NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of Business and Summary of Significant Accounting Policies:
Description of Business
The use of the terms “CEC Entertainment,” the “Company,” “we,” “us” and “our” throughout these unaudited notes to the interim Consolidated Financial Statements refer to CEC Entertainment, Inc. and its subsidiaries.
We currently operate and franchise Chuck E. Cheese’s and Peter Piper Pizza family dining and entertainment venues in
47
states and
14
foreign countries and territories. Our venues provide our guests with a variety of family entertainment and dining alternatives. All of our venues utilize a consistent restaurant-entertainment format that features both family dining and entertainment areas with a mix of food, entertainment and merchandise. The economic characteristics, products and services, preparation processes, distribution methods and types of customers are substantially similar for each of our venues. Therefore, we aggregate each venue’s operating performance into one reportable segment for financial reporting purposes.
Basis of Presentation
The Company has a controlling financial interest in International Association of CEC Entertainment, Inc. (the “Association”), a variable interest entity (“VIE”). The Association primarily administers the collection and disbursement of funds (the “Association Funds”) used for advertising, entertainment and media programs that benefit both us and our Chuck E. Cheese’s franchisees. We and our franchisees are required to contribute a percentage of gross sales to these funds and could be required to make additional contributions to fund any deficits that may be incurred by the Association. We include the Association in our Consolidated Financial Statements, as we concluded that we are the primary beneficiary of its variable interests because we (a) have the power to direct the majority of its significant operating activities; (b) provide it unsecured lines of credit; and (c) own the majority of the venues that benefit from the Association’s advertising, entertainment and media expenditures. We eliminate the intercompany portion of transactions with VIEs from our financial results. The assets, liabilities and operating results of the Association are not material to our Consolidated Financial Statements.
The Association Funds are required to be segregated and used for specified purposes. Cash balances held by the Association are restricted for use in our advertising, entertainment and media programs, and are recorded as “Restricted cash” on our Consolidated Balance Sheets. Contributions to the advertising, entertainment and media funds from our franchisees were
$1.3 million
and
$1.2 million
for the
six months ended
July 1, 2018
and
July 2, 2017
, respectively. Our contributions to the Association Funds are eliminated in consolidation. On January 1, 2018 we adopted Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers (ASC Topic 606)
. As a result of the adoption of ASU 2016-15,
Statement of Cash Flows (Topic 230) and ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash,
on January 1, 2018, certain reclassifications have been made in our Consolidated Statements of Cash Flows to conform with the current period presentation.
For further details regarding the impact of these new accounting standards on our Consolidated financial statements “Recently Issued Accounting Guidance - Accounting Guidance Adopted - below.
We reclassified
$1.8 million
and
$3.7 million
, respectively, of depreciation and amortization for the three and six months ended July 2, 2017 which was previously included in “General and administrative expenses” and we reclassified “Depreciation and amortization” of
$25.8 million
and
$52.2 million
, respectively, for the three months and six months ended July 2, 2017 from “Company venue operating costs” to a single classification as “Depreciation and amortization” now shown in “Other costs and expenses” in our Consolidated Statements of Earnings, to conform to the current period’s presentation.
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.
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Interim Financial Statements
The accompanying Consolidated Financial Statements as of and for the
three and six months ended
July 1, 2018
and
July 2, 2017
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 31, 2017
, filed with the SEC on
March 28, 2018
.
Recently Issued Accounting Guidance
Accounting Guidance Adopted:
Effective January 1, 2018, we adopted the following Accounting Standards Updates:
(i) ASU 2016-04,
Liabilities—Extinguishments of Liabilities (Subtopic 405-20).
This amendment provides a narrow scope exception to Liabilities—Extinguishment of Liabilities (Subtopic 405-20) that requires breakage for those liabilities to be accounted for in accordance with the breakage guidance in ASU 2014-09
Revenue From Contracts With Customers (Topic 606).
Under the new guidance, if an entity expects to be entitled to a breakage amount for a liability resulting from the sale of a prepaid stored-value product, the entity shall derecognize the amount related to the expected breakage in proportion to the pattern of rights expected to be exercised by the product holder only to the extent that it is probable that a significant reversal of the recognized breakage amount will not subsequently occur. If an entity does not expect to be entitled to a breakage amount for a prepaid stored-value product, the entity shall derecognize the amount related to the breakage when the likelihood of the product holder exercising its remaining rights becomes remote. The adoption of this amendment did not have a significant impact on our Consolidated Financial Statements.
(ii) ASU 2016-10
, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
(“ASU 2016-10”). This amendment updates the revenue guidance on identifying performance obligations and accounting for licenses of intellectual property, changing the FASB's previous proposals on right-of-use licenses and contractual restrictions. We elected the modified retrospective method to apply this standard. Under the modified retrospective method, results for reporting periods beginning on or after
January 1, 2018
are presented under the revenue guidance in this amendment, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting treatment. The cumulative impact of adopting this amendment was not material, and as such we did not record an adjustment to our opening accumulated deficit in our Consolidated Balance Sheet as of
January 1, 2018
. For further details, see Note 2. “Revenue.”
(iii) ASU 2016-15,
Statement of Cash Flows (Topic 230) and
ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
on a retrospective basis
.
Amounts generally described as restricted cash and restricted cash equivalents are now presented with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Accordingly, as a result of the adoption of these amendments, we reclassified
$0.1 million
of restricted cash into cash, cash equivalents and restricted cash as of
July 2, 2017
for a total balance of
$89.6 million
, which resulted in a reduction in net cash provided by operating activities of
$0.2 million
in the Consolidated Statement of Cash Flows for the
six months ended
July 2, 2017
. The adoption of these amendments did not impact net cash used in investing or financing activities for the six months ended
July 2, 2017
.
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The adoption of these amendments also requires us to reconcile our cash balance on our Consolidated Statements of Cash Flows to the cash balance on our Consolidated Balance Sheets, as well as make disclosures about the nature of restricted cash balances. A reconciliation of “Cash and cash equivalents” and “Restricted cash” as presented in our Consolidated Balance Sheets for the periods presented and “Cash, cash equivalents and restricted cash” as presented in our Consolidated Statements of Cash Flows for the
six months ended July 1, 2018
and
July 2, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2018
|
|
December 31, 2017
|
|
July 2, 2017
|
|
January 1, 2017
|
|
(in thousands)
|
Cash and cash equivalents
|
$
|
88,887
|
|
|
$
|
67,200
|
|
|
$
|
89,462
|
|
|
$
|
61,023
|
|
Restricted cash
|
207
|
|
|
112
|
|
|
115
|
|
|
268
|
|
Cash, cash equivalents and restricted cash
|
$
|
89,094
|
|
|
$
|
67,312
|
|
|
$
|
89,577
|
|
|
$
|
61,291
|
|
__________________
|
|
(1)
|
Restricted cash represents cash balances held by the Association that are restricted for use in our advertising, entertainment and media programs (see Note 1 “Description of Business and Summary of Significant Accounting Policies” for further discussion of the Association Funds).
|
(iv) ASU 2017-04,
Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
on a prospective basis.
