, B and C, which have different vesting requirements. The options in Tranche A are service based, and vest and become exercisable in equal installments on each of the first five anniversaries of the respective grant dates. The Black-Scholes model was used to estimate the fair value of Tranche A stock options. Tranche B and Tranche C options are performance based and vest and become exercisable when certain return thresholds are achieved. The Monte Carlo simulation model was used to estimate the fair value of Tranche B and Tranche C stock options. Unvested Tranche A options are also subject to accelerated vesting and exercisability on the first anniversary of a change in control of Parent or within 12 monthsfollowingsuch a change in control. Tranche B and C options may also vest and become exercisable if applicable hurdles are achieved in connection with an initial public offering. Compensation costs related to options in the Parent were recorded by the Company.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The weighted-average fair value of the options granted in 2018, 2017 and 2016 was estimated at $4.93, $1.93 and $0.98 per option, $3.71, $2.28 and $1.28 per option and $2.99, $1.68 and $0.87 per option, respectively, for Tranches A, B and C, respectively, on the date of grant based on the following assumptions:
|
| | | | | | | | | | | |
| | Fiscal Year |
| | 2018 | | 2017 | | 2016 |
| | February 2018 | | August 2017 | | February 2017 | | February 2016 |
| | | | | | | | |
| Dividend yield | — | % | | — | % | | — | % | | — | % |
| Volatility for Tranche A | 33 | % | | 35 | % | | 34 | % | | 30 | % |
| Volatility for Tranches B and C | 35 | % | | 34 | % | | 33 | % | | 30 | % |
| Risk-free interest rate for Tranche A | 2.70 | % | | 1.39 | % | | 1.38 | % | | 1.09 | % |
| Risk-free interest rate for Tranches B and C | 2.42 | % | | 1.28 | % | | 1.16 | % | | 0.99 | % |
| Expected life - years | 3.7 |
| | 1.7 |
| | 2.2 |
| | 3.6 |
|
A summary of the option activity under the equity incentive plan as of December 30, 2018 and the activity for 2018 is presented below:
|
| | | | | | | | |
| | Stock Options | Weighted Average Exercise Price (1) | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value |
| | | | ($ per share) | | ($ in thousands) |
| Outstanding stock options, December 31, 2017 | | 2,349,288 |
| $9.00 | | |
| Options Granted | | 112,769 |
| $13.73 | | |
| Options Exercised | | (7,745 | ) | $9.96 | | |
| Options Forfeited | | (466,981 | ) | $10.53 | | |
| Outstanding stock options, December 30, 2018 | | 1,987,331 |
| $8.87 | 5.6 | $ | — |
|
| Stock options expected to vest, December 30, 2018 | | 1,360,557 |
| $9.08 | 5.7 | $ | — |
|
| Exercisable stock options, December 30, 2018 | | 475,603 |
| $8.21 | 5.2 | $ | 310 |
|
_________________
(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 December 30, 2018, we had $0.6 million of total unrecognized share based compensation expense related to unvested options, net of expected forfeitures, which is expected to be amortized over the remaining weighted average period of 3.1 years.
In January 2019 and February 2019, the Parent granted additional options to purchase 314,051 shares and 110,994 shares, respectively, of its common stock to certain officers and employees of the Company.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A summary of stock based compensation costs recognized and capitalized is presented below:
|
| | | | | | | | | | | | |
| | | Fiscal Year |
| | | December 30,
2018 | | December 31,
2017 | | January 1,
2017 |
| | | (in thousands) |
| Stock-based compensation costs | | $ | 337 |
| | $ | 620 |
| | $ | 702 |
|
Portion capitalized as property and equipment (1) | | (13 | ) | | (14 | ) | | (13 | ) |
| Stock-based compensation expense recognized | | $ | 324 |
| | $ | 606 |
| | $ | 689 |
|
| Tax benefit recognized from stock-based compensation awards | | $ | — |
| | $ | — |
| | $ | 4 |
|
__________________
(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 17. Stockholder’s Equity:
We have one class of common capital stock, as disclosed on our Consolidated Balance Sheets. All outstanding common stock is owned by Queso Holdings Inc. As of December 30, 2018 and December 31, 2017, we have 200 shares issued and outstanding.
Note 18. Related Party Transactions:
CEC Entertainment reimburses 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 $1.5 million, $1.4 million and $1.7 million for Fiscal 2018, Fiscal 2017 and Fiscal 2016, respectively.
Included in our Accounts Receivable balance are amounts due from Parent totaling $2.6 million and $2.5 million at December 30, 2018 and December 31, 2017, respectively, primarily related to various general and administrative and transaction related expenses paid on behalf of Parent.
Note 19. 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:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
| | | | | | | | | | | | | | | | | | | | |
| CEC Entertainment, Inc. |
| Condensed Consolidating Balance Sheet |
| As of December 30, 2018 |
| (in thousands) |
| | | | | | | | | | | |
| | | Issuer | | Guarantor | | 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 assets | | 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 |
|
| Capital lease obligations, current portion | | 661 |
| | — |
| | 16 |
| | — |
| | 677 |
|
| Accounts payable and accrued expenses | | 56,277 |
| | 34,429 |
| | 2,321 |
| | — |
| | 93,027 |
|
| Other current liabilities | | 4,768 |
| | 510 |
| | — |
| | — |
| | 5,278 |
|
| Total current liabilities | | 69,306 |
| | 34,939 |
| | 2,337 |
| | — |
| | 106,582 |
|
| Capital lease obligations, less current portion | | 12,296 |
| | — |
| | 34 |
| | — |
| | 12,330 |
|
| Bank indebtedness and other long-term debt, 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 | | 217,437 |
| | 18,191 |
| | 482 |
| | — |
| | 236,110 |
|
| 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 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
| | | | | | | | | | | | | | | | | | | | |
| CEC Entertainment, Inc. |
| Condensed Consolidating Balance Sheet |
| As of December 31, 2017 |
| (in thousands) |
| | | | | | | | | | | |
| | | Issuer | | Guarantor | | Non-Guarantors | | Eliminations | | Consolidated |
| Current assets: | | | | | | | | | | |
| Cash and cash equivalents | | $ | 59,948 |
| | $ | 410 |
| | $ | 6,842 |
| | — |
| | $ | 67,200 |
|
| Restricted cash | | — |
| | — |
| | 112 |
| | — |
| | 112 |
|
| Accounts receivable | | 27,098 |
| | 3,283 |
| | 2,563 |
| | (1,923 | ) | | 31,021 |
|
| Inventories | | 17,104 |
| | 4,614 |
| | 282 |
| | — |
| | 22,000 |
|
| Prepaid assets | | 13,766 |
| | 5,549 |
| | 1,083 |
| | — |
| | 20,398 |
|
| Total current assets | | 117,916 |
| | 13,856 |
| | 10,882 |
| | (1,923 | ) | | 140,731 |
|
| Property and equipment, net | | 496,725 |
| | 66,669 |
| | 6,627 |
| | — |
| | 570,021 |
|
| Goodwill | | 433,024 |
| | 51,414 |
| | — |
| | — |
| | 484,438 |
|
| Intangible assets, net | | 16,764 |
| | 463,613 |
| | — |
| | — |
| | 480,377 |
|
| Intercompany | | 90,937 |
| | 10,770 |
| | — |
| | (101,707 | ) | | — |
|
| Investment in subsidiaries | | 462,873 |
| | — |
| | — |
| | (462,873 | ) | | — |
|
| Other noncurrent assets | | 7,913 |
| | 11,359 |
| | 205 |
| | — |
| | 19,477 |
|
| Total assets | | $ | 1,626,152 |
| | $ | 617,681 |
| | $ | 17,714 |
| | $ | (566,503 | ) | | $ | 1,695,044 |
|
| Current liabilities: | | | | | | | | | | |
| Bank indebtedness and other long-term debt, current portion | | $ | 7,600 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 7,600 |
|
| Capital lease obligations, current portion | | 586 |
| | — |
| | 10 |
| | — |
| | 596 |
|
| Accounts payable and accrued expenses | | 58,014 |
| | 35,134 |
| | 4,169 |
| | — |
| | 97,317 |
|
| Other current liabilities | | 4,265 |
| | 511 |
| | — |
| | — |
| | 4,776 |
|
| Total current liabilities | | 70,465 |
| | 35,645 |
| | 4,179 |
| | — |
| | 110,289 |
|
| Capital lease obligations, less current portion | | 12,956 |
| | — |
| | 54 |
| | — |
| | 13,010 |
|
| Bank indebtedness and other long-term debt, less current portion | | 965,213 |
| | — |
| | — |
| | — |
| | 965,213 |
|
| Deferred tax liability | | 99,083 |
| | 16,697 |
| | (1,594 | ) | | — |
| | 114,186 |
|
| Intercompany | | — |
| | 75,052 |
| | 28,578 |
| | (103,630 | ) | | — |
|
| Other noncurrent liabilities | | 216,287 |
| | 13,465 |
| | 446 |
| | — |
| | 230,198 |
|
| Total liabilities | | 1,364,004 |
| | 140,859 |
| | 31,663 |
| | (103,630 | ) | | 1,432,896 |
|
| Stockholder's equity: | | | | | | | | | | |
| Common stock | | — |
| | — |
| | — |
| | — |
| | — |
|
| Capital in excess of par value | | 359,233 |
| | 466,114 |
| | 3,241 |
| | (469,355 | ) | | 359,233 |
|
| Retained earnings (deficit) | | (95,199 | ) | | 10,708 |
| | (15,304 | ) | | 4,596 |
| | (95,199 | ) |
| Accumulated other comprehensive income (loss) | | (1,886 | ) | | — |
| | (1,886 | ) | | 1,886 |
| | (1,886 | ) |
| Total stockholder's equity | | 262,148 |
| | 476,822 |
| | (13,949 | ) | | (462,873 | ) | | 262,148 |
|
| Total liabilities and stockholder's equity | | $ | 1,626,152 |
