UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31,September 29, 2019
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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: 001-13687
CEC ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
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Kansas (State or other jurisdiction of incorporation or organization) | | 48-0905805 (IRS Employer Identification No.) |
1707 Market Place Blvd Irving, Texas | | 75063 |
(Address of principal executive offices) | | (Zip Code) |
(972) 258-8507
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
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 ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, 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 ý No ¨
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 | ý | Smaller reporting company | ¨ |
| | Emerging growth company | ¨
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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 Act ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
As of AprilOctober 30, 2019, an aggregate of 200 shares of the registrant’s common stock, par value $0.01 per share were outstanding.
CEC ENTERTAINMENT, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements.
CEC ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share information)
| | | | March 31, 2019 | | December 30, 2018 | | September 29, 2019 | | December 30, 2018 |
ASSETS | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 112,030 |
| | $ | 63,170 |
| | $ | 105,059 |
| | $ | 63,170 |
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Restricted cash | | 266 |
| | 151 |
| | 212 |
| | 151 |
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Accounts receivable | | 20,747 |
| | 24,020 |
| | 20,576 |
| | 24,020 |
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Income taxes receivable | | — |
| | 10,160 |
| | — |
| | 10,160 |
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Inventories | | 24,593 |
| | 23,807 |
| | 27,579 |
| | 23,807 |
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Prepaid expenses | | 18,712 |
| | 25,424 |
| | 14,274 |
| | 25,424 |
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Total current assets | | 176,348 |
| | 146,732 |
| | 167,700 |
| | 146,732 |
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Property and equipment, net | | 533,610 |
| | 539,185 |
| | 525,107 |
| | 539,185 |
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Operating lease right-of-use assets, net | | 544,592 |
| | — |
| | 536,057 |
| | — |
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Goodwill | | 484,438 |
| | 484,438 |
| | 484,438 |
| | 484,438 |
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Intangible assets, net | | 470,242 |
| | 477,085 |
| | 469,218 |
| | 477,085 |
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Other noncurrent assets | | 18,883 |
| | 18,725 |
| | 16,794 |
| | 18,725 |
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Total assets | | $ | 2,228,113 |
| | $ | 1,666,165 |
| | $ | 2,199,314 |
| | $ | 1,666,165 |
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LIABILITIES AND STOCKHOLDER’S EQUITY | | | | | | | | |
Current liabilities: | | | | | | | | |
Bank indebtedness and other long-term debt, current portion | | $ | 7,600 |
| | $ | 7,600 |
| | $ | 7,600 |
| | $ | 7,600 |
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Operating lease liability, current portion | | 47,509 |
| | — |
| | 49,203 |
| | — |
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Accounts payable | | 38,848 |
| | 31,410 |
| | 43,701 |
| | 31,410 |
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Accrued expenses | | 40,405 |
| | 36,030 |
| | 44,156 |
| | 36,030 |
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Unearned revenues | | 22,706 |
| | 18,124 |
| | 21,869 |
| | 18,124 |
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Accrued interest | | 2,417 |
| | 7,463 |
| | 8,223 |
| | 7,463 |
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Other current liabilities | | 5,332 |
| | 5,955 |
| | 4,548 |
| | 5,955 |
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Total current liabilities | | 164,817 |
| | 106,582 |
| | 179,300 |
| | 106,582 |
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Operating lease obligations, less current portion | | 529,972 |
| | — |
| | 522,380 |
| | — |
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Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion | | 960,715 |
| | 961,514 |
| | 958,986 |
| | 961,514 |
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Deferred tax liability | | 108,450 |
| | 107,058 |
| | 102,721 |
| | 107,058 |
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Accrued insurance | | 9,861 |
| | 9,861 |
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Other noncurrent liabilities | | 190,510 |
| | 238,579 |
| | 196,030 |
| | 248,440 |
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Total liabilities | | 1,964,325 |
| | 1,423,594 |
| | 1,959,417 |
| | 1,423,594 |
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Stockholder’s equity: | | | | | | | | |
Common stock, $0.01 par value; authorized 1,000 shares; 200 shares issued as of March 31, 2019 and December 30, 2018 | | — |
| | — |
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Common stock, $0.01 par value; authorized 1,000 shares; 200 shares issued as of September 29, 2019 and December 30, 2018 | | | — |
| | — |
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Capital in excess of par value | | 359,696 |
| | 359,570 |
| | 359,930 |
| | 359,570 |
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Accumulated deficit | | (94,414 | ) | | (115,660 | ) | | (118,482 | ) | | (115,660 | ) |
Accumulated other comprehensive loss | | (1,494 | ) | | (1,339 | ) | | (1,551 | ) | | (1,339 | ) |
Total stockholder’s equity | | 263,788 |
| | 242,571 |
| | 239,897 |
| | 242,571 |
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Total liabilities and stockholder’s equity | | $ | 2,228,113 |
| | $ | 1,666,165 |
| | $ | 2,199,314 |
| | $ | 1,666,165 |
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The accompanying notes are an integral part of these unaudited interim Consolidated Financial Statements.
CEC ENTERTAINMENT, INC.
COSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands)
| | | Three Months Ended | Three Months Ended | | Nine Months Ended |
| March 31, 2019 | | April 1, 2018 | September 29, 2019 | | September 30, 2018 | | September 29, 2019 | | September 30, 2018 |
REVENUES: | | | | | | | | | | |
Food and beverage sales | $ | 117,815 |
| | $ | 118,377 |
| $ | 92,645 |
| | $ | 94,023 |
| | $ | 302,111 |
| | $ | 308,658 |
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Entertainment and merchandise sales | 149,677 |
| | 131,117 |
| 119,688 |
| | 121,611 |
| | 386,778 |
| | 368,633 |
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Total company venue sales | 267,492 |
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| 249,494 |
| 212,333 |
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| 215,634 |
| | 688,889 |
| | 677,291 |
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Franchise fees and royalties | 5,820 |
| | 5,410 |
| 5,261 |
| | 5,311 |
| | 17,194 |
| | 15,917 |
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Total revenues | 273,312 |
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| 254,904 |
| 217,594 |
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| 220,945 |
| | 706,083 |
| | 693,208 |
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OPERATING COSTS AND EXPENSES: | | | |
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Company venue operating costs (excluding Depreciation and amortization): | | | | |
Company venue operating costs and expenses (excluding Depreciation and amortization): | |
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Cost of food and beverage | 26,652 |
| | 27,360 |
| 21,302 |
| | 22,520 |
| | 69,239 |
| | 72,774 |
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Cost of entertainment and merchandise | 11,746 |
| | 9,382 |
| 10,113 |
| | 9,874 |
| | 31,311 |
| | 27,676 |
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Total cost of food, beverage, entertainment and merchandise | 38,398 |
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| 36,742 |
| 31,415 |
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| 32,394 |
| | 100,550 |
| | 100,450 |
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Labor expenses | 72,505 |
| | 67,349 |
| 63,213 |
| | 65,028 |
| | 199,693 |
| | 194,994 |
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Lease costs | 27,027 |
| | 24,049 |
| 27,559 |
| | 23,851 |
| | 82,102 |
| | 72,615 |
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Other venue operating expenses | 35,297 |
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| 38,062 |
| 34,586 |
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| 38,232 |
| | 102,536 |
| | 113,363 |
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Total company venue operating costs | 173,227 |
| | 166,202 |
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Total company venue operating costs and expenses | | 156,773 |
| | 159,505 |
| | 484,881 |
| | 481,422 |
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Other costs and expenses: | | | | | | | | | |
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Advertising expense | 12,253 |
| | 13,974 |
| 10,803 |
| | 11,058 |
| | 34,033 |
| | 38,010 |
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General and administrative expenses | 15,243 |
| | 12,909 |
| 13,051 |
| | 13,193 |
| | 42,944 |
| | 39,519 |
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Depreciation and amortization | 24,334 |
| | 26,572 |
| 24,622 |
| | 24,739 |
| | 73,074 |
| | 76,804 |
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Transaction, severance and related litigation costs | 23 |
| | 534 |
| 371 |
| | (263 | ) | | 402 |
| | 463 |
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Asset impairments | | 8,202 |
| | 5,344 |
| | 9,487 |
| | 6,935 |
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Total operating costs and expenses | 225,080 |
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| 220,191 |
| 213,822 |
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| 213,576 |
| | 644,821 |
| | 643,153 |
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Operating income | 48,232 |
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| 34,713 |
| 3,772 |
|
| 7,369 |
| | 61,262 |
| | 50,055 |
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Interest expense | 19,808 |
| | 18,557 |
| 22,029 |
| | 19,069 |
| | 61,816 |
| | 56,740 |
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Income before income taxes | 28,424 |
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| 16,156 |
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Income tax expense | 7,178 |
| | 3,933 |
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Net income | $ | 21,246 |
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| $ | 12,223 |
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Loss on extinguishment of debt | | 2,910 |
| | — |
| — |
| 2,910 |
| | — |
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Loss before income taxes | | (21,167 | ) |
| (11,700 | ) | | (3,464 | ) | | (6,685 | ) |
Income tax benefit | | (5,833 | ) | | (2,213 | ) | | (642 | ) | | (454 | ) |
Net loss | | $ | (15,334 | ) |
| $ | (9,487 | ) | | $ | (2,822 | ) | | $ | (6,231 | ) |
The accompanying notes are an integral part of these unaudited interim Consolidated Financial Statements.
CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMELOSS
(Unaudited)
(in thousands)
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| Three Months Ended |
| March 31, 2019 | | April 1, 2018 |
Net income | $ | 21,246 |
| | $ | 12,223 |
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Components of other comprehensive income, net of tax: | | | |
Foreign currency translation adjustments | (155 | ) | | 154 |
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Comprehensive income | $ | 21,091 |
| | $ | 12,377 |
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| Three Months Ended | | Nine Months Ended |
| September 29, 2019 | | September 30, 2018 | | September 29, 2019 | | September 30, 2018 |
Net loss | $ | (15,334 | ) | | $ | (9,487 | ) | | $ | (2,822 | ) | | $ | (6,231 | ) |
Foreign currency translation adjustments | 73 |
| | (172 | ) | | (212 | ) | | 127 |
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Comprehensive loss | $ | (15,261 | ) | | $ | (9,659 | ) | | $ | (3,034 | ) | | $ | (6,104 | ) |
The accompanying notes are an integral part of these unaudited interim Consolidated Financial Statements.
CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
| | | Three Months Ended | Nine Months Ended |
| March 31, 2019 | | April 1, 2018 | September 29, 2019 | | September 30, 2018 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
Net income | $ | 21,246 |
| | $ | 12,223 |
| |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Net loss | | $ | (2,822 | ) | | $ | (6,231 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | |
Loss on extinguishment of debt | | 2,910 |
| | — |
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Depreciation and amortization | 24,334 |
| | 26,572 |
| 73,074 |
| | 76,804 |
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Deferred income taxes | 1,448 |
| | (672 | ) | (4,261 | ) | | (3,314 | ) |
Stock-based compensation expense | 1,162 |
| | 64 |
| 1,985 |
| | 169 |
|
Amortization of lease related liabilities | — |
| | (211 | ) | — |
| | (749 | ) |
Amortization of original issue discount and deferred debt financing costs | 1,059 |
| | 1,137 |
| 3,544 |
| | 3,284 |
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Debt refinancing costs | | 694 |
| | — |
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Loss on asset disposals, net | 954 |
| | 1,237 |
| 2,903 |
| | 2,551 |
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Non-cash lease expense | 732 |
| | 1,181 |
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Asset impairments | | 9,487 |
| | 6,935 |
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Non-cash lease costs | | 2,438 |
| | 4,109 |
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Change in operating lease liabilities | (152 | ) | | — |
| (1,219 | ) | | — |
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Other adjustments | 112 |
| | (26 | ) | (170 | ) | | 531 |
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Changes in operating assets and liabilities: | | | | | | |
Accounts receivable | 3,369 |
| | 3,071 |
| 4,222 |
| | 2,016 |
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Inventories | (864 | ) | | (1,641 | ) | (3,871 | ) | | (84 | ) |
Prepaid expenses | (2,079 | ) | | 442 |
| 2,167 |
| | (3,479 | ) |
Accounts payable | 7,692 |
| | 2,195 |
| 7,356 |
| | 886 |
|
Accrued expenses | 1,638 |
| | 1,916 |
| 932 |
| | 3,847 |
|
Unearned revenues | 4,578 |
| | 3,908 |
| 3,740 |
| | (3,263 | ) |
Accrued interest | (4,975 | ) | | (5,010 | ) | 972 |
| | (5,291 | ) |
Income taxes receivable | 10,224 |
| | 4,426 |
| |
Income taxes payable | | 11,563 |
| | 1,994 |
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Deferred landlord contributions | — |
| | 1,752 |
| — |
| | 1,760 |
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Net cash provided by operating activities | 70,478 |
| | 52,564 |
| 115,644 |
| | 82,475 |
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CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | |
Purchases of property and equipment | (18,372 | ) | | (18,060 | ) | (60,388 | ) | | (55,202 | ) |
Development of internal use software | (282 | ) | | (515 | ) | (787 | ) | | (1,992 | ) |
Proceeds from sale of property and equipment | 21 |
| | 158 |
| 160 |
| | 464 |
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Net cash used in investing activities | (18,633 | ) | | (18,417 | ) | (61,015 | ) | | (56,730 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | |
Proceeds from refinancing of senior term loan | | 479,449 |
| | — |
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Repayments on senior term loan | (1,900 | ) | | (1,900 | ) | (473,749 | ) | | (5,700 | ) |
Payment of debt financing costs | | (15,375 | ) | | (395 | ) |
Payments on financing lease obligations | (168 | ) | | (145 | ) | (530 | ) | | (442 | ) |
Payments on sale leaseback obligations | (803 | ) | | (688 | ) | (2,469 | ) | | (2,119 | ) |
CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTSTATEMENTS OF CASH FLOWS, CONT'D
(Unaudited)
(in thousands)
| | Return of capital |
| | — |
| |
Net cash used in financing activities | (2,871 | ) | | (2,733 | ) | (12,674 | ) | | (8,656 | ) |
Effect of foreign exchange rate changes on cash | 1 |
| | 46 |
| (5 | ) | | 51 |
|
Change in cash, cash equivalents and restricted cash | 48,975 |
| | 31,460 |
| 41,950 |
| | 17,140 |
|
Cash, cash equivalents and restricted cash at beginning of period | 63,321 |
| | 67,312 |
| 63,321 |
| | 67,312 |
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Cash, cash equivalents and restricted cash at end of period | $ | 112,296 |
| | $ | 98,772 |
| $ | 105,271 |
| | $ | 84,452 |
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| Three Months Ended | Nine Months Ended |
| March 31, 2019 | | April 1, 2018 | September 29, 2019 | | September 30, 2018 |
SUPPLEMENTAL CASH FLOW INFORMATION: | | | | | | |
Interest paid | $ | 23,799 |
| | $ | 22,546 |
| $ | 57,232 |
| | $ | 59,229 |
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Income taxes (refunded) paid, net | $ | (4,493 | ) | | $ | 180 |
| $ | (7,944 | ) | | $ | 867 |
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Non cash portion of Loss on debt extinguishment | | 2,364 |
| | — |
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NON-CASH INVESTING AND FINANCING ACTIVITIES: | | | | | | |
Accrued construction costs | $ | 1,062 |
| | $ | 634 |
| $ | 5,687 |
| | $ | 1,659 |
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The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the statementstatements of financial position that sum to the total of the same such amounts shown in the statementstatements of cash flows.
| | | March 31, 2019 | | April 1, 2018 | | | | | |
| Three Months Ended | September 29, 2019 | | September 30, 2018 |
Cash and cash equivalents | $ | 112,030 |
| | $ | 98,686 |
| $ | 105,059 |
| | $ | 84,429 |
|
Restricted cash(1) | 266 |
| | 86 |
| 212 |
| | 23 |
|
Cash, cash equivalents and restricted cash | $ | 112,296 |
| | $ | 98,772 |
| $ | 105,271 |
| | $ | 84,452 |
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__________________
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(1) | Restricted cash represents cash balances held by the Association that are restricted for use in our advertising, entertainment and media programs. |
The accompanying notes are an integral part of these unaudited interim Consolidated Financial Statements.
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Description of Business and Summary of Significant Accounting Policies:
Description of Business
The use of the terms “CEC Entertainment,” the “Company,” “we,” “us” and “our” throughout these unaudited notes to the interim Consolidated Financial Statements refer to CEC Entertainment, Inc. and its subsidiaries.
We currently operate and franchise Chuck E. Cheese’sCheese and Peter Piper Pizza family dining and entertainment venues in 47 states and 1415 foreign countries and territories. As of March 31,September 29, 2019, we and our franchisees operated a total of 748738 venues, of which 554553 were Company-operated venues located in 44 states and Canada. Our franchisees operated a total of 194185 venues located in 1514 states and 1314 foreign countries and territories, including Chile, Colombia, Costa Rica, Guam, Guatemala, Honduras, Jordan, Mexico, Panama, Peru, Puerto Rico, Saudi Arabia, Trinidad & Tobago, and the United Arab Emirates. As of March 31,September 29, 2019, a total of 181 Chuck E. Cheese'sCheese venues are located in California, Texas, and Florida (178 are Company-operated and three are franchised locations), and a total of 133118 Peter Piper Pizza venues are located in Arizona, Texas, and Mexico (33 are Company-operated and 10085 are franchised locations).
All of our venues utilize a consistent restaurant-entertainment format that features both family dining and entertainment areas with a mix of food, entertainment and merchandise. The economic characteristics, products and services, preparation processes, distribution methods and types of customers are substantially similar for each of our venues. Therefore, we aggregate each venue’s operating performance into one reportable segment for financial reporting purposes.
Basis of Presentation
The Company has a controlling financial interest in International Association of CEC Entertainment, Inc. (the “Association”), a variable interest entity (“VIE”). The Association primarily administers the collection and disbursement of funds (the “Association Funds”) used for advertising, entertainment and media programs that benefit both us and our Chuck E. Cheese’sCheese franchisees. We and our franchisees are required to contribute a percentage of gross sales to these funds and could be required to make additional contributions to fund any deficits that may be incurred by the Association. We include the Association in our Consolidated Financial Statements, as we concluded that we are the primary beneficiary of its variable interests because we (a) have the power to direct the majority of its significant operating activities; (b) provide it unsecured lines of credit; and (c) own the majority of the venues that benefit from the Association’s advertising, entertainment and media expenditures. We eliminate the intercompany portion of transactions with VIEs from our financial results. The assets, liabilities and operating results of the Association are not material to our Consolidated Financial Statements.
The Association Funds are required to be segregated and used for specified purposes. Cash balances held by the Association are restricted for use in our advertising, entertainment and media programs, and are recorded as “Restricted cash” on our Consolidated Balance Sheets. Contributions to the advertising, entertainment and media funds from our franchisees were $0.8$2.3 million and $0.7$1.8 million for the threenine months ended March 31,September 29, 2019 and April 1,September 30, 2018, respectively. Our contributions to the Association Funds are eliminated in consolidation.
The preparation of these unaudited Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our unaudited Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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. Our current fiscal year, which ends on December 29, 2019, and our fiscal year ended December 30, 2018, each consist of 52 weeks. References to the three and nine-month periods ended ended September 29, 2019 and September 30, 2018 are for the 13-week and 39-week periods ended September 29, 2019 and September 30, 2018, respectively.
Interim Financial Statements
The accompanying Consolidated Financial Statements as of and for the three and nine months ended March 31,September 29, 2019 and April 1,September 30, 2018 are unaudited and are presented in accordance with the requirements for quarterly reports on Form 10-Q and, consequently, do not include all of the information and footnote disclosures required by GAAP. In the opinion of management, the Consolidated Financial Statements include all adjustments (consisting solely of normal recurring adjustments) necessary for the fair statement of its consolidated results of operations, financial position and cash flows as of the
dates and for the periods presented in accordance with GAAP and the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). All intercompany accounts have been eliminated in consolidation.
Consolidated results of operations for interim periods are not necessarily indicative of results for the full year. The unaudited Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2018, filed with the SEC on March 12, 2019.
Recently Adopted Accounting Guidance
Effective December 31, 2018, the beginning of our Fiscal 2019 year, we adopted Accounting Standards Update (“ASU”) ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”) and the subsequent amendment ASU 2018-11, Leases (Topic 842): Target Improvements (“ASU 2018-11”). This new standardASU 2016-02 introduces a new lease model that requires the recognition of lease right-of-use assets and operating lease liabilities on the balance sheet and the disclosure of key information about leasing arrangements. While this new standard retains most of the principles of the existing lessor model under U.S. GAAP, it aligns many of those principles with Accounting Standards Codification (“ASC”) 606: Revenue from Contracts with Customers. ASU 2018-11 provides for another transition method in addition to the modified retrospective approach required by ASU 2016-02. This option allows for entities to initially apply the new leases standardASU 2016-02 at the adoption date and recognize a cumulative adjustment to the opening balance sheet of retained earnings in the period of adoption. The cumulative impact of adopting the new lease guidanceASU 2016-02 did not require us to record an adjustment to our opening accumulated deficit as of December 31, 2018 in our Consolidated Balance Sheet.
Upon the adoption of ASU 2016-02, we applied the package of practical expedients included therein, which eliminated the requirements to reassess prior conclusions about lease identification, lease classification, and initial direct costs. We did not elect the hindsight practical expedient, which permits the use of hindsight when determining lease term. Further, we elected a short-term lease exception policy, permitting us to not apply the recognition requirements of this standard to short-term leases (i.e. leases with terms of 1 year or less) and an accounting policy to account for lease and non-lease components as a single component for real estate operating leases. We also utilized the transition method included in ASU 2018-11. By applying ASU 2016-02 at the adoption date, as opposed to at the beginning of the earliest period presented, the presentation of financial information for periods prior to December 31, 2018 remained unchanged and in accordance with Accounting Standards Codification (“ASC”) 840Leases (Topic 840). The adoption of the guidance in ASU 2016-02 resulted in the recognition as of December 31, 2018 of Right-of-Use assets related to our operating leases of $557.1 million and lease liabilities related to our operating leases of $590.8 million. In addition, as a result of electing to account for lease and non-lease components as a single component for certain classes of assets, lease costs for the three and nine months ended March 31,September 29, 2019 includes $3.5include $3.4 million and $10.5 million, respectively, of common area maintenance charges, which was previously included in “Other venue operating expenses” in our Consolidated Statement of Earnings. Other venue operating expenses in our Consolidated Statement of Earnings for the three and nine months ended April 1,September 30, 2018 includes common area maintenance charges of $3.6 million.$3.2 million and $10.2 million, respectively. The adoption of the guidance did not have a material impact on our Consolidated Statement of Cash Flows.