This amendment eliminates Step 2 from the goodwill impairment test, which measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill, from the goodwill impairment test. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. We early adopted this amendment on
January 1, 2018
. The adoption of this amendment did not have a significant impact on our Consolidated Financial Statements.
Accounting Guidance Not Yet Adopted:
In February 2016, the FASB issued ASU 2016-02
,
Leases (Topic 842)
. This new standard introduces a new lease model that requires the recognition of lease assets and lease liabilities on the balance sheet and the disclosure of key information about leasing arrangements. While this new standard retains most of the principles of the existing lessor model under U.S. GAAP, it aligns many of those principles with
Accounting Standards Codification (“ASC”) 606: Revenue from Contracts with Customers
. The new guidance will be effective for us beginning December 31, 2018. We are currently evaluating the impact of the adoption of this guidance on our Consolidated Financial Statements, but we expect this will have a material effect on our balance sheet since the Company has a significant amount of operating and capital lease arrangements.
In February 2018, the FASB issued ASU 2018-02,
Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.
This standard provides companies with an option to reclassify stranded tax effects resulting from enactment of the Tax Cuts and Jobs Act ("TCJA") from accumulated other comprehensive income to retained earnings. This ASU will be effective for us for annual and interim periods beginning on December 31, 2019. Early adoption of this standard is permitted and may be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the tax rate as a result of TCJA is recognized. We do not expect the adoption of this ASU to have a material impact on our results of operations, financial position and cash flows.
2. Revenue:
Food, beverage and merchandise revenues from company-operated venues are recognized when sold. A portion of our entertainment revenue includes customer purchases of game play credits on Play Pass game cards. We recognize a liability for the estimated amount of unused game play credits which we believe our customers will utilize in the future, based on credits remaining on Play Pass cards and utilization patterns.
We sell gift cards to our customers in our venues and through certain third-party distributors, which do not expire and do not incur a service fee on unused balances. Gift card sales are recorded as deferred revenue when sold and are recognized as revenue when: (a) the gift card is redeemed by the guest or (b) the likelihood of the gift card being redeemed by the guest is remote (“gift card breakage”) and we determine that we do not have a legal obligation to remit the value of the unredeemed gift
card under applicable state unclaimed property escheat statutes. Gift card breakage is determined based upon historical redemption patterns of our gift cards.
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
On
January 1, 2018
we adopted the revenue guidance set forth in ASU 2016-10. Under the new guidance, there is a five-step model to apply to revenue recognition. The five-steps consist of: (i) the determination of whether a contract, an agreement between two or more parties that creates legally enforceable rights and obligations, exists; (ii) the identification of the performance obligations in the contract; (iii) the determination of the transaction price; (iv) the allocation of the transaction price to the performance obligations in the contract; and (v) recognition of revenue when (or as) the performance obligation is satisfied.
ASU 2016-10 requires us to recognize initial and renewal franchise and development fees on a straight-line basis over the life of the related franchise agreement or the renewal period. Historically, we recognized revenue from initial franchise and development fees upon the opening of a franchised restaurant when we completed all of our material obligations and initial services. Additionally, our national advertising fund receipts from Association members are now accounted for on a gross basis as “Franchise fees and royalties,” when historically they were netted against “Advertising expense.” Revenue related to advertising contributions from our franchisees was
$0.6 million
and
$1.3 million
in the
three and six months ended
July 1, 2018
, respectively, and is recorded in “Franchise fees and royalties” in our Consolidated Statement of Earnings.
Liabilities relating to unused game credits, Play Pass game cards, 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
six months ended
July 1, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
Balance at
|
|
January 1, 2018
|
|
Revenue Deferred
|
|
Revenue Recognized
|
|
July 1, 2018
|
|
(in thousands)
|
PlayPass related deferred revenue
|
$
|
12,035
|
|
|
$
|
36,136
|
|
|
$
|
(38,183
|
)
|
|
$
|
9,988
|
|
Gift card related deferred revenue
|
3,868
|
|
|
2,883
|
|
|
(3,476
|
)
|
|
3,275
|
|
Unearned franchise and development fees
|
4,274
|
|
|
1,045
|
|
|
(31
|
)
|
|
5,288
|
|
Other unearned revenues
|
873
|
|
|
13,547
|
|
|
(13,012
|
)
|
|
1,408
|
|
Total unearned revenue
|
$
|
21,050
|
|
|
$
|
53,611
|
|
|
$
|
(54,702
|
)
|
|
$
|
19,959
|
|
3. Property and Equipment
Asset Impairments
During the
three and six months ended
July 1, 2018
we recognized an impairment charge of
$1.6 million
, primarily related to one venue. This impairment charge was the result of a decline in the venue’s financial performance, primarily related to various economic factors in the market in which the venue is located. As of
July 1, 2018
, the aggregate carrying value of the property and equipment at impaired venues, after the impairment charge, was
$0.4 million
for venues impaired in
2018
.
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
4. Intangible Assets, Net:
The following table presents our indefinite and definite-lived intangible assets at
July 1, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Life (Years)
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
|
|
(in thousands)
|
Chuck E. Cheese's tradename
|
Indefinite
|
|
$
|
400,000
|
|
|
|
|
$
|
400,000
|
|
Peter Piper Pizza tradename
|
Indefinite
|
|
26,700
|
|
|
|
|
26,700
|
|
Favorable lease agreements
(1)
|
10
|
|
14,880
|
|
|
(7,976
|
)
|
|
6,904
|
|
Franchise agreements
|
25
|
|
53,300
|
|
|
(8,222
|
)
|
|
45,078
|
|
|
|
|
$
|
494,880
|
|
|
$
|
(16,198
|
)
|
|
$
|
478,682
|
|
__________________
|
|
(1)
|
In connection with the Merger, as defined in Note 12 “Consolidating Guarantor Financial Information”, and the acquisition of Peter Piper Pizza in October 2014, we also recorded unfavorable lease liabilities of
$10.2 million
and
$3.9 million
, respectively, which are included in “Other current liabilities” and “Other noncurrent liabilities” in our Consolidated Balance Sheets. Such amounts are being amortized over a weighted average life of
10 years
, and are included in “Rent expense” in our Consolidated Statements of Earnings.
|
Amortization expense related to favorable lease agreements was
$0.3 million
and $
0.4 million
for the
three months ended
July 1, 2018
and
July 2, 2017
, respectively, and $
0.7 million
and $
0.9 million
for the
six months ended
July 1, 2018
and
July 2, 2017
, respectively, and is included in “Rent expense” in our Consolidated Statements of Earnings. Amortization expense related to franchise agreements was
$0.5 million
for both the
three months ended
July 1, 2018
and
July 2, 2017
, respectively, and $
1.0 million
for both the
six months ended
July 1, 2018
and
July 2, 2017
, respectively, and is included in “Depreciation and amortization” in our Consolidated Statements of Earnings.