| | $ | 617,681 |
| | $ | 17,714 |
| | $ | (566,503 | ) | | $ | 1,695,044 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
| | | | | | | | | | | | | | | | | | | | |
| CEC Entertainment, Inc. |
| Consolidating Statement of Comprehensive Income (Loss) |
| Fiscal Year 2018 |
| (in thousands) |
| | | | | | | | | | | |
| | | Issuer | | Guarantor | | Non-Guarantors | | Eliminations | | Consolidated |
| Revenues: | | | | | | | | | | |
| Food and beverage sales | | $ | 338,837 |
| | $ | 52,353 |
| | $ | 5,468 |
| | $ | — |
| | $ | 396,658 |
|
| Entertainment and merchandise sales | | 432,266 |
| | 36,086 |
| | 10,324 |
| | — |
| | 478,676 |
|
| Total company venue sales | | 771,103 |
| | 88,439 |
| | 15,792 |
| | — |
| | 875,334 |
|
| Franchise fees and royalties | | 1,797 |
| | 16,693 |
| | 2,242 |
| | — |
| | 20,732 |
|
| International Association assessments and other fees | | 1,187 |
| | 38,659 |
| | 36,043 |
| | (75,889 | ) | | — |
|
| Total revenues | | 774,087 |
| | 143,791 |
| | 54,077 |
| | (75,889 | ) | | 896,066 |
|
| Operating Costs and Expenses: | | | | | | | | | | |
| Company venue operating costs (excluding Depreciation and amortization): | | | | | | | | | | |
| Cost of food and beverage | | 78,458 |
| | 13,925 |
| | 1,936 |
| | — |
| | 94,319 |
|
| Cost of entertainment and merchandise | | 34,435 |
| | 1,580 |
| | 635 |
| | — |
| | 36,650 |
|
| Total cost of food, beverage, entertainment and merchandise | | 112,893 |
| | 15,505 |
| | 2,571 |
| | — |
| | 130,969 |
|
| Labor expenses | | 231,727 |
| | 19,657 |
| | 4,943 |
| | — |
| | 256,327 |
|
| Rent expense | | 86,882 |
| | 7,544 |
| | 2,058 |
| | — |
| | 96,484 |
|
| Other venue operating expenses | | 170,239 |
| | 16,287 |
| | 3,602 |
| | (39,873 | ) | | 150,255 |
|
| Total company venue operating costs | | 601,741 |
| | 58,993 |
| | 13,174 |
| | (39,873 | ) | | 634,035 |
|
| Advertising expense | | 36,833 |
| | 6,051 |
| | 41,330 |
| | (36,016 | ) | | 48,198 |
|
| General and administrative expenses | | 17,956 |
| | 35,184 |
| | 1,710 |
| | — |
| | 54,850 |
|
| Depreciation and amortization | | 88,174 |
| | 10,606 |
| | 1,940 |
| | — |
| | 100,720 |
|
| Transaction, severance and related litigation costs | | 277 |
| | 250 |
| | — |
| | — |
| | 527 |
|
| Asset Impairment | | 2,591 |
| | 4,341 |
| | 3 |
| | — |
| | 6,935 |
|
| Total operating costs and expenses | | 747,572 |
| | 115,425 |
| | 58,157 |
| | (75,889 | ) | | 845,265 |
|
| Operating income (loss) | | 26,515 |
| | 28,366 |
| | (4,080 | ) | | — |
| | 50,801 |
|
| Equity in earnings (loss) in affiliates | | 13,940 |
| | — |
| | — |
| | (13,940 | ) | | — |
|
| Interest expense | | 72,394 |
| | 3,241 |
| | 648 |
| | — |
| | 76,283 |
|
| Income (loss) before income taxes | | (31,939 | ) | | 25,125 |
| | (4,728 | ) | | (13,940 | ) | | (25,482 | ) |
| Income tax expense (benefit) | | (11,478 | ) | | 7,295 |
| | (838 | ) | | — |
| | (5,021 | ) |
| Net income (loss) | | $ | (20,461 | ) | | $ | 17,830 |
| | $ | (3,890 | ) | | $ | (13,940 | ) | | $ | (20,461 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
|
| Components of other comprehensive income (loss), net of tax: | |
|
| |
|
| |
|
| |
|
| |
|
|
| Foreign currency translation adjustments | | 547 |
| | — |
| | 547 |
| | (547 | ) | | 547 |
|
| Comprehensive income (loss) | | $ | (19,914 | ) | | $ | 17,830 |
| | $ | (3,343 | ) | | $ | (14,487 | ) | | $ | (19,914 | ) |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
| | | | | | | | | | | | | | | | | | | | |
| CEC Entertainment, Inc. |
| Consolidating Statement of Comprehensive Income (Loss) |
| Fiscal Year 2017 |
| (in thousands) |
| | | | | | | | | | | |
| | | Issuer | | Guarantor | | Non-Guarantors | | Eliminations | | Consolidated |
| Revenues: | | | | | | | | | | |
| Food and beverage sales | | $ | 351,374 |
| | $ | 52,962 |
| | $ | 6,273 |
| | $ | — |
| | $ | 410,609 |
|
| Entertainment and merchandise sales | | 406,930 |
| | 41,036 |
| | 10,313 |
| | — |
| | 458,279 |
|
| Total company venue sales | | 758,304 |
| | 93,998 |
| | 16,586 |
| | — |
| | 868,888 |
|
| Franchise fees and royalties | | 1,694 |
| | 16,189 |
| | — |
| |
|
| | 17,883 |
|
| International Association assessments and other fees | | 1,684 |
| | 37,743 |
| | 34,366 |
| | (73,793 | ) | | — |
|
| Total revenues | | 761,682 |
| | 147,930 |
| | 50,952 |
| | (73,793 | ) | | 886,771 |
|
| Operating Costs and Expenses: | | | | | | | | | | |
| Company venue operating costs (excluding Depreciation and amortization): | | | | | | | | | | |
| Cost of food and beverage | | 81,420 |
| | 14,137 |
| | 2,013 |
| | — |
| | 97,570 |
|
| Cost of entertainment and merchandise | | 27,704 |
| | 1,591 |
| | 653 |
| | — |
| | 29,948 |
|
| Total cost of food, beverage, entertainment and merchandise | | 109,124 |
| | 15,728 |
| | 2,666 |
| | — |
| | 127,518 |
|
| Labor expenses | | 224,176 |
| | 18,791 |
| | 5,094 |
| | — |
| | 248,061 |
|
| Rent expense | | 87,342 |
| | 6,375 |
| | 2,200 |
| | — |
| | 95,917 |
|
| Other venue operating expenses | | 168,991 |
| | 15,122 |
| | 4,802 |
| | (39,453 | ) | | 149,462 |
|
| Total company venue operating costs | | 589,633 |
| | 56,016 |
| | 14,762 |
| | (39,453 | ) | | 620,958 |
|
| Advertising expense | | 35,514 |
| | 5,437 |
| | 41,768 |
| | (34,340 | ) | | 48,379 |
|
| General and administrative expenses | | 20,208 |
| | 35,950 |
| | 324 |
| | — |
| | 56,482 |
|
| Depreciation and amortization | | 97,789 |
| | 9,900 |
| | 2,082 |
| | — |
| | 109,771 |
|
| Transaction, severance and related litigation costs | | 974 |
| | 474 |
| | — |
| | — |
| | 1,448 |
|
| Asset Impairment | | 1,824 |
| | 14 |
| | 5 |
| | — |
| | 1,843 |
|
| Total operating costs and expenses | | 745,942 |
| | 107,791 |
| | 58,941 |
| | (73,793 | ) | | 838,881 |
|
| Operating income (loss) | | 15,740 |
| | 40,139 |
| | (7,989 | ) | | — |
| | 47,890 |
|
| Equity in earnings (loss) in affiliates | | 25,405 |
| | — |
| | — |
| | (25,405 | ) | | — |
|
| Interest expense | | 64,117 |
| | 4,261 |
| | 737 |
| | — |
| | 69,115 |
|
| Income (loss) before income taxes | | (22,972 | ) | | 35,878 |
| | (8,726 | ) | | (25,405 | ) | | (21,225 | ) |
| Income tax expense (benefit) | | (76,038 | ) | | 2,407 |
| | (660 | ) | | — |
| | (74,291 | ) |
| Net income (loss) | | $ | 53,066 |
| | $ | 33,471 |
| | $ | (8,066 | ) | | $ | (25,405 | ) | | $ | 53,066 |
|
| |
| |
| |
| |
| |
|
|
| Components of other comprehensive income (loss), net of tax: | |
| |
| |
| |
| |
|
|
| Foreign currency translation adjustments | | 1,010 |
| | — |
| | 1,010 |
| | (1,010 | ) | | 1,010 |
|
| Comprehensive income (loss) | | $ | 54,076 |
| | $ | 33,471 |
| | $ | (7,056 | ) | | $ | (26,415 | ) | | $ | 54,076 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
| | | | | | | | | | | | | | | | | | | | |
| CEC Entertainment, Inc. |
| Consolidating Statement of Comprehensive Income (Loss) |
| Fiscal Year 2016 |
| (in thousands) |
| | | | | | | | | | | |
| | | Issuer | | Guarantor | | Non-Guarantors | | Eliminations | | Consolidated |
| Revenues: | | | | | | | | | | |
| Food and beverage sales | | $ | 361,111 |
| | $ | 48,178 |
| | $ | 5,770 |
| | $ | — |
| | $ | 415,059 |
|
| Entertainment and merchandise sales | | 453,362 |
| | 27,059 |
| | 9,834 |
| | — |
| | 490,255 |
|
| Total company venue sales | | 814,473 |
| | 75,237 |
| | 15,604 |
| | — |
| | 905,314 |
|
| Franchise fees and royalties | | 2,011 |
| | 16,328 |
| | — |
| | — |
| | 18,339 |
|
| International Association assessments and other fees | | 1,308 |
| | 36,861 |
| | 36,250 |
| | (74,419 | ) | | — |
|
| Total revenues | | 817,792 |
| | 128,426 |
| | 51,854 |
| | (74,419 | ) | | 923,653 |
|
| Operating Costs and Expenses: | | | | | | | | | | |
| Company venue operating costs (excluding Depreciation and amortization): | | | | | | | | | | |
| Cost of food and beverage | | 89,373 |
| | 12,835 |
| | 2,107 |
| | — |
| | 104,315 |
|
| Cost of entertainment and merchandise | | 29,668 |
| | 1,690 |
| | 656 |
| | — |
| | 32,014 |
|
| Total cost of food, beverage, entertainment and merchandise | | 119,041 |
| | 14,525 |
| | 2,763 |
| | — |
| | 136,329 |
|
| Labor expenses | | 230,526 |
| | 15,865 |
| | 5,035 |
| | — |
| | 251,426 |
|
| Rent expense | | 88,557 |
| | 5,234 |
| | 2,215 |
| | — |
| | 96,006 |
|
| Other venue operating expenses | | 170,385 |
| | 12,134 |
| | 4,545 |
| | (38,195 | ) | | 148,869 |
|
| Total company venue operating costs | | 608,509 |
| | 47,758 |
| | 14,558 |
| | (38,195 | ) | | 632,630 |
|
| Advertising expense | | 37,891 |
| | 4,358 |
| | 40,117 |
| | (36,224 | ) | | 46,142 |
|
| General and administrative expenses | | 24,704 |
| | 35,867 |
| | 440 |
| | — |
| | 61,011 |
|
| Depreciation and amortization | | 109,985 |
| | 7,343 |
| | 2,241 |
| | — |
| | 119,569 |
|
| Transaction, severance and related litigation costs | | 1,244 |
| | 55 |
| | — |
| | — |
| | 1,299 |
|
| Asset Impairment | | 1,487 |
| | — |
| | 63 |
| | — |
| | 1,550 |
|
| Total operating costs and expenses | | 783,820 |
| | 95,381 |
| | 57,419 |
| | (74,419 | ) | | 862,201 |
|
| Operating income (loss) | | 33,972 |