Note 2. Unearned Revenue:Revenues:
Liabilities relating to unused game credits, gift card liabilities and deferred franchise and development fees are included in “Unearned revenues” on our Consolidated Balance Sheets. The following table presents changes in the Company’s Unearned revenue balances during the threenine months ended March 31,September 29, 2019:
| | | Balance at | | | | | | Balance at | Balance at | | | | | | Balance at |
| December 31, 2018 | | Revenue Deferred | | Revenue Recognized | | March 31, 2019 | December 31, 2018 | | Revenue Deferred | | Revenue Recognized | | September 29, 2019 |
| (in thousands) | (in thousands) |
PlayPass related deferred revenue | $ | 5,561 |
| | $ | 14,346 |
| | $ | (12,455 | ) | | $ | 7,452 |
| |
PlayPass and ticket related deferred revenue | | $ | 5,561 |
| | $ | 36,541 |
| | $ | (35,331 | ) | | $ | 6,771 |
|
Gift card related deferred revenue | 5,253 |
| | 1,926 |
| | (2,882 | ) | | 4,297 |
| 5,253 |
| | 7,814 |
| | (8,003 | ) | | 5,064 |
|
Unearned franchise and development fees | 6,321 |
| | 2,572 |
| | (29 | ) | | 8,864 |
| 6,321 |
| | 2,324 |
| | (145 | ) | | 8,500 |
|
Other unearned revenues | 989 |
| | 9,101 |
| | (7,997 | ) | | 2,093 |
| 989 |
| | 19,944 |
| | (19,399 | ) | | 1,534 |
|
Total unearned revenue | $ | 18,124 |
| | $ | 27,945 |
| | $ | (23,363 | ) | | $ | 22,706 |
| |
Total unearned revenues | | $ | 18,124 |
| | $ | 66,623 |
| | $ | (62,878 | ) | | $ | 21,869 |
|
Note 3. Property and Equipment
Asset Impairments
During the three and nine months ended September 29, 2019, we recognized an asset impairment charge of $8.2 million and $9.5 million, primarily related to 10 and 12 venues, respectively. During the three and nine months ended September 30, 2018, we recognized an asset impairment charge of $5.3 million and $6.9 million primarily related to eight and nine venues, respectively. These impairment charges were the result of a decline in the venues’ financial performance, primarily related to various competitive and economic factors in the market in which the venues are located. As of September 29, 2019, the aggregate carrying value of the property and equipment at impaired venues, after the impairment charges, was $7.2 million for venues impaired in 2019.
Note 4. Intangible Assets, Net:
The following table presents our indefinite and definite-lived intangible assets at March 31,September 29, 2019:
| | | Weighted Average Life (Years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | Weighted Average Life (Years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| | (in thousands) | | (in thousands) |
Chuck E. Cheese's tradename | Indefinite | | $ | 400,000 |
| |
| | $ | 400,000 |
| |
Chuck E. Cheese tradename | | Indefinite | | $ | 400,000 |
| |
| | $ | 400,000 |
|
Peter Piper Pizza tradename | Indefinite | | 26,700 |
| |
| | 26,700 |
| Indefinite | | 26,700 |
| |
| | 26,700 |
|
Franchise agreements | 25 | | 53,300 |
| | (9,758 | ) | | 43,542 |
| 25 | | 53,300 |
| | (10,782 | ) | | 42,518 |
|
| | $ | 480,000 |
| | $ | (9,758 | ) | | $ | 470,242 |
| | $ | 480,000 |
| | $ | (10,782 | ) | | $ | 469,218 |
|
In connection with the adoption of ASU 2016-02 effective December 31, 2018, we reclassified $6.3 million related to the net carrying amount of our favorable lease definite-lived intangible asset from “Intangible Assets, Net” to “Operating lease right-of-use assets, net” on our Consolidated Balance Sheets. See Note 1. “Description of Business and Summary of Significant Accounting Policies - Recently Adopted Accounting Guidance” and Note 4.5. “Leases” for further discussion on the adoption of ASU 2016-02.
Amortization expense related to favorable lease agreements was $0.4$0.3 million and $1.0 million for the three monthsand nine-month periods ended April 1,September 30, 2018, respectively, and is included in “Lease costs” in our Consolidated Statements of Earnings. As described above, in connection with the adoption of ASU 2016-02 at the beginning of Fiscal 2019, our favorable lease definite-lived intangible asset was reclassified from “Intangible Assets, Net” to “Operating lease right-of-use assets, net” and therefore we no longer have any amortization expense related to favorable lease agreements. Amortization expense related to franchise agreements was $0.5 million for both the three months ended March 31,September 29, 2019 and April 1,September 30, 2018, respectively, and $1.5 million for both the nine months ended September 29, 2019 and September 30, 2018, respectively, and is included in “Depreciation and amortization” in our Consolidated Statements of Earnings.
Note 4.5. Leases:
We lease certain venues, warehouses, office space and equipment. The leases generally require us to pay minimum rent, property taxes, insurance, and other maintenance costs. Certain lease agreements include rental payments based on a percentage of retail sales over contractual levels and others include rental payments adjusted periodically for inflation. Our lease agreements do not contain any material residual value guarantees or material restrictive covenantscovenants.
Most of the Company's leases generally have initial terms of 10 to 20 years and include one or more options to renew. The exercise of lease renewal options is at our sole discretion, and based on our history of exercising renewal lease options, our operating lease liabilities typically assume the exercise of two lease renewal options. The depreciable life of assets and leasehold improvements are limited by the expected lease term.
| | | | March 31, 2019 | | September 29, 2019 |
| Balance Sheet Classification | (in thousands) | Balance Sheet Classification | (in thousands) |
Assets | | | | |
Operating | Operating lease right-of-use assets, net | $ | 544,592 |
| Operating lease right-of-use assets, net (1) | $ | 536,057 |
|
Finance | Property and equipment, net (1) | 9,839 |
| Property and equipment, net (2) | 9,346 |
|
Total leased assets | | $ | 554,431 |
| | $ | 545,403 |
|
| | | | |
Liabilities | | | | |
Current | | | | |
Operating | Operating lease liability, current portion | $ | 47,509 |
| Operating lease liability, current portion | $ | 49,203 |
|
Finance | Other current liabilities | 735 |
| Other current liabilities | 803 |
|
Noncurrent | | | | |
Operating | Operating lease obligations, less current portion | 529,972 |
| Operating lease obligations, less current portion | 522,380 |
|
Finance | Other noncurrent liabilities | 12,104 |
| Other noncurrent liabilities | 11,675 |
|
Total leased liabilities | | $ | 590,320 |
| | $ | 584,061 |
|
__________________
(1)During the nine months ended September 29, 2019, we recognized impairment charges of $0.2 million against our operating right-of-use lease assets related to three Peter Piper Pizza venues in Oklahoma that were closed in 2018. These impairment charges represent a change in the sublease income assumptions for these locations to reflect a longer than expected period to secure subtenants.
(2) Finance lease assets are recorded net of accumulated amortization of $5.2$5.7 million as of March 31,September 29, 2019.
As most of our leases do not provide an implicit rate, we use our estimated incremental borrowing rate based on the current cost of debt on our secured credit facilitiesSecured Credit Facilities at commencement date in determining the present value of lease payments.
| | | | Three Months Ended | | Three Months Ended | | Nine Months Ended |
| | March 31, 2019 | | September 29, 2019 | | September 29, 2019 |
| | Statement of Earnings Classification | | (in thousands) | | Statement of Earnings Classification | | (in thousands) | | (in thousands) |
Operating lease cost(1) | | Lease costs | | $ | 27,027 |
| | Lease costs | | $ | 27,559 |
| | $ | 82,102 |
|
Operating lease cost (2) | | General and administrative | | 323 |
| | General and administrative | | 326 |
| | 976 |
|
Finance lease cost | | | | | | |
Amortization of leased assets | | Depreciation and amortization | | 248 |
| | Depreciation and amortization | | 246 |
| | 742 |
|
Interest on lease liabilities | | Net interest expense | | 381 |
| | Net interest expense | | 366 |
| | 1,123 |
|
Net lease cost | | $ | 27,979 |
| | $ | 28,497 |
| | $ | 84,943 |
|
__________________
(1) Includes common area maintenance charges of $3.5 million.$3.4 million and $10.5 million for the three and nine months ended September 29, 2019, respectively.
(2) Represents the lease cost associated with operating leases relating to our corporate offices and warehouse facilities.
The following table illustrates the Company’s future minimum rental payments for non-cancelable leases as of September 29, 2019:
| | Maturity of Lease Liabilities | | Operating Leases (1) | | Finance Leases (2) | | Total | |
| | | Operating Leases (1) | | Finance Leases (2) | | Total |
| | (in thousands) | | (in thousands) |
Remainder of 2019 | | $ | 69,565 |
| | $ | 2,192 |
| | $ | 71,757 |
| | $ | 22,694 |
| | $ | 548 |
| | $ | 23,242 |
|
2020 | | 91,300 |
| | 2,204 |
| | 93,504 |
| | 91,537 |
| | 2,194 |
| | 93,731 |
|
2021 | | 89,249 |
| | 2,181 |
| | 91,430 |
| | 89,203 |
| | 2,173 |
| | 91,376 |
|
2022 | | 87,383 |
| | 2,147 |
| | 89,530 |
| | 87,221 |
| | 2,147 |
| | 89,368 |
|
2023 | | 84,958 |
| | 1,920 |
| | 86,878 |
| | 84,861 |
| | 1,920 |
| | 86,781 |
|
After 2023 | | 451,203 |
| | 13,216 |
| | 464,419 |
| | 472,432 |
| | 12,931 |
| | 485,363 |
|
Total lease payments | | 873,658 |
| | 23,860 |
| | 897,518 |
| | 847,948 |
| | 21,913 |
| | 869,861 |
|
Less: interest | | 296,177 |
| | 11,021 |
| | 307,198 |
| | 276,365 |
| | 9,435 |
| | 285,800 |
|
Present value of lease liabilities | | $ | 577,481 |
| | $ | 12,839 |
| | $ | 590,320 |
| |
Present value of minimum lease payments (3) | | | $ | 571,583 |
| | $ | 12,478 |
| | $ | 584,061 |
|
__________________
(1) Operating lease payments include payments related to options to extend lease terms that are reasonably certain of being exercised and exclude legally binding minimum lease payments for leases signed but not yet commenced.
(2) Finance lease payments include payments related to options to extend lease terms that are reasonably certain of being exercised and exclude legally binding minimum lease payments for leases signed but not yet commenced.
(3) The present value of minimum operating lease payments of $49.2 million and $522.4 million are included in “Operating lease liability, current portion” and “Operating lease obligations, less current portion”, respectively, in our Consolidated Balance Sheet. The present value of minimum finance lease payments of $0.8 million and $11.7 million are included in “Other current liabilities” and “Other noncurrent liabilities”, respectively, in our Consolidated Balance Sheet.
|
| | | |
| | Nine Months Ended |
Lease Term and Discount Rate | March 31,
September 29, 2019 |
Weighted average remaining lease term (years): | |
Operating leases | | 10.310 |
|
Finance leases | | 11.411 |
|
Weighted average discount rate: | | |
Operating leases | | 8.0 | % |
Finance leases | | 13.613.2 | % |
The following table includes supplemental cash flow information related to leases:
| | | | | | | Nine Months Ended |
| | March 31, 2019 | | September 29, 2019 |
| | (in thousands) | | (in thousands) |
Cash paid for amounts included in the measurement of lease liabilities: | Cash paid for amounts included in the measurement of lease liabilities: | | Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows for operating leases | Operating cash flows for operating leases | $ | 23,398 |
| Operating cash flows for operating leases | $ | 64,237 |
|
Operating cash flows for finance leases | Operating cash flows for finance leases | 381 |
| Operating cash flows for finance leases | 1,123 |
|
Financing cash flows for finance leases | Financing cash flows for finance leases | 168 |
| Financing cash flows for finance leases | 488 |
|
Right-of-use assets obtained in exchange for lease obligations: | Right-of-use assets obtained in exchange for lease obligations: | | Right-of-use assets obtained in exchange for lease obligations: | |
Operating lease liabilities | | 234 |
| | 17,397 |
|
Finance lease liabilities | | — |
| | — |
|
The following table illustrates the Company’s future minimum rental payments for non-cancelable leases as of December 30, 2018:
| | | Financing | | Operating | Financing | | Operating |
Fiscal Years | (in thousands) | (in thousands) |
2019 | 2,182 |
| | 92,435 |
| 2,182 |
| | 92,435 |
|
2020 | 2,214 |
| | 90,983 |
| 2,214 |
| | 90,983 |
|
2021 | 2,201 |
| | 88,914 |
| 2,201 |
| | 88,914 |
|
2022 | 2,184 |
| | 87,183 |
| 2,184 |
| | 87,183 |
|
2023 | 1,956 |
| | 84,806 |
| 1,956 |
| | 84,806 |
|
Thereafter | 13,266 |
| | 457,277 |
| |
After 2023 | | 13,266 |
| | 457,277 |
|
Future minimum lease payments | 24,003 |
| | 901,598 |
| 24,003 |
| | 901,598 |
|
Less amounts representing interest | (10,996 | ) | | | (10,996 | ) | | |
Present value of future minimum lease payments | 13,007 |
| | | 13,007 |
| | |
Less current portion | (677 | ) | | | (677 | ) | | |
Finance lease liability, net of current portion | $ | 12,330 |
| | | $ | 12,330 |
| | |
Note 5.6. Accounts Payable:
Accounts payable consisted of the following as of the dates presented:
| | | March 31, 2019 | | December 30, 2018 | September 29, 2019 | | December 30, 2018 |
| (in thousands) | (in thousands) |
Trade and other amounts payable | $ | 26,962 |
| | $ | 20,685 |
| $ | 33,312 |
| | $ | 20,685 |
|
Book overdraft | 11,886 |
| | 10,725 |
| 10,389 |
| | 10,725 |
|
Accounts payable | $ | 38,848 |
| | $ | 31,410 |
| $ | 43,701 |
| | $ | 31,410 |
|
The book overdraft balance represents checkspayments we have issued but that have not yet presented tocleared the banks.
Note 6.7. Indebtedness and Interest Expense:
Our long-term debt consisted of the following as of the dates presented:
| | | March 31, 2019 | | December 30, 2018 | September 29, 2019 | | December 30, 2018 |
| (in thousands) | (in thousands) |
Term loan facility | $ | 722,000 |
| | $ | 723,900 |
| $ | 760,000 |
| | $ | 723,900 |
|
Revolving credit facility | | — |
| | — |
|
Senior notes | 255,000 |
| | 255,000 |
| 255,000 |
| | 255,000 |
|
Total debt outstanding | 977,000 |
| | 978,900 |
| 1,015,000 |
| | 978,900 |
|
Less: | | | | | | |
Deferred financing costs, net | (7,667 | ) | | (8,633 | ) | (18,003 | ) | | (8,633 | ) |
Unamortized original issue discount
| (1,018 | ) | | (1,153 | ) | (30,411 | ) | | (1,153 | ) |
Current portion of term loan facility | (7,600 | ) | | (7,600 | ) | |
Current portion of Term Loan Facility | | (7,600 | ) | | (7,600 | ) |
Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion | $ | 960,715 |
| | $ | 961,514 |
| $ | 958,986 |
| | $ | 961,514 |
|
We were in compliance with the debt covenants in effect as of March 31,September 29, 2019 for both the secured credit facilitiesSecured Credit Facilities and the senior notes.Senior Notes.
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 opportunistically pursue financing transactions. In addition, we may elect to repurchase amounts of our outstanding debt, including the Senior Notes (as defined below under “Senior Unsecured Debt”), for cash, through open market repurchases or privately negotiated transactions with certain of our debt holders, although there is no assurance we will do so.
Secured Credit Facilities
OurOn August 30, 2019 the Company entered into a new credit agreement and related security agreements with Credit Suisse AG, Cayman Islands Branch, as administrative and collateral agent. The new credit agreement provides senior secured financing consisting of:
| |
(i) | a $114 million secured revolving credit facility which includes a $50 million letter of credit sub-facility (collectively the “2019 Revolving Credit Facility”) with a maturity date of August 30, 2024 (the “revolver maturity date); and |
| |
(ii) | a $760 million secured term loan facility (the “2019 Term Loan Facility” and together with the 2019 Revolving Credit Facility, the “2019 Secured Credit Facilities”) with a maturity date of August 30, 2026 (the “term loan maturity date”). |
In the event more than $50 million of the Company’s 8.0% Senior Notes maturing February 15, 2022 remain outstanding on the date that is 91 days prior to the stated maturity date of the notes, the term loan maturity date will spring to such earlier date, November 16, 2021.
The net proceeds from the 2019 Secured Credit Facilities, plus cash on hand, were used to pay the outstanding principal, accrued interest and fees related to our secured credit facilities include (i) a $760.0 million term loan facility with a maturity datedated as of February 14, 20212014, as amended by an incremental assumption agreement, dated as of May 8, 2018 (the “term“2014 Secured Credit Facilities”), and debt issuance costs related to the 2019 Secured Credit Facilities. All obligations under the 2014 Secured Credit Facilities have been terminated.
The 2019 secured term loan facility”)was issued net of $30.4 million of original issue discount. We also incurred a total of $15.4 million in debt issuance costs ($13.4 million related to the issuance of the 2019 Term Loan Facility and (ii)$2.0 million related to the 2019 Revolving Credit Facility). The debt issuance costs are reflected in our consolidated financial statements as follows:
Loss on Extinguishment of Debt: We recorded a $95.0loss on extinguishment of debt totaling $2.9 million senior securedwhich includes $0.5 million of fees paid to lenders in connection with the 2019 Term Loan Facility and wrote off $2.4 million of unamortized deferred financing costs and original issue discount related to the 2014 Secured Credit
Facilities;
Transaction related costs: We expensed third party fees totaling $0.3 million related to legal fees incurred in connection with the 2019 Term Loan Facility. The transaction related costs are included in “Transaction, severance and related litigation costs” in our Consolidated Statement of Earnings;
Interest Expense: We expensed third party fees totaling $0.4 million related to rating agency fees incurred in connection with the 2019 Secured Credit Facilities. These fees are included in “Interest Expense” in our Consolidated Statement of Earnings; and
Deferred Financing Costs: Debt issuance costs totaling $14.2 million related to the 2019 Secured Credit Facilities were capitalized and are included in “Bank indebtedness and other long-term debt, net of deferred financing costs” on our Consolidated Balance Sheets. We also continued to defer $2.1 million of unamortized deferred financing costs related to the 2014 Secured Credit Facilities.
The deferred financing costs related to the 2019 Term Loan Facility and original issue discount are amortized through the 2019 term loan maturity date, and the deferred financing costs related to the 2019 Revolving Credit Facility are being amortized through the 2019 revolver maturity date. The amortization of the deferred financing costs and original issue discount is included in “Interest expense” in our Consolidated Statements of Earnings.
The 2019 Secured Credit Facilities allow the Company to request one or more incremental term loan facilities and/or increase the commitments under our revolving credit facility in an aggregate amount of up to the sum of (a) $50.0 million plus (b) such additional amount so long as, (i) in the case of loans that rank equally and without preference with the liens on the collateral securing the 2019 Secured Credit Facilities, our net first lien senior secured leverage ratio (the ratio of total consolidated debt secured by first-priority liens on the collateral net of unrestricted cash to the last twelve month’s EBITDA, as defined in the 2019 Senior Credit Facilities agreement) would be no greater than 2.75 to 1.00 and (ii) in the case of loans that rank junior to the liens on the collateral securing the 2019 Secured Credit Facilities, our total net secured leverage ratio (as defined in the 2019 Senior Credit Facilities agreement) would be no greater than 5.00 to 1.00, subject to certain conditions, and receipt of commitments by existing or additional lenders.
The 2019 Secured Credit Facilities include certain mandatory prepayment requirements:
Excess Cash Flow- Subject to certain exceptions, to the extent we have excess cash flow determined on an annual basis (as defined in the 2019 Secured Credit Facilities agreement), we are required to make a mandatory prepayment of term loan principal (reduced by any optional prepayments of principal that may have occurred during the fiscal year) to the extent that 75% (the “required percentage” which is subject to step downs discussed below) times the excess cash flow exceeds $10.0 million. The required percentage steps down from 75% to 50% provided our Net Total Leverage Ratio (the ratio of total consolidated debt including lease related obligations net of unrestricted cash to the last twelve month’s EBITDA, as defined in the 2019 Senior Credit Facilities agreement) is less than or equal to 4.50 to 1.00 and greater than 4.25 to 1.00, steps down to 25% provided our Net Total Leverage Ratio is less than or equal to 4.25 to 1.00 and greater than 4.00 to 1.00, and steps down to 0% provided our Net Total Leverage Ratio is less than or equal to 4.00 to 1.00.
Sales and Disposition of Assets- Subject to certain exceptions, we are required to make a mandatory prepayment of term loan principal of 100% of the net cash proceeds of all non-ordinary course asset sales, other dispositions of property or certain casualty events, in each case subject to certain exceptions and provided that the Company may (i) reinvest within 12 months or (ii) commit to reinvest those proceeds and does reinvest such proceeds within 18 months in assets to be used in its business, or certain other permitted investments; and
Issuance or incurrence of Debt- Subject to certain exceptions, we are required to make a mandatory prepayment of term loan principal of 100% of the net cash proceeds of any issuance or incurrence of debt, other than proceeds from debt permitted under the 2019 Secured Credit Facilities.
The Company may voluntarily repay outstanding loans under the 2019 Secured Credit Facilities at any time, without prepayment premium or penalty except in connection with a maturity daterepricing event as described below, subject to customary “breakage” costs with respect to LIBOR rate loans. Any refinancing through the issuance or repricing amendment of November 16, 2020 (as discussedany debt that results in more detail below, $95.0 million of our original $150.0 million revolving credit facility maturing on February 14,a repricing event applicable to the 2019 was extended to November 16, 2020). Term Loan Facility resulting in a lower yield occurring at any time during the first twelve months following August 30, 2019 will be accompanied by a 1.00% prepayment premium or fee, as applicable.
The revolving credit facility includes a letter of credit sub-facility and a $30.0 million swingline loan sub-facility (the “revolving credit facility” and together with the term loan facility, the “secured credit facilities”). The term loan facility2019 Term Loan Facility requires scheduled quarterly payments equal to 0.25%$1.9 million (0.25% of the original principal amountamount) from July 2014December 2019 to December 2020,June 2026, with the remaining balance paiddue at maturity, February 14, 2021.August 30, 2026.
As of March 31,September 29, 2019, we had no borrowings outstanding and an $8.5 million letter of credit issued but undrawn under the revolving credit facility, and2019 Revolving Credit Facility. As of December 30, 2018 we had a $9.0 million letter of credit issued but undrawn under the revolving credit facility as of December 30, 2018. On May 8, 2018 we entered into an incremental assumption agreement with certain of our revolving credit facility lenders to extend the maturity on $95.0 million of the revolving credit facility through November 16, 2020. In connection with the extension of the maturity date, we agreed to the following covenants for the benefit of the revolving credit facility lenders: (a) with respect to each fiscal year (commencing with the fiscal year ending December 30, 2018), to the extent we have excess cash flow (as defined in the secured credit facilities agreement), we are required to make a mandatory prepayment of term loan principal to the extent that 75% times our excess cash flow (as defined in the secured credit facilities agreement and subject to step-downs based on our net first lien senior secured leverage ratio) exceeds $10 million with any such required mandatory payment reduced by any optional prepayments of principal that may have occurred during the fiscal year, and (b) we shall not incur additional first lien debt in connection with certain acquisitions, mergers or consolidations unless our net first lien senior secured leverage ratio is greater than 3.65 to 1.00 on a pro forma basis. The remaining $55.0 million of the original revolving credit facility matured on February 14, 2019 with no borrowing thereunder outstanding thereunder. All borrowings under our revolving credit facility are subject to the satisfaction of customary conditions, including the absence of a default and the accuracy of representations and warranties.