5. Accounts Payable:
Accounts payable consisted of the following as of the dates presented:
|
|
|
|
|
|
|
|
|
|
July 1, 2018
|
|
December 31, 2017
|
|
(in thousands)
|
Trade and other amounts payable
|
$
|
23,881
|
|
|
$
|
20,492
|
|
Book overdraft
|
10,169
|
|
|
10,882
|
|
Accounts payable
|
$
|
34,050
|
|
|
$
|
31,374
|
|
The book overdraft balance represents checks issued but not yet presented to banks.
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
6. Indebtedness and Interest Expense:
Our long-term debt consisted of the following as of the dates presented:
|
|
|
|
|
|
|
|
|
|
July 1,
2018
|
|
December 31,
2017
|
|
(in thousands)
|
Term loan facility
|
$
|
727,700
|
|
|
$
|
731,500
|
|
Senior notes
|
255,000
|
|
|
255,000
|
|
Total debt outstanding
|
982,700
|
|
|
986,500
|
|
Less:
|
|
|
|
Unamortized original issue discount
|
(1,424
|
)
|
|
(1,694
|
)
|
Deferred financing costs, net
|
(10,433
|
)
|
|
(11,993
|
)
|
Current portion
|
(7,600
|
)
|
|
(7,600
|
)
|
Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion
|
$
|
963,243
|
|
|
$
|
965,213
|
|
Secured Credit Facilities
Our secured credit facilities include (i) a
$760.0 million
term loan facility with a maturity date of February 14, 2021 (the “term loan facility”) and (ii) a
$150.0 million
senior secured revolving credit facility with an original maturity date of February 14, 2019, which includes a letter of credit sub-facility and a
$30.0 million
swingline loan sub-facility (the “revolving credit facility” and together with the term loan facility, the “secured credit facilities”). The term loan facility requires scheduled quarterly payments equal to 0.25% of the original principal amount from
July 2014
to
December 2020
, with the remaining balance paid at maturity,
February 14, 2021
. We had no borrowings outstanding and
$9.0 million
and
$9.9 million
, respectively of issued but undrawn letters of credit under the revolving credit facility as of
July 1, 2018
and
December 31, 2017
, respectively.
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), we will make one or more optional prepayments of term loans, to the extent required, such that the amount of such optional prepayments, together with the mandatory excess cash flow prepayment of term loans required under the secured credit facilities in respect of such fiscal year, shall equal at least 75% of the Company’s excess cash flow for such fiscal year (subject to step-downs based on our net first lien senior secured leverage ratio, and subject to a certain excess cash flow threshold amount) 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 not greater than 3.65 to 1.00 on a pro forma basis. The maturity date of the amount of the revolving credit facility that was not extended remains
February 14, 2019
.
The term loan was issued net of
$3.8 million
of original issue discount. We also paid
$17.8 million
and
$3.8 million
in debt financing costs related to the term loan facility and revolving credit facility inclusive of costs incurred in connection with the
May 8, 2018
incremental assumption agreement, respectively. All debt financing costs were capitalized in “Bank indebtedness and other long-term debt, net of deferred financing costs” on our Consolidated Balance Sheets. The original issue discount and deferred financing costs related to the term loan facility are amortized over the life of the term loan facility, and the deferred financing costs related to the revolving credit facility are being amortized through
November 16, 2020
, and are included in “Interest expense” on our Consolidated Statements of Earnings.
Borrowings under the secured credit facilities bear interest at a rate equal to, at our option, either (a) a London Interbank Offered Rate (“LIBOR”) determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowings, adjusted for certain additional costs, subject to a
1.00%
floor in the case of term loans or (b) a base rate determined by reference to the highest of (i) the federal funds effective rate plus
0.50%
; (ii) the prime rate of Deutsche Bank AG New York Branch; and (iii) the one-month adjusted LIBOR plus
1.00%
, in each case plus an applicable margin. The base applicable margin is
3.25%
with respect to LIBOR borrowings and
2.25%
with respect to base rate borrowings under the
term loan facility and base rate borrowings and swingline borrowings under the revolving credit facility. The applicable margin
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
for LIBOR borrowings under the term loan facility is subject to one step-down from
3.25%
to
3.00%
based on our net first lien senior secured leverage ratio and the applicable margin for LIBOR borrowings under the revolving credit facility is subject to two step-downs from
3.25%
to
3.00%
and
2.75%
based on our net first lien senior secured leverage ratio. Effective March 4, 2016, the applicable margin for both our term loan facility and revolving credit facility stepped down to 3.0%. Effective November 16,
2017
, the applicable margin for LIBOR borrowings under both the term loan facility and the revolving credit facility returned to their previous level of
3.25%
.
In addition to paying interest on outstanding principal under the secured credit facilities, we are required to pay a commitment fee to the lenders under the revolving credit facility with respect to the unutilized commitments thereunder. The base applicable commitment fee rate under the revolving credit facility was
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. We are also required to pay customary agency fees, as well as letter of credit participation fees computed at a rate per annum equal to the applicable margin for LIBOR rate borrowings on the dollar equivalent of the daily stated amount of outstanding letters of credit, plus such letter of credit issuer’s customary documentary and processing fees and charges and a fronting fee computed at a rate equal to
0.125%
per annum on the daily stated amount of such letter of credit.
During the
six months ended
July 1, 2018
, the federal funds rate ranged from
1.34%
to
1.92%
, the prime rate ranged from
4.50%
to
5.00%
and the one-month LIBOR ranged from
1.55%
to
2.10%
.
The weighted average effective interest rate incurred on our borrowings under our secured credit facilities was
5.6%
and
4.6%
for the
six months ended
July 1, 2018
and
July 2, 2017
, respectively, which includes amortization of deferred financing costs related to our secured credit facilities, amortization of our term loan facility original issue discount and commitment and other fees related to our secured credit facilities.
Obligations under the secured credit facilities are unconditionally guaranteed by Queso Holdings Inc. (“Parent”) on a limited-recourse basis and each of our existing and future direct and indirect material, wholly-owned domestic subsidiaries, subject to certain exceptions. The obligations are secured by a pledge of our capital stock and substantially all of our assets and those of each subsidiary guarantor, including capital stock of the subsidiary guarantors and
65%
of the capital stock of the first-tier foreign subsidiaries that are not subsidiary guarantors, in each case subject to exceptions. Such security interests consist of first priority liens with respect to the collateral.