| | 33,045 |
| | (5,565 | ) | | — |
| | 61,452 |
|
| Equity in earnings (loss) in affiliates | | 13,654 |
| | — |
| | — |
| | (13,654 | ) | | — |
|
| Interest expense | | 62,630 |
| | 4,664 |
| | 451 |
| | — |
| | 67,745 |
|
| Income (loss) before income taxes | | (15,004 | ) | | 28,381 |
| | (6,016 | ) | | (13,654 | ) | | (6,293 | ) |
| Income tax expense (benefit) | | (11,337 | ) | | 10,520 |
| | (1,809 | ) | | — |
| | (2,626 | ) |
| Net income (loss) | | $ | (3,667 | ) | | $ | 17,861 |
| | $ | (4,207 | ) | | $ | (13,654 | ) | | $ | (3,667 | ) |
| | | | | | | | | | | |
| Components of other comprehensive income (loss), net of tax: | | | | | | | | | | |
| Foreign currency translation adjustments | | 420 |
| | — |
| | 420 |
| | (420 | ) | | 420 |
|
| Comprehensive income (loss) | | $ | (3,247 | ) | | $ | 17,861 |
| | $ | (3,787 | ) | | $ | (14,074 | ) | | $ | (3,247 | ) |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
| | | | | | | | | | | | | | | | | | | | | |
| CEC Entertainment, Inc. |
| Consolidating Statement of Cash Flows |
| Fiscal Year 2018 |
| (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
| Issuer |
| Guarantors |
| Non-Guarantors |
| Eliminations |
| Consolidated |
| Cash flows provided by (used in) operating activities: |
| $ | 68,828 |
|
| $ | 21,872 |
|
| $ | (3,910 | ) |
| $ | — |
|
| $ | 86,790 |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
| Purchases of property and equipment |
| (61,178 | ) |
| (14,646 | ) |
| (1,264 | ) |
| — |
|
| (77,088 | ) |
| Development of internal use software |
| (1,845 | ) |
| (911 | ) |
| — |
|
| — |
|
| (2,756 | ) |
| Proceeds from sale of property and equipment |
| 560 |
|
| — |
|
| — |
|
| — |
|
| 560 |
|
| Cash flows provided by (used in) investing activities |
| (62,463 | ) |
|
| (15,557 | ) |
| (1,264 | ) |
| — |
|
| (79,284 | ) |
|
|
|
|
|
|
|
|
|
|
|
| Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
| Repayments on senior term loan |
| (7,600 | ) |
| — |
|
| — |
|
| — |
|
| (7,600 | ) |
| Payment of debt financing costs | | (442 | ) | | — |
| | — |
| | — |
| | (442 | ) |
| Payments on capital lease obligations |
| (586 | ) |
| — |
|
| (9 | ) |
| — |
|
| (595 | ) |
| Payments on sale leaseback transactions |
| (2,910 | ) | — |
| — |
|
| — |
|
| — |
|
| (2,910 | ) |
| Cash flows provided by (used in) financing activities |
| (11,538 | ) |
|
| — |
|
| (9 | ) |
| — |
|
| (11,547 | ) |
| Effect of foreign exchange rate changes on cash |
| — |
|
| — |
|
| 50 |
|
| — |
|
| 50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash, cash equivalents and restricted cash
|
| (5,173 | ) |
|
| 6,315 |
|
| (5,133 | ) |
| — |
|
| (3,991 | ) |
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
|
| $ | 54,775 |
|
|
| $ | 6,725 |
|
| $ | 1,821 |
|
| $ | — |
|
| $ | 63,321 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| CEC Entertainment, Inc. |
| Consolidating Statement of Cash Flows |
| Fiscal Year 2017 |
| (in thousands) |
| | | | | | | | | | | |
| | | Issuer | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
| Cash flows provided by (used in) operating activities: | | $ | 73,925 |
| | $ | 29,569 |
| | $ | 803 |
| | $ | — |
| | $ | 104,297 |
|
| |
| |
| | | | | |
| |
| Cash flows from investing activities: | | | | | | | | |
| |
| Purchases of property and equipment | | (62,544 | ) | | (27,061 | ) | | (1,353 | ) | | — |
| | (90,958 | ) |
| Development of internal use software | | — |
| | (3,243 | ) | | — |
| | — |
| | (3,243 | ) |
| Proceeds from sale of property and equipment | | 489 |
| | — |
| | — |
| | — |
| | 489 |
|
| Cash flows provided by (used in) investing activities | | (62,055 | ) | — |
| (30,304 | ) | — |
| (1,353 | ) | — |
| — |
| — |
| (93,712 | ) |
| |
|
|
|
|
|
|
|
|
| |
| Cash flows from financing activities: | | | | | | | | | | |
| Repayments on senior term loan | | (7,600 | ) | | — |
| | — |
| | — |
| | (7,600 | ) |
| Repayments on note payable | | — |
| | (13 | ) | | — |
| | — |
| | (13 | ) |
| Proceeds from financing sale-leaseback transaction | | 4,073 |
| | — |
| | — |
| | — |
| | 4,073 |
|
| Payments on capital lease obligations | | (460 | ) | | — |
| | (7 | ) | | — |
| | (467 | ) |
| Payments on sale leaseback transactions | | (2,470 | ) | | — |
| | — |
| | — |
| | (2,470 | ) |
| Return of capital | | 1,447 |
| | — |
| | — |
| | — |
| | 1,447 |
|
| Cash flows provided by (used in) financing activities | | (5,010 | ) | | (13 | ) | | (7 | ) | | — |
| | (5,030 | ) |
| Effect of foreign exchange rate changes on cash |
| — |
| | — |
| | 466 |
| | — |
| | 466 |
|
| | | | | | | | | | |
| Change in cash and cash equivalents and restricted cash | | 6,860 |
| | (748 | ) | | (91 | ) | | — |
| | 6,021 |
|
| Cash and cash equivalents and restricted cash at beginning of period |
| 53,088 |
| | 1,158 |
| | 7,045 |
| | — |
| | 61,291 |
|
| Cash and cash equivalents and restricted cash at end of period | | $ | 59,948 |
| | $ | 410 |
| | $ | 6,954 |
| | $ | — |
| | $ | 67,312 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| CEC Entertainment, Inc. |
| Consolidating Statement of Cash Flows |
| Fiscal Year 2016 |
| (in thousands) |
| | | | | | | | | | | |
| | | Successor |
| | | Issuer | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
| Cash flows provided by (used in) operating activities: | | $ | 73,722 |
| | $ | 44,608 |
| | $ | 625 |
| | $ | — |
| | $ | 118,955 |
|
| | | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | | | |
| Purchases of property and equipment | | (69,827 | ) | | (18,439 | ) | | (414 | ) | | — |
| | (88,680 | ) |
| Development of internal use software | | (7,671 | ) | | (2,784 | ) | | — |
| | — |
| | (10,455 | ) |
| Proceeds from sale of property and equipment | | 696 |
| | — |
| | — |
| | — |
| | 696 |
|
| Cash flows provided by (used in) investing activities | | (76,802 | ) | — |
| (21,223 | ) | — |
| (414 | ) | — |
| — |
| — |
| (98,439 | ) |
| | | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | | | |
| Repayments on senior term loan | | (7,600 | ) | | — |
| | — |
| | — |
| | (7,600 | ) |
| Repayments on note payable | | — |
| | (50 | ) | | — |
| | — |
| | (50 | ) |
| Intercompany note | | 23,974 |
| | (23,974 | ) | | — |
| | — |
| | — |
|
| Payments on capital lease obligations | | (417 | ) | | — |
| | (4 | ) | | — |
| | (421 | ) |
| Payments on sale leaseback transactions | | (2,028 | ) | | — |
| | — |
| | — |
| | (2,028 | ) |
| Excess tax benefit realized from stock-based compensation | | 4 |
| | — |
| | — |
| | — |
| | 4 |
|
| Cash flows provided by (used in) financing activities | | 13,933 |
| | (24,024 | ) | | (4 | ) | | — |
| | (10,095 | ) |
| Effect of foreign exchange rate changes on cash | | — |
| | — |
| | 216 |
| | — |
| | 216 |
|
| |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
| Change in cash and cash equivalents and restricted cash | | 10,853 |
| | (639 | ) | | 423 |
| | — |
| | 10,637 |
|
| Cash and cash equivalents and restricted cash at beginning of period | | $ | 42,235 |
| | $ | 1,797 |
| | $ | 6,622 |
| | $ | — |
| | $ | 50,654 |
|
| Cash and cash equivalents and restricted cash at end of period | | $ | 53,088 |
| | $ | 1,158 |
| | $ | 7,045 |
| | $ | — |
| | $ | 61,291 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 20. Quarterly Results of Operations(Unaudited):
The following table summarizes our unaudited quarterly condensed consolidated results of operations in 2018 and 2017:
|
| | | | | | | | | | | | | | | |
| | Quarters in Fiscal Year 2018 |
| | April 1,
2018 | | July 1,
2018 | | September 30,
2018 | | December 30,
2018 |
| | (in thousands) |
| Food and beverage sales | $ | 118,377 |
| | $ | 96,258 |
| | $ | 94,023 |
| | $ | 88,000 |
|
| Entertainment and merchandise sales | 131,117 |
| | 115,904 |
| | 121,611 |
| | 110,044 |
|
| Company venue sales | 249,494 |
| | 212,162 |
| | 215,634 |
| | 198,044 |
|
| Franchise fees and royalties | 5,410 |
| | 5,196 |
| | 5,311 |
| | 4,815 |
|
| Total revenues | $ | 254,904 |
| | $ | 217,358 |
| | $ | 220,945 |
| | $ | 202,859 |
|
| Operating income (loss) | $ | 34,713 |
| | $ | 7,974 |
| | $ | 7,369 |
| | $ | 745 |
|
| Income (loss) before income taxes | $ | 16,156 |
| | $ | (11,139 | ) | | $ | (11,700 | ) | | $ | (18,799 | ) |
| Net income (loss) | $ | 12,223 |
| | $ | (8,965 | ) | | $ | (9,487 | ) | | $ | (14,232 | ) |
|
| | | | | | | | | | | | | | | |
| | Quarters in Fiscal Year 2017 |
| | April 2,
2017 | | July 2,
2017 | | October 1,
2017 | | December 31,
2017 |
| | (in thousands) |
| Food and beverage sales | $ | 124,419 |
| | $ | 97,411 |
| | $ | 98,255 |
| | $ | 90,524 |
|
| Entertainment and merchandise sales | 135,917 |
| | 109,724 |
| | 110,633 |
| | 102,005 |
|
| Company venue sales | 260,336 |
| | 207,135 |
| | 208,888 |
| | 192,529 |
|
| Franchise fees and royalties | 4,623 |
| | 4,649 |
| | 4,459 |
| | 4,152 |
|
| Total revenues | $ | 264,959 |
| | $ | 211,784 |
| | $ | 213,347 |
| | $ | 196,681 |
|
| Operating income (loss) | $ | 44,659 |
| | $ | 7,814 |
| | $ | 1,138 |
| | $ | (5,721 | ) |
| Income (loss) before income taxes | $ | 27,598 |
| | $ | (9,247 | ) | | $ | (16,313 | ) | | $ | (23,263 | ) |