The term loan was issued net of $3.8 million of original issue discount. We also paid $17.8 million and $3.8 million in debt financing costs related to the term loan facility and revolving credit facility (inclusive of costs incurred in connection with the May 8, 2018 incremental assumption agreement), respectively. All debt financing costs were capitalized in “Bank indebtedness and other long-term debt, net of deferred financing costs” on our Consolidated Balance Sheets. The original issue discount and deferred financing costs related to the term loan facility are amortized over the life of the term loan facility, and the deferred financing costs related to the revolving credit facility are being amortized through November 16, 2020, and are included in “Interest expense” on our Consolidated Statements of Earnings.2014 Senior Secured Facilities.
Borrowings under the secured credit facilities2019 Secured Credit Facilities bear interest at a rate equal to, at ourthe option either of the Company, either:
(a) a London Interbank Offered Rate (“LIBOR”)LIBOR rate determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowings,borrowing, adjusted for certain additional costs, subject to a 1.00% floor in the case of term loansfloor; or (b)
(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 BankCredit Suisse AG, New York Branch;Cayman Islands Branch, and (iii) the one-month adjusted LIBOR plus 1.00%, in.
In each case plusthe interest rate is also subject to an applicable margin. The base applicable margin is 3.25% with respect to LIBOR borrowings and 2.25% with respect to base rate borrowings underdetermined as follows:
•2019 Term Loan Facility:
|
| | | |
Margin for Base Rate Loans | | Margin for LIBOR Loans |
5.50% | | 6.50 | % |
•2019 Revolving Credit Facility:
|
| | | | |
Net Total Leverage Ratio | | Margin for Base Rate Loans | | Margin for LIBOR Loans |
Greater than 4.80 to 1.00 | | 5.50% | | 6.50% |
Less than or equal to 4.80 to 1.00 but greater than 4.30 to 1.00 | | 5.25% | | 6.25% |
Less than or equal to 4.30 to 1.00 | | 5.00% | | 6.00% |
During 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 period from 3.25% to 3.00% based on our net first lien senior secured leverage ratio andAugust 30, 2019 through September 29, 2019 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.2019 Secured Credit Facilities was 6.50%. During the threeperiod from December 31, 2018 through August 29, 2019 and the nine months ended March 31, 2019,September 30, 2018, the applicable margin for LIBOR borrowings under both the term loan facility and the revolving credit facility2014 Secured Credit Facilities was 3.25%.
In addition to paying interest on outstanding principal under both the secured credit facilities, we are2019 and 2014 Secured Credit Facilities, the Company is required to pay a commitment fee to the lenders under the respective revolving credit facility withfacilities in respect to theof any unutilized commitments thereunder. The base applicable commitment fee rate under the revolving credit facility2019 Revolving Credit Facility is 0.50% per annum and is subject to one step-down from 0.50% to 0.375% based on our net first lien senior secured leverage ratio. determined as follows:
|
| | |
Net Total Leverage Ratio | | Commitment Fee |
Greater than 4.30 to 1.00 | | 0.50% |
Less than or equal to 4.30 to 1.00 | | 0.375% |
During the threenine months ended March 31,September 29, 2019 and April 1,September 30, 2018 the commitment fee rate was 0.50%. We are
The Company is also required to pay customary agency fees as well as letter of credit participation fees computed at a rate per annum equal to the applicable margin for LIBOR rate borrowings on the dollar equivalent of the daily stated amount of outstanding letters of credit, plus such letter of credit issuer’s customary documentary and processing fees and charges, and a fronting fee computed at a rate equal to 0.125% per annum on the daily stated amount of sucheach letter of credit.
During the threenine months ended March 31,September 29, 2019, the federal funds rate ranged from 2.40%1.83% to 2.43%2.45%, the prime rate wasranged from 5.00% to 5.50% and the one-month LIBOR ranged from 2.48%2.02% to 2.52%.
The weighted average effective interest rate incurred on our borrowings under both our secured credit facilities2019 and 2014 Secured Credit Facilities was 6.2%6.6% and 5.5%5.7% for the threenine months ended March 31,September 29, 2019 and April 1,September 30, 2018, respectively, which includes amortization of deferred financing costs related to our secured credit facilities,Secured Credit Facilities, amortization of our term loan facilityTerm Loan Facility original issue discount and commitment and other fees related to our secured credit facilities.Secured Credit Facilities but excludes the Loss on extinguishment of debt.
Obligations under the secured credit facilitiesboth the 2019 and 2014 Secured Credit Facilities are unconditionally guaranteed by Queso Holdings Inc. (“Parent”)Parent on a
limited-recourse basis and each of our existing and future direct and indirect material, wholly-owned domestic subsidiaries, subject to certain exceptions. The obligations are secured by a pledge of our capital stock and substantially all of our assets and those of each subsidiary guarantor, including capital stock of the subsidiary guarantors and 65% of the capital stock of the first-tierfirst- tier foreign subsidiaries that are not subsidiary guarantors, in each case subject to exceptions. Such security interests consist of first priority liens with respect to the collateral.
The secured credit facilities2019 Secured Credit Facilities also contain customary affirmative and negative covenants, and events of default, which limit our ability to, among other things: incur additional debt or issue certain preferred shares; create liens on certain assets; make certain loans or investments (including acquisitions); pay dividends on or make distributions with respect to our capital stock or make other restricted payments; consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; sell assets; enter into certain transactions with our affiliates; enter into sale-leaseback transactions; change our lines of business; restrict dividends from our subsidiaries or restrict liens; change our fiscal year; and modify the terms of certain debt or organizational agreements. For a period of 18 months following August 30, 2019, we are prohibited from paying dividends to investment funds managed by Apollo or its affiliates.
Our revolving credit facility2019 Revolving Credit Facility includes a springing financial maintenance covenant that requires our net first lien senior secured leverage ratio not to exceed 6.255.25 to 1.00 (the ratio of consolidated net debt secured by first-priority liens on the collateral to the last twelve months’ EBITDA, as defined in the senior credit facilities).1.00. The covenant will be tested quarterly if the revolving credit facility2019 Revolving Credit Facility is more than 30% drawn (excluding outstanding letters of credit) and will be a condition to drawings under the revolving credit facilityRevolving Credit Facility that would result in more than 30% drawn thereunder.
Senior Unsecured Debt
Our senior unsecured debt consists of $255.0 million aggregate principal amount borrowings of 8.0% Senior Notes due 2022 (the “senior notes”“Senior Notes”). The senior notesSenior Notes bear interest at a rate of 8.0% per year payable February 15th and August 15th each year and mature on February 15, 2022. We may call some or all of the senior notesSenior Notes at 102% on or after February 15, 2019 and at 100% on or after February 15, 2020 as set forth in the indenture governing the senior notesSenior Notes (the “indenture”).
We paid $6.4 million in debt issuance costs related to the senior notes,Senior Notes, which we capitalized in “Bank indebtedness and other long-term debt, net of deferred financing costs” on our Consolidated Balance Sheets. The deferred financing costs are being amortized over the life of the senior notesSenior Notes and are included in “Interest expense” in our Consolidated Statements of Earnings.
Our obligations under the senior notesSenior 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.2019 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 notesSenior Notes was 8.2% for both the threenine months ended March 31,September 29, 2019 and April 1,September 30, 2018, which includedincludes amortization of deferred financing costs and other fees related to our senior notes.Senior Notes.
Interest Expense
Interest expense consisted of the following for the periods presented: | | | Three Months Ended | Three Months Ended |
| March 31, 2019 | | April 1, 2018 | September 29, 2019 | | September 30, 2018 |
| (in thousands) | (in thousands) |
Term loan facility (1) | $ | 10,666 |
| | $ | 9,119 |
| |
Term Loan Facility (1) | | $ | 12,776 |
| | $ | 9,946 |
|
Senior notes | 5,082 |
| | 5,082 |
| 5,083 |
| | 5,083 |
|
Finance lease obligations | 381 |
| | 428 |
| 366 |
| | 394 |
|
Sale leaseback obligations | 2,695 |
| | 2,630 |
| 2,393 |
| | 2,628 |
|
Amortization of deferred financing costs | 924 |
| | 1,001 |
| 970 |
| | 923 |
|
Other | 60 |
| | 297 |
| 441 |
| | 95 |
|
Total interest expense | $ | 19,808 |
| | $ | 18,557 |
| $ | 22,029 |
| | $ | 19,069 |
|
|
| | | | | | | |
| Nine Months Ended |
| September 29, 2019 | | September 30, 2018 |
| (in thousands) |
Term Loan Facility (1) | $ | 34,019 |
| | $ | 28,747 |
|
Senior Notes | 15,248 |
| | 15,248 |
|
Finance lease obligations | 1,123 |
| | 1,253 |
|
Sale leaseback obligations | 7,770 |
| | 7,880 |
|
Amortization of deferred financing costs | 2,817 |
| | 2,878 |
|
Other | 839 |
| | 734 |
|
Total interest expense | $ | 61,816 |
| | $ | 56,740 |
|
__________________
(1) Includes amortization of original issue discount.
The weighted average effective interest rate incurred on our borrowings under our secured credit facilities2019 and senior notes2014 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 facilitiesSecured Credit Facilities and senior notes)Senior Notes) was 6.7%7.0% for the threenine months ended March 31,September 29, 2019 and 6.2%6.3% for the threenine months ended April 1,September 30, 2018, respectively.
We were in compliance with the debt covenants in effect as of March 31, 2019 for both the secured credit facilities and the senior notes.
Note 7.8. Fair Value of Financial Instruments:
Fair value measurements of financial instruments are determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy) has been established.
The following table presents information on our financial instruments as of the periods presented:
| | | | March 31, 2019 | | December 30, 2018 | | September 29, 2019 | | December 30, 2018 |
| | Carrying Amount (1) | | Estimated Fair Value | | Carrying Amount (1) | | Estimated Fair Value | | Carrying Amount (1) | | Estimated Fair Value | | Carrying Amount (1) | | Estimated Fair Value |
| | (in thousands) | | (in thousands) |
Financial Liabilities: | | | | | | | | | | | | | | | | |
Bank indebtedness and other long-term debt: | | | | | | | | | | | | | | | | |
Current portion | | $ | 7,600 |
| | $ | 7,391 |
| | $ | 7,600 |
| | $ | 7,051 |
| | $ | 7,600 |
| | $ | 7,464 |
| | $ | 7,600 |
| | $ | 7,051 |
|
Long-term portion (2) | | 968,382 |
| | 929,021 |
| | 970,147 |
| | 885,212 |
| | 1,007,400 |
| | 980,882 |
| | 971,300 |
| | 885,212 |
|
Bank indebtedness and other long-term debt: | | $ | 975,982 |
| | $ | 936,412 |
| | $ | 977,747 |
| | $ | 892,263 |
| | $ | 1,015,000 |
| | $ | 988,346 |
| | $ | 978,900 |
| | $ | 892,263 |
|
_________________
(1) Excluding net deferred financing costs.costs and original issue discount.
(2) NetThe unamortized portion of original issue discount.discount was $30.4 million and 1.2 million at September 29, 2019 and December 30, 2018, respectively.
Our financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, our secured credit facilities2019 and 2014 Secured Credit Facilities and our senior notes.Senior Notes. The carrying amount of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximates fair value because of their short maturities. The estimated fair value of both our secured credit facilities, term loan facility2019 and senior notes2014 Secured Credit Facilities and our Senior Notes was determined by using thetheir respective average of the ask and bid price of our outstanding borrowings under our term loan facility and the senior notes as of the nearest open market date preceding the reporting period end. The average of the ask and bid price are classified as Level 2 in the fair value hierarchy.
Our non-financial assets, which include long-lived assets, including property, plant and equipment, operating lease right-of-use assets, goodwill and intangible assets, are reported at carrying value and are not required to be measured at fair value on a recurring basis. However, on a periodic basis, or whenever events or changes in circumstances indicate that their carrying value may not be recoverable, we assess our long-lived assets for impairment.
During the threenine months ended March 31,September 29, 2019 and April 1,September 30, 2018, there were no significant transfers among Level 1, 2 or 3 fair value determinations.
Note 8.9. Other Noncurrent Liabilities:
Other noncurrent liabilities consisted of the following as of the dates presented: | | | | March 31, 2019 | | December 30, 2018 | | September 29, 2019 | | December 30, 2018 |
| | (in thousands) | | (in thousands) |
Sale leaseback obligations, less current portion (1) | | $ | 172,543 |
| | $ | 174,520 |
| | $ | 171,729 |
| | $ | 174,520 |
|
Lease related liabilities (2) | | — |
| | 45,195 |
| | — |
| | 45,195 |
|
Financing lease obligations, less current portion
| | 12,104 |
| | 12,330 |
| | 11,675 |
| | 12,330 |
|
Accrued insurance | | | 6,724 |
| | 9,861 |
|
Other | | 5,863 |
| | 6,534 |
| | 5,902 |
| | 6,534 |
|
Total other noncurrent liabilities | | $ | 190,510 |
| | $ | 238,579 |
| | $ | 196,030 |
| | $ | 248,440 |
|
_________________________________
| |
(1) | The sale leaseback obligations are accounted for under the financing method, rather than as completed sales. Under the financing method the sales proceeds received are included in other long-term liabilities until our continuing involvement with the properties is terminated. The rental payments related to the sale leaseback properties are recorded as interest expense and a reduction of the sale leaseback obligation. |
| |
(2) | Lease liabilities totaling $45.2 million were reclassified in connection with the adoption of ASU 2016-02 on December 31, 2018.See2018. See Note 1. “Description of Business and Summary of Significant Accounting Policies - Recently Adopted Accounting Guidance” and Note 4.5. “Leases” for further discussion on the adoption of ASU 2016-02. |
Note 9.10. Income Taxes:
Our income tax expense (benefit) consists of the following for the periods presented:
|
| | | | | | | |
| Three Months Ended |
| September 29, 2019 | | September 30, 2018 |
| (in thousands) |
Federal and state income taxes | $ | (5,900 | ) | | $ | (2,451 | ) |
Foreign income taxes (1) | 67 |
| | 238 |
|
Income tax benefit | $ | (5,833 | ) | | $ | (2,213 | ) |
| | | Three Months Ended | Nine Months Ended |
| March 31, 2019 | | April 1, 2018 | September 29, 2019 | | September 30, 2018 |
| (in thousands) | (in thousands) |
Federal and state income taxes | $ | 6,898 |
| | $ | 3,535 |
| $ | (1,334 | ) | | $ | (1,167 | ) |
Foreign income taxes (1) | 280 |
| | 398 |
| 692 |
| | 713 |
|
Income tax expense | $ | 7,178 |
| | $ | 3,933 |
| |
Income tax benefit | | $ | (642 | ) | | $ | (454 | ) |
__________________
(1) Including foreign taxes withheld.
Our effective income tax rate was 27.6% and 18.9% for the three months ended March 31,September 29, 2019 was 25.3% as compared to 24.3% for the three months ended April 1, 2018.and September 30, 2018, respectively. Our effective income tax rate for the three months ended March 31,September 29, 2019 and April 1, 2018 were favorably impacted by employment-related federaldiffers from the statutory rate primarily due to state income tax credits, offset by state taxes and the negativeunfavorable impact of nondeductible litigation costs related to the Merger nondeductible penalties, and(as defined in Note 13. “Consolidating Guarantor Financial Information”), foreign income taxes (taxes withheld(withheld on royalties and franchise fees earned from international franchisees not offset by foreign tax credits due to the foreign tax credit limitation)., and certain nondeductible penalties and other expenses, partially offset by the favorable impact of employment-related federal income tax credits. Our effective income tax rate for the three months ended September 30, 2018, differs from the statutory tax rate primarily due to state income taxes, nondeductible litigation costs related to the Merger, foreign income taxes (withheld on royalties and franchise fees earned from international franchisees not offset by foreign tax credits due to the foreign tax credit limitation), non-deductible penalties and other expenses, and an increase in the reserve for uncertain tax positions, partially offset by the favorable impact of employment-related federal income tax credits.
Our effective income tax rate was 18.5% and 6.8% for the nine-month period ended September 29, 2019 and September 30, 2018, respectively. Our effective income tax rate for the nine-month period ended September 29, 2019 differs from the statutory rate primarily due to state income taxes net of the favorable impact of certain state tax legislation enacted during the second quarter of 2019 that decreased the amount of income subject to state taxation, nondeductible litigation costs related to the Merger (as defined in Note 13. “Consolidating Guarantor Financial Information”), foreign income taxes (withheld on royalties and franchise fees earned from international franchisees not offset by foreign tax credits due to the foreign tax credit limitation), and certain nondeductible penalties and other expenses, partially offset by the favorable impact of employment-related federal income tax credits. Our effective income tax rate for the nine-month period ended September 30, 2018 differs from the statutory tax rate primarily due to state income taxes including the impact of certain state tax legislation enacted during the second quarter of 2018 that increased the amount of income subject to state taxation, nondeductible litigation costs related to the Merger, foreign income taxes (withheld on royalties and franchise fees earned from international franchisees not offset by foreign tax credits due to the foreign tax credit limitation), certain non-deductible penalties and other expenses, 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 the favorable impact of employment-related federal income tax credits, adjustments to the provisional estimate provided at the end of Fiscal 2017 to account for the impact of the Tax Cuts and Jobs Act (“TCJA”) enacted on December 22, 2017 pursuant to Staff Accounting Bulletin No. 118 (“SAB 118”), 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 loaned to our Canadian subsidiary.
For the periods presented herein, we have used the year-to-date effective tax rate (the “discrete method”), as prescribed by ASC 740-270, Accounting for Income Taxes-Interim Reporting when a reliable estimate of the estimated annual rate cannot be made. We believe at this time, the use of the discrete method is more appropriate than the annual effective tax rate method due to significant variations in the customary relationship between income tax expense and projected annual pre-tax income or
loss which occurs when annual projected pre-tax income or loss nears a relatively small amount in comparison to the differences between income and deductions determined for financial statement purposes versus income tax purposes. Using the discrete method, we have determined our current and deferred income tax expense as if the interim period were an annual period.
Our liability for uncertain tax positions (excluding interest and penalties) was $4.2 million as of March 31,September 29, 2019 and $4.3 million as of December 30, 2018 and if recognized would decrease our provision for income taxes by $3.3$3.2 million. Within the next twelve months, we could settle or otherwise conclude certain ongoing income tax audits and resolve uncertain tax positions as a result of expiring statutes of limitations or payment. As such, it is reasonably possible that the liability for uncertain tax positions could decrease by as much as $3.7 million within the next twelve months.
Total accrued interest and penalties related to unrecognized tax benefits was $1.2 million as of September 29, 2019 and $1.1 million as of March 31, 2019 and December 30, 2018.2018, respectively. On the Consolidated Balance Sheets, we include current accrued interest related to unrecognized tax benefits in “Accrued interest,” current accrued penalties in “Accrued expenses” and noncurrent accrued interest and penalties in “Other noncurrent liabilities.”
Note 10.11. Stock-Based Compensation Arrangements:
2014 Equity Incentive Plan
The 2014 Equity Incentive Plan provides Parent authority to grant equity incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, stock bonus awards or performance compensation awards to certain directors, officers or employees of the Company. A summary of the options outstanding under the equity incentive plan as of March 31,September 29, 2019 and the activity for the threenine months ended March 31,September 29, 2019 is presented below:
|
| | | | | | | |
| Stock Options | Weighted Average Exercise Price (1) | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value |
| | ($ per share) | | ($ in thousands) |
Outstanding stock options, December 30, 2018 | 1,987,331 |
| $8.87 |
|
|
Options Granted | 424,985 |
| $8.86 |
|
|
Options Forfeited | (5,366 | ) | $8.58 |
|
|
Outstanding stock options, March 31, 2019 | 2,406,950 |
| $8.87 | 6.1 | $ | 2,197 |
|
Stock options expected to vest, March 31, 2019 | 1,624,580 |
| $9.05 | 6.5 | $ | 1,182 |
|
Exercisable stock options, March 31, 2019 | 601,862 |
| $8.31 | 5.0 | $ | 883 |
|
| | | | |
|
| | | | | | | |
| Stock Options | Weighted Average Exercise Price (1) | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value |
| | ($ per share) | | ($ in thousands) |
Outstanding stock options, December 30, 2018 | 1,987,331 |
| $8.87 |
|
|
Options granted | 424,985 |
| $8.86 |
|
|
Options forfeited | (114,921 | ) | $9.87 |
|
|
Outstanding stock options, September 29, 2019 | 2,297,395 |
| $8.80 | 5.5 | $ | — |
|
Stock options expected to vest, September 29, 2019 | 1,530,812 |
| $8.97 | 5.9 | $ | — |
|
Exercisable stock options, September 29, 2019 | 841,086 |
| $8.31 | 4.5 | $ | — |
|
__________________
(1) The weighted average exercise price reflects the original grant date fair value per option as adjusted for the dividend payment made in August 2015.
As of March 31,September 29, 2019, we had $1.7$1.4 million of total unrecognized share-based compensation expense related to unvested options, which is expected to be amortized over the remaining weighted-average vesting period of 4.43.9 years.
Stock Awards
During the first quarter of 2019, certain officers of the Company were granted stock bonus awards under the 2014 Equity Incentive Plan. The number of common shares of Parent awarded was based on the fair market value of Parent’s common stock as of December 31, 2018. The shares granted to the officers were fully vested immediately on the date that they were granted. In addition, during 2019, the Company agreed to issue fully vested common shares of Parent to certain officers of the Company in the first quarter 2020 based on the Company’s financial performance for Fiscal 2019.