The secured credit facilities also contain customary affirmative and negative covenants, and events of default, which limit our ability to, among other things: incur additional debt or issue certain preferred shares; create liens on certain assets; make certain loans or investments (including acquisitions); pay dividends on or make distributions with respect to our capital stock or make other restricted payments; consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; sell assets; enter into certain transactions with our affiliates; enter into sale-leaseback transactions; change our lines of business; restrict dividends from our subsidiaries or restrict liens; change our fiscal year; and modify the terms of certain debt or organizational agreements..
Our revolving credit facility includes a springing financial maintenance covenant that requires our net first lien senior secured leverage ratio not to exceed
6.25
to
1.00
(the ratio of consolidated net debt secured by first-priority liens on the collateral to the last twelve months’ EBITDA, as defined in the senior credit facilities). The covenant will be tested quarterly if the revolving credit facility is more than
30%
drawn (excluding outstanding letters of credit) and will be a condition to drawings under the revolving credit facility that would result in more than
30%
drawn thereunder.
Senior Unsecured Debt
Our senior unsecured debt consists of
$255.0 million
aggregate principal amount borrowings of
8.0%
Senior Notes due 2022 (the “senior notes”). The senior notes bear interest at a rate of
8.0%
per year and mature on February 15, 2022. We may redeem some or all of the senior notes at certain redemption prices set forth in the indenture governing the senior notes (the “indenture”).
We paid
$6.4 million
in debt issuance costs related to the senior notes, which we capitalized in “Bank indebtedness and other long-term debt, net of deferred financing costs” on our Consolidated Balance Sheets. The deferred financing costs are being amortized over the life of the senior notes and are included in “Interest expense” in our Consolidated Statements of Earnings.
Our obligations under the senior notes are fully and unconditionally guaranteed, jointly and severally, by our present and future direct and indirect wholly-owned material domestic subsidiaries that guarantee our secured credit facilities.
The indenture contains restrictive covenants that limit our ability to, among other things: (i) incur additional debt or issue certain preferred shares; (ii) create liens on certain assets; (iii) make certain loans or investments (including acquisitions);
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(iv) pay dividends on or make distributions in respect of our capital stock or make other restricted payments; (v) consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; (vi) sell assets; (vii) enter into certain transactions with our affiliates; and (viii) restrict dividends from our subsidiaries.
The weighted average effective interest rate incurred on borrowings under our senior notes was
8.2%
for the both
six months ended
July 1, 2018
and
July 2, 2017
, which included amortization of deferred financing costs and other fees related to our senior notes.
Interest Expense
Interest expense consisted of the following for the periods presented:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
July 1, 2018
|
|
July 2, 2017
|
|
(in thousands)
|
Term loan facility
(1)
|
$
|
9,681
|
|
|
$
|
7,619
|
|
Senior notes
|
5,083
|
|
|
5,083
|
|
Capital lease obligations
|
431
|
|
|
414
|
|
Sale leaseback obligations
|
2,623
|
|
|
2,663
|
|
Amortization of deferred financing costs
|
954
|
|
|
1,001
|
|
Other
|
341
|
|
|
281
|
|
Total interest expense
|
$
|
19,113
|
|
|
$
|
17,061
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
July 1, 2018
|
|
July 2, 2017
|
|
(in thousands)
|
Term loan facility
(1)
|
$
|
18,800
|
|
|
$
|
15,226
|
|
Senior notes
|
10,165
|
|
|
10,165
|
|
Capital lease obligations
|
859
|
|
|
831
|
|
Sale leaseback obligations
|
5,252
|
|
|
5,302
|
|
Amortization of deferred financing costs
|
1,955
|
|
|
2,003
|
|
Other
|
640
|
|
|
596
|
|
Total interest expense
|
$
|
37,671
|
|
|
$
|
34,123
|
|
__________________
(1) Includes amortization of original issue discount.
The weighted average effective interest rate incurred on our borrowings under our secured credit facilities and senior notes (including amortized debt issuance costs, amortization of original issue discount, commitment and other fees related to the secured credit facilities and senior notes) was
6.3%
for the
six months ended
July 1, 2018
and
5.5%
for the
six months ended
July 2, 2017
, respectively.
We were in compliance with the debt covenants in effect as of
July 1, 2018
for both the secured credit facilities and the senior notes.
7. Fair Value of Financial Instruments:
Fair value measurements of financial instruments are determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy) has been established.
The following table presents information on our financial instruments as of the periods presented:
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2018
|
|
|
December 31, 2017
|
|
|
Carrying Amount
(1)
|
|
Estimated Fair Value
|
|
|
Carrying Amount
(1)
|
|
Estimated Fair Value
|
|
|
(in thousands)
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
Bank indebtedness and other long-term debt:
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
7,600
|
|
|
$
|
7,068
|
|
|
|
$
|
7,600
|
|
|
$
|
7,220
|
|
Long-term portion
(2)
|
|
973,676
|
|
|
896,189
|
|
|
|
977,206
|
|
|
937,662
|
|
Bank indebtedness and other long-term debt:
|
|
$
|
981,276
|
|
|
$
|
903,257
|
|
|
|
$
|
984,806
|
|
|
$
|
944,882
|
|
_________________
(1) Excluding net deferred financing costs.
(2) Net of original issue discount.
Our financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, our secured credit facilities and our senior notes. The carrying amount of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximates fair value because of their short maturities. The estimated fair value of our secured credit facilities, term loan facility and senior notes was determined by using the respective average of the ask and bid price of our outstanding borrowings under our term loan facility and the senior notes as of the nearest open market date preceding the reporting period end. The average of the ask and bid price are classified as Level 2 in the fair value hierarchy.
Our non-financial assets, which include long-lived assets, including property, plant and equipment, 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
six months ended July 1, 2018
and
July 2, 2017
, there were no significant transfers among Level 1, 2 or 3 fair value determinations.
8. Other Noncurrent Liabilities:
Other noncurrent liabilities consisted of the following as of the dates presented:
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2018
|
|
December 31, 2017
|
|
|
(in thousands)
|
Sale leaseback obligations, less current portion
|
|
$
|
176,324
|
|
|
$
|
177,933
|
|
Deferred rent liability
|
|
29,775
|
|
|
27,951
|
|
Deferred landlord contributions
|
|
7,571
|
|
|
6,282
|
|
Long-term portion of unfavorable leases
|
|
4,577
|
|
|
5,453
|
|
Other
|
|
4,867
|
|
|
4,268
|
|
Total other noncurrent liabilities
|
|
$
|
223,114
|
|
|
$
|
221,887
|
|
9. Income Taxes:
Our income tax expense consists of the following for the periods presented:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
July 1, 2018
|
|
July 2, 2017
|
|
(in thousands)
|
Federal and state income taxes
|
$
|
(2,251
|
)
|
|
$
|
(3,420
|
)
|
Foreign income taxes
(1)
|
77
|
|
|
103
|
|
Income tax benefit
|
$
|
(2,174
|
)
|
|
$
|
(3,317
|
)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
July 1, 2018
|
|
July 2, 2017
|
|
(in thousands)
|
Federal and state income taxes
|
$
|
1,284
|
|
|
$
|
6,678
|
|
Foreign income taxes
(1)
|
475
|
|
|
383
|
|
Income tax expense
|
$
|
1,759
|
|
|
$
|
7,061
|
|
_________________
(1) Including foreign taxes withheld.