| Net income (loss) | $ | 17,220 |
| | $ | (5,930 | ) | | $ | (11,092 | ) | | $ | 52,868 |
|
Quarterly operating results are not necessarily representative of operations for a full year.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
ITEM 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, as of the end of the period covered by this report. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 30, 2018 to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, was (a) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (b) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only a reasonable assurance of achieving the desired control objectives.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of management and our directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Our management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 30, 2018 based on the criteria established in “Internal Control – Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our management’s assessment, we have concluded that, as of December 30, 2018 our internal control over financial reporting was effective based on those criteria.
Changes in Internal Control over Financial Reporting
During the quarterly period ended December 30, 2018, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. Other Information.
None.
PART III
ITEM 10. Directors, Executive Officers, and Corporate Governance.
Board of Directors
As of the date of this report, the Board consists of four members, including our Chief Executive Officer, one partner of Apollo, one principal of Apollo and one additional member.
The following table provides information regarding our executive officers and the members of our Board:
|
| | | | |
Name | | Age | | Position(s) |
| | | | |
Thomas Leverton | | 47 | | Chief Executive Officer and Director |
J. Roger Cardinale | | 59 | | President |
James A. Howell | | 53 | | Executive Vice President and Chief Financial Officer |
Andrew S. Jhawar | | 47 | | Chairman |
Naveen R. Shahani | | 28 | | Director |
Allen R. Weiss | | 64 | | Director |
Thomas Leverton has served as a member of our Board and Chief Executive Officer of the Company since July 2014. He served as Chief Executive Officer of Topgolf from May 2013 until July 2014. From June 2010 to August 2012, Mr. Leverton served as Chief Executive Officer of Omniflight, an air medical operator. Earlier in his career, he held executive roles at FedEx Office, including Executive Vice President and Chief Development Officer. Mr. Leverton also served as Chief Operating Officer of TXU Energy. He began his career at Johnson & Johnson and Bain & Company. In light of our ownership structure and Mr. Leverton’s extensive executive leadership and management experience, the Board believes it is appropriate for Mr. Leverton to serve as our director.
J. Roger Cardinale has served as President of the Company since June 2014. Previously, he served as Executive Vice President of Development and Purchasing of the Company since December 1999. In 2013, he was named President of the Company’s International Division. Prior to that, he served as Senior Vice President of Purchasing from March 1998 to December 1999 and Senior Vice President of Real Estate from January 1999 to December 1999. From January 1993 to March 1998, he served as Vice President of Purchasing and, from September 1990 to January 1993, he served as Director of Purchasing. Mr. Cardinale also held various other positions with the Company from November 1986 to September 1990.
James A. Howell has served as Executive Vice President, Chief Financial Officer of the Company since September 2018. He served as Chief Financial Officer of Billabong International Ltd. Mr. Howell previously was Executive Vice President-Finance and Treasurer of Nordstrom, Inc., Chief Financial Officer for CAE SimuFlite, Inc., Senior Manager at PricewaterhouseCoopers LLP and Senior Vice President & Controller at Blockbuster, Inc.
Andrew S. Jhawar became Chairman of our Board in December 2018. Mr. Jhawar is a Senior Partner and Head of the Consumer & Retail Industry team of Apollo Management, L.P., having joined in February 2000. Prior to Apollo Global Management, LLC, he served as an Investment Banker at Donaldson, Lufkin & Jenrette Securities Corporation and at Jefferies & Company, Inc. Mr. Jhawar has been the Chairman of The Fresh Market, Inc. since April 2016, QDOBA Restaurant Corporation since December 2018, and The Stand, LLC since August 2015. He previously served as the Chairman of Sprouts Farmers Market, Inc. from March 2013 to August 2015 and a member of the Board from April 2011 through March 2013 and from August 2015 through February 2016. In addition, Mr. Jhawar has previously been a Director of Hostess Brands, LLC from April 2013 through June 2017, Smart & Final Inc. from May 2007 through December 2012, General Nutrition Centers, Inc. from December 2003 through March 2007, and Rent-A-Center, Inc. from October 2001 through June 2005. Mr. Jhawar graduated with an M.B.A. from Harvard Business School and graduated, summa cum laude, with a B.S. in Economics from the Wharton School of the University of Pennsylvania.In light of our ownership structure and Mr. Jhawar’s extensive financial and business experience, including experience working with companies in the restaurant, consumer goods and retail industries, the Board believes it is appropriate for Mr. Jhawar to serve as our Chairman.
Naveen R. Shahani became a member of our Board in February 2019. Mr. Shahani is a Principal of Apollo, having joined in 2014. Prior to Apollo, he was a member of the Financial Sponsors Group in the Investment Banking Division of Credit Suisse. Mr. Shahani graduated magna cum laude with a B.S. in Economics from the Wharton School at the University of Pennsylvania. In light of our ownership structure and his significant experience analyzing and investing in public and private companies, the Board believes it is appropriate for Mr. Shahani to serve as our director.
Allen R. Weiss became a member of our Board in June 2014. Mr. Weiss served as President of Worldwide Operations for the Walt Disney Parks and Resorts business of The Walt Disney Company, a global entertainment company listed on the NYSE, from 2005 until his retirement in November 2011. Prior to that, Mr. Weiss served in a number of roles for The Walt Disney Company beginning in 1972, including most recently as President of Walt Disney World Resort, Executive Vice President of Walt Disney World Resort and Vice President of Resort Operations Support. Mr. Weiss serves as a director of Dick’s Sporting Goods, Inc. and Apollo Group, Inc. (a private education provider unaffiliated with Apollo). Mr. Weiss also serves on the board or council of a number of community and civic organizations. In light of our ownership structure and Mr. Weiss’s knowledge and understanding of the entertainment sector, including insight gained through his executive leadership and management experience at The Walt Disney Company, the Board believes it is appropriate for Mr. Weiss to serve as our director.
Corporate Governance
Committees of the Board
The Board of Directors has two standing committees: Audit and Compensation. While the Audit Committee has primary responsibility for risk oversight, both our Audit Committee and our entire Board of Directors are actively involved in risk oversight on behalf of the Company and both receive a report on the Company’s risk management activities from our executive management team on a regular basis. Members of both the Audit Committee and the Board of Directors also engage in periodic discussions with our President, Chief Executive Officer, Chief Financial Officer, General Counsel, Internal Audit and other officers of the Company as they deem appropriate to ensure that risk is being properly managed at the Company. In addition, each of the committees of the Board of Directors considers risks associated with its respective area of responsibility.
Audit Committee
The Audit Committee is composed of three directors: Andrew Jhawar, Naveen Shahani and Allen Weiss. Lance Milken, who resigned as a director of the Company effective December 21, 2018, and Michael Diverio, who resigned as a director of the Company effective February 19, 2019, served on the Audit Committee through the dates of their respective resignations. The primary role of the Audit Committee is to provide financial oversight. Our management is responsible for preparing financial statements, and our independent registered public accounting firm is responsible for auditing those financial statements. The Audit Committee does not provide any expert or special assurance or certifications as to our financial statements or as to the work of our independent registered public accounting firm. The Audit Committee is directly responsible for the selection, engagement, compensation, retention and oversight of our independent registered public accounting firm. The Board has also determined that each member of the Audit Committee is financially literate.