The following table summarizestables summarize stock-based compensation expense and the associated tax benefit recognized in the Consolidated Financial Statements for the periods presented:
|
| | | | | | | |
| Three Months Ended |
| March 31, 2019 | | April 1, 2018 |
| (in thousands) |
Stock-based compensation costs related to stock awards | $ | 1,031 |
| | $ | — |
|
Stock-based compensation costs related to incentive stock options | 126 |
| | 67 |
|
Portion capitalized as property and equipment (1) | (10 | ) | | (3 | ) |
Stock-based compensation expense recognized | $ | 1,147 |
| | $ | 64 |
|
Payroll taxes related to stock awards | $ | 15 |
| | $ | — |
|
|
| | | | | | | |
| Three Months Ended |
| September 29, 2019 | | September 30, 2018 |
| (in thousands) |
Stock-based compensation costs related to stock awards | $ | (182 | ) | | $ | — |
|
Stock-based compensation costs related to incentive stock options, net (1) | 71 |
| | (58 | ) |
Stock-based compensation expense recognized | $ | (111 | ) | | $ | (58 | ) |
|
| | | | | | | |
| Nine Months Ended |
| September 29, 2019 | | September 30, 2018 |
| (in thousands) |
Stock-based compensation costs related to stock awards | $ | 1,632 |
| | $ | — |
|
Stock-based compensation costs related to incentive stock options, net (1) | 353 |
| | 169 |
|
Stock-based compensation expense recognized | $ | 1,985 |
| | $ | 169 |
|
Payroll taxes related to stock awards | $ | 15 |
| | $ | — |
|
__________________
| |
(1) | We capitalize the portion of stock-based compensation costs related to our design, construction, facilities and legal departments that are directly attributable to our venue development projects, such as the design and construction of a new venue and the remodeling and expansion of our existing venues. Capitalized stock-based compensation costs attributable to our venue development projects are included in “Property and equipment, net” in the Consolidated Balance Sheets. |
Note 11.12. Stockholder’s Equity:
The following table summarizestables summarize the changes in stockholder’s equity during the three monthsand nine-month periods ended March 31, 2019:September 29, 2019 and September 30, 2018, respectively:
| | | | Common Stock | | Capital In Excess of Par Value | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | | | Common Stock | | Capital In Excess of Par Value | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | |
| | Shares | | Amount | | Total | | Shares | | Amount | | Total |
| | (in thousands, except share information) | | (in thousands, except share information) |
Balance at December 30, 2018 | | 200 |
| | $ | — |
| | $ | 359,570 |
| | $ | (115,660 | ) | | $ | (1,339 | ) | | $ | 242,571 |
| | 200 |
| | $ | — |
| | $ | 359,570 |
| | $ | (115,660 | ) | | $ | (1,339 | ) | | $ | 242,571 |
|
Net income | | | — |
| | — |
| | — |
| | 21,246 |
| | — |
| | 21,246 |
|
Other comprehensive loss | | | — |
| | — |
| | — |
| | — |
| | (155 | ) | | (155 | ) |
Stock-based compensation costs related to stock awards | | | — |
| | — |
| | 126 |
| | — |
| | — |
| | 126 |
|
Balance March 31, 2019 | | | 200 |
| | $ | — |
| | $ | 359,696 |
| | $ | (94,414 | ) | | $ | (1,494 | ) | | $ | 263,788 |
|
Net loss | | | — |
| | — |
| | — |
| | (8,734 | ) | | — |
| | (8,734 | ) |
Other comprehensive loss | | | — |
| | — |
| | — |
| | — |
| | (130 | ) | | (130 | ) |
Stock-based compensation costs related to stock awards | | | — |
| | — |
| | 171 |
| | — |
| | — |
| | 171 |
|
Balance June 30, 2019 | | | 200 |
| | $ | — |
| | $ | 359,867 |
| | $ | (103,148 | ) | | $ | (1,624 | ) | | $ | 255,095 |
|
Net loss | | — |
| | — |
| | — |
| | 21,246 |
| | — |
| | 21,246 |
| | — |
| | $ | — |
| | $ | — |
| | $ | (15,334 | ) | | $ | — |
| | $ | (15,334 | ) |
Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | (155 | ) | | (155 | ) | | — |
| | — |
| | — |
| | — |
| | 73 |
| | 73 |
|
Stock-based compensation costs | | — |
| | — |
| | 126 |
| | — |
| | — |
| | 126 |
| |
Balance March 31, 2019 | | 200 |
| | $ | — |
| | $ | 359,696 |
| | $ | (94,414 | ) | | $ | (1,494 | ) | | $ | 263,788 |
| |
Stock-based compensation costs related to stock awards | | | — |
| | — |
| | 63 |
| | — |
| | — |
| | 63 |
|
Balance September 29, 2019 | | | 200 |
| | $ | — |
| | $ | 359,930 |
| | $ | (118,482 | ) | | $ | (1,551 | ) | | $ | 239,897 |
|
12. |
| | | | | | | | | | | | | | | | | | | | | | | |
| | 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 December 31, 2017 | | 200 |
| | $ | — |
| | $ | 359,233 |
| | $ | (95,199 | ) | | $ | (1,886 | ) | | $ | 262,148 |
|
Net income | | — |
| | — |
| | — |
| | 12,223 |
| | — |
| | 12,223 |
|
Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | 154 |
| | 154 |
|
Stock-based compensation costs related to stock awards | | — |
| | — |
| | 67 |
| | — |
| | — |
| | 67 |
|
Balance April 1, 2018 | | 200 |
| | $ | — |
| | $ | 359,300 |
| | $ | (82,976 | ) | | $ | (1,732 | ) | | $ | 274,592 |
|
Net loss | | — |
| | — |
| | — |
| | (8,965 | ) | | — |
| | (8,965 | ) |
Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | 145 |
| | 145 |
|
Stock-based compensation costs related to stock awards | | — |
| | — |
| | 166 |
| | — |
| | — |
| | 166 |
|
Balance July 1, 2018 | | 200 |
| | $ | — |
| | $ | 359,466 |
| | $ | (91,941 | ) | | $ | (1,587 | ) | | $ | 265,938 |
|
Net loss | | — |
| | — |
| | — |
| | (9,487 | ) | | — |
| | (9,487 | ) |
Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (172 | ) | | (172 | ) |
Stock-based compensation costs related to stock awards | | — |
| | — |
| | (55 | ) | | — |
| | — |
| | (55 | ) |
Balance September 30, 2018 | | 200 |
| | — |
| | $ | 359,411 |
| | $ | (101,428 | ) | | $ | (1,759 | ) | | $ | 256,224 |
|
13. Consolidating Guarantor Financial Information:
On February 14, 2014, CEC Entertainment, Inc. (the “Issuer”) merged with and into an entity controlled by Apollo Global Management, LLCInc. (“Apollo”) and its subsidiaries, which we refer to as the “Merger.” The senior notesSenior Notes issued by the Issuer, in conjunction with the Merger, are our unsecured obligations and are fully and unconditionally, jointly and severally guaranteed by all of our 100% wholly-owned U.S. subsidiaries (the “Guarantors”). Our wholly-owned foreign subsidiaries and our less-than-wholly-owned U.S. subsidiaries are not a party to the guarantees (the “Non-Guarantors”). The following schedules present the condensed consolidating financial statements of the Issuer, Guarantors and Non-Guarantors, as well as consolidated results, for the periods presented:
| | CEC Entertainment, Inc. | Condensed Consolidating Balance Sheet | As of March 31, 2019 | |
As of September 29, 2019 | | As of September 29, 2019 |
(in thousands) | | | | | | | | | | | | | | | | | | | | | |
| | Issuer | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated | | Issuer | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
Current assets: | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 104,407 |
| | $ | 5,065 |
| | $ | 2,558 |
| | $ | — |
| | $ | 112,030 |
| | $ | 94,627 |
| | $ | 7,712 |
| | $ | 2,720 |
| | $ | — |
| | $ | 105,059 |
|
Restricted cash | | — |
| | — |
| | 266 |
| | — |
| | 266 |
| | — |
| | — |
| | 212 |
| | — |
| | 212 |
|
Accounts receivable | | 13,946 |
| | 5,950 |
| | 5,834 |
| | (4,983 | ) | | 20,747 |
| | 13,098 |
| | 6,644 |
| | 4,620 |
| | (3,786 | ) | | 20,576 |
|
Inventories | | 18,658 |
| | 5,641 |
| | 294 |
| |
|
| | 24,593 |
| | 20,420 |
| | 6,862 |
| | 297 |
| | — |
| | 27,579 |
|
Prepaid expenses | | 8,030 |
| | 9,740 |
| | 942 |
| |
|
| | 18,712 |
| | 6,754 |
| | 6,776 |
| | 744 |
| | — |
| | 14,274 |
|
Total current assets | | 145,041 |
| | 26,396 |
| | 9,894 |
| | (4,983 | ) | | 176,348 |
| | 134,899 |
| | 27,994 |
| | 8,593 |
| | (3,786 | ) | | 167,700 |
|
Property and equipment, net | | 459,345 |
| | 68,873 |
| | 5,392 |
| | — |
| | 533,610 |
| | 456,798 |
| | 63,281 |
| | 5,028 |
| | — |
| | 525,107 |
|
Operating lease right-of-use assets, net | | 485,766 |
| | 48,717 |
| | 10,109 |
| | — |
| | 544,592 |
| | 478,836 |
| | 47,677 |
| | 9,544 |
| | — |
| | 536,057 |
|
Goodwill | | 433,024 |
| | 51,414 |
| | — |
| | — |
| | 484,438 |
| | 433,024 |
| | 51,414 |
| | — |
| | — |
| | 484,438 |
|
Intangible assets, net | | 8,584 |
| | 461,658 |
| | — |
| | — |
| | 470,242 |
| | 8,152 |
| | 461,066 |
| | — |
| | — |
| | 469,218 |
|
Intercompany | | 57,340 |
| | 80,658 |
| | — |
| | (137,998 | ) | | — |
| | 41,679 |
| | 96,942 |
| | — |
| | (138,621 | ) | | — |
|
Investment in subsidiaries | | 491,735 |
| | — |
| | — |
| | (491,735 | ) | | — |
| | 497,945 |
| | — |
| | — |
| | (497,945 | ) | | — |
|
Other noncurrent assets | | 7,104 |
| | 11,759 |
| | 20 |
| | — |
| | 18,883 |
| | 6,741 |
| | 10,036 |
| | 17 |
| | — |
| | 16,794 |
|
Total assets | | $ | 2,087,939 |
| | $ | 749,475 |
| | $ | 25,415 |
| | $ | (634,716 | ) | | $ | 2,228,113 |
| | $ | 2,058,074 |
| | $ | 758,410 |
| | $ | 23,182 |
| | $ | (640,352 | ) | | $ | 2,199,314 |
|
Current liabilities: | | | | | | | | | | | | | | | | | | | | |
Bank indebtedness and other long-term debt, current portion | | $ | 7,600 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 7,600 |
| | $ | 7,600 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 7,600 |
|
Operating lease liability, current portion | | 42,988 |
| | 3,399 |
| | 1,122 |
| | — |
| | 47,509 |
| | 44,413 |
| | 3,749 |
| | 1,041 |
| | — |
| | 49,203 |
|
Accounts payable and accrued expenses | | 57,215 |
| | 41,414 |
| | 5,747 |
| | — |
| | 104,376 |
| |
Accounts payable, accrued expenses and unearned revenues | | | 66,180 |
| | 46,049 |
| | 5,720 |
| | — |
| | 117,949 |
|
Other current liabilities | | 5,317 |
| | — |
| | 15 |
| | — |
| | 5,332 |
| | 4,530 |
| | — |
| | 18 |
| | — |
| | 4,548 |
|
Total current liabilities | | 113,120 |
| | 44,813 |
| | 6,884 |
| | — |
| | 164,817 |
| | 122,723 |
| | 49,798 |
| | 6,779 |
| | — |
| | 179,300 |
|
Operating lease obligations, less current portion | | 463,959 |
| | 56,689 |
| | 9,324 |
| | — |
| | 529,972 |
| | 458,412 |
| | 55,100 |
| | 8,868 |
| | — |
| | 522,380 |
|
Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion
| | 960,715 |
| | — |
| | — |
| | — |
| | 960,715 |
| | 958,986 |
| | — |
| | — |
| | — |
| | 958,986 |
|
Deferred tax liability | | 91,990 |
| | 18,037 |
| | (1,577 | ) | | — |
| | 108,450 |
| | 86,918 |
| | 17,577 |
| | (1,774 | ) | | — |
| | 102,721 |
|
Intercompany | | — |
| | 116,598 |
| | 26,383 |
| | (142,981 | ) | | — |
| | — |
| | 116,739 |
| | 25,668 |
| | (142,407 | ) | | — |
|
Other noncurrent liabilities | | 194,367 |
| | 5,970 |
| | 34 |
| | — |
| | 200,371 |
| | 191,138 |
| | 4,868 |
| | 24 |
| | — |
| | 196,030 |
|
Total liabilities | | 1,824,151 |
| | 242,107 |
| | 41,048 |
| | (142,981 | ) | | 1,964,325 |
| | 1,818,177 |
| | 244,082 |
| | 39,565 |
| | (142,407 | ) | | 1,959,417 |
|
Stockholder's equity: | | | | | | | | | | | | | | | | | | | | |
Common stock | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Capital in excess of par value | | 359,696 |
| | 466,114 |
| | 3,241 |
| | (469,355 | ) | | 359,696 |
| | 359,930 |
| | 466,114 |
| | 3,241 |
| | (469,355 | ) | | 359,930 |
|
Retained earnings (deficit) | | (94,414 | ) | | 41,254 |
| | (17,224 | ) | | (24,030 | ) | | (94,414 | ) | |
Accumulated earnings (deficit) | | | (118,482 | ) | | 48,214 |
| | (18,073 | ) | | (30,141 | ) | | (118,482 | ) |
Accumulated other comprehensive income (loss) | | (1,494 | ) | | — |
| | (1,650 | ) | | 1,650 |
| | (1,494 | ) | | (1,551 | ) | | — |
| | (1,551 | ) | | 1,551 |
| | (1,551 | ) |
Total stockholder's equity | | 263,788 |
| | 507,368 |
| | (15,633 | ) | | (491,735 | ) | | 263,788 |
| | 239,897 |
| | 514,328 |
| | (16,383 | ) | | (497,945 | ) | | 239,897 |
|
Total liabilities and stockholder's equity | | $ | 2,087,939 |
| | $ | 749,475 |
| | $ | 25,415 |
| | $ | (634,716 | ) | | $ | 2,228,113 |
| | $ | 2,058,074 |
| | $ | 758,410 |
| | $ | 23,182 |
| | $ | (640,352 | ) | | $ | 2,199,314 |
|
| | CEC Entertainment, Inc. | Condensed Consolidating Balance Sheet | As of December 30, 2018 | (in thousands) | | | | | | | | | | | | | | | | | | | | | |
| | Issuer | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated | | Issuer | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
Current assets: | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 54,775 |
| | $ | 6,725 |
| | $ | 1,670 |
| | $ | — |
| | $ | 63,170 |
| | $ | 54,775 |
| | $ | 6,725 |
| | $ | 1,670 |
| | $ | — |
| | $ | 63,170 |
|
Restricted cash | | — |
| | — |
| | 151 |
| | — |
| | 151 |
| | — |
| | — |
| | 151 |
| | — |
| | 151 |
|
Accounts receivable | | 28,421 |
| | 4,956 |
| | 4,117 |
| | (3,314 | ) | | 34,180 |
| | 28,421 |
| | 4,956 |
| | 4,117 |
| | (3,314 | ) | | 34,180 |
|
Inventories | | 16,896 |
| | 6,617 |
| | 294 |
| | — |
| | 23,807 |
| | 16,896 |
| | 6,617 |
| | 294 |
| | — |
| | 23,807 |
|
Prepaid expenses | | 14,264 |
| | 10,562 |
| | 598 |
| | — |
| | 25,424 |
| | 14,264 |
| | 10,562 |
| | 598 |
| | — |
| | 25,424 |
|
Total current assets | | 114,356 |
| | 28,860 |
| | 6,830 |
| | (3,314 | ) | | 146,732 |
| | 114,356 |
| | 28,860 |
| | 6,830 |
| | (3,314 | ) | | 146,732 |
|
Property and equipment, net | | 468,827 |
| | 64,721 |
| | 5,637 |
| | — |
| | 539,185 |
| | 468,827 |
| | 64,721 |
| | 5,637 |
| | — |
| | 539,185 |
|
Goodwill | | 433,024 |
| | 51,414 |
| | — |
| | — |
| | 484,438 |
| | 433,024 |
| | 51,414 |
| | — |
| | — |
| | 484,438 |
|
Intangible assets, net | | 14,716 |
| | 462,369 |
| | — |
| | — |
| | 477,085 |
| | 14,716 |
| | 462,369 |
| | — |
| | — |
| | 477,085 |
|
Intercompany | | 78,402 |
| | 66,373 |
| | — |
| | (144,775 | ) | | — |
| | 78,402 |
| | 66,373 |
| | — |
| | (144,775 | ) | | — |
|
Investment in subsidiaries | | 477,556 |
| | — |
| | — |
| | (477,556 | ) | | — |
| | 477,556 |
| | — |
| | — |
| | (477,556 | ) | | — |
|
Other noncurrent assets | | 7,292 |
| | 11,409 |
| | 24 |
| | — |
| | 18,725 |
| | 7,292 |
| | 11,409 |
| | 24 |
| | — |
| | 18,725 |
|
Total assets | | $ | 1,594,173 |
| | $ | 685,146 |
| | $ | 12,491 |
| | $ | (625,645 | ) | | $ | 1,666,165 |
| | $ | 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 |
| | $ | 7,600 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 7,600 |
|
Accounts payable and accrued expenses | | 56,277 |
| | 34,429 |
| | 2,321 |
| | — |
| | 93,027 |
| |
Accounts payable, accrued expenses and unearned revenues | | | 56,277 |
| | 34,429 |
| | 2,321 |
| | — |
| | 93,027 |
|
Other current liabilities | | 5,429 |
| | 510 |
| | 16 |
| | — |
| | 5,955 |
| | 5,429 |
| | 510 |
| | 16 |
| | — |
| | 5,955 |
|
Total current liabilities | | 69,306 |
| | 34,939 |
| | 2,337 |
| | — |
| | 106,582 |
| | 69,306 |
| | 34,939 |
| | 2,337 |
| | — |
| | 106,582 |
|
Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion | | 961,514 |
| | — |
| | — |
| | — |
| | 961,514 |
| | 961,514 |
| | — |
| | — |
| | — |
| | 961,514 |
|
Deferred tax liability | | 91,049 |
| | 17,866 |
| | (1,857 | ) | | — |
| | 107,058 |
| | 91,049 |
| | 17,866 |
| | (1,857 | ) | | — |
| | 107,058 |
|
Intercompany | | — |
| | 119,498 |
| | 28,591 |
| | (148,089 | ) | | — |
| | — |
| | 119,498 |
| | 28,591 |
| | (148,089 | ) | | — |
|
Other noncurrent liabilities | | 229,733 |
| | 18,191 |
| | 516 |
| | — |
| | 248,440 |
| | 229,733 |
| | 18,191 |
| | 516 |
| | — |
| | 248,440 |
|
Total liabilities | | 1,351,602 |
| | 190,494 |
| | 29,587 |
| | (148,089 | ) | | 1,423,594 |
| | 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 |
| | 359,570 |
| | 466,114 |
| | 3,241 |
| | (469,355 | ) | | 359,570 |
|
Retained earnings (deficit) | | (115,660 | ) | | 28,538 |
| | (18,691 | ) | | (9,847 | ) | | (115,660 | ) | |
Accumulated 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 | ) | | (1,339 | ) | | — |
| | (1,646 | ) | | 1,646 |
| | (1,339 | ) |
Total stockholder's equity | | 242,571 |
| | 494,652 |
| | (17,096 | ) | | (477,556 | ) | | 242,571 |
| | 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 |
| | $ | 1,594,173 |
| | $ | 685,146 |
| | $ | 12,491 |
| | $ | (625,645 | ) | | $ | 1,666,165 |
|
| | CEC Entertainment, Inc. | Consolidating Statement of Comprehensive Income (Loss) | For the Three Months Ended March 31, 2019 | |
For the Three Months Ended September 29, 2019 | | For the Three Months Ended September 29, 2019 |
(in thousands) | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Issuer | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated | | Issuer | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
Revenues: | | | | | | | | | | | | | | | | | | | | |
Food and beverage sales | | $ | 102,113 |
| | $ | 14,223 |
| | $ | 1,479 |
| | $ | — |
| | $ | 117,815 |
| | $ | 77,475 |
| | $ | 13,866 |
| | $ | 1,304 |
| | $ | — |
| | $ | 92,645 |
|
Entertainment and merchandise sales | | 133,650 |
| | 13,207 |
| | 2,820 |
| | — |
| | 149,677 |
| | 106,258 |
| | 10,651 |
| | 2,779 |
| | — |
| | 119,688 |
|
Total company venue sales | | 235,763 |
| | 27,430 |
| | 4,299 |
| | — |
| | 267,492 |
| | 183,733 |
| | 24,517 |
| | 4,083 |
| | — |
| | 212,333 |
|
Franchise fees and royalties | | 685 |
| | 4,294 |
| | 841 |
| | — |
| | 5,820 |
| | 448 |
| | 4,249 |
| | 564 |
| | — |
| | 5,261 |
|
International Association assessments and other fees | | 315 |
| | 11,785 |
| | 11,319 |
| | (23,419 | ) | | — |
| | 258 |
| | 8,485 |
| | 8,763 |
| | (17,506 | ) | | — |
|
Total revenues | | 236,763 |
| | 43,509 |
| | 16,459 |
| | (23,419 | ) | | 273,312 |
| | 184,439 |
| | 37,251 |
| | 13,410 |
| | (17,506 | ) | | 217,594 |
|
Operating Costs and Expenses: | | | | | | | | | | | | | | | | | | | | |
Company venue operating costs (excluding Depreciation and amortization):
| | | | | | | | | | | |
Company venue operating costs: | | | | | | | | | | | |
Cost of food and beverage | | 22,428 |
| | 3,734 |
| | 490 |
| | — |
| | 26,652 |
| | 17,243 |
| | 3,635 |
| | 424 |
| | — |
| | 21,302 |
|
Cost of entertainment and merchandise | | 11,044 |
| | 443 |
| | 259 |
| | — |
| | 11,746 |
| | 9,445 |
| | 396 |
| | 272 |
| | — |
| | 10,113 |
|
Total cost of food, beverage, entertainment and merchandise | | 33,472 |
| | 4,177 |
| | 749 |
| | — |
| | 38,398 |
| | 26,688 |
| | 4,031 |
| | 696 |
| | — |
| | 31,415 |
|
Labor expenses | | 66,240 |
| | 4,941 |
| | 1,324 |
| | — |
| | 72,505 |
| | 57,163 |
| | 4,847 |
| | 1,203 |
| | — |
| | 63,213 |
|
Lease costs | | 24,594 |
| | 1,861 |
| | 572 |
| | — |
| | 27,027 |
| | 25,105 |
| | 1,865 |
| | 589 |
| | — |
| | 27,559 |
|
Other venue operating expenses | | 42,811 |
| | 3,737 |
| | 849 |
| | (12,100 | ) | | 35,297 |
| | 38,399 |
| | 3,992 |
| | 939 |
| | (8,744 | ) | | 34,586 |
|
Total company venue operating costs | | 167,117 |
| | 14,716 |
| | 3,494 |
| | (12,100 | ) | | 173,227 |
| | 147,355 |
| | 14,735 |
| | 3,427 |
| | (8,744 | ) | | 156,773 |
|
Advertising expense | | 11,324 |
| | 1,600 |
| | 10,648 |
| | (11,319 | ) | | 12,253 |
| | 8,649 |
| | 1,190 |
| | 9,726 |
| | (8,762 | ) | | 10,803 |
|
General and administrative expenses | | 5,106 |
| | 10,398 |
| | (261 | ) | | — |
| | 15,243 |
| | 4,240 |
| | 8,561 |
| | 250 |
| | — |
| | 13,051 |
|
Depreciation and amortization | | 21,426 |
| | 2,467 |
| | 441 |
| | — |
| | 24,334 |
| |
Depreciation and Amortization | | 74,749 |
| 21,766 |
| | 2,476 |
| | 380 |
| | — |
| | 24,622 |
|
Transaction, severance and related litigation costs | | 23 |
| | — |
| | — |
| | — |
| | 23 |
| | 371 |
| | — |