Our effective income tax rates for the
three and six months ended
July 1, 2018
were
19.5%
and
35.1%
, respectively, as compared to
35.9%
and
38.5%
, respectively, for the
three and six months ended
July 2, 2017
. Our effective income tax rate for the
three and six months ended
July 1, 2018
was impacted by the reduction in the U.S. federal statutory corporate income tax rate from
35%
to
21%
resulting from the Tax Cuts and Jobs Act (TCJA) signed into law on
December 22, 2017
. Our effective income tax rate for the
three and six months ended
July 1, 2018
differs from the statutory tax rate primarily due to state income taxes, the favorable impact of employment-related federal income tax credits, a one-time adjustment to deferred taxes (the tax effect of the cumulative foreign currency translation adjustment existing as of
January 1, 2018
) resulting from the change in our intent to no longer indefinitely reinvest monies previously loaned to our Canadian subsidiary partially offset by the negative impact of nondeductible litigation costs related to the Merger, non-deductible penalties, and state tax legislation enacted during the second quarter of 2018 that increased the amount of income subject to state taxation and changed state income tax rates. Our effective income tax rates for the
three and six months ended
July 2, 2017
differed from the statutory rate primarily due to state income taxes and the favorable impact of employment-related federal income tax credits.
The TCJA’s reduction in the U.S. corporate tax rate from
35%
to
21%
(effective for
Fiscal 2018
) and increased allowance for bonus depreciation will have a favorable impact on our future net income and cash flows. While we were able to make provisional estimates for the impact of the TJCA, the actual results may differ from these estimates, due to, among other things, changes in our interpretations and assumptions relating to the changes made by the TCJA and additional guidance that is anticipated to be issued by the U.S. Treasury and Internal Revenue Service regarding (i) the newly enacted increase in bonus depreciation for qualifying assets acquired and placed in service after
September 27, 2017
, (ii) the expansion of the limitation
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
under Section 162(m) relating to the deductibility of executive compensation in excess of
$1.0 million
, and (iii) the one-time transition tax, net of foreign tax credits and operating losses, on earnings of foreign subsidiaries that were previously deferred from U.S. tax.
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
$3.9 million
as of
July 1, 2018
and
December 31, 2017
and if recognized would decrease our provision for income taxes by
$2.7 million
. Within the next twelve months, we could settle or otherwise conclude certain ongoing income tax audits. As such, it is reasonably possible that the liability for uncertain tax positions could decrease by as much as
$1.1 million
as a result of settlements with certain taxing authorities and expiring statutes of limitations within the next twelve months.
Total accrued interest and penalties related to unrecognized tax benefits as of
July 1, 2018
and
December 31, 2017
was
$1.1 million
and
$1.0 million
, respectively. On the Consolidated Balance Sheets, we include current interest related to unrecognized tax benefits in “Accrued interest,” current penalties in “Accrued expenses” and noncurrent accrued interest and penalties in “Other noncurrent liabilities.”
10. Stock-Based Compensation Arrangements:
The 2014 Equity Incentive Plan provides Parent authority to grant equity incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, stock bonus awards or performance compensation awards to certain directors, officers or employees of the Company. A summary of the options outstanding under the equity incentive plan as of
July 1, 2018
and the activity for the
six months ended
July 1, 2018
is presented below:
|
|
|
|
|
|
|
|
|
|
Stock Options
|
Weighted Average Exercise Price
(1)
|
Weighted Average Remaining Contractual Term
|
Aggregate Intrinsic Value
|
|
|
($ per share)
|
|
($ in thousands)
|
Outstanding stock options, December 31, 2017
|
2,349,288
|
|
$9.00
|
|
|
Options Granted
|
112,769
|
|
$13.73
|
|
|
Options Exercised
|
(7,745
|
)
|
$9.96
|
|
|
Options Forfeited
|
(191,632
|
)
|
$9.58
|
|
|
Outstanding stock options, July 1, 2018
|
2,262,680
|
|
$9.17
|
6.2
|
$
|
132
|
|
Stock options expected to vest, July 1, 2018
|
1,573,236
|
|
$9.40
|
6.3
|
$
|
—
|
|
Exercisable stock options, July 1, 2018
|
514,639
|
|
$8.41
|
5.8
|
$
|
423
|
|
|
|
|
|
|
__________________
(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
July 1, 2018
, we had
$1.1 million
of total unrecognized share-based compensation expense related to unvested options, which is expected to be amortized over the remaining weighted-average period of
2.8
years.
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The following table summarizes stock-based compensation expense and the associated tax benefit recognized in the Consolidated Financial Statements for the periods presented:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
July 1,
2018
|
|
July 2,
2017
|
|
(in thousands)
|
Stock-based compensation costs
|
$
|
166
|
|
|
$
|
189
|
|
Portion capitalized as property and equipment
(1)
|
(3
|
)
|
|
(3
|
)
|
Stock-based compensation expense recognized
|
$
|
163
|
|
|
$
|
186
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
July 1,
2018
|
|
July 2,
2017
|
|
(in thousands)
|
Stock-based compensation costs
|
$
|
233
|
|
|
$
|
343
|
|
Portion capitalized as property and equipment
(1)
|
(6
|
)
|
|
(7
|
)
|
Stock-based compensation expense recognized
|
$
|
227
|
|
|
$
|
336
|
|
__________________
|
|
(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.