The Audit Committee has established a procedure whereby complaints or concerns regarding accounting, internal controls or auditing matters may be submitted anonymously to the Audit Committee by email at auditcomm@cecentertainment.com. The Audit Committee met four times in 2018.
Although our Board of Directors has determined that each of the members of our Audit Committee is financially literate and has experience analyzing or evaluating financial statements, at this time we do not have an “audit committee financial expert” within the meaning of Item 407 of Regulation S-K under the Exchange Act serving on the Audit Committee. As a company whose stock is privately-held and given the financial sophistication and other business experience of the members of the audit committee, we do not believe that we require the services of an audit committee financial expert at this time.
Compensation Committee
The Compensation Committee is composed of three directors: Andrew Jhawar, Naveen Shahani and Allen Weiss. Lance Milken, who resigned as a director of the Company effective December 21, 2018, and Michael Diverio, who resigned as a director of the Company effective February 19, 2019, served on the Audit Committee through the dates of their respective resignations. The Compensation Committee is responsible for approving the compensation, including performance bonuses, payable to the executive officers of the Company, and administering the Company’s equity compensation plans.
The Compensation Committee acts on behalf of and in conjunction with the Board of Directors to establish or recommend the compensation of executive officers of the Company and to provide oversight of our overall compensation programs and philosophy. The Compensation Committee met twice in 2018.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics that applies to all of our officers and employees, as well as a separate Code of Ethics for our Chief Executive Officer, President and Senior Financial Officers that applies to our principal executive officer, principal financial officer and principal accounting officer. Both documents may be accessed on our website at www.chuckecheese.com, under “Investor Relations-Governance.”
ITEM 11. Executive and Director Compensation
Information required by Item 11 will be set forth in a future amendment to this Annual Report on Form 10-K.
PART III, ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information, as of March 1, 2019, relating to the beneficial ownership of the Company’s common stock by: (i) each director and named executive officer; (ii) the directors and the executive officers as a group; and (iii) each person, as that term is used in the Exchange Act, known to the Company to own beneficially five percent (5%) or more of the Company’s outstanding shares of common stock. Unless otherwise indicated, to the Company’s knowledge, each stockholder has sole voting and dispositive power with respect to the securities beneficially owned by that stockholder. Except as otherwise indicated, all stockholders set forth below have the same principal business address as the Company. On December 30, 2018, there were 200 shares of the Company’s common stock outstanding.
|
| | | | | | |
| Name of Beneficial Owner | | Number of Shares of Common Stock | | Percentage of Outstanding Common Stock |
Queso Holdings Inc. (1) | | 200 |
| | 100 | % |
| Thomas Leverton | | — |
| | — |
|
| J. Roger Cardinale | | — |
| | — |
|
| James A. Howell | | — |
| | — |
|
| Andrew S. Jhawar | | — |
| | — |
|
| Naveen R. Shahani | | — |
| | — |
|
| Allen R. Weiss | | — |
| | — |
|
| Directors and Executive Officers as a Group (6 persons) | | — |
| | — |
|
___________________________
_______________
| |
(1) | AP VIII CEC Holdings, L.P. (“Queso LP”) isIf the sole shareholder of Queso Holdings Inc. Apollo Management VIII, L.P. (“Management VIII”) is the manager of Queso LP. AIF VIII Management, LLC (“AIF VIII LLC”) is the general partner of Management VIII. Apollo Management, L.P. (“Apollo Management”) is the sole member-manager of AIF VIII LLC. Apollo Management GP, LLC (“Management GP”) is the general partner of Apollo Management. Apollo Management Holdings, L.P. (“Management Holdings”) is the sole member of Management GP. Apollo Management Holdings GP, LLC (“Management Holdings GP”) is the general partner of Management Holdings. Leon Black, Joshua Harris and Marc Rowan are the managers, as well as executive officers, of Management Holdings GP, and as such may be deemed to have voting and dispositive control with respect to the shares of our common stock held of record by Queso Holdings Inc. Each of Queso LP, Management VIII, AIF VIII LLC, Apollo Management, Management GP, Management Holdings and Management Holdings GP, disclaims beneficial ownershipminimum quantitative component of the sharesIncentive Bonus Plan were achieved, the bonus payout, as a percentage of our common stock owned of record by Queso Holdings Inc., except to the extent of any pecuniary interest therein. The address of each of Queso Holdings Inc., Queso LP, Management VIII, AIF VIII LLC, Apollo Management, Management GP, Management Holdings and Management Holdings GP, and Messrs. Black, Harris and Rowan, is 9 W. 57th Street, 43rd Floor, New York, New York 10019. |
Part III, ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
The Company’s Code of Business Conduct and Ethics provides that employees, officers and directors must act in the best interests of the Company and refrain from engaging in any activity or having a personal interest that presents a “conflict of interest.” In addition, under applicable SEC rules, the Company is required to disclose related person transactions as defined in the SEC’s rules. The Code of Business Conduct and Ethics may be accessed on the Company’s website at www.chuckecheese.com under “Investor Relations-Governance.” We intend to disclose future amendments to or, with respect to directors and certain executive officers, waivers from, certain provisions of the Code of Business Conduct and Ethics on our website.
Related Party Transaction Policy
The Board of Directors has adopted a Related Party Transaction Policy to set forth in writing the policies and procedures for review and approval of transactions involving the Company and “related parties” (directors, executive officers, security holders owning five percent or greater of the Company’s outstanding voting securities, and immediate family members of the foregoing persons)target, would be 50%. The policy covers any related party transaction that meets the minimum threshold for disclosure under the relevant SEC rules, generally transactions involving amounts exceeding $120,000 in which a related party had, has or will have a direct or indirect material interest.
Policy
Related party transactions must be approved by the Audit Committee or by the Chairman of the Audit Committee under authority delegated to the Chairman of the Audit Committee by the Audit Committee.
A related party transaction will be approved only if the Audit Committee or the Chairman of the Audit Committee determines that it is fair to the Company and in, or not inconsistent with, the best interests of the Company and its stockholders.
In considering the transaction, the Audit Committee or its Chairman will consider all relevant facts and circumstances of the transaction or proposed transaction with a related party.
Procedures
The affected related party will bring the matter to the attention of the General Counsel.
The General Counsel will determine whether the matter should be considered by the Audit Committee or its Chairman.
If a member of the Audit Committee is involved in the transaction, he or she will be recused from all discussions and decisions about the transaction.
The transaction must be approved in advance by the Audit Committee or its Chairman whenever practicable, and if not practicable, it may be presented to the General Counsel for preliminary approval, or be preliminarily entered into, subject to ratification by the Audit Committee or its Chairman.
If the Audit Committee or its Chairman does not ratify the related party transaction, the Company will take all reasonable efforts or actions to amend, terminate or cancel it, as directed by the Audit Committee or its Chairman.
All related party transactions will be disclosed to the Board of Directors following their approval or ratification.
Currently, there are no related party transactions which meet the requirements for review and approval under our policy.
Director Independence
We are not a listed issuer whose securities are listed on a national securities exchange or in an inter-dealer quotation system which has requirements that a majority of the Board of Directors be independent. However, if we were a listed issuer whose securities were traded on the New York Stock Exchange and subject to such requirements, we would be entitled to rely on the controlled company exception contained in the NYSE Listing Manual, Section 303A.00 for the exception from the independence requirements related to the majority of our Board of Directors and for the independence requirements related
to our Compensation Committee. Pursuant to NYSE Listing Manual, Section 303A.00, a company of which more than 50% of the voting power for the election of directors is held by an individual, a group or another company is exempt from the requirements that its Board of Directors consist of a majority of independent directors and that the Compensation Committee (and, if applicable, the nominating committee) of such company be comprised solely of independent directors. At December 30, 2018, Apollo beneficially owned 100% of the voting power of the Company which would qualify the Company as a controlled company eligible for exemption under the rule.
ITEM 14. Principal Accountant Fees and Services.
The firm of Deloitte & Touche LLP was the independent registered public accounting firm for the audit of the Company’s annual consolidated financial statements included in the Company’s annual report on Form 10-K, the review of the consolidated financial statements included in the Company’s quarterly reports on Forms 10-Q and for services that are normally provided by accountants in connection with statutory and regulatory filings or engagements for the fiscal years ended December 30, 2018 and December 31, 2017. The following table presents fees billed or expected to be billed for professional services rendered by Deloitte & Touche LLP for the audit of the Company’s annual consolidated financial statements, audit-related services, tax services and all other services rendered by Deloitte & Touche LLP for the Company’s 2018 and 2017 fiscal years:
|
| | | | | | | | |
| | | Fiscal 2018 | | Fiscal 2017 |
Audit Fees (1) | | $ | 585,000 |
| | $ | 585,000 |
|
Audit-related Fees (2) | | 10,000 |
| | 7,000 |
|
Tax fees (3) | | — |
| | 15,000 |
|
All other fees (4) | | 3,000 |
| | 2,000 |
|
| Total | | $ | 598,000 |
| | $ | 609,000 |
|
_______________________
| |
(1)
| “Audit fees” are fees billed by Deloitte & Touche LLP for professional services rendered for the audit of the Company’s annual consolidated financial statements included in the Company’s Form 10-K, the review of the Company’s quarterly consolidated financial statements included in the Company’s Forms 10-Q, and includes fees for services that are normally incurred in connection with statutory and regulatory filings or engagements, such as consents, comfort letters, statutory audits, attest services and review of documents filed with the Securities and Exchange Commission. |
| |
(2) | “Audit-related fees” are fees billed by Deloitte & Touche LLPThe maximum bonus payout on the quantitative component of the Incentive Bonus Plan, as a percentage of target, is 150%. |
If the actual quantitative component achieved was either (i) greater than such component’s minimum level but less than its target level or (ii) greater than such component’s target level but less than its maximum level, then the portion of the bonus payable in respect of such component would be calculated based on a linear interpolation.