| | — |
| | — |
| | 371 |
|
Asset impairments | | | 2,023 |
| | 6,179 |
| | — |
| | — |
| | 8,202 |
|
Total operating costs and expenses | | 204,996 |
| | 29,181 |
| | 14,322 |
| | (23,419 | ) | | 225,080 |
| | 184,404 |
| | 33,141 |
| | 13,783 |
| | (17,506 | ) | | 213,822 |
|
Operating income | | 31,767 |
| | 14,328 |
| | 2,137 |
| | — |
| | 48,232 |
| |
Equity in earnings (loss) in affiliates | | 14,386 |
| | — |
| | — |
| | (14,386 | ) | | — |
| |
Operating income (loss) | | | 35 |
| | 4,110 |
| | (373 | ) | | — |
| | 3,772 |
|
Equity in earnings in affiliates | | | 658 |
| | — |
| | — |
| | (658 | ) | | — |
|
Interest expense | | 18,915 |
| | 711 |
| | 182 |
| | — |
| | 19,808 |
| | 21,150 |
| | 705 |
| | 174 |
| | — |
| | 22,029 |
|
Loss on extinguishment of debt | | | 2,910 |
| | — |
| | — |
| | — |
| | 2,910 |
|
Income (loss) before income taxes | | 27,238 |
| | 13,617 |
| | 1,955 |
| | (14,386 | ) | | 28,424 |
| | (23,367 | ) | | 3,405 |
| | (547 | ) | | (658 | ) | | (21,167 | ) |
Income tax expense | | 5,992 |
| | 903 |
| | 283 |
| | — |
| | 7,178 |
| |
Income tax expense (benefit) | | | (8,033 | ) | | 2,321 |
| | (121 | ) | | — |
| | (5,833 | ) |
Net income (loss) | | $ | 21,246 |
| | $ | 12,714 |
| | $ | 1,672 |
| | $ | (14,386 | ) | | $ | 21,246 |
| | $ | (15,334 | ) | | $ | 1,084 |
| | $ | (426 | ) | | $ | (658 | ) | | $ | (15,334 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| | | | | | | | | | |
Components of other comprehensive income (loss), net of tax: | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustments | | (155 | ) | | — |
| | (155 | ) | | 155 |
| | (155 | ) | | 73 |
| |
|
| | (73 | ) | | 73 |
| | 73 |
|
Comprehensive income (loss) | | $ | 21,091 |
| | $ | 12,714 |
| | $ | 1,517 |
| | $ | (14,231 | ) | | $ | 21,091 |
| | $ | (15,261 | ) | | $ | 1,084 |
| | $ | (499 | ) | | $ | (585 | ) | | $ | (15,261 | ) |
| | CEC Entertainment, Inc. | Consolidating Statement of Comprehensive Income (Loss) | For the Three Months Ended April 1, 2018 | |
For the Three Months Ended September 30, 2018 | | For the Three Months Ended September 30, 2018 |
(in thousands) | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Issuer | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated | | Issuer | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
Revenues: | | | | | | | | | | | | | | | | | | | | |
Food and beverage sales | | $ | 102,648 |
| | $ | 13,958 |
| | $ | 1,771 |
| | $ | — |
| | $ | 118,377 |
| | $ | 79,871 |
| | $ | 12,854 |
| | $ | 1,298 |
| | $ | — |
| | $ | 94,023 |
|
Entertainment and merchandise sales | | 115,275 |
| | 12,727 |
| | 3,115 |
| | — |
| | 131,117 |
| | 108,461 |
| | 10,380 |
| | 2,770 |
| | — |
| | 121,611 |
|
Total company venue sales | | 217,923 |
| | 26,685 |
| | 4,886 |
| | — |
| | 249,494 |
| | 188,332 |
| | 23,234 |
| | 4,068 |
| | — |
| | 215,634 |
|
Franchise fees and royalties | | 572 |
| | 4,143 |
| | 695 |
| | — |
| | 5,410 |
| | 441 |
| | 4,302 |
| | 568 |
| | — |
| | 5,311 |
|
International Association assessments and other fees | | 341 |
| | 9,038 |
| | 10,562 |
| | (19,941 | ) | | — |
| | 221 |
| | 9,588 |
| | 8,862 |
| | (18,671 | ) | | — |
|
Total revenues | | 218,836 |
| | 39,866 |
| | 16,143 |
| | (19,941 | ) | | 254,904 |
| | 188,994 |
| | 37,124 |
| | 13,498 |
| | (18,671 | ) | | 220,945 |
|
Operating Costs and Expenses: | | | | | | | | | | | | | | | | | | | | |
Company venue operating costs (excluding Depreciation and amortization): | | | | | | | | | | | |
Company venue operating costs: | | | | | | | | | | | |
Cost of food and beverage | | 22,884 |
| | 3,891 |
| | 585 |
| | — |
| | 27,360 |
| | 18,700 |
| | 3,348 |
| | 472 |
| | — |
| | 22,520 |
|
Cost of entertainment and merchandise | | 8,766 |
| | 446 |
| | 170 |
| | — |
| | 9,382 |
| | 9,306 |
| | 391 |
| | 177 |
| | — |
| | 9,874 |
|
Total cost of food, beverage, entertainment and merchandise | | 31,650 |
| | 4,337 |
| | 755 |
| | — |
| | 36,742 |
| | 28,006 |
| | 3,739 |
| | 649 |
| | — |
| | 32,394 |
|
Labor expenses | | 60,829 |
| | 5,095 |
| | 1,425 |
| | — |
| | 67,349 |
| | 58,818 |
| | 4,976 |
| | 1,234 |
| | — |
| | 65,028 |
|
Lease costs | | 21,797 |
| | 1,689 |
| | 563 |
| | — |
| | 24,049 |
| | 21,719 |
| | 1,630 |
| | 502 |
| | — |
| | 23,851 |
|
Other venue operating expenses | | 42,908 |
| | 3,590 |
| | 969 |
| | (9,405 | ) | | 38,062 |
| | 43,711 |
| | 3,500 |
| | 830 |
| | (9,809 | ) | | 38,232 |
|
Total company venue operating costs | | 157,184 |
| | 14,711 |
| | 3,712 |
| | (9,405 | ) | | 166,202 |
| | 152,254 |
| | 13,845 |
| | 3,215 |
| | (9,809 | ) | | 159,505 |
|
Advertising expense | | 10,985 |
| | 1,941 |
| | 11,584 |
| | (10,536 | ) | | 13,974 |
| | 8,984 |
| | 1,150 |
| | 9,786 |
| | (8,862 | ) | | 11,058 |
|
General and administrative expenses | | 4,195 |
| | 8,168 |
| | 546 |
| | — |
| | 12,909 |
| | 5,017 |
| | 8,499 |
| | (323 | ) | | — |
| | 13,193 |
|
Depreciation and amortization | | 23,377 |
| | 2,732 |
| | 463 |
| | — |
| | 26,572 |
| | 21,429 |
| | 2,807 |
| | 503 |
| | — |
| | 24,739 |
|
Transaction, severance and related litigation costs | | 313 |
| | 221 |
| | — |
| | — |
| | 534 |
| | (262 | ) | | (1 | ) | | — |
| | — |
| | (263 | ) |
Asset impairments | | | 2,505 |
| | 2,836 |
| | 3 |
| | — |
| | 5,344 |
|
Total operating costs and expenses | | 196,054 |
| | 27,773 |
| | 16,305 |
| | (19,941 | ) | | 220,191 |
| | 189,927 |
| | 29,136 |
| | 13,184 |
| | (18,671 | ) | | 213,576 |
|
Operating income (loss) | | 22,782 |
| | 12,093 |
| | (162 | ) | | — |
| | 34,713 |
| | (933 | ) | | 7,988 |
| | 314 |
| | — |
| | 7,369 |
|
Equity in earnings (loss) in affiliates | | 8,645 |
| | — |
| | — |
| | (8,645 | ) | | — |
| |
Equity in earnings in affiliates | | | 5,444 |
| | — |
| | — |
| | (5,444 | ) | | — |
|
Interest expense | | 17,528 |
| | 844 |
| | 185 |
| | — |
| | 18,557 |
| | 18,205 |
| | 692 |
| | 172 |
| | — |
| | 19,069 |
|
Income (loss) before income taxes | | 13,899 |
| | 11,249 |
| | (347 | ) | | (8,645 | ) | | 16,156 |
| | (13,694 | ) | | 7,296 |
| | 142 |
| | (5,444 | ) | | (11,700 | ) |
Income tax expense | | 1,676 |
| | 2,186 |
| | 71 |
| | — |
| | 3,933 |
| |
Income tax expense (benefit) | | | (4,207 | ) | | 2,113 |
| | (119 | ) | | — |
| | (2,213 | ) |
Net income (loss) | | $ | 12,223 |
| | $ | 9,063 |
| | $ | (418 | ) | | $ | (8,645 | ) | | $ | 12,223 |
| | $ | (9,487 | ) | | $ | 5,183 |
| | $ | 261 |
| | $ | (5,444 | ) | | $ | (9,487 | ) |
| | | | | | | | | | | | | | | | | | | | |
Components of other comprehensive income (loss), net of tax: | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustments | | 154 |
| | — |
| | 154 |
| | (154 | ) | | 154 |
| | (172 | ) | | — |
| | (172 | ) | | 172 |
| | (172 | ) |
Comprehensive income (loss) | | $ | 12,377 |
| | $ | 9,063 |
| | $ | (264 | ) | | $ | (8,799 | ) | | $ | 12,377 |
| | $ | (9,659 | ) | | $ | 5,183 |
| | $ | 89 |
| | $ | (5,272 | ) | | $ | (9,659 | ) |
|
| | | | | | | | | | | | | | | | | | | | |
CEC Entertainment, Inc. |
Consolidating Statement of Comprehensive Income (Loss) |
For the Nine Months Ended September 29, 2019 |
(in thousands) |
| | | | | | | | | | |
| | Issuer | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
Revenues: | | | | | | | | | | |
Food and beverage sales | | $ | 256,765 |
| | $ | 41,416 |
| | $ | 3,930 |
| | $ | — |
| | $ | 302,111 |
|
Entertainment and merchandise sales | | 344,417 |
| | 34,566 |
| | 7,795 |
| | — |
| | 386,778 |
|
Total company venue sales | | 601,182 |
| | 75,982 |
| | 11,725 |
| | — |
| | 688,889 |
|
Franchise fees and royalties | | 1,784 |
| | 13,235 |
| | 2,175 |
| | — |
| | 17,194 |
|
International Association assessments and other fees | | 836 |
| | 30,710 |
| | 28,692 |
| | (60,238 | ) | | — |
|
Total revenues | | 603,802 |
| | 119,927 |
| | 42,592 |
| | (60,238 | ) | | 706,083 |
|
Operating Costs and Expenses: | | | | | | | | | | |
Company venue operating costs (excluding Depreciation and amortization):
| | | | | | | | | | |
Cost of food and beverage | | 57,048 |
| | 10,870 |
| | 1,321 |
| | — |
| | 69,239 |
|
Cost of entertainment and merchandise | | 29,315 |
| | 1,266 |
| | 730 |
| | — |
| | 31,311 |
|
Total cost of food, beverage, entertainment and merchandise | | 86,363 |
| | 12,136 |
| | 2,051 |
| | — |
| | 100,550 |
|
Labor expenses | | 181,397 |
| | 14,591 |
| | 3,705 |
| | — |
| | 199,693 |
|
Lease costs | | 74,749 |
| | 5,587 |
| | 1,766 |
| | — |
| | 82,102 |
|
Other venue operating expenses | | 119,942 |
| | 11,617 |
| | 2,549 |
| | (31,572 | ) | | 102,536 |
|
Total company venue operating costs | | 462,451 |
| | 43,931 |
| | 10,071 |
| | (31,572 | ) | | 484,881 |
|
Advertising expense | | 28,562 |
| | 4,165 |
| | 29,972 |
| | (28,666 | ) | | 34,033 |
|
General and administrative expenses | | 13,895 |
| | 29,297 |
| | (248 | ) | | — |
| | 42,944 |
|
Depreciation and amortization | | 64,461 |
| | 7,414 |
| | 1,199 |
| | — |
| | 73,074 |
|
Transaction, severance and related litigation costs | | 402 |
| | — |
| | — |
| | — |
| | 402 |
|
Asset Impairments | | 3,134 |
| | 6,353 |
| | — |
| | — |
| | 9,487 |
|
Total operating costs and expenses | | 572,905 |
| | 91,160 |
| | 40,994 |
| | (60,238 | ) | | 644,821 |
|
Operating income | | 30,897 |
| | 28,767 |
| | 1,598 |
| | — |
| | 61,262 |
|
Equity in earnings in affiliates | | 20,677 |
| | — |
| | — |
| | (20,677 | ) | | — |
|
Interest expense | | 59,093 |
| | 2,210 |
| | 513 |
| | — |
| | 61,816 |
|
Loss on debt extinguishment | | 2,910 |
| | — |
| | — |
| | — |
| | 2,910 |
|
Income before income taxes | | (10,429 | ) | | 26,557 |
| | 1,085 |
| | (20,677 | ) | | (3,464 | ) |
Income tax expense | | (7,607 | ) | | 6,880 |
| | 85 |
| | — |
| | (642 | ) |
Net income | | $ | (2,822 | ) | | $ | 19,677 |
| | $ | 1,000 |
| | $ | (20,677 | ) | | $ | (2,822 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
|
Components of other comprehensive income (loss), net of tax: | | | | | | | | | | |
Foreign currency translation adjustments | | (212 | ) | | — |
| | (212 | ) | | 212 |
| | (212 | ) |
Comprehensive income (loss) | | $ | (3,034 | ) | | $ | 19,677 |
| | $ | 788 |
| | $ | (20,465 | ) | | $ | (3,034 | ) |
|
| | | | | | | | | | | | | | | | | | | | |
CEC Entertainment, Inc. |
Consolidating Statement of Comprehensive Income (Loss) |
For the Nine Months Ended September 30, 2018 |
(in thousands) |
| | | | | | | | | | |
| | Issuer | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
Revenues: | | | | | | | | | | |
Food and beverage sales | | $ | 264,130 |
| | $ | 40,250 |
| | $ | 4,278 |
| | $ | — |
| | $ | 308,658 |
|
Entertainment and merchandise sales | | 324,231 |
| | 36,255 |
| | 8,147 |
| | — |
| | 368,633 |
|
Total company venue sales | | 588,361 |
| | 76,505 |
| | 12,425 |
| | — |
| | 677,291 |
|
Franchise fees and royalties | | 1,441 |
| | 12,661 |
| | 1,815 |
| | — |
| | 15,917 |
|
International Association assessments and other fees | | 794 |
| | 28,339 |
| | 27,951 |
| | (57,084 | ) | | — |
|
Total revenues | | 590,596 |
| | 117,505 |
| | 42,191 |
| | (57,084 | ) | | 693,208 |
|
Operating Costs and Expenses: | | | | | | | | | | |
Company venue operating costs (excluding Depreciation and amortization): | | | | | | | | | | |
Cost of food and beverage | | 60,432 |
| | 10,845 |
| | 1,497 |
| | — |
| | 72,774 |
|
Cost of entertainment and merchandise | | 25,972 |
| | 1,238 |
| | 466 |
| | — |
| | 27,676 |
|
Total cost of food, beverage, entertainment and merchandise | | 86,404 |
| | 12,083 |
| | 1,963 |
| | — |
| | 100,450 |
|
Labor expenses | | 176,106 |
| | 15,065 |
| | 3,823 |
| | — |
| | 194,994 |
|
Lease costs | | 65,417 |
| | 5,638 |
| | 1,560 |
| | — |
| | 72,615 |
|
Other venue operating expenses | | 129,006 |
| | 10,882 |
| | 2,634 |
| | (29,159 | ) | | 113,363 |
|
Total company venue operating costs | | 456,933 |
| | 43,668 |
| | 9,980 |
| | (29,159 | ) | | 481,422 |
|
Advertising expense | | 28,742 |
| | 4,511 |
| | 32,682 |
| | (27,925 | ) | | 38,010 |
|
General and administrative expenses | | 13,539 |
| | 25,336 |
| | 644 |
| | — |
| | 39,519 |
|
Depreciation and amortization | | 67,073 |
| | 8,253 |
| | 1,478 |
| | — |
| | 76,804 |
|
Transaction, severance and related litigation costs | | 197 |
| | 266 |
| | — |
| | — |
| | 463 |
|
Asset impairment | | 2,591 |
| | 4,341 |
| | 3 |
| | — |
| | 6,935 |
|
Total operating costs and expenses | | 569,075 |
| | 86,375 |
| | 44,787 |
| | (57,084 | ) | | 643,153 |
|
Operating income (loss) | | 21,521 |
| | 31,130 |
| | (2,596 | ) | | — |
| | 50,055 |
|
Equity in earnings in affiliates | | 19,869 |
| | — |
| | — |
| | (19,869 | ) | | — |
|
Interest expense | | 53,833 |
| | 2,446 |
| | 461 |
| | — |
| | 56,740 |
|
Income (loss) before income taxes | | (12,443 | ) | | 28,684 |
| | (3,057 | ) | | (19,869 | ) | | (6,685 | ) |
Income tax expense | | (6,212 | ) | | 6,526 |
| | (768 | ) | | — |
| | (454 | ) |
Net income (loss) | | $ | (6,231 | ) | | $ | 22,158 |
| | $ | (2,289 | ) | | $ | (19,869 | ) | | $ | (6,231 | ) |
| | | | | | | | | | |
Components of other comprehensive income (loss), net of tax: | | | | | | | | | | |
Foreign currency translation adjustments | | 127 |
| | — |
| | 127 |
| | (127 | ) | | 127 |
|
Comprehensive income (loss) | | $ | (6,104 | ) | | $ | 22,158 |
| | $ | (2,162 | ) | | $ | (19,996 | ) | | $ | (6,104 | ) |
| | CEC Entertainment, Inc. | Consolidating Statement of Cash Flows | For the Three Months Ended March 31, 2019 | |
For the Nine Months Ended September 29, 2019 | | For the Nine Months Ended September 29, 2019 |
(in thousands) | | | | | | | | | | | | | | | | | |
| | Issuer | | Guarantors | | Non-Guarantors | | Consolidated | | Issuer | | Guarantors | | Non-Guarantors | | Consolidated |
Cash flows provided by operating activities: | | $ | 64,577 |
| | $ | 4,743 |
| | $ | 1,158 |
| | $ | 70,478 |
| | $ | 104,719 |
| | $ | 9,292 |
| | $ | 1,633 |
| | $ | 115,644 |
|
| | | | | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | |
Purchases of property and equipment | | (12,602 | ) | | (5,699 | ) | | (71 | ) | | (18,372 | ) | | (52,180 | ) | | (7,701 | ) | | (507 | ) | | (60,388 | ) |
Development of internal use software | | 421 |
| | (703 | ) | | — |
| | (282 | ) | | (183 | ) | | (604 | ) | | — |
| | (787 | ) |
Proceeds from sale of property and equipment | | 21 |
| | — |
| | — |
| | 21 |
| | 160 |
| | — |
| | — |
| | 160 |
|
Cash flows used in investing activities | | (12,160 | ) | | (6,402 | ) | | (71 | ) | | (18,633 | ) | | (52,203 | ) | | (8,305 | ) | | (507 | ) | | (61,015 | ) |
| | | | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | |
Net proceeds from senior term loan, net of original issue discount | | | 479,449 |
| | — |
| | — |
| | 479,449 |
|
Repayments on senior term loan | | (1,900 | ) | | — |
| | — |
| | (1,900 | ) | | (473,749 | ) | | — |
| | — |
| | (473,749 | ) |
Payments on capital lease obligations | | (165 | ) | | — |
| | (3 | ) | | (168 | ) | |
Payment of debt financing costs | | | (15,375 | ) | | — |
| | — |
| | (15,375 | ) |
Payments on financing lease obligations | | | (520 | ) | | — |
| | (10 | ) | | (530 | ) |
Payments on sale leaseback transactions | | (803 | ) | | — |
| | — |
| | (803 | ) | | (2,469 | ) | | — |
| | — |
| | (2,469 | ) |
Cash flows used in financing activities | | (2,868 | ) | | — |
| | (3 | ) | | (2,871 | ) | | (12,664 | ) | | — |
| | (10 | ) | | (12,674 | ) |
Effect of foreign exchange rate changes on cash | | — |
| | — |
| | 1 |
| | 1 |
| | — |
| | — |
| | (5 | ) | | (5 | ) |
Change in cash, cash equivalents and restricted cash | | 49,549 |
| | (1,659 | ) | | 1,085 |
| | 48,975 |
| | 39,852 |
| | 987 |
| | 1,111 |
| | 41,950 |
|
Cash, cash equivalents and restricted cash at beginning of period | | 54,775 |
| | 6,725 |
| | 1,821 |
| | 63,321 |
| | 54,775 |
| | 6,725 |
| | 1,821 |
| | 63,321 |
|
Cash, cash equivalents and restricted cash at end of period | | $ | 104,324 |
| | $ | 5,066 |
| | $ | 2,906 |
| | $ | 112,296 |
| | $ | 94,627 |
| | $ | 7,712 |
| | $ | 2,932 |
| | $ | 105,271 |
|
| | CEC Entertainment, Inc. | Consolidating Statement of Cash Flows | For the Three Months Ended April 1, 2018 | |
For the Nine Months Ended September 30, 2018 | | For the Nine Months Ended September 30, 2018 |
(in thousands) | | | | | | | | | | | | | | | | | |
| | Issuer | | Guarantors | | Non-Guarantors | | Consolidated | | Issuer | | Guarantors | | Non-Guarantors | | Consolidated |
Cash flows provided by (used in) operating activities: | | $ | 38,848 |
| | $ | 18,807 |
| | $ | (5,091 | ) | | $ | 52,564 |
| | $ | 68,801 |
| | $ | 17,888 |
| | $ | (4,214 | ) | | $ | 82,475 |
|
| | | |
| |
| |
| | | |
| |
| |
|
Cash flows from investing activities: | |
| |
| |
| |
| |
| |
| |
| |
|
Purchases of property and equipment | | (9,502 | ) | | (7,868 | ) | | (690 | ) | | (18,060 | ) | | (38,536 | ) | | (15,512 | ) | | (1,154 | ) | | (55,202 | ) |
Development of internal use software | | (622 | ) | | 107 |
| | — |
| | (515 | ) | | (1,484 | ) | | (508 | ) | | — |
| | (1,992 | ) |
Proceeds from the sale of property and equipment | | 316 |
| | (158 | ) | | — |
| | 158 |
| | 464 |
| |
|
| | — |
| | 464 |
|
Cash flows used in investing activities | | (9,808 | ) | — |
| (7,919 | ) | — |
| (690 | ) | — |
| (18,417 | ) | | (39,556 | ) | — |
| (16,020 | ) | — |
| (1,154 | ) | — |
| (56,730 | ) |
| | | | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | |
Repayments on senior term loan | | (1,900 | ) | | — |
| | — |
| | (1,900 | ) | | (5,700 | ) | | — |
| | — |
| | (5,700 | ) |
Payment of debt financing costs | | | (395 | ) | | — |
| | — |
| | (395 | ) |
Payments on capital lease obligations | | (143 | ) | | — |
| | (2 | ) | | (145 | ) | | (436 | ) | | — |
| | (6 | ) | | (442 | ) |
Payments on sale leaseback transactions | | (688 | ) | | — |
| | — |
| | (688 | ) | | (2,119 | ) | | — |
| | — |
| | (2,119 | ) |
Cash flows used in financing activities | | (2,731 | ) | — |
| — |
| — |
| (2 | ) | — |
| (2,733 | ) | | (8,650 | ) | — |
| — |
| — |
| (6 | ) | — |
| (8,656 | ) |
Effect of foreign exchange rate changes on cash | | — |
| | — |
| | 46 |
| | 46 |
| | — |
| | — |
| | 51 |
| | 51 |
|
Change in cash, cash equivalents and restricted cash | | 26,309 |
| — |
| 10,888 |
| — |
| (5,737 | ) | — |
| 31,460 |
| | 20,595 |
| — |
| 1,868 |
| — |
| (5,323 | ) | — |
| 17,140 |
|
Cash, cash equivalents and restricted cash at beginning of period | | 59,948 |
| | 410 |
| | 6,954 |
| | 67,312 |
| | 59,948 |
| | 410 |
| | 6,954 |
| | 67,312 |
|
Cash, cash equivalents and restricted cash at end of period | | $ | 86,257 |
| | $ | 11,298 |
| | $ | 1,217 |
| | $ | 98,772 |
| | $ | 80,543 |
| | $ | 2,278 |
| | $ | 1,631 |
| | $ | 84,452 |
|
13.Note 14. Related Party Transactions:
We reimburse Apollo Management, L.P. for certain out-of-pocket expenses incurred in connection with travel and Board of Directors related expenses. In addition, CEC Entertainment engages Apollo portfolio companies to provide various services, including security services to its venues, licensed music video content for use in its venues, and employment screening services to its recruiting functions. Included in our Total operating costs and expenses are related expenses totaling $1.1 million and $0.4 million for both the three months ended March 31,September 29, 2019 and April 1,September 30, 2018, respectively, and $1.8 million and $1.2 million, respectively, for the nine months ended September 29, 2019 and September 30, 2018.