|
11. Stockholder’s Equity:
The following table summarizes the changes in stockholder’s equity during the
six months ended July 1, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Capital In
Excess of
Par Value
|
|
Accumulated Deficit
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
Total
|
|
|
(in thousands, except share information)
|
Balance at December 31, 2017
|
|
200
|
|
|
$
|
—
|
|
|
$
|
359,233
|
|
|
$
|
(95,199
|
)
|
|
$
|
(1,886
|
)
|
|
$
|
262,148
|
|
Net income
|
|
—
|
|
|
—
|
|
|
|
|
3,256
|
|
|
|
|
3,256
|
|
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
|
|
|
|
300
|
|
|
300
|
|
Stock-based compensation costs
|
|
—
|
|
|
—
|
|
|
233
|
|
|
|
|
|
|
233
|
|
Balance July 1, 2018
|
|
200
|
|
|
$
|
—
|
|
|
$
|
359,466
|
|
|
$
|
(91,943
|
)
|
|
$
|
(1,586
|
)
|
|
$
|
265,937
|
|
12. Consolidating Guarantor Financial Information:
On February 14, 2014, CEC Entertainment, Inc. (the “Issuer”) merged with and into an entity controlled by Apollo Global Management, LLC and its subsidiaries, which we refer to as the “Merger.” The senior notes issued by the Issuer, in conjunction with the Merger, are our unsecured obligations and are fully and unconditionally, jointly and severally guaranteed by all of our 100% wholly-owned U.S. subsidiaries (the “Guarantors”). Our wholly-owned foreign subsidiaries and our less-than-wholly-owned U.S. subsidiaries are not a party to the guarantees (the “Non-Guarantors”). The following schedules present the condensed consolidating financial statements of the Issuer, Guarantors and Non-Guarantors, as well as consolidated results, for the periods presented:
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CEC Entertainment, Inc.
|
Condensed Consolidating Balance Sheet
|
As of July 1, 2018
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
86,234
|
|
|
$
|
1,884
|
|
|
$
|
769
|
|
|
$
|
—
|
|
|
$
|
88,887
|
|
Restricted cash
|
|
—
|
|
|
—
|
|
|
207
|
|
|
—
|
|
|
207
|
|
Accounts receivable
|
|
20,823
|
|
|
2,748
|
|
|
4,665
|
|
|
(4,009
|
)
|
|
24,227
|
|
Inventories
|
|
16,361
|
|
|
4,041
|
|
|
269
|
|
|
—
|
|
|
20,671
|
|
Prepaid expenses
|
|
14,360
|
|
|
13,083
|
|
|
1,302
|
|
|
—
|
|
|
28,745
|
|
Total current assets
|
|
137,778
|
|
|
21,756
|
|
|
7,212
|
|
|
(4,009
|
)
|
|
162,737
|
|
Property and equipment, net
|
|
474,661
|
|
|
72,528
|
|
|
6,591
|
|
|
—
|
|
|
553,780
|
|
Goodwill
|
|
433,024
|
|
|
51,414
|
|
|
—
|
|
|
—
|
|
|
484,438
|
|
Intangible assets, net
|
|
15,692
|
|
|
462,990
|
|
|
—
|
|
|
—
|
|
|
478,682
|
|
Intercompany
|
|
76,325
|
|
|
—
|
|
|
—
|
|
|
(76,325
|
)
|
|
—
|
|
Investment in subsidiaries
|
|
477,703
|
|
|
—
|
|
|
—
|
|
|
(477,703
|
)
|
|
—
|
|
Other noncurrent assets
|
|
7,870
|
|
|
10,111
|
|
|
81
|
|
|
—
|
|
|
18,062
|
|
Total assets
|
|
$
|
1,623,053
|
|
|
$
|
618,799
|
|
|
$
|
13,884
|
|
|
$
|
(558,037
|
)
|
|
$
|
1,697,699
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
Bank indebtedness and other long-term debt, current portion
|
|
$
|
7,600
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,600
|
|
Capital lease obligations, current portion
|
|
624
|
|
|
—
|
|
|
10
|
|
|
—
|
|
|
634
|
|
Accounts payable and accrued expenses
|
|
55,843
|
|
|
39,717
|
|
|
4,389
|
|
|
—
|
|
|
99,949
|
|
Other current liabilities
|
|
4,490
|
|
|
510
|
|
|
—
|
|
|
—
|
|
|
5,000
|
|
Total current liabilities
|
|
68,557
|
|
|
40,227
|
|
|
4,399
|
|
|
—
|
|
|
113,183
|
|
Capital lease obligations, less current portion
|
|
12,627
|
|
|
—
|
|
|
47
|
|
|
—
|
|
|
12,674
|
|
Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion
|
|
963,243
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
963,243
|
|
Deferred tax liability
|
|
96,539
|
|
|
16,056
|
|
|
(1,923
|
)
|
|
—
|
|
|
110,672
|
|
Intercompany
|
|
—
|
|
|
53,341
|
|
|
26,993
|
|
|
(80,334
|
)
|
|
—
|
|
Other noncurrent liabilities
|
|
216,150
|
|
|
15,379
|
|
|
461
|
|
|
—
|
|
|
231,990
|
|
Total liabilities
|
|
1,357,116
|
|
|
125,003
|
|
|
29,977
|
|
|
(80,334
|
)
|
|
1,431,762
|
|
Stockholder's equity:
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Capital in excess of par value
|
|
359,466
|
|
|
466,115
|
|
|
3,241
|
|
|
(469,356
|
)
|
|
359,466
|
|
Retained earnings (deficit)
|
|
(91,943
|
)
|
|
27,681
|
|
|
(17,748
|
)
|
|
(9,933
|
)
|
|
(91,943
|
)
|
Accumulated other comprehensive income (loss)
|
|
(1,586
|
)
|
|
—
|
|
|
(1,586
|
)
|
|
1,586
|
|
|
(1,586
|
)
|
Total stockholder's equity
|
|
265,937
|
|
|
493,796
|
|
|
(16,093
|
)
|
|
(477,703
|
)
|
|
265,937
|
|
Total liabilities and stockholder's equity
|
|
$
|
1,623,053
|
|
|
$
|
618,799
|
|
|
$
|
13,884
|
|
|
$
|
(558,037
|
)
|
|
$
|
1,697,699
|
|
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CEC Entertainment, Inc.