The Company’s Adjusted EBITDA of $184.1 million resulted in a payout equal to 100% of the target for that component under the Incentive Bonus Plan. As this metric could contribute up to 40% of the total bonus available under the Incentive Bonus Plan, the actual payout for the Adjusted EBITDA component was 40% of an eligible employees’ target bonus (100% x 40% = 40%). Similarly, the Company’s free cash flow of $95.7 million resulted in a payout equal to 115% of the target, as adjusted from the target initially set, for that component under the Incentive Bonus Plan. As this metric could contribute up to 20% of the total bonus available under the Incentive Bonus Plan, actual payout for the free cash flow component of the Incentive Bonus Plan was 23% of eligible employees’ target bonus (115% x 20% = 23%). Furthermore, the Company’s 2.7% growth of comparable venue sales resulted in a payout equal to 100% of the target for this component of the bonus calculation. As this metric could contribute up to 10% of the total bonus available under the Incentive Bonus Plan, actual payout for the comparable venue sales component was 10% of eligible employees’ target bonus (100% x 10% = 10%). Finally, the Company’s $914.9 million of revenues resulted in no payout for this component of the bonus calculation under the Incentive Bonus Plan.
The Incentive Bonus Plan also provides that each employee may be awarded a bonus of up to 20% of the total target bonus percentage based on the employee’s achievement of individual performance goals. The percentage of the individual performance component awarded to an employee is decided by the employee’s direct supervisor (or, in the case of our Chief Executive Officer, by the Compensation Committee), whose decision is to be guided by the employee’s achievement of his or her goals that were established in coordination with the supervisor or the Compensation Committee, as applicable, at the beginning of the employee’s review period. The discretionary component of the Incentive Bonus Plan cannot be achieved above 100% of target, and many employees were awarded less than 100% of the discretionary portion of the bonus.
Assuming a 100% award of the individual performance portion of the bonus, the maximum payout that an eligible employee could receive would be 93% of the employee’s target bonus (40% + 23% +10% + 0% + 20% = 93%).
These calculations are set forth in the following table:
|
| | | | | | |
| | | | | 2019 Payout |
| Metric | | % Weighting | | Bonus as a % of Target | | % of Base |
| Adjusted EBITDA | | 40% | | 100% | | 40% |
| Free cash flow | | 20% | | 115% | | 23% |
| Comparable venue sales change | | 10% | | 100% | | 10% |
| Revenue | | 10% | | —% | | —% |
| Individual performance | | 20% | | 100% | | 20% |
| Total | | 100% | | | | 93% |
Based on these calculations, our named executive officers received the following bonuses under the Incentive Bonus Plan:
|
| | |
| Name and Position | | 2019 Incentive Bonus Plan Payment |
Tom Leverton, Former Chief Executive Officer (1)(2) | | $— |
| J. Roger Cardinale, President | | $441,350 |
James Howell, Chief Financial Officer (2) | | $— |
_______________
| |
(1) | Mr. Leverton’s employment with the Company terminated as of January 21, 2020; therefore he was eligible for assurance services that are reasonably relateda payment under the 2019 Incentive Bonus Plan. |
| |
(2) | See section entitled “Stock Bonuses” |
Stock Bonuses
On October 12, 2018, each of Messrs. Leverton and Cardinale entered into an “Amendment to Employment Agreement”, as discussed above under “Employment Agreements with Named Executive Officers” that provided for a stock bonus grant valued at $70,471 for Mr. Leverton and $63,363 for Mr. Cardinale, effective January 1, 2019. The following table outlines the details of the common shares of Parent issued effective January 1, 2019:
|
| | | | |
| Name and Position | | Number of common shares of Parent (2) | | Payout value of 2019 Stock Bonus |
Tom Leverton, Former Chief Executive Officer (1) | | 7,954 | | $70,471 |
| J. Roger Cardinale, President | | 7,152 | | $63,363 |
_______________
| |
(1) | Mr. Leverton’s employment with the Company terminated as of January 21, 2020. |
| |
(2) | The number of common shares of Parent is presented on a gross basis, before shares withheld for taxes. The total number of shares withheld for taxes for Mr. Leverton and Mr. Cardinale were 2,358 and 2,120, respectively. |
On January 18, 2019, each of Messrs. Leverton and Howell entered into a stock bonus agreement with Parent whereby they elected to receive their 2019 incentive payment under the Incentive Bonus Plan in common stock of Parent (the “Stock Bonus Agreement”). Under the Stock Bonus Agreement, Mr. Leverton and Mr. Howell would receive their 2019 Incentive Bonus Plan payment as unrestricted shares of common stock of Parent equal to the quotient, rounded down to the nearest whole number of shares, derived by dividing the product of (i) (a) 100% of the cash value of their bonus amount as calculated under the Incentive Bonus Plan, multiplied by (b) 1.4, by (ii) $8.86 (the “Stock Bonus”).
Assuming a 100% award of the discretionary portion of their bonus, the maximum payout that Messrs. Leverton and Howell could receive based on the target achievements discussed above under “Non-Equity Incentive Plan Compensation” would be 133% of their target bonus (40% + 23% +10% + 0% + 20% + 40% = 133%).
Based on these calculations, Mr. Leverton and Mr. Howell received the following bonuses under the Stock Bonus Agreement:
|
| | | | |
| Name and Position | | Number of common shares of Parent | | Payout value of 2019 Stock Bonus |
Tom Leverton, Former Chief Executive Officer (1) | | 67,353 | | $596,750 |
| James Howell, Chief Financial Officer | | 58,185 | | $515,527 |
______________
| |
(1) | Mr. Leverton’s employment with the Company terminated as of January 21, 2020, therefore he was eligible for a payment under the 2019 Stock Bonus Agreement. |
| |
(2) | The number of common shares of Parent is presented on a gross basis, before shares withheld for taxes. The total number of shares withheld for taxes for Mr. Leverton and Mr. Howell were 27,440 and 23,596, respectively. |
Mr. Leverton’s and Mr. Howell’s common shares of Parent were issued on March 6, 2020, the date on which annual bonuses were paid to employees of the Company with respect to 2019 performance.
Indemnification Agreements
The board of directors has authorized the Company to enter into indemnification agreements with certain current and future directors and senior officers of the Company who may be designated from time to time by the board of directors, including each of our named executive officers. The indemnification agreements supplement and clarify existing indemnification provisions of the Company’s Third Restated Articles of Incorporation and Second Amended and Restated Bylaws and, in general, require the Company, to the extent permitted under applicable law, to indemnify such persons against all expenses, judgments and fines incurred in connection with the defense or settlement of any actions brought against them by reason of the fact that they are or were directors or officers of the Company or any other enterprise, to the extent they assumed those responsibilities at the direction of the Company. The indemnification agreements also establish processes and procedures for indemnification claims, advancement of expenses and costs and other determinations with respect to indemnification.
Outstanding Equity Awards at 2019 Fiscal Year-End
The following table provides information on stock options held by our named executive officers as of December 29, 2019, the last day of our 2019 fiscal year. Each equity grant is shown separately for each named executive officer. The vesting schedule for each grant is shown following this table, based on the stock option award grant date.
|
| | | | | | | | | | | | | | |
| | | Option Awards |
| | | Equity Incentive Plan Awards: | | | | |
| Name | | Number of Securities Underlying Unexercised Options (#) Exercisable | | Number of Securities Underlying Unexercised Options (#) Unexercisable (1) | | Number of Securities Underlying Unexercised Unearned Options (#) (1) | | Options Exercise Price ($) (2) | | Option Expiration Date |
| Thomas Leverton | | 193,625 |
| | — |
| | 387,250 |
| | 8.03 |
| | 02/14/2024 |
| | | — |
| | 38,727 |
| | — |
| | 8.86 |
| | 02/14/2029 |
| J. Roger Cardinale | | 129,083 |
| | — |
| | 258,166 |
| | 8.03 |
| | 02/14/2024 |
| | | — |
| | 25,817 |
| | — |
| | 8.86 |
| | 02/14/2029 |
| James Howell | | — |
| | 70,350 |
| | 140,701 |
| | 8.86 |
| | 01/30/2029 |
___________________________
| |
(1) | Under the Queso Holdings Inc. Equity Incentive Plan Stock Option Agreement, as amended (the “Option Agreement”), which each named executive officer signed as a condition of receiving option grants from Parent, each of our named executive officers was awarded three tranches of stock options (with each of Tranche A, Tranche B, and Tranche C equal to 1/3 of the total grant). As to the performancestock options granted to Messrs. Leverton and Cardinale in 2014, Tranche A stock options vested and became exercisable in equal installments on each of the audit or reviewfirst five anniversaries of the Company’s consolidated financial statementsdate the stock options were granted. As to the stock options granted to Messrs. Leverton, Cardinale and Howell in 2014, Tranche A stock options vest and become exercisable in equal installments on each of the first five anniversaries of the date the stock options were granted. Tranche B stock options vest and become exercisable if AP VIII CEC Holdings, L.P. (f/k/a AP VIII Queso Holdings, L.P.), an affiliate of our sponsor, and its affiliates realize a multiple on invested capital (“MOIC”) of at least 2.0x (with such MOIC to be calculated in accordance with the methodology set forth in the Equity Incentive Plan). Tranche C stock options vest and become exercisable if AP VIII CEC Holdings, L.P., an affiliate of our sponsor, and its affiliates realize an MOIC of at least 3.0x. For a description of the treatment of the stock option in the event of an initial public offering or other attestation serviceschange in control, please see the description below under the heading “Potential Payments Upon Termination or consultations that are not reported underChange in Control - Accelerated Vesting of Stock Options; Option to Repurchase Stock.” As of the same date, none of our named executive officers’ Tranche B and C stock options had vested. |
(2) The listed stock option exercise prices reflect adjustments taking into account dividends paid in 2015.