In connection with the 2019 Secured Credit Facilities, an affiliate of Apollo received an arrangement fee of $1.1 million related to the 2019 Term Loan Facility (see Note 7 “Indebtedness and Interest Expense” for further discussion of the 2019 Secured Credit Facilities).
Included in our Accounts Receivable balance are amounts due from Parent totaling $3.0 million and $2.6 million at both March 31,September 29, 2019 and December 30, 2018, respectively, primarily related to various general and administrative and transaction related expenses paid on behalf of Parent. Our Accrued Expenses balance includes amounts payable to Parent totaling $0.3 million and $0.1 million at September 29, 2019 and December 30, 2018, respectively, primarily related to stock bonus awards granted to certain officers of the Company (see Note 11 “Stock-Based Compensation Arrangements” for further discussion of stock bonus awards granted to officers).
Note 14.15. Commitments and Contingencies:
Legal Proceedings
From time to time, we are involved in various inquiries, investigations, claims, lawsuits and other legal proceedings that are incidental to the conduct of our business. These matters typically involve claims from customers, employees or other third parties involved in operational issues common to the retail, restaurant and entertainment industries. Such matters typically represent actions with respect to contracts, intellectual property, taxation, employment, employee benefits, personal injuries and
other matters. A number of such claims may exist at any given time, and there are currently a number of claims and legal proceedings pending against us.
In the opinion of our management, after consultation with legal counsel, the amount of liability with respect to claims or proceedings currently pending against us is not expected to have a material effect on our consolidated financial condition, results of operations or cash flows. All necessary loss accruals based on the probability and estimate of loss have been recorded.
Litigation Related to the Merger: Following the January 16, 2014 announcement that CEC Entertainment had entered into an agreement (“Merger Agreement”), pursuant to which an entity controlled by Apollo Global Management, LLCInc. 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 filedappealed the District Court’s decision to dismiss the lawsuit in its entirety, but after conducting oral arguments, on September 27, 2019 the Kansas Court of Appeals affirmed the trial court’s dismissal of the case, and Plaintiff did not file a notice of appeal from this last decision before the expiration of the District Court’s decision. The parties have filed their briefs and are awaiting a setting for oral argument. While no assurance can be given asdeadline 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.do so.
Note 15.16. Subsequent Events:
The Company has evaluated subsequent events through May 14,November 11, 2019, and determined that there have been no events that have occurred that would require adjustments to our disclosures in the consolidated financial statements except for the transaction described below:
Business Combination: On April 7, 2019, Parent and Leo Holdings Corp. (“Leo”), a publicly traded special purpose acquisition company, together with Parent’s controlling stockholder, an entity owned by funds managed by affiliates of Apollo, entered into a Business Combination Agreement (the “Leo Merger Agreement”). Also concurrent with the closing of the transaction, Leo will domesticate as a Delaware corporation, following which Parent will merge with and into Leo with the result that the Company will become a wholly-owned subsidiary of Leo, which will be renamed Chuck E. Cheese Brands Inc. (the “Business Combination”). Concurrent with the consummation of the Business Combination, additional investors will purchase $100 million of common stock of Leo in a private placement. After giving effect to any redemptions by the public shareholders of Leo, the balance of the approximately $200 million in cash held in Leo Holdings’ trust account, together with the $100 million in private placement proceeds, will be used to pay transaction expenses and de-leverage the Company’s existing capital structure by repaying all, or substantially all, of the $255 million senior notes (see Note 6. “Indebtedness and Interest Expense -Senior Unsecured Debt”). It is expected that existing shareholders including funds managed by affiliates of Apollo, will hold an approximately 51% stake in the Company upon completion of the Business Combination.
In connection with the proposed Business Combination, including the domestication of Leo as a Delaware corporation, on April 29, 2019 Leo filed with the SEC a registration statement on Form S-4 containing a preliminary proxy statement and a preliminary prospectus of Leo. After the registration statement is declared effective, Leo will mail a definitive proxy statement/prospectus relating to the proposed Business Combination and other relevant materials for the proposed Business Combination to its shareholders as of a record date to be established for voting on the proposed Business Combination.statements.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
As used in this report, the terms “CEC Entertainment,” 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 (i) our Consolidated Financial Statements and related notes included in Part I, Item 1. “Financial Statements” of this report and (ii) Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 8. “Financial Statements and Supplementary Data” in our Annual Report on Form 10-K for the fiscal year ended December 30, 2018, filed with the Securities and Exchange Commission (“SEC”) on March 12, 2019. Our MD&A includes the following sub-sections:
Presentation of Operating Results;
Executive Summary;
Key Measure of Our Financial Performance 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;
Critical Accounting Policies and Estimates;
Recently Issued Accounting Guidance;
Non-GAAP Financial Measures; and
Cautionary Statement Regarding Forward-Looking Statements.
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, except for a 53 week year when the fourth quarter has 14 weeks. Our current fiscal year, which ends on December 29, 2019, and our fiscal year ended December 30, 2018, each consist of 52 weeks. References to the three-month and nine-month periods ended September 29, 2019 and September 30, 2018 are for the 13-week and 39-week periods ended September 29, 2019 and September 30, 2018, respectively.
Seasonality and Variation in Quarterly Results
Our operating results fluctuate seasonally due to the timing of school vacations, holidays and changing weather conditions. As a result, we typically generate higher sales volumes during the first quarter of each fiscal year. School operating schedules, holidays and weather conditions may affect 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 the full fiscal year.
Executive Summary
General
We develop, operate and franchise family dining and entertainment centers (also referred to as “venues”) under the names “Chuck E. Cheese’s”Cheese” (“Where A Kid Can Be A Kid”) and “Peter Piper Pizza” (“Pizza Made Fresh, Families Made Happy”). Our venues deliver a lively, kid-friendly atmosphere that 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 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 selection of more sophisticated options for adults. We operate 554553 venues and have an additional 194185 venues operating under franchise arrangements across 47 states and 1415 foreign countries and territories as of March 31,September 29, 2019.
The following table summarizes information regarding the number of Company-operated and franchised venues for the periods presented:
| | | | Three Months Ended | | Three Months Ended | | Nine Months Ended |
| | March 31, 2019 | | April 1, 2018 | | September 29, 2019 | | September 30, 2018 | | September 29, 2019 | | September 30, 2018 |
Number of Company-operated venues: | | | | | | | | | | | | |
Beginning of period | | 554 |
| | 562 |
| | 554 |
| | 559 |
| | 554 |
| | 562 |
|
New | | — |
| | — |
| | 1 |
| | 1 |
| | 1 |
| | 1 |
|
Acquired from franchisee (1) | | 1 |
| | — |
| | — |
| | — |
| | 1 |
| | — |
|
Closed | | (1 | ) | | (1 | ) | | (2 | ) | | (3 | ) | | (3 | ) | | (6 | ) |
End of period | | 554 |
| | 561 |
| | 553 |
| | 557 |
| | 553 |
| | 557 |
|
Number of franchised venues: | | | | | | | | | | | | |
Beginning of period | | 196 |
| | 192 |
| | 195 |
| | 196 |
| | 196 |
| | 192 |
|
New | | — |
| | 4 |
| | 4 |
| | 1 |
| | 7 |
| | 7 |
|
Acquired from franchisee (1) | | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) | | — |
|
Closed | | (1 | ) | | (1 | ) | | (14 | ) | | — |
| | (17 | ) | | (2 | ) |
End of period | | 194 |
| | 195 |
| | 185 |
| | 197 |
| | 185 |
| | 197 |
|
Total number of venues: | | | | | | | | | | | | |
Beginning of period | | 750 |
| | 754 |
| | 749 |
| | 755 |
| | 750 |
| | 754 |
|
New | | — |
| | 4 |
| | 5 |
| | 2 |
| | 8 |
| | 8 |
|
Acquired from franchisee | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Closed | | (2 | ) | | (2 | ) | | (16 | ) | | (3 | ) | | (20 | ) | | (8 | ) |
End of period | | 748 |
| | 756 |
| | 738 |
| | 754 |
| | 738 |
| | 754 |
|
__________________
| |
(1) | The number of new Company-operated venues and closed franchised venues during the threenine months ended March 31,September 29, 2019 included one store that was acquired from a franchisee. |
Key Measure 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 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-ownedCompany-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. Company-operated venues that were temporarily closed for more than three months are included in comparable venue sales once they have been reopened for at least 12 months as of the beginning of each respective fiscal year. We define “comparable venue sales change” as the percentage change in comparable venue sales for each respective fiscal period. 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.
Adjusted EBITDA and Margin. We define Adjusted 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 certain other adjustments required or permitted in calculating covenant compliance under the indenture governing our senior notesSenior Notes and/or our secured credit facilities.2019 and 2014 Secured Credit Facilities (as defined under “Financial Condition, Liquidity and Capital Resources - Debt Financing”). 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, unlimited game-play time blocks, game-play credits, and merchandise. A portion of our company venue sales 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 circumstanc
es,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 fees from the sale of equipment and other items or services to franchisees. 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. 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.
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 tickets issued, stored-value PlayPass and All You Can Play (“AYCP”) cards, prizes provided and merchandise sold to our customers.
Labor expenses consist of salaries and wages, bonuses, related payroll taxes and benefits for venue personnel;
Lease costs includesinclude lease costs for Company-operated venues includingand, effective the first day of Fiscal 2019, in connection with the adoption of a new lease accounting standards, lease costs include common area maintenance (“CAM”) charges; and
Other venue operating expenses primarily include utilities, repair and maintenance costs, liability and property insurance, property taxes, credit card processing fees, licenses, preopening expenses, venue asset disposal gains and losses, CAM charges (through the end of Fiscal 2018 as discussed under Lease costs above) and all other costs directly related to the operation of a venue.
“Cost of food and beverage” and “Cost of entertainment and merchandise,” as a percentage of CompanyTotal company venue sales, are influenced both by the cost of products and by 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.
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 (i) directly related to our Company-operated venues’ property and equipment, including leasehold improvements, game and ride equipment, furniture, fixtures and other equipment, and (ii) depreciation and amortization of corporate assets and intangibles.
Results of Operations
The following table summarizes our principal sources of company venue sales expressed in dollars and as a percentage of total company venue sales for the periods presented:
| | | | Three Months Ended | | Three Months Ended |
| | March 31, 2019 | | April 1, 2018 | | September 29, 2019 | | September 30, 2018 |
| | (in thousands, except percentages) | | (in thousands, except percentages) |
Food and beverage sales | | $ | 117,815 |
| | 44.0 | % | | $ | 118,377 |
| | 47.4 | % | | $ | 92,645 |
| | 43.6 | % | | $ | 94,023 |
| | 43.6 | % |
Entertainment and merchandise sales | | 149,677 |
| | 56.0 | % | | 131,117 |
| | 52.6 | % | | 119,688 |
| | 56.4 | % | | 121,611 |
| | 56.4 | % |
Total company venue sales | | $ | 267,492 |
| | 100.0 | % | | $ | 249,494 |
| | 100.0 | % | | $ | 212,333 |
| | 100.0 | % | | $ | 215,634 |
| | 100.0 | % |
|
| | | | | | | | | | | | | | |
| | Nine Months Ended |
| | September 29, 2019 | | September 30, 2018 |
| | (in thousands, except percentages) |
Food and beverage sales | | $ | 302,111 |
| | 43.9 | % | | $ | 308,658 |
| | 45.6 | % |
Entertainment and merchandise sales | | 386,778 |
| | 56.1 | % | | 368,633 |
| | 54.4 | % |
Total company venue sales | | $ | 688,889 |
| | 100.0 | % | | $ | 677,291 |
| | 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:
| | | | Three Months Ended | | Three Months Ended |
| | March 31, 2019 | | April 1, 2018 | | September 29, 2019 | | September 30, 2018 |
| | (in thousands, except percentages (4)) | | (in thousands, except percentages (4)) |
Total company venue sales | | $ | 267,492 |
| | 97.9 | % | | $ | 249,494 |
| | 97.9 | % | | $ | 212,333 |
| | 97.6 | % | | $ | 215,634 |
| | 97.6 | % |
Franchise fees and royalties | | 5,820 |
| | 2.1 | % | | 5,410 |
| | 2.1 | % | | 5,261 |
| | 2.4 | % | | 5,311 |
| | 2.4 | % |
Total revenues | | 273,312 |
| | 100.0 | % | | 254,904 |
| | 100.0 | % | | 217,594 |
| | 100.0 | % | | 220,945 |
| | 100.0 | % |
Operating Costs and Expenses: | | | | | | | | | | | | | | | | |
Cost of food and beverage (1) | | 26,652 |
| | 22.6 | % | | 27,360 |
| | 23.1 | % | | 21,302 |
| | 23.0 | % | | 22,520 |
| | 24.0 | % |
Cost of entertainment and merchandise (2) | | 11,746 |
| | 7.8 | % | | 9,382 |
| | 7.2 | % | | 10,113 |
| | 8.4 | % | | 9,874 |
| | 8.1 | % |
Total cost of food, beverage, entertainment and merchandise (3) | | 38,398 |
| | 14.4 | % | | 36,742 |
| | 14.7 | % | | 31,415 |
| | 14.8 | % | | 32,394 |
| | 15.0 | % |
Labor expenses (3) | | 72,505 |
| | 27.1 | % | | 67,349 |
| | 27.0 | % | | 63,213 |
| | 29.8 | % | | 65,028 |
| | 30.2 | % |
Lease costs (3) | | 27,027 |
| | 10.1 | % | | 24,049 |
| | 9.6 | % | | 27,559 |
| | 13.0 | % | | 23,851 |
| | 11.1 | % |
Other venue operating expenses (3) | | 35,297 |
| | 13.2 | % | | 38,062 |
| | 15.3 | % | | 34,586 |
| | 16.3 | % | | 38,232 |
| | 17.7 | % |
Total company venue operating costs (3) | | 134,829 |
| | 50.4 | % | | 129,460 |
| | 51.9 | % | |
Total company venue operating costs and expenses (3) | | | 156,773 |
| | 73.8 | % | | 159,505 |
| | 74.0 | % |
Other costs and expenses: | | | | | | | | | | | | | | | | |
Advertising expense | | 12,253 |
| | 4.5 | % | | 13,974 |
| | 5.5 | % | | 10,803 |
| | 5.0 | % | | 11,058 |
| | 5.0 | % |
General and administrative expenses | | 15,243 |
| | 5.6 | % | | 12,909 |
| | 5.1 | % | | 13,051 |
| | 6.0 | % | | 13,193 |
| | 6.0 | % |
Depreciation and amortization | | 24,334 |
| | 8.9 | % | | 26,572 |
| | 10.4 | % | | 24,622 |
| | 11.3 | % | | 24,739 |
| | 11.2 | % |
Transaction, severance and related litigation costs | | 23 |
| | — | % | | 534 |
| | 0.2 | % | | 371 |
| | 0.2 | % | | (263 | ) | | (0.1 | )% |
Asset impairments | | | 8,202 |
| | 3.8 | % | | 5,344 |
| | 2.4 | % |
Total operating costs and expenses | | 225,080 |
| | 82.4 | % | | 220,191 |
| | 86.4 | % | | 213,822 |
| | 98.3 | % | | 213,576 |
| | 96.7 | % |
Operating income | | 48,232 |
| | 17.6 | % | | 34,713 |
| | 13.6 | % | | 3,772 |
| | 1.7 | % | | 7,369 |
| | 3.3 | % |
Interest expense | | 19,808 |
| | 7.2 | % | | 18,557 |
| | 7.3 | % | | 22,029 |
| | 10.1 | % | | 19,069 |
| | 8.6 | % |
Income before income taxes | | $ | 28,424 |
| | 10.4 | % | | $ | 16,156 |
| | 6.3 | % | |
Loss on extinguishment of debt | | | 2,910 |
| | 1.3 | % | | — |
| | — | % |
Loss before income taxes | | | $ | (21,167 | ) | | (9.7 | )% | | $ | (11,700 | ) | | (5.3 | )% |
|
| | | | | | | | | | | | | | |
| | Nine Months Ended |
| | September 29, 2019 | | September 30, 2018 |
| | (in thousands, except percentages (4)) |
Total company venue sales | | $ | 688,889 |
| | 97.6 | % | | $ | 677,291 |
| | 97.7 | % |
Franchise fees and royalties | | 17,194 |
| | 2.4 | % | | 15,917 |
| | 2.3 | % |
Total revenues | | 706,083 |
| | 100.0 | % | | 693,208 |
| | 100.0 | % |
Operating Costs and Expenses: | | | | | | | | |
Cost of food and beverage (1) | | 69,239 |
| | 22.9 | % | | 72,774 |
| | 23.6 | % |
Cost of entertainment and merchandise (2) | | 31,311 |
| | 8.1 | % | | 27,676 |
| | 7.5 | % |
Total cost of food, beverage, entertainment and merchandise (3) | | 100,550 |
| | 14.6 | % | | 100,450 |
| | 14.8 | % |
Labor expenses (3) | | 199,693 |
| | 29.0 | % | | 194,994 |
| | 28.8 | % |
Lease costs (3) | | 82,102 |
| | 11.9 | % | | 72,615 |
| | 10.7 | % |
Other venue operating expenses (3) | | 102,536 |
| | 14.9 | % | | 113,363 |
| | 16.7 | % |
Total company venue operating costs and expenses (3) | | 484,881 |
| | 70.4 | % | | 481,422 |
| | 71.1 | % |
Other costs and expenses: | | | | | | | | |
Advertising expense | | 34,033 |
| | 4.8 | % | | 38,010 |
| | 5.5 | % |
General and administrative expenses | | 42,944 |
| | 6.1 | % | | 39,519 |
| | 5.7 | % |
Depreciation and amortization | | 73,074 |
| | 10.3 | % | | 76,804 |
| | 11.1 | % |
Transaction, severance and related litigation costs | | 402 |
| | 0.1 | % | | 463 |
| | 0.1 | % |
Asset impairments | | 9,487 |
| | 1.3 | % | | 6,935 |
| | 1.0 | % |
Total operating costs and expenses | | 644,821 |
| | 91.3 | % | | 643,153 |
| | 92.8 | % |
Operating income | | 61,262 |
| | 8.7 | % | | 50,055 |
| | 7.2 | % |
Interest expense | | 61,816 |
| | 8.8 | % | | 56,740 |
| | 8.2 | % |
Loss on extinguishment of debt | | $ | 2,910 |
| | 0.4 | % | | $ | — |
| | — | % |
Loss before income taxes | | $ | (3,464 | ) | | (0.5 | )% | | $ | (6,685 | ) | | (1.0 | )% |
__________________
| |
(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 Total 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. |
Three months ended March 31,September 29, 2019 Compared to the Three months ended April 1,September 30, 2018
Revenues
Company venue sales were $267.5$212.3 million and $249.5$215.6 million for the firstthird quarter of 2019 and the firstthird quarter of 2018, respectively. The increasedecrease in Companycompany venue sales iswas primarily attributable to a 7.7% increase0.9% decrease in comparable venue sales. In addition,sales, and net revenue deferrals were $1.9related to a net Play Pass revenue deferral of $0.7 million and $3.2 million for the first quarter of 2019 and the first quarter of 2018, respectively, declining as a result of the introduction of AYCP, our time-based play offering, in the third quarter of 2018. These favorable impacts were partially offset by a $1.52019 compared to $1.7 million decrease in revenue related to venue closures innet breakage for the third quarter of 2018.
Franchise fees and royalties increased from $5.4were $5.3 million to $5.8 million or 7.6% infor both the firstthird quarter of 2019 compared to the first quarter of 2018, primarily due to a net increase in franchise locations.and 2018.
Company Venue Operating Costs
The cost of food, beverage, entertainment and merchandise, as a percentage of totalTotal company venue sales, was 14.4%14.8% and 14.7%15.0% for the firstthird quarter of 2019 and 2018, , respectively, as sales shifted towards higher margin entertainment and merchandise sales from food and beverage sales.respectively.
The cost of food and beverage, as a percentage of food and beverage sales, was 22.6%23.0% and 23.1%24.0% for the firstthird quarter of 2019 and 2018, respectively. The decrease in the cost of food and beverage on a percentage basis in the firstthird quarter of 2019 was primarily driven by higher average selling prices and favorability in commodity prices and volume, partially offset by an increase in beverage costs.volume.
The cost of entertainment and merchandise, as a percentage of entertainment and merchandise sales, was 7.8%8.4% and 7.2%8.1% for the firstthird quarter of 2019 and 2018, respectively. The increase in the cost of entertainment and merchandise on a percentage of sales basis in the firstthird quarter of 2019 reflects the impact of the All You Can PlayAYCP and More Tickets initiatives we launched nationally in all of our Chuck E. Cheese Company-operated venues during the third quarter of 2018.
Gross profit, which represents RevenuesTotal revenues less total cost of food, beverage, entertainment and merchandise, as a percentage of Total revenues was 86.0%85.6% and 85.6%85.3% for the firstthird quarter of 2019 and 2018, respectively. The increase in gross profit as a percentage of Total revenues was driven by the shift in Company venue sales towards entertainment and merchandise sales.
Labor expenses, as a percentage of sales, were 27.1%29.8% and 27.0%30.2% for the firstthird quarter of 2019 and 2018, respectively, as the favorable impact of a decrease in labor hours exceeded wage pressures exceeded productivity gains.pressures. Our sales per labor hour improved approximately 4.0% in the third quarter of 2019 from the third quarter of 2018.
Lease costs, as a percentage of sales, were 10.1%13.0% and 9.6%11.1%, for the firstthird quarter of 2019 and 2018, respectively. Lease costs for the firstthird quarter of 2019 were impacted by the adoption of a new lease standard effective December 31, 2018, the first day of Fiscal 2019, that requires us to recognize lease and non-lease components, such as CAM charges, as lease costs, rather than reflecting CAM charges as Other venue operating expenses. Excluding CAM charges, Lease costs, as a percentage of sales, would have been 8.8%11.4% for the firstthird quarter of 2019.2019, primarily reflecting a decrease in Company venue sales.