|
Condensed Consolidating Balance Sheet
|
As of December 31, 2017
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
59,948
|
|
|
$
|
410
|
|
|
$
|
6,842
|
|
|
$
|
—
|
|
|
$
|
67,200
|
|
Restricted cash
|
|
—
|
|
|
—
|
|
|
112
|
|
|
—
|
|
|
112
|
|
Accounts receivable
|
|
27,098
|
|
|
3,283
|
|
|
2,563
|
|
|
(1,923
|
)
|
|
31,021
|
|
Inventories
|
|
17,104
|
|
|
4,614
|
|
|
282
|
|
|
—
|
|
|
22,000
|
|
Prepaid expenses
|
|
13,766
|
|
|
5,549
|
|
|
1,083
|
|
|
—
|
|
|
20,398
|
|
Total current assets
|
|
117,916
|
|
|
13,856
|
|
|
10,882
|
|
|
(1,923
|
)
|
|
140,731
|
|
Property and equipment, net
|
|
496,725
|
|
|
66,669
|
|
|
6,627
|
|
|
—
|
|
|
570,021
|
|
Goodwill
|
|
433,024
|
|
|
51,414
|
|
|
—
|
|
|
—
|
|
|
484,438
|
|
Intangible assets, net
|
|
16,764
|
|
|
463,613
|
|
|
—
|
|
|
—
|
|
|
480,377
|
|
Intercompany
|
|
90,937
|
|
|
10,770
|
|
|
—
|
|
|
(101,707
|
)
|
|
—
|
|
Investment in subsidiaries
|
|
462,873
|
|
|
—
|
|
|
—
|
|
|
(462,873
|
)
|
|
—
|
|
Other noncurrent assets
|
|
7,913
|
|
|
11,359
|
|
|
205
|
|
|
—
|
|
|
19,477
|
|
Total assets
|
|
$
|
1,626,152
|
|
|
$
|
617,681
|
|
|
$
|
17,714
|
|
|
$
|
(566,503
|
)
|
|
$
|
1,695,044
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
Bank indebtedness and other long-term debt, current portion
|
|
$
|
7,600
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,600
|
|
Capital lease obligations, current portion
|
|
586
|
|
|
—
|
|
|
10
|
|
|
—
|
|
|
596
|
|
Accounts payable and accrued expenses
|
|
58,014
|
|
|
35,134
|
|
|
4,169
|
|
|
—
|
|
|
97,317
|
|
Other current liabilities
|
|
4,265
|
|
|
511
|
|
|
—
|
|
|
—
|
|
|
4,776
|
|
Total current liabilities
|
|
70,465
|
|
|
35,645
|
|
|
4,179
|
|
|
—
|
|
|
110,289
|
|
Capital lease obligations, less current portion
|
|
12,956
|
|
|
—
|
|
|
54
|
|
|
—
|
|
|
13,010
|
|
Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion
|
|
965,213
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
965,213
|
|
Deferred tax liability
|
|
99,083
|
|
|
16,697
|
|
|
(1,594
|
)
|
|
—
|
|
|
114,186
|
|
Intercompany
|
|
—
|
|
|
75,052
|
|
|
28,578
|
|
|
(103,630
|
)
|
|
—
|
|
Other noncurrent liabilities
|
|
216,287
|
|
|
13,465
|
|
|
446
|
|
|
—
|
|
|
230,198
|
|
Total liabilities
|
|
1,364,004
|
|
|
140,859
|
|
|
31,663
|
|
|
(103,630
|
)
|
|
1,432,896
|
|
Stockholder's equity:
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Capital in excess of par value
|
|
359,233
|
|
|
466,114
|
|
|
3,241
|
|
|
(469,355
|
)
|
|
359,233
|
|
Retained earnings (deficit)
|
|
(95,199
|
)
|
|
10,708
|
|
|
(15,304
|
)
|
|
4,596
|
|
|
(95,199
|
)
|
Accumulated other comprehensive income (loss)
|
|
(1,886
|
)
|
|
—
|
|
|
(1,886
|
)
|
|
1,886
|
|
|
(1,886
|
)
|
Total stockholder's equity
|
|
262,148
|
|
|
476,822
|
|
|
(13,949
|
)
|
|
(462,873
|
)
|
|
262,148
|
|
Total liabilities and stockholder's equity
|
|
$
|
1,626,152
|
|
|
$
|
617,681
|
|
|
$
|
17,714
|
|
|
$
|
(566,503
|
)
|
|
$
|
1,695,044
|
|
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CEC Entertainment, Inc.
|
Consolidating Statement of Comprehensive Income (Loss)
|
For the Three Months Ended July 1, 2018
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Food and beverage sales
|
|
$
|
81,611
|
|
|
$
|
13,438
|
|
|
$
|
1,209
|
|
|
$
|
—
|
|
|
$
|
96,258
|
|
Entertainment and merchandise sales
|
|
100,495
|
|
|
13,147
|
|
|
2,262
|
|
|
—
|
|
|
115,904
|
|
Total company venue sales
|
|
182,106
|
|
|
26,585
|
|
|
3,471
|
|
|
—
|
|
|
212,162
|
|
Franchise fees and royalties
|
|
429
|
|
|
4,216
|
|
|
551
|
|
|
—
|
|
|
5,196
|
|
International Association assessments and other fees
|
|
233
|
|
|
9,713
|
|
|
8,529
|
|
|
(18,475
|
)
|
|
—
|
|
Total revenues
|
|
182,768
|
|
|
40,514
|
|
|
12,551
|
|
|
(18,475
|
)
|
|
217,358
|
|
Operating Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
Company venue operating costs:
|
|
|
|
|
|
|
|
|
|
|
Cost of food and beverage
|
|
18,848
|
|
|
3,607
|
|
|
439
|
|
|
—
|
|
|
22,894
|
|
Cost of entertainment and merchandise
|
|
7,899
|
|
|
403
|
|
|
119
|
|
|
—
|
|
|
8,421
|
|
Total cost of food, beverage, entertainment and merchandise
|
|
26,747
|
|
|
4,010
|
|
|
558
|
|
|
—
|
|
|
31,315
|
|
Labor expenses
|
|
56,461
|
|
|
4,994
|
|
|
1,163
|
|
|
—
|
|
|
62,618
|
|
Rent expense
|
|
21,900
|
|
|
2,319
|
|
|
495
|
|
|
—
|
|
|
24,714
|
|
Other venue operating expenses
|
|
42,386
|
|
|
3,793
|
|
|
837
|
|
|
(9,947
|
)
|
|
37,069
|
|
Total company venue operating costs
|
|
147,494
|
|
|
15,116
|
|
|
3,053
|
|
|
(9,947
|
)
|
|
155,716
|
|
Advertising expense
|
|
8,773
|
|
|
1,420
|
|
|
11,312
|
|
|
(8,528
|
)
|
|
12,977
|
|
General and administrative expenses
|
|
4,326
|
|
|
8,669
|
|
|
421
|
|
|
—
|
|
|
13,416
|
|
Depreciation and amortization
|
|
22,268
|
|
|
2,713
|
|
|
512
|
|
|
—
|
|
|
25,493
|
|
Transaction, severance and related litigation costs
|
|
146
|
|
|
45
|
|
|
—
|
|
|
—
|
|
|
191
|
|
Asset impairments
|
|
86
|
|
|
1,505
|
|
|
—
|
|
|
—
|
|
|
1,591
|
|
Total operating costs and expenses
|
|
183,093
|
|
|
29,468
|
|
|
15,298
|
|
|
(18,475
|
)
|
|
209,384
|
|
Operating income (loss)
|
|
(325
|
)
|
|
11,046
|
|
|
(2,747
|
)
|
|
—
|
|
|
7,974
|
|
Equity in earnings (loss) in affiliates
|
|
5,778
|
|
|
—
|
|
|
—
|
|
|
(5,778
|
)
|
|
—
|
|
Interest expense
|
|
18,099
|
|
|
911
|
|
|
103
|
|
|
—
|
|
|
19,113
|
|
Income (loss) before income taxes
|
|
(12,646
|
)
|
|
10,135
|
|
|
(2,850
|
)
|
|
(5,778
|
)
|
|
(11,139
|
)
|
Income tax expense
|
|
(3,681
|
)
|
|
2,227
|
|
|
(720
|
)
|
|
—
|
|
|
(2,174
|
)
|
Net income (loss)
|
|
$
|
(8,965
|
)
|
|
$
|
7,908
|
|
|
$
|
(2,130
|
)
|
|
$
|
(5,778
|
)
|
|
$
|
(8,965
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Components of other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
145
|
|
|
—
|
|
|
145
|
|
|
(145
|
)
|
|
145
|
|
Comprehensive income (loss)
|
|
$
|
(8,820
|
)
|
|
$
|
7,908
|
|
|
$
|
(1,985
|
)
|
|
$
|
(5,923
|
)
|
|
$
|
(8,820
|
)
|
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CEC Entertainment, Inc.