Potential Payments Upon Termination or Change in Control
Severance Benefits
As described above, the employment agreements with each of Messrs. Leverton, Cardinale, and Howell provide for severance benefits upon a termination by the Company without “cause” or upon a resignation by the named executive officer with “good reason,” in either case consisting of a lump-sum payment (a “Severance Payment”) equal to the sum of one year of base salary plus the annual bonus paid to the named executive officer in respect of the most recently completed fiscal year. “Good reason” is defined as the occurrence of any of the following: (i) any reduction in base salary (or in the case of Mr. Leverton, reduction in base salary or maximum bonus opportunity), (ii) any material breach by the Company of the executive’s employment agreement, or (iii) a forced relocation of more than 50 miles from the executive’s principal place of employment. As indicated above, pursuant to the amendments to their Employment Agreements, the Company’s obligation to make a Severance Payment to Messrs. Leverton and Cardinale also attaches in the event of either (x) the Company’s non-extension of the Agreement without “cause,” or (y) the Executive’s non-extension of the Agreement for ”good reason.” In any event, the executive’s right to receive a Severance Payment is conditioned upon the execution, delivery, and non-revocation by the executive of a comprehensive release of claims in favor of the Company.
Accelerated Vesting of Stock Options; Option to Repurchase Stock
The Option Agreements signed by Messrs. Leverton, Cardinale, and Howell provide that any Tranche A stock options that have not vested at the time of a termination of employment for any reason other than certain qualifying terminations of employment that occur within six months following a change in control will be canceled for no consideration. In the event of a change in control, however, any unvested Tranche A stock options are to be canceled and converted into a right to receive an amount of cash equal to the aggregate spread value of such unvested stock options at the time of the transaction (the “Converted Award”), which amount shall be contributed to a rabbi trust and is payable on the six-month anniversary of the change in control (or, if earlier, the original scheduled vesting date), as long as the named executive officer is still employed at that time. If the employment of Mr. Leverton, Mr. Cardinale, or Mr. Howell. as applicable, is terminated without “cause” or by the executive for
“good reason” (as each such term is defined in such executive’s employment agreement) before the six-month anniversary of the change in control, however, any then-outstanding portion of the Converted Award shall be released from the rabbi trust and paid within 10 days following such termination of employment.
In the event of an initial public offering, the original stock options vesting schedule for all stock options held by our named executive officers shall hold, with the exception that if any Tranche B or Tranche C stock options vest as a result of achievement of the applicable performance targets in such initial public offering, 50% of such stock options shall be exercisable upon the consummation of such offering, with the remaining 50% becoming exercisable on the later of (A) the first anniversary of the offering and (B) the third anniversary of the grant date, subject to the applicable named executive officer’s continued employment through the applicable date.
If the employment of a named executive officer is terminated for any reason other than “cause’’ independent of a change in control or initial public offering, all unvested stock options held by such named executive officer at the time of the termination of his employment will be canceled for no consideration, but vested stock options may be exercised for a defined period after the termination. A termination for ‘‘cause’’ will result in termination of all stock options, including those that have vested.
Each of Messrs. Leverton, Cardinale, and Howell also signed an “Investor Rights Agreement” as a condition of purchasing common stock of Parent pursuant to his employment agreement. The Investor Rights Agreement provides that Parent or its designee may repurchase such stock from the officer in the event of termination of his employment prior to a public offering by Parent. If the executive’s termination is for any reason other than (i) by the Company for “cause” (as that term is defined in the Investor Rights Agreement), or (ii) a voluntary resignation by the executive, then the price that the Company or its designee will pay for the stock will be the fair market value of the stock as of the termination date. If the termination is by the Company for “cause,” or by the executive for any reason, the price to be paid will be the lesser of the fair market value of the stock as of the termination date and the amount originally paid by the shareholder to acquire the shares, less any amount per share of any dividends or other distributions paid or payable to the shareholder since share purchase. Following the same framework, the Option Agreement allows the Company the same right (but not obligation) to repurchase any shares of common stock acquired by our named executive officers through option exercises.
As of December 29, 2019, 100% of the Tranche A stock options granted to Messrs. Leverton and Cardinale in 2014 had vested, so in the event of their termination as of that date for any reason (other than a termination for cause) and absent a change in control, these vested stock options would be available for exercise. Under the Option Agreement, such stock options remain exercisable as follows: (a) in the event of death or disability of the named executive officer, by the earlier of (1) one year following such termination and (2) the expiration of the option term; and (b) for all other terminations, by the earlier of (1) 90 days following such termination and (2) the expiration of the option term. None of the Tranche A stock options granted to Messrs. Leverton, Cardinale, and Howell in 2019 had vested as of December 29, 2019.
If, in connection with a change in control, the Company had terminated the employment of Messrs. Leverton, Cardinale, or Howell without cause, or as the result of their respective resignation for good reason as of December 29, 2019, their respective Tranche A stock options would have vested in full.
In summary, therefore, assuming a severance-eligible termination as of December 29, 2019, each of our named executives would have been entitled to the following:
|
| | | | | | | |
| Name | | | Resignation with Good Reason | | Termination Without Cause | | Terminated Without Cause or Resignation with Good Reason Following a Change in Control |
| | | | ($) | | ($) | | ($) |
| Thomas Leverton: | | | | | | | |
| • Salary | | | 550,000 | | 550,000 | | 550,000 |
| • Non-Equity Incentive Plan Compensation | | | 426,250 | | 426,250 | | 426,250 |
• Accelerated payment of the Converted Award (1) | | | — | | — | | — |
| Totals | | | 976,250 | | 976,250 | | 976,250 |
| | | | | | | | |
| J. Roger Cardinale | | | | | | | |
| • Salary | | | 485,000 | | 485,000 | | 485,000 |
| • Non-Equity Incentive Plan Compensation | | | 441,350 | | 441,350 | | 441,350 |
• Accelerated payment of the Converted Award (1) | | | — | | — | | — |
| Totals | | | 926,350 | | 926,350 | | 926,350 |
| | | | | | | | |
| James Howell | | |
| |
| |
|
| • Salary | | | 406,720 | | 406,720 | | 406,720 |
| • Non-Equity Incentive Plan Compensation | | | 368,234 | | 368,234 | | 368,234 |
• Accelerated payment of the Converted Award (1) | | | — | | — | | — |
| Totals | | | 774,954 | | 774,954 | | 774,954 |
| |
(1) | Subject to the continued employment of Messrs. Leverton, Cardinale, and Howell, as applicable, any portion of the Converted Award (i.e., the spread value of Tranche A stock options in a change in control) is payable on the six-month anniversary of such transaction. If, however, the employment of Mr. Leverton, Mr. Cardinale, or Mr. Howell, as applicable, is terminated without cause or due to a resignation with good reason prior to such date, such named executive officer would be eligible to accelerated payment of the Converted Award. |
DIRECTOR COMPENSATION
As of December 29, 2019, we compensated Peter Brown and Allen Weiss for their service on our board of directors and committees thereof with annual retainer fees of $86,500 and $76,500, respectively, which amount was prorated for Mr. Brown, who joined our board of directors on March 20, 2019. All other members of our board of directors receive no compensation. We reimburse our directors for travel expenses to and from our board meetings and other reasonable out-of-pocket expenses they incur when attending meetings or conducting their duties as directors.
The following table sets forth information concerning fees and other amounts earned or paid to each non-employee director of the Company during Fiscal 2019:
Director Compensation for Fiscal 2019
|
| | | | | | | | | | | | | | | |
Name (1) | | Fees Earned or Paid in Cash | | Stock Awards | | Option Awards | | All Other Compensation | | Total |
| | | ($)(7) | | ($) | | ($) | | ($) | | ($) |
Peter C. Brown (2) | | 64,875 |
| | — |
| | — |
| | — |
| | 64,875 |
|
Allen R. Weiss (3) | | 80,874 |
| | — |
| | — |
| | — |
| | 80,874 |
|
Andrew S. Jhawar(4)
| | — |
| | — |
| | — |
| | — |
| | — |
|
Naveen R. Shahani (5) | | — |
| | — |
| | — |
| | — |
| | — |
|
Michael Diverio (6) | | — |
| | — |
| | — |
| | — |
| | — |
|
____________________
| |
(1) | Mr. Leverton, who stepped down as Chief Executive Officer and director effective January 21, 2020, has been excluded from this table because his compensation is fully reflected in the Summary Compensation Table. |
| |
(2) | Mr. Brown was appointed to the board of directors effective as of March 20, 2019. In addition, the board of directors also appointed Mr. Brown to the audit fees.and compensation committees of the board of directors, and elected him as Chairman of the Audit Committee of the board of directors. Mr. Brown’s compensation reflects a prorated retainer amount based on his partial year of service on the board of directors and committees thereof. |
| |
(3) | “Tax fees” are fees billed by Deloitte & Touche LLPMr. Weiss was compensated $100,000 per year for professionalhis services renderedon our board of directors, and committees thereof, through March 7, 2019. For the period from March 8, 2019 through December 29, 2019, Mr. Weiss’ annual retainer fee for tax compliance, tax planninghis services on our board of directors, and tax advice.committees thereof, was $76,500. |
| |
(4) | “All other fees” are fees billed by Deloitte & Touche LLPMr. Jhawar resigned as a member of the Audit Committee of the board of directors and from the position of Chairman of the Audit Committee of the board of directors effective March 20, 2019. Mr. Jhawar was an employee of Apollo during Fiscal 2019 and was not awarded any compensation for any professional services not included in the first three categories.his board of directors and committee service. |
All audit services, audit related services, and other services were pre-approved by the Audit Committee, which concluded that the provision of such services by Deloitte & Touche LLP was compatible with the maintenance of that firm’s independence in the conduct of its auditing functions. The Audit Committee’s pre-approval policy (i) identifies the guiding principles that must be considered by the audit committee in approving services to ensure that Deloitte & Touche LLP’s independence is not impaired; (b) describes the audit, audit-related, tax and other services that may be provided and the non-audit services that are prohibited; and (c) sets forth pre-approval requirements for all permitted services. Under the policy, all services to be provided by Deloitte & Touche LLP must be pre-approved by the Audit Committee. | |
(5) | Mr. Shahani was appointed to the board of directors and to the Audit Committee of the board of directors effective as of February 19, 2019. Mr. Shahani was an employee of Apollo during the period from February 19, 2019 through December 29, 2019 and was not awarded any compensation for his board of directors and committee service. |
| |
(6) | During Fiscal 2019, Mr. Diverio, who resigned as a director effective February 19, 2019, was an employee of Apollo and was not awarded any compensation for his board of directors and committee service. |
| |
(7) | This column reports the amount of cash compensation earned in 2019 for board of directors and committee service. |
PART II – OTHER INFORMATION
PART IV
ITEM 15. Exhibits and Financial Statement Schedules.