Other venue operating expenses, as a percentage of sales, were 13.2%16.3% and 15.3%17.7% for the firstthird quarter of 2019 and 2018, respectively. Other venue operating expenses for the firstthird quarter of 2019 were impacted by the adoption of a new lease standard, as discussed in the previous paragraph under Lease costs. Other venue operating expenses as a percentage of sales, including the impact of CAM charges, would have been 14.5%17.9% for the firstthird quarter of 2019, reflecting savings initiativesincreasing primarily as a result of an increase in insurance costs associated with general costs.liability claims.
Advertising Expense
Advertising expense was $12.3$10.8 million and $14.0$11.1 million for the firstthird quarter of 2019 and 2018, respectively, due to a planned shift in our marketing strategy.strategy away from television to targeted digital and social media platforms.
General and Administrative Expenses
General and administrative expenses were $15.2$13.1 million and $12.9$13.2 million for the third quarter of 2019 and 2018, respectively. The decrease in general and administrative expenses for the third quarter of 2019 is primarily due to a decrease in miscellaneous professional services fees.
Transaction, severance and related litigation costs
Transaction, severance and related litigation costs were $0.4 million and $(0.3) million for the third quarter of 2019 and 2018, respectively. The Transaction, severance and related litigation costs for the third quarter of 2019 relate to third-party costs incurred in connection with the refinancing of our Secured Credit Facilities. See further discussion of the refinancing of our senior secured facilities in “Financial Condition, Liquidity and Capital Resources - Debt Financing” of this report. The Transaction, severance and related litigation costs for the third quarter of 2018 reflect an insurance settlement received relating to legal fees incurred in prior years.
Asset Impairments
In the third quarter of 2019 we recognized an asset impairment charge of $8.2 million primarily related to ten venues, of which none were previously impaired. In the third quarter of 2018, we recognized an asset impairment charge of $5.3 million related to eight venues, of which one was previously impaired. We continue to operate all of the venues that were impaired in the third quarter of 2019 and all but two of the venues that were impaired in the third quarter of 2018. The impairment charge was based on the determination that the financial performance of these venues was adversely impacted by various competitive and economic factors in the markets in which the venues are located.
Interest Expense
Interest expense was $22.0 millionand $19.1 million for the third quarter of 2019 and 2018, respectively. The increase in interest expense is related to an increase in the weighted average effective rate incurred on our borrowings under our 2019 and 2014 Secured Credit Facilities driven by the increase in LIBOR rates and a higher interest margin on our recently refinanced secured credit facilities. The weighted average effective interest rate incurred on our borrowings under our secured credit facilities was 7.3% and 5.9% for the third quarter of 2019 and 2018, respectively, which includes amortization of deferred financing costs related to our secured credit facilities, amortization of our 2019 and 2014 Term Loan Facility original issue discount and commitment and other fees related to our secured credit facilities. See further discussion of the refinancing of our senior secured facilities in “Financial Condition, Liquidity and Capital Resources - Debt Financing” of this report.
Loss on Extinguishment of Debt
In the third quarter of 2019 we recognized a Loss on Extinguishment of Debt of $2.9 million in connection with the refinancing of our 2014 Secured Credit Facilities. See further discussion of the refinancing of our senior secured facilities in “Financial Condition, Liquidity and Capital Resources - Debt Financing” of this report.
Income Taxes
Our effective income tax rate was 27.6% and 18.9% for the third quarter of 2019 and 2018, respectively. Our effective income tax rate for the third quarter of 2019 differs from the statutory rate primarily due to state income taxes and the unfavorable impact of nondeductible litigation costs related to the Merger (as defined in Note 13. “Consolidating Guarantor Financial Information”), foreign income taxes (withheld on royalties and franchise fees earned from international franchisees not offset by foreign tax credits due to the foreign tax credit limitation), and certain nondeductible penalties and other expenses, partially offset by the favorable impact of employment-related federal income tax credits.
Our effective income tax rate for the third quarter of 2018, differs from the statutory tax rate primarily due to state income taxes, nondeductible litigation costs related to the Merger, foreign income taxes (withheld on royalties and franchise fees earned from international franchisees not offset by foreign tax credits due to the foreign tax credit limitation), non-deductible penalties and other expenses, and an increase in the reserve for uncertain tax positions, partially offset by the favorable impact of employment-related federal income tax credits.
Nine months ended September 29, 2019 Compared to Nine months ended September 30, 2018
Revenues
Company venue sales were $688.9 million and $677.3 million for the first nine months of 2019 and 2018, respectively. The increase in company venue sales for the first nine months of 2019 was primarily attributable to a 2.7% increase in comparable venue sales, partially offset by a $2.0 million decrease in company venue sales due to temporary store closures and a net reduction of four Company-operated venues. In addition, net revenue deferrals related to PlayPass were $1.2 million for the first nine months of 2019 compared to $3.7 million in net revenue breakage for the first nine months of 2018, which further offset the increase in comparable venue sales.
Franchise fees and royalties increased from $15.9 million to $17.2 million primarily due to a net increase in average franchise locations during the first nine months of 2019.
Company Venue Operating Costs
The cost of food, beverage, entertainment and merchandise, as a percentage of Total company venue sales, was 14.6% and 14.8% for the first nine months of 2019 and 2018, respectively, as a sales shift towards higher margin Entertainment and merchandise sales from food and beverage sales was offset by cost pressures, primarily related to the impact of new initiatives launched by the Company in the third quarter of 2018.
The cost of food and beverage, as a percentage of food and beverage sales, was 22.9% and 23.6% for the first nine months of 2019 and 2018, respectively. The decrease in the cost of food and beverage on a percentage basis in the first nine months of 2019 was driven by an increase in average selling prices and favorability in commodity prices and volume.
The cost of entertainment and merchandise, as a percentage of entertainment and merchandise sales, was 8.1% and 7.5% for the first nine months of 2019 and 2018, respectively. The cost of entertainment and merchandise on a percentage basis for the first nine months of 2019 compared to the first nine months of 2018 was impacted by a combination of the impact of AYCP and More Tickets, which were launched nationally during the third quarter of 2018.
Gross profit, which represents Total revenues less total cost of food, beverage, entertainment and merchandise, as a percentage of Total revenues, was 85.8% and 85.5% for the first nine months of 2019 and 2018, respectively.
Labor expenses, as a percentage of sales, were 29.0% and 28.8% for the first nine months of 2019 and 2018, respectively, as wage pressures exceeded the favorable impact of a decrease in labor hours on higher sales. Our sales per labor hour improved approximately 5.2% in the first nine months of 2019 from the first nine months of 2018.
Lease costs, as a percentage of sales, were 11.9% and 10.7%, for the first nine months of 2019 and 2018, respectively. Lease costs for the first nine months of 2019 were impacted by the adoption of a new lease standard effective December 31, 2018, the first day of Fiscal 2019, that requires us to recognize lease and non-lease components, such as CAM charges, as lease costs, rather than reflecting CAM charges as Other venue operating expenses. Excluding CAM charges, Lease costs, as a percentage of sales, would have been 10.4% for the first nine months of 2019, reflecting an increase in Company venue sales.
Other venue operating costs, as a percentage of sales, were 14.9% and 16.7% for the first nine months of 2019 and 2018, respectively. Other venue operating expenses for the first nine months of 2019 were impacted by the adoption of a new lease standard, as discussed in the previous paragraph under Lease costs. Other venue operating expenses as a percentage of sales, including the impact of CAM charges, would have been 16.4% for the first nine months of 2019, reflecting savings initiatives and efficiencies in general operating costs. The favorable impact of these savings was partially offset by an increase in bank and credit card service fees, as the percentage of credit card sales increased in the first nine months of 2019 from the first nine months of 2018.
Advertising Expense
Advertising expense was $34.0 million and $38.0 million for the first nine months of 2019 and 2018, respectively, due to a planned shift in our marketing strategy away from television to targeted digital and social media platforms.
General and Administrative Expenses
General and administrative expenses were $42.9 million and $39.5 million for the first nine months of 2019 and 2018, respectively. The increase in general and administrative expenses forin the first quarternine months of 2019 is primarily due to an increase in performance-based compensation as a result of improved operating results.
Depreciation and Amortization
Depreciation and amortization was $24.3$73.1 million and $26.6$76.8 million for the first quarternine months of 2019 and 2018, respectively. The decrease in depreciation and amortization is primarily due to the impact of eightsix venue closures and non-cash venue impairments recorded in 2018.
Transaction, Severance and Related Litigation Costs
Transaction, severance and related litigation costs were $0.4 million and $0.5 million for the first nine months of 2019 and 2018, as well as certain property plantrespectively. The Transaction, severance and equipment having reachedrelated litigation costs for the endfirst nine months of their depreciable lives.2019 relate to legal fees incurred in connection with Merger related litigation costs. The Transaction, severance and related litigation costs for the first nine months of 2018 relate to $0.2 million in legal fees incurred in connection with Merger related litigation, and severance payments of $0.3 million.
Asset Impairments
In the first nine months of 2019 we recognized an asset impairment charge of $9.5 million primarily related to 12 venues, of which none were previously impaired. In the first nine months of 2018, we recognized an asset impairment charge of $6.9 million related to 9 venues, of which one was previously impaired. We continue to operate all of the venues that were impaired in the first nine months of 2019 and all but three of the venues that were impaired in the first nine months of 2018. The impairment charge was based on the determination that the financial performance of these venues was adversely impacted by various competitive and economic factors in the markets in which the venues are located.
Interest Expense
Interest expense was $61.8 millionand $56.7 million for the first nine months of 2019 and 2018, respectively. The increase in interest expense is related to an increase in the weighted average effective rate incurred on our borrowings under both our 2019 and 2014 Secured Credit Facilities, driven by the increase in LIBOR rates and a higher interest margin on our recently refinanced secured credit facilities. The weighted average effective interest rate incurred on our borrowings under our secured credit facilities was 6.6% and 5.7% for the first nine months of 2019 and 2018, respectively, which includes amortization of deferred financing costs related to both our 2019 and 2014 Secured Credit Facilities, amortization of our 2019 and 2014 Term Loan Facility original issue discount and commitment and other fees related to our secured credit facilities. See further discussion of the refinancing of our senior secured facilities in “Financial Condition, Liquidity and Capital Resources - Debt Financing” of this report.
Loss on Extinguishment of Debt
In the first nine months of 2019 we recognized a Loss on Extinguishment of Debt of $2.9 million in connection with the refinancing of our 2014 Secured Credit Facilities. See further discussion of the refinancing of our senior secured facilities in “Financial Condition, Liquidity and Capital Resources - Debt Financing” of this report.
Income Taxes
Our effective income tax rate was 25.3%18.5% and 24.3%6.8% for the first quarternine months of 2019 and 2018, respectively. Our effective income tax rate for the first nine months of 2019 differs from the statutory rate primarily due to state taxes net of the favorable impact of certain state tax legislation enacted during the second quarter of 2019 and 2018 were both favorably impacted by employment-related federalthat decreased the amount of income tax credits, offset bysubject to state income taxes, the negative impact oftaxation, nondeductible litigation costs related to the Merger nondeductible penalties, and(as defined in Note 13. “Consolidating Guarantor Financial Information”), foreign income taxes (taxes withheld(withheld on royalties and franchise fees earned from international franchisees not offset by foreign tax credits due to the foreign tax credit limitation)., and certain nondeductible penalties and other expenses, partially offset by the favorable impact of employment-related federal income tax credits.
Our effective income tax rate for the first nine months of 2018 differs from the statutory tax rate primarily due to state income taxes including the impact of certain state tax legislation enacted during the second quarter of 2018 that increased the amount of income subject to state taxation, nondeductible litigation costs related to the Merger, foreign income taxes (withheld on royalties and franchise fees earned from international franchisees not offset by foreign tax credits due to the foreign tax credit limitation), certain non-deductible penalties and other expenses, 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 the favorable impact of employment-related federal income tax credits, adjustments to the provisional estimate provided at the end of Fiscal 2017 to account for the impact of the TCJA enacted on December 22, 2017 pursuant to SAB 118, 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 loaned to our Canadian subsidiary.
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 become due;
frequent inventory turnover results in a limited investment required in inventories; and
our accounts payable cash management strategies.
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. As part of our capital allocation strategy, we may elect from time to time to retire certain of our debt obligations through voluntary prepayments or open market purchases.
Sources and Uses of Cash
The following tables present summarized consolidated financial information that we believe is helpful in evaluating our liquidity and capital resources as of and for the periods presented:
| | | | Three Months Ended | | Nine Months Ended |
| | March 31, 2019 | | April 1, 2018 | | September 29, 2019 | | September 30, 2018 |
| | (in thousands) | | (in thousands) |
Net cash provided by operating activities | | $ | 70,478 |
| | $ | 52,564 |
| | $ | 115,644 |
| | $ | 82,475 |
|
Net cash used in investing activities | | (18,633 | ) | | (18,417 | ) | | (61,015 | ) | | (56,730 | ) |
Net cash used in financing activities | | (2,871 | ) | | (2,733 | ) | | (12,674 | ) | | (8,656 | ) |
Effect of foreign exchange rate changes on cash | | 1 |
| | 46 |
| | (5 | ) | | 51 |
|
Change in cash, cash equivalents and restricted cash | | $ | 48,975 |
| | $ | 31,460 |
| | $ | 41,950 |
| | $ | 17,140 |
|
Interest paid | | $ | 23,799 |
| | $ | 22,546 |
| | $ | 57,232 |
| | $ | 59,229 |
|
Income taxes paid (refunded), net | | $ | (4,493 | ) | | $ | 180 |
| | $ | (7,944 | ) | | $ | 867 |
|
| | | | March 31, 2019 | | December 30, 2018 | | September 29, 2019 | | December 30, 2018 |
| | ($ in thousands) | | ($ in thousands) |
Cash and cash equivalents | | $ | 112,030 |
| | $ | 63,170 |
| | $ | 105,059 |
| | $ | 63,170 |
|
Restricted cash | | 266 |
| | 151 |
| | 212 |
| | 151 |
|
Available unused commitments under Revolving Credit Facility | | | 105,538 |
| | 141,000 |
|
Total cash, cash equivalents, restricted cash and available unused commitments under Revolving Credit Facility | | | $ | 210,809 |
| | $ | 204,321 |
|
Term loan facility | | 722,000 |
| | 723,900 |
| | 760,000 |
| | 723,900 |
|
Senior notes | | 255,000 |
| | 255,000 |
| | 255,000 |
| | 255,000 |
|
Available unused commitments under revolving credit facility | | 86,538 |
| | 141,000 |
| |
Sources and Uses of Cash - ThreeNine months ended March 31,September 29, 2019 Compared to the ThreeNine months ended April 1,September 30, 2018
Net cash provided by operating activities was $70.5$115.6 million and $52.6$82.5 million in the threenine months ended March 31,September 29, 2019 and the three months ended April 1,September 30, 2018, respectively. The increase in net cash provided by operating activities is primarily due to an increase in net income, income tax refunds received, and favorable fluctuations in our working capital.
Net cash used in investing activities was $18.6$61.0 million and $18.4$56.7 million in the threenine months ended March 31,September 29, 2019 and the three months ended April 1,September 30, 2018, respectively. Net cash used in investing activities in the threenine months ended March 31,September 29, 2019 and April 1,September 30, 2018 relates primarily to capital expenditures.
Net cash used in financing activities was $2.9$12.7 million and $2.7$8.7 million in the threenine months ended March 31,September 29, 2019 and September 30, 2018, respectively. The net cash used in financing activities for the threenine months ended April 1,September 29, 2019 includes (i) $5.9 million in loan costs and third party legal and other professional fees paid, net of proceeds received, in connection with the refinancing of our secured credit facilities occurring in the third quarter of 2019, (ii) principal payments on our 2014 Secured Credit Facilities and (iii) other lease related obligations. See further discussion below under Debt Financing - Secured Credit Facilities. Net cash used in financing activities for the nine months ended September 30, 2018 relatingrelates primarily to principal payments on our term loan2014 Secured Credit Facilities and other lease related obligations.
Debt Financing
Secured Credit Facilities
On August 30, 2019 the Company entered into a new credit agreement and related security agreements with Credit Suisse AG, Cayman Islands Branch, as administrative and collateral agent. The new credit agreement provides senior secured financing consisting of:
Our | |
(i) | a $114 million secured revolving credit facility which includes a $50 million letter of credit sub-facility (collectively the “2019 Revolving Credit Facility”) with a maturity date of August 30, 2024 (the “revolver maturity date); and |
| |
(ii) | a $760 million secured credit facilities include (i) a $760.0 million term loan facility (the “2019 Term Loan Facility” and together with the 2019 |
Revolving Credit Facility, the “2019 Secured Credit Facilities”) with a maturity date of February 14, 2021August 30, 2026 (the “term loan facility”maturity date”) and (ii) a $95.0.
In the event more than $50 million senior secured revolving credit facility with aof the Company’s 8.0% Senior Notes maturing February 15, 2022 remain outstanding on the date that is 91 days prior to the stated maturity date of November 16, 2020 (as discussed in more detail below, $95.0 million of our original $150.0 million revolving credit facility maturing on February 14, 2019, was extended to November 16, 2020). The revolving credit facility includes a letter of credit sub-facility and a $30.0 million swingline loan sub-facility (the “revolving credit facility” and together withthe notes, the term loan facility,maturity date will spring to such earlier date, November 16, 2021.
The net proceeds from the “secured2019 Secured Credit Facilities, plus cash on hand, were used to pay the outstanding principal, accrued interest and fees related to our secured credit facilities”). On May 8, 2018 we entered intofacilities dated as of February 14, 2014, as amended by an incremental assumption agreement, dated as of May 8, 2018 (the “2014 Secured Credit Facilities”), and debt issuance costs related to the 2019 Secured Credit Facilities. All obligations under the 2014 Secured Credit Facilities have been terminated.
The 2019 secured term loan was issued net of $30.4 million of original issue discount. We also incurred a total of $15.4 million in debt issuance costs ($13.4 million related to the issuance of the 2019 Term Loan Facility and $2.0 million related to the 2019 Revolving Credit Facility). The debt issuance costs are reflected in our consolidated financial statements as follows:
Loss on Extinguishment of Debt: We recorded a loss on extinguishment of debt totaling $2.9 million which includes $0.5 million of fees paid to lenders in connection with certainthe 2019 Term Loan Facility and wrote off $2.4 million of unamortized deferred financing costs and original issue discount related to the 2014 Secured Credit Facilities;
Transaction related costs: We expensed third party fees totaling $0.3 million related to legal fees incurred in connection with the 2019 Term Loan Facility. The transaction related costs are included in “Transaction, severance and related litigation costs” in our Consolidated Statement of Earnings;
Interest Expense: We expensed third party fees totaling $0.4 million related to rating agency fees incurred in connection with the 2019 Secured Credit Facilities. These fees are included in “Interest Expense” in our Consolidated Statement of Earnings; and
Deferred Financing Costs: Debt issuance costs totaling $14.2 million related to the 2019 Secured Credit Facilities were capitalized and are included in “Bank indebtedness and other long-term debt, net of deferred financing costs” on our Consolidated Balance Sheets. We also continued to defer $2.1 million of unamortized deferred financing costs related to the 2014 Secured Credit Facilities.
The deferred financing costs related to the 2019 Term Loan Facility and original issue discount are amortized through the 2019 term loan maturity date, and the deferred financing costs related to the 2019 Revolving Credit Facility are being amortized through the 2019 revolver maturity date. The amortization of the deferred financing costs and original issue discount is included in “Interest expense” in our Consolidated Statements of Earnings.
The 2019 Secured Credit Facilities allow the Company to request one or more incremental term loan facilities and/or increase the commitments under our revolving credit facility lendersin an aggregate amount of up to extend the maturity on $95.0sum of (a) $50.0 million plus (b) such additional amount so long as, (i) in the case of the revolving credit facility through November 16, 2020. In connectionloans that rank equally and without preference with the extensionliens on the collateral securing the 2019 Secured Credit Facilities, our net first lien senior secured leverage ratio (the ratio of total consolidated debt secured by first-priority liens on the maturity date, we agreedcollateral net of unrestricted cash to the following covenants forlast twelve month’s EBITDA, as defined in the benefit2019 Senior Credit Facilities agreement) would be no greater than 2.75 to 1.00 and (ii) in the case of loans that rank junior to the revolving facility lenders: (a) with respectliens on the collateral securing the 2019 Secured Credit Facilities, our total net secured leverage ratio (as defined in the 2019 Senior Credit Facilities agreement) would be no greater than 5.00 to each fiscal year (commencing with the fiscal year ending December 30, 2018),1.00, subject to certain conditions, and receipt of commitments by existing or additional lenders.
The 2019 Secured Credit Facilities include certain mandatory prepayment requirements:
Excess Cash Flow- Subject to certain exceptions, to the extent we have excess cash flow determined on an annual basis (as defined in the secured credit facilities2019 Secured Credit Facilities agreement), we are required to make a mandatory prepayment of term loan principal to the extent that 75% times our excess cash flow (as defined in the secured credit facilities agreement and subject to step-downs based on our net first lien senior secured leverage ratio) exceeds $10 million with any such required mandatory payment reduced(reduced by any optional prepayments of principal that may have occurred during the fiscal year,year) to the extent that 75% (the “required percentage” which is subject to step downs discussed below) times the excess cash flow exceeds $10.0 million. The required percentage steps down from 75% to 50% provided our Net Total Leverage Ratio (the ratio of total consolidated debt including lease related obligations net of unrestricted cash to the last twelve month’s EBITDA, as defined in the 2019 Senior Credit Facilities agreement) is less than or equal to 4.50 to 1.00 and greater than 4.25 to 1.00, steps down to 25% provided our Net Total Leverage Ratio is less than or equal to 4.25 to 1.00 and greater than 4.00 to 1.00, and steps down to 0% provided our Net Total Leverage Ratio is less than or equal to 4.00 to 1.00.
Sales and Disposition of Assets (b)- Subject to certain exceptions, we shall not incur additional first lien senior securedare required to make a mandatory prepayment of term loan principal of 100% of the net cash proceeds of all non-ordinary course asset sales,
other dispositions of property or certain casualty events, in each case subject to certain exceptions and provided that the Company may (i) reinvest within 12 months or (ii) commit to reinvest those proceeds and does reinvest such proceeds within 18 months in assets to be used in its business, or certain other permitted investments; and
Issuance or incurrence of Debt- Subject to certain exceptions, we are required to make a mandatory prepayment of term loan principal of 100% of the net cash proceeds of any issuance or incurrence of debt, other than proceeds from debt permitted under the 2019 Secured Credit Facilities.
The Company may voluntarily repay outstanding loans under the 2019 Secured Credit Facilities at any time, without prepayment premium or penalty except in connection with certain acquisitions, mergersa repricing event as described below, subject to customary “breakage” costs with respect to LIBOR rate loans. Any refinancing through the issuance or consolidations unless our netrepricing amendment of any debt that results in a repricing event applicable to the 2019 Term Loan Facility resulting in a lower yield occurring at any time during the first lien senior secured leverage ratio is greater than 3.65 to 1.00 ontwelve months following August 30, 2019 will be accompanied by a pro forma basis. The remaining $55.0 million of the original revolving credit facility matured on February 14, 2019 with no borrowing thereunder outstanding thereunder.1.00% prepayment premium or fee, as applicable.