DocumentsThe following information required under this item (other than Exhibit 31.3 and 31.4) were filed as part of this report:the Original Form 10-K:
|
| | |
| | | |
Financial Statements. | | The financial statements and related notes included in Part II, Item 8. “Financial Statements and Supplementary Data” are filed as a part of this Annual Report on Form 10-K. See “Index to1. Consolidated Financial Statements.” |
| | | |
| 2. Financial Statement Schedules. | | There are no financial statement schedules filed as a part of this Annual Report on Form 10-K, since the circumstances requiring inclusion of such schedules are not present. |
| | | |
| 3. Exhibits. | |
The exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index, which Exhibit Index is incorporated in this Annual Report on Form 10-K by reference. The exhibits include agreements to which the Company is a party or has a beneficial interest. The agreements have been filed to provide investors with information regarding their respective terms. The agreements are not intended to provide any other factual information about the Company or its business or operations. In particular, the assertions embodied in any representations, warranties and covenants contained in the agreements may be subject to qualifications with respect to knowledge and materiality different from those applicable to investors and may be qualified by information in confidential disclosure schedules not included with the exhibits. These disclosure schedules may contain information that modifies, qualifies and creates exceptions to the representations, warranties and covenants set forth in the agreements. Moreover, certain representations, warranties and covenants in the agreements may have been used for the purpose of allocating risk between the parties, rather than establishing matters as facts. In addition, information concerning the subject matter of the representations, warranties and covenants may have changed after the date of the respective agreement, which subsequent information may or may not be fully reflected in the Company’s public disclosures. Accordingly, investors should not rely on the representations, warranties and covenants in the agreements as characterizations of the actual state of facts about the Company or its business or operations on the date hereof. |
|
| | |
Exhibit Number | | Description |
| 2.1 | | |
| | |
| 3.1 | | |
| | |
| 3.2 | | |
| | |
| 4.1 | | . |
| | |
| 4.2 | | |
| | |
| 4.3 | | |
| | |
| 4.4 | | Second Supplemental Indenture, dated as of November 20, 2014, among Peter Piper Holdings, Inc., CEC Entertainment, Inc., Peter Piper Inc., Peter Piper Mexico, LLC, Peter Piper Texas, LLC, Texas PP Beverage, Inc. and Wilmington Trust, National Association (incorporated by reference to Exhibit 4.4 to the Company’s Annual Report on Form 10-K (File No. 001-13687) as filed with the Commission on March 5, 2015) |
| | |
| 4.5 | | |
| | |
| 4.6 | | |
| | |
| 4.7 | | |
| | |
| 10.1 | | First Lien Credit Agreement, dated as of February 14, 2014, among Queso Holdings Inc., as Holdings, Q Merger Sub Inc., as Borrower, the Lenders party thereto, Deutsche Bank AG New York Branch, as Administrative Agent, Deutsche Bank Securities Inc., Credit Suisse Securities (USA) LLC, Morgan Stanley Senior Funding, Inc. and UBS Securities LLC, as Joint Lead Arrangers and Joint Bookrunners, Credit Suisse Securities (USA) LLC, as Syndication Agent, and Morgan Stanley Senior Funding, Inc. and UBS Securities LLC, as Documentation Agents (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-4 (File No. 333-199298) as filed with the Commission on October 14, 2014) |
| | |
| 10.2 | | |
| | |
|
| | |
| 10.3 | | |
| | |
| 10.4 | | |
| | |
| 10.5 | | First Lien Credit Agreement, dated as of August 30, 2019, among Queso Holdings Inc., as Holdings, CEC Entertainment, Inc., as Borrower, the Lenders party thereto, and Credit Suisse AG, Cayman Islands Branch, as Administrative Agent (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q (File No. 001-13687) as filed with the Commission on November 12, 2019) |
| | |
| 10.6 | | |
| | |
| 10.7 | | |
| | |
| 10.8 | | |
| | |
| 10.9 | | |
| | |
| 10.10 | | |
| | |
| 10.11 | | |
| | |
| 10.12 | | |
| | |
| 10.13 | | |
| | |
| 10.14 | | |
| | |
| 10.15 | | |
| | |
| 10.16 | | |
| | |
| 10.17 | | |
|
| | |
| | |
| 10.18 | | |
| | |
| 10.19 | | |
| | |
| 21.1 | | |
| | |
| 24.1 | | |
| |
| 31.1 | | |
| | |
| 31.2 | | |
| | |
| 31.3* | | |
| | |
| 31.4* | | |
| | |
| 32.1 | | |
| |
| 32.2 | | |
| |
| 101.INS | | XBRL Instance Document (incorporated by reference to Exhibit 101.1INS to the Company’s Annual Report on Form 10-K (File No. 001-13687) as filed with the Commission on March 12, 2019) |
| |
| 101.SCH | | XBRL Taxonomy Extension Schema Document (incorporated by reference to Exhibit 101.1SCH to the Company’s Annual Report on Form 10-K (File No. 001-13687) as filed with the Commission on March 12, 2019) |
| |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document (incorporated by reference to Exhibit 101.1CAL to the Company’s Annual Report on Form 10-K (File No. 001-13687) as filed with the Commission on March 12, 2019) |
| |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document (incorporated by reference to Exhibit 101.1DEF to the Company’s Annual Report on Form 10-K (File No. 001-13687) as filed with the Commission on March 12, 2019) |
| |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document (incorporated by reference to Exhibit 101.1LAB to the Company’s Annual Report on Form 10-K (File No. 001-13687) as filed with the Commission on March 12, 2019) |
| |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document (incorporated by reference to Exhibit 101.1PRE to the Company’s Annual Report on Form 10-K (File No. 001-13687) as filed with the Commission on March 12, 2019) |
__________________
*Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | |
| |
| | | |
Dated: March 11, 2019April 27, 2020 | | CEC Entertainment, Inc. |
| | |
| | | /s/ Thomas LevertonDavid McKillips |
| | | Thomas LevertonDavid McKillips |
| | | Chief Executive Officer and Director |
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | |
|
| | | | |
Signature | | Title | | Date |
| | |
/s/ Thomas Leverton | | Chief Executive Officer and Director (Principal Executive Officer) | | March 11, 2019 |
Thomas Leverton | | | | |
| | |
/s/ James A. Howell | | Executive Vice President and Chief Financial Officer (Principal Financial Officer) | | March 11, 2019 |
James A. Howell | | | | |
| | |
/s/ David Rappaport | | Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer) | | March 11, 2019 |
David Rappaport | | | | |
| | |
* | | Director | | March 11, 2019 |
Andrew S. Jhawar
| | | | |
| | |
* | | Director | | March 11, 2019 |
Naveen R. Shahani | | | | |
| | |
* | | Director | | March 11, 2019 |
Allen R. Weiss | | | | |
| | |
*By: | | | | |
/s/ Rodolfo Rodriguez, Jr. | | Executive Vice President, Chief Legal and Human Resources Officer | | March 11, 2019 |
Rodolfo Rodriguez, Jr. | | | | |
|
| | |
Exhibit
Number
| | Description |
2.1 | | |
| | |
3.1 | | |
| | |
3.2 | | |
| | |
4.1 | | .
|
| | |
4.2 | | |
| | |
4.3 | | |
| | |
4.4 | | Second Supplemental Indenture, dated as of November 20, 2014, among Peter Piper Holdings, Inc., CEC Entertainment, Inc., Peter Piper Inc., Peter Piper Mexico, LLC, Peter Piper Texas, LLC, Texas PP Beverage, Inc. and Wilmington Trust, National Association (incorporated by reference to Exhibit 4.4 to the Company’s Annual Report on Form 10-K (File No. 001-13687) as filed with the Commission on March 5, 2015) |
| | |
4.5 | | |
| | |
4.6 | | |
| | |
4.7 | | |
| | |
10.1 | | First Lien Credit Agreement, dated as of February 14, 2014, among Queso Holdings Inc., as Holdings, Q Merger Sub Inc., as Borrower, the Lenders party thereto, Deutsche Bank AG New York Branch, as Administrative Agent, Deutsche Bank Securities Inc., Credit Suisse Securities (USA) LLC, Morgan Stanley Senior Funding, Inc. and UBS Securities LLC, as Joint Lead Arrangers and Joint Bookrunners, Credit Suisse Securities (USA) LLC, as Syndication Agent, and Morgan Stanley Senior Funding, Inc. and UBS Securities LLC, as Documentation Agents (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-4 (File No. 333-199298) as filed with the Commission on October 14, 2014) |
| | |
10.2 | | |
| | |
|
| | |
10.3 | | |
| | |
10.4 | | |
| | |
10.5 | | |
| | |
10.6 | | |
| | |
10.7 | | |
| | |
10.8 | | |
| | |
10.9 | | |
| | |
10.10 | | |
| | |
10.11 | | |
| | |
10.12 | | |
| | |
10.13 | | |
| | |
10.14* | | |
| | |
21.1* | | |
| | |
24.1* | | |
| | |
31.1* | | |
| |
31.2* | | |
| |
32.1** | | |
| |
32.2** | | |
| |
101.INS | | XBRL Instance Document |
| |
|
| | |
101.SCH | | XBRL Taxonomy Extension Schema Document |
| |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
| |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
| |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
| |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
__________________
*Filed herewith.
** Furnished herewith.