The secured credit facilities require2019 Term Loan Facility requires scheduled quarterly payments on the term loan facility equal to 0.25%$1.9 million (0.25% of the original principal amount of the term loan facilityamount) from July 2014December 2019 to December 2020,June 2026, with the remaining balance paiddue at maturity, February 14, 2021.August 30, 2026.
As of March 31,September 29, 2019, we had no borrowings outstanding and an $8.5 million letter of letterscredit issued but undrawn under the 2019 Revolving Credit Facility. As of December 30, 2018 we had a $9.0 million letter of credit issued but undrawn under the revolving credit facility leaving $86.5 million in borrowing capacity underrelated to the revolving credit facility as of March 31, 2019. As of December 30, 2018, we had no borrowings outstanding and $9.0 million of letters of credit issued but undrawn under the revolving credit facility.2014 Senior Secured Facilities.
Borrowings under the secured credit facilities2019 Secured Credit Facilities bear interest at a rate equal to, at ourthe option either of the Company, either:
(a) a London Interbank Offered Rate (“LIBOR”)LIBOR rate determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowings,borrowing, adjusted for certain additional costs, subject to a 1.00% floor in the case of term loansfloor; or (b)
(b) a base rate determined by reference to the highest of (i) the federal funds effective rate plus 0.5%;0.50%, (ii) the prime rate of Deutsche BankCredit Suisse AG, New York Branch;Cayman Islands Branch, and (iii) the one-month adjusted LIBOR plus 1.00%; in.
In each case plusthe interest rate is also subject to an applicable margin. The base applicable margin is 3.25% with respect to LIBOR borrowings and 2.25% with respect to base rate borrowings underdetermined as follows:
•2019 Term Loan Facility:
|
| | |
Margin for Base Rate Loans | | Margin for LIBOR Loans |
5.50% | | 6.50% |
•2019 Revolving Credit Facility:
|
| | | | |
Net Total Leverage Ratio | | Margin for Base Rate Loans | | Margin for LIBOR Loans |
Greater than 4.80 to 1.00 | | 5.50% | | 6.50% |
Less than or equal to 4.80 to 1.00 but greater than 4.30 to 1.00 | | 5.25% | | 6.25% |
Less than or equal to 4.30 to 1.00 | | 5.00% | | 6.00% |
During the term loan facility, and base rate borrowings and swingline borrowings underperiod from August 30, 2019 through September 29, 2019 the revolving credit facility. The applicable margin for LIBOR borrowings under the term loan facility is subject to one step down2019 Secured Credit Facilities was 6.50%. During the period from 3.25% to 3.00%, based on our net first lien senior secured leverage ratio. The applicable margin for LIBOR borrowings underDecember 31, 2018 through August 29, 2019 and 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 both the threenine months ended March 31, 2019 and April 1,September 30, 2018, the applicable margin for LIBOR borrowings under both the term loan facility and the revolving facility2014 Secured Credit Facilities was 3.25%.
During the three months ended March 31, 2019, the federal funds rate ranged from 2.40% to 2.43%, the prime rate was 5.50% and the one-month LIBOR ranged from 2.48% to 2.52%.
In addition to paying interest on outstanding principal under both the secured credit facilities, we are2019 and 2014 Secured Credit Facilities, the Company is required to pay a commitment fee to the lenders under the respective revolving credit facility withfacilities in respect to theof any unutilized commitments thereunder. The base applicable commitment fee rate under the revolving credit facility2019 Revolving Credit Facility is 0.5% per annum and is subject to one step-down from 0.5% to 0.375% based on our net first lien senior secured leverage ratio. determined as follows:
|
| | |
Net Total Leverage Ratio | | Commitment Fee |
Greater than 4.30 to 1.00 | | 0.50% |
Less than or equal to 4.30 to 1.00 | | 0.375% |
During both the threenine months ended March 31,September 29, 2019 and April 1,September 30, 2018 the commitment fee rate was 0.5%0.50%. We are
The Company is also required to pay customary agency fees as well as letter of credit participation fees computed at a rate per annum equal to the applicable margin for LIBOR rate borrowings on the dollar equivalent of the daily stated amount of outstanding letters of credit, plus such letter of credit issuer’s customary documentary and processing fees and charges, and a fronting fee computed at a rate equal to 0.125% per annum on the daily stated amount of sucheach letter of credit.
AllDuring the nine months ended September 29, 2019, the federal funds rate ranged from 1.83% to 2.45%, the prime rate ranged from 5.00% to 5.50% and the one-month LIBOR ranged from 2.02% to 2.52%.
The weighted average effective interest rate incurred on our borrowings under both our revolving credit facility2019 and 2014 Secured Credit Facilities was 6.6% and 5.7% for the nine months ended September 29, 2019 and September 30, 2018, respectively, which includes amortization of deferred financing costs related to our Secured Credit Facilities, amortization of our Term Loan Facility original issue discount and commitment and other fees related to our Secured Credit Facilities but excludes the Loss on extinguishment of debt.
Obligations under the both the 2019 and 2014 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 satisfactionsubsidiary guarantors and 65% of the capital stock of the first- tier foreign subsidiaries that are not subsidiary guarantors, in each case subject to exceptions. Such security interests consist of first priority liens with respect to the collateral.
The 2019 Secured Credit Facilities also contain customary conditions, includingaffirmative and negative covenants, and events of default, which limit our ability to, among other things: incur additional debt or issue certain preferred shares; create liens on certain assets; make certain loans or investments (including acquisitions); pay dividends on or make distributions with respect to our capital stock or make other restricted payments; consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; sell assets; enter into certain transactions with our affiliates; enter into sale-leaseback transactions; change our lines of business; restrict dividends from our subsidiaries or restrict liens; change our fiscal year; and modify the absenceterms of certain debt or organizational agreements. For a defaultperiod of 18 months months following August 30, 2019, we are prohibited from paying dividends to investment funds managed by Apollo or its affiliates.
Our 2019 Revolving Credit Facility includes a springing financial maintenance covenant that requires our net first lien senior secured leverage ratio not to exceed 5.25 to 1.00. The covenant will be tested quarterly if the 2019 Revolving Credit Facility is more than 30% drawn (excluding outstanding letters of credit) and will be a condition to drawings under the accuracy of representations and warranties.Revolving Credit Facility that would result in more than 30% drawn thereunder.
Senior Unsecured NotesDebt
Our senior unsecured notes consistdebt consists of $255.0 million aggregate principal amount borrowings of 8.0% Senior Notes due 2022 (the “senior notes”“Senior Notes”) and mature on February 15, 2022.. The senior notesSenior Notes bear interest at a rate of 8.0% per year payable February 15th and August 15th of each year.
year and mature on February 15, 2022. We may call some or all of the senior notesSenior Notes at 102% on or after February 15, 2019 and at 100% on or after February 15, 2020 as set forth in the indenture governing the senior notesSenior Notes (the “indenture”).
We paid $6.4 million in debt issuance costs related to the Senior Notes, which we capitalized in “Bank indebtedness and other long-term debt, net of deferred financing costs” on our Consolidated Balance Sheets. The deferred financing costs are being amortized over the life of the Senior Notes and are included in “Interest expense” in our Consolidated Statements of Earnings.
Our obligations under the Senior Notes are fully and unconditionally guaranteed, jointly and severally, by our present and future direct and indirect wholly-owned material domestic subsidiaries that guarantee our 2019 Secured Credit Facilities.
The indenture contains restrictive covenants that limit our ability to, among other things: (i) incur additional debt or issue certain preferred shares; (ii) create liens on certain assets; (iii) make certain loans or investments (including acquisitions); (iv) pay dividends on or make distributions in respect of our capital stock or make other restricted payments; (v) consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; (vi) sell assets; (vii) enter into certain transactions with our affiliates; and (viii) restrict dividends from our subsidiaries.
The weighted average effective interest rate incurred on borrowings under our Senior Notes was 8.2% for both the nine months ended September 29, 2019 and September 30, 2018, which includes amortization of deferred financing 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’sCheese and Peter Piper Pizza venues through various planned capital initiatives and the development or acquisition of additional Company-operatedCompany-
operated venues. During the nine months ended September 29, 2019, we completed 252 game enhancements and 20 major remodels 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 the first threenine months of 2019 totaled approximately $18.7$61.2 million.
The following table reconciles the approximate total capital spend by initiative to our Consolidated Statements of Cash Flows for the periods presented:
| | | | Three Months Ended | | Nine Months Ended |
| | March 31, 2019 |
| April 1, 2018 | | September 29, 2019 |
| September 30, 2018 |
| | (in thousands) | | (in thousands) |
Growth capital spend (1) | | $ | 4,904 |
| | $ | 5,307 |
| | $ | 23,390 |
| | $ | 21,157 |
|
Maintenance capital spend (2) | | 13,332 |
| | 12,138 |
| | 35,264 |
| | 33,048 |
|
IT capital spend | | 418 |
| | 1,139 |
| | 2,521 |
| | 2,989 |
|
Total Capital Spend | | $ | 18,654 |
| | $ | 18,584 |
| | $ | 61,175 |
| | $ | 57,194 |
|
__________________
| |
(1) | Growth capital spend includes major remodels, including the re-imaging effort to update Chuck E. Cheese venues to a new look and feel, venue expansions, 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 March 31,September 29, 2019, we had no off-balance sheet financing arrangements as described in Regulation S-K Item 303(a)(4)(ii).
For information regarding our contractual obligations, refer to “Off Balance Sheet Arrangements and Contractual Obligations” in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 30, 2018, filed with the SEC on March 12, 2019.
See further discussion of our indebtedness and future debt obligations in “Financial Condition, Liquidity and Capital Resources - Debt Financing” of this report. There have been no other material changes to our contractual obligations since December 30, 2018.
Critical Accounting Policies and Estimates
Information with respect to our critical accounting policies and estimates, which we believe could have the most significant effect on our reported consolidated results and require difficult, subjective or complex judgment by management are described under “Critical Accounting Policies and Estimates” in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 30, 2018, filed with the SEC on March 12, 2019. Except for the adoption of Accounting Standards Update ASU 2016-12, Leases (Topic 842) and subsequent amendment ASU 2018-11, Leases (Topic 842): Target Improvements, there has been no other material change to the information concerning our critical accounting policies and estimates since December 30, 2018 (see Note 1. “Description of Business and Summary of Significant Accounting Policies” to our Consolidated Financial Statements included in Part I, Item 1. “Financial Statements” of this report).
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 I, Item 1. “Financial Statements” of this report for a description of recently issued accounting guidance.
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, and stock based compensation. In addition, Adjusted EBITDA excludes other items we consider unusual or non-recurring and certain other adjustments required or permitted in calculating covenant compliance under our secured credit facilitiesSecured Credit Facilities and the indenture governing our senior notesSenior Notes (see discussion of our senior notesSenior Notes in Note 67. “Indebtedness and Interest Expense” to our Consolidated Financial Statements included in Part I, Item 1. “Financial Statements” and above under the heading “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 (i) the annualized full year effect of Company-operated and franchised venues that were opened and closed during the year.year, (ii) the projected annualized run-rate expected to be achieved from major remodels under development, and (iii) the full-year effect of costs savings resulting from contract negotiations with suppliers, and investments in productivity enhancements or other operational initiatives. 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 (loss) 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 incomeloss to Adjusted EBITDA and Adjusted EBITDA Margin for the periods presented:
| | | | Three Months Ended | | Three Months Ended | | Nine Months Ended |
| | March 31, 2019 | | April 1, 2018 | | September 29, 2019 | | September 30, 2018 | | September 29, 2019 | | September 30, 2018 |
| | (in thousands, except percentages) | | (in thousands, except percentages) |
Total revenues | | $ | 273,312 |
| | $ | 254,904 |
| | $ | 217,594 |
| | $ | 220,945 |
| | $ | 706,083 |
| | $ | 693,208 |
|
Net income as reported | | $ | 21,246 |
|
| $ | 12,223 |
| |
Net loss as reported | | | $ | (15,334 | ) |
| $ | (9,487 | ) |
| $ | (2,822 | ) |
| $ | (6,231 | ) |
Interest expense | | 19,808 |
|
| 18,557 |
| | 22,029 |
|
| 19,069 |
|
| 61,816 |
|
| 56,740 |
|
Income tax expense | | 7,178 |
|
| 3,933 |
| |
Income tax benefit | | | (5,833 | ) |
| (2,213 | ) |
| (642 | ) |
| (454 | ) |
Depreciation and amortization | | 24,334 |
|
| 26,572 |
| | 24,622 |
|
| 24,739 |
|
| 73,074 |
|
| 76,804 |
|
EBITDA | | 72,566 |
| | 61,285 |
| | 25,484 |
| | 32,108 |
| | 131,426 |
| | 126,859 |
|
Asset impairments | | | 8,202 |
|
| 5,344 |
|
| 9,487 |
|
| 6,935 |
|
Loss on asset disposals, net (1) | | 954 |
|
| 1,237 |
| | 920 |
|
| 513 |
|
| 2,903 |
|
| 2,551 |
|
Unrealized (gain) loss on foreign exchange (2) | | (342 | ) | | 356 |
| | 168 |
| | (412 | ) | | (469 | ) | | 283 |
|
Non-cash stock-based compensation (3) | | 1,162 |
|
| 64 |
| | (111 | ) |
| (58 | ) |
| 2,000 |
|
| 169 |
|
Rent expense book to cash (4) | | 732 |
|
| 2,174 |
| | 783 |
|
| 945 |
|
| 2,481 |
|
| 5,133 |
|
Franchise revenue, net cash received (5) | | 698 |
|
| 421 |
| | 464 |
|
| (30 | ) |
| 1,634 |
|
| 712 |
|
Venue pre-opening costs (6) | | 65 |
|
| 23 |
| |
One-time and unusual items (7) | | 300 |
|
| 762 |
| |
Impact of purchase accounting (6) | | | 31 |
|
| — |
|
| 31 |
|
| — |
|
Venue pre-opening costs (7) | | | 170 |
|
| 81 |
|
| 386 |
|
| 105 |
|
One-time and unusual items (8) | | | 2,781 |
|
| 44 |
|
| 3,566 |
|
| 1,511 |
|
Adjusted EBITDA | | $ | 76,135 |
| | $ | 66,322 |
| | $ | 38,892 |
| | $ | 38,535 |
| | $ | 153,445 |
| | $ | 144,258 |
|
Adjusted EBITDA Margin | | 27.9 | % | | 26.0 | % | | 17.9 | % | | 17.4 | % | | 21.7 | % | | 20.8 | % |
____________
| |
(1) | Relates primarily to gains or losses upon disposal of property or equipment. |
| |
(2) | Relates to unrealized gains or losses on the revaluation of our indebtedness with our Canadian subsidiary. |
| |
(3) | Represents non-cash equity-based compensation expense. |
| |
(4) | 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 landlordslandlord incentives and allowances in the period in which it was received. |
| |
(5) | 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. |
| |
(6) | Represents revenue related to unearned franchise fees that were removed in purchase accounting, and therefore were not recorded as revenue. |
| |
(7) | Relates to start-up and marketing costs incurred prior to the opening of new Company-ownedCompany-operated venues and generally consists of payroll, recruiting, training, supplies and rent incurred prior to venue opening. |
| |
(7)(8) | Represents non-recurring income and expenses primarily related to (i) legal fees, claims and settlements related to litigation in respect of the merger in 2014 of CEC Entertainment, Inc. with and into an entity controlled by Apollo Global Management, LLC and its subsidiaries (referred to as the “Merger”);Merger; (ii) severance expense and executive termination benefits; (iii) legal claims and settlements related to employee class action lawsuits and settlements; (iv) one-time loss on extinguishment of debt related to the refinancing of our 2014 Secured Credit Facilities; (v) professional and legal fees incurred in connection with our 2019 Secured Credit Facilities; (vi) sales and use tax refundstaxes relating to prior periods; (v)(vii) professional fees incurred in connection with one-time strategic corporate and tax initiatives, such as accounting and consulting fees related to incurred to enhancethe acquisition of Peter Piper Pizza (such as transfer pricing; (vi)pricing and cost segregation); (viii) legal fees incurred in connection with certain potential transactions the Company did not pursue; (vii)(ix) removing current period property losses and insurance recoveries relating to prior period business interruption losses at certain venues, primarily relating to disaster recoveries, such as natural disasters, fires, floods and property damage; (viii)(x) one-time costs related to the early termination of a supplier contract in connection with the transition to a new supplier; (ix)(xi) one-time marketing expenses related to the grand openings of our re-imaged Chuck E. Cheese venues; and (x)(xii) one-time training and travel-related costs incurred in connection with training venue employees in connection with the implementation of our PlayPass initiative and the re-imaging effort of the venues in our Chuck E. Cheese portfolio. |
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,” “intent,” “may,” “plan,” “predict,” “potential,” “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, objections of management and expected market growth are forward-looking statements. Forward-looking statements are made 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 1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 30, 2018, filed with the SEC on March 12, 2019. 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, including, but are 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 preferences;
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 discretionary spending;
increases in food, labor and other operating costs;
the impact of labor scheduling legislation;
our ability to successfully open international franchises and to operate under the United States 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 business;
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;
the seasonality of our business;
inadequate insurance coverage;
labor shortages and immigration reform;
loss of certain personnel;
our ability to protect our trademarks or other proprietary rights;
our ability to pay our fixed rental payments;
impairment charges for goodwill, indefinite-lived intangible assets or other long-lived assets;
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 failure to maintain adequate internal controls over our financial and management systems;
risks associated with our proposed business combination and the related business combination agreement, and following the consummation of the proposed business combination, the increased costs, and the risks, associated with being a reporting company with publicly traded equity; and
other risks, uncertainties and factors set forth in Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 30, 2018, filed with the SEC on March 12, 2019.
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.
ITEM 3. 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 from our secured credit facilities.2019 Secured Credit Facilities. All of our borrowings outstanding under the secured credit facilities, $722.02019 Secured Credit Facilities, $760 million as of March 31,September 29, 2019, accrue interest at variable rates. Assuming the revolving credit facility2019 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$7.6 million change in annual interest expense on indebtedness under the secured credit facilities.2019 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 the three months ended March 31,September 29, 2019 and April 1,September 30, 2018, the average cost of a block of cheese was $1.68$1.94 and $1.70,$1.77, respectively. The estimated increase in our food costs from a hypothetical 10% increase in the average cost of a block of cheese would have been $0.2 million and $0.3 million for both the three months ended March 31,September 29, 2019 and April 1, 2018.September 30, 2018, respectively. For the nine months ended September 29, 2019 and September 30, 2018, the average cost of a block of cheese was $1.78 and $1.72, respectively. The estimated increase in our food costs from a hypothetical 10% increase in the average cost of a block of cheese would have been $0.7 million and $0.8 million for the nine months ended September 29, 2019 and September 30, 2018, respectively.
For the three and nine months ended March 31,September 29, 2019 and April 1,September 30, 2018, the average cost of dough per pound was $0.47 and $0.48, respectively.$0.47. The estimated increase in our food costs from a hypothetical 10% increase in the average cost of dough per pound would have been $0.1 million for both the three months ended March 31,September 29, 2019 and April 1,September 30, 2018. The estimated increase in our food costs from a hypothetical 10% increase in the average cost of dough per pound would have been $0.3 million and $0.4 million for the nine months ended September 29, 2019 and September 30, 2018,. respectively.
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 1110 Company-operated venues in Canada. For the three and nine months ended March 31,September 29, 2019, our Canadian venues generated operating income of $0.6less than $0.1 million and $0.7 million, respectively, compared to our consolidated operating income of $48.2$3.8 million .and $61.3 million, respectively.
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 United States dollar for the three and nine months ended March 31,September 29, 2019 were $0.750. $0.767, $0.733 and $0.764,$0.767, respectively. A hypothetical 10% devaluation in the average quoted U.S. dollar-equivalent of the Canadian dollar exchange rate during the three and nine months ended March 31,September 29, 2019 would have decreased our reported consolidated operating results by $0.1 million for both the three and nine months ended March 31,September 29, 2019.
ITEM 4. 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 as of March 31,September 29, 2019 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.
Changes in Internal Control over Financial Reporting
During the quarterly period covered by this report there has been no change in our internal controlprocesses over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, other than as set forth below.reporting.
In the first quarter, we completed the implementation of a lease administrative and reporting system to increase the efficiency of our existing lease administration and financial reporting process. Internal controls and processes have been designed to address changes in the business applications and financial processes as a result of this implementation.
PART II – OTHER INFORMATION
ITEM 1. Legal Proceedings.
Refer to Note 1415 “Commitments and Contingencies” to our Consolidated Financial Statements included in Part I, Item 1. “Financial Statements” of this report for a discussion of our legal proceedings.
ITEM 1A. Risk Factors.
Other than as set forth below, weWe believe there have been no material changes in our risk factors from those disclosed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 30, 2018, filed with the SEC on March 12, 2019.
We are subject to risks arising from the proposed business combination
On April 7, 2019, Parent and Leo Holdings Corp. (“Leo”), a publicly traded special purpose acquisition company, together with Parent’s controlling stockholder, an entity owned by funds managed by affiliates of Apollo, entered into a Business Combination Agreement (the “Leo Merger Agreement”). Pursuant to the Leo Merger Agreement, following Leo’s domestication as a Delaware corporation, Parent will merge with and into Leo with the result that the Company will become a wholly-owned subsidiary of Leo, which will be renamed Chuck E. Cheese Brands Inc. (the “Business Combination”). Existing shareholders, including the funds managed by affiliates of Apollo, will hold an approximate 51% stake in Chuck E. Cheese Brands Inc. upon completion of the Business Combination.
Consummation of the Business Combination is subject to various conditions, including certain approvals by the shareholders of Leo and the consummation of a concurrent $100 million private placement by Leo of its common stock. There can be no assurance that the Business Combination will be consummated as contemplated or at all. The failure of the Business Combination to be consummated for any reason could negatively impact the reputation of the Company.
In addition, management and employees of the Company are devoting significant time and resources to the completion of the Business Combination.
Upon consummation of the Business Combination, the Company intends to repay all, or substantially all, of the $255 million senior notes.
Following consummation of the Business Combination, the Company will be a wholly-owned subsidiary of a publicly traded company. As a result, the Company, and its Parent, will be subject to increased costs and other risks associated with being a company with publicly traded equity.
Refer to Note 15. “Subsequent Events” to our Consolidated Financial Statements included in Part I, Item 1. “Financial Statements” of this report for a discussion of our legal proceedings.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
NONE.
ITEM 6. Exhibits.
EXHIBIT INDEX
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Exhibit Number | | Description |
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| | 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 |
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101.INS | | XBRL Instance Document |
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101.SCH | | XBRL Taxonomy Extension Schema Document |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
__________________
* Filed herewith.
** Furnished herewith.
SIGNATURES
Pursuant to the requirements 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.
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| | | | CEC ENTERTAINMENT, INC. |
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May 14,November 12, 2019 | | By: | | /s/ James A. Howell |
| | | | James A. Howell |
| | | | Executive Vice President and Chief Financial Officer |
| | | | (Principal Financial Officer) |
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May 14,November 12, 2019 | | By: | | /s/ David RappaportTony Howard |
| | | | David RappaportTony Howard |
| | | | Vice President, Controller and Chief Accounting Officer |
| | | | (Principal Accounting Officer) |
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EXHIBIT INDEX
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Exhibit
Number
| | Description |
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| |
| | |
| |
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.