|
Consolidating Statement of Comprehensive Income (Loss)
|
For the Three Months Ended July 2, 2017
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Food and beverage sales
|
|
$
|
82,807
|
|
|
$
|
13,324
|
|
|
$
|
1,280
|
|
|
$
|
—
|
|
|
$
|
97,411
|
|
Entertainment and merchandise sales
|
|
88,857
|
|
|
18,811
|
|
|
2,056
|
|
|
—
|
|
|
109,724
|
|
Total company venue sales
|
|
171,664
|
|
|
32,135
|
|
|
3,336
|
|
|
—
|
|
|
207,135
|
|
Franchise fees and royalties
|
|
463
|
|
|
4,186
|
|
|
—
|
|
|
—
|
|
|
4,649
|
|
International Association assessments and other fees
|
|
375
|
|
|
10,544
|
|
|
8,098
|
|
|
(19,017
|
)
|
|
—
|
|
Total revenues
|
|
172,502
|
|
|
46,865
|
|
|
11,434
|
|
|
(19,017
|
)
|
|
211,784
|
|
Operating Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
Company venue operating costs:
|
|
|
|
|
|
|
|
|
|
|
Cost of food and beverage
|
|
18,936
|
|
|
3,464
|
|
|
423
|
|
|
—
|
|
|
22,823
|
|
Cost of entertainment and merchandise
|
|
6,329
|
|
|
389
|
|
|
136
|
|
|
—
|
|
|
6,854
|
|
Total cost of food, beverage, entertainment and merchandise
|
|
25,265
|
|
|
3,853
|
|
|
559
|
|
|
—
|
|
|
29,677
|
|
Labor expenses
|
|
54,654
|
|
|
4,541
|
|
|
1,156
|
|
|
—
|
|
|
60,351
|
|
Rent expense
|
|
21,825
|
|
|
1,552
|
|
|
529
|
|
|
—
|
|
|
23,906
|
|
Other venue operating expenses
|
|
42,664
|
|
|
3,259
|
|
|
990
|
|
|
(10,946
|
)
|
|
35,967
|
|
Total company venue operating costs
|
|
144,408
|
|
|
13,205
|
|
|
3,234
|
|
|
(10,946
|
)
|
|
149,901
|
|
Advertising expense
|
|
8,315
|
|
|
1,413
|
|
|
10,580
|
|
|
(8,071
|
)
|
|
12,237
|
|
General and administrative expenses
|
|
4,391
|
|
|
9,268
|
|
|
60
|
|
|
—
|
|
|
13,719
|
|
Depreciation and amortization
|
|
24,729
|
|
|
2,401
|
|
|
493
|
|
|
—
|
|
|
27,623
|
|
Transaction, severance and related litigation costs
|
|
490
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
490
|
|
Total operating costs and expenses
|
|
182,333
|
|
|
26,287
|
|
|
14,367
|
|
|
(19,017
|
)
|
|
203,970
|
|
Operating income (loss)
|
|
(9,831
|
)
|
|
20,578
|
|
|
(2,933
|
)
|
|
—
|
|
|
7,814
|
|
Equity in earnings (loss) in affiliates
|
|
27,993
|
|
|
—
|
|
|
—
|
|
|
(27,993
|
)
|
|
—
|
|
Interest expense
|
|
15,921
|
|
|
975
|
|
|
165
|
|
|
—
|
|
|
17,061
|
|
Income (loss) before income taxes
|
|
2,241
|
|
|
19,603
|
|
|
(3,098
|
)
|
|
(27,993
|
)
|
|
(9,247
|
)
|
Income tax expense (benefit)
|
|
8,171
|
|
|
(10,515
|
)
|
|
(973
|
)
|
|
—
|
|
|
(3,317
|
)
|
Net income (loss)
|
|
$
|
(5,930
|
)
|
|
$
|
30,118
|
|
|
$
|
(2,125
|
)
|
|
$
|
(27,993
|
)
|
|
$
|
(5,930
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Components of other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
420
|
|
|
—
|
|
|
420
|
|
|
(420
|
)
|
|
420
|
|
Comprehensive income (loss)
|
|
$
|
(5,510
|
)
|
|
$
|
30,118
|
|
|
$
|
(1,705
|
)
|
|
$
|
(28,413
|
)
|
|
$
|
(5,510
|
)
|
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CEC Entertainment, Inc.
|
Consolidating Statement of Comprehensive Income (Loss)
|
For the Six Months Ended July 1, 2018
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Food and beverage sales
|
|
$
|
184,259
|
|
|
$
|
27,396
|
|
|
$
|
2,980
|
|
|
$
|
—
|
|
|
$
|
214,635
|
|
Entertainment and merchandise sales
|
|
215,770
|
|
|
25,874
|
|
|
5,377
|
|
|
—
|
|
|
247,021
|
|
Total company venue sales
|
|
400,029
|
|
|
53,270
|
|
|
8,357
|
|
|
—
|
|
|
461,656
|
|
Franchise fees and royalties
|
|
1,000
|
|
|
8,359
|
|
|
1,247
|
|
|
—
|
|
|
10,606
|
|
International Association assessments and other fees
|
|
574
|
|
|
18,751
|
|
|
19,090
|
|
|
(38,415
|
)
|
|
—
|
|
Total revenues
|
|
401,603
|
|
|
80,380
|
|
|
28,694
|
|
|
(38,415
|
)
|
|
472,262
|
|
Operating Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
Company venue operating costs:
|
|
|
|
|
|
|
|
|
|
|
Cost of food and beverage
|
|
41,733
|
|
|
7,497
|
|
|
1,024
|
|
|
—
|
|
|
50,254
|
|
Cost of entertainment and merchandise
|
|
16,665
|
|
|
848
|
|
|
289
|
|
|
—
|
|
|
17,802
|
|
Total cost of food, beverage, entertainment and merchandise
|
|
58,398
|
|
|
8,345
|
|
|
1,313
|
|
|
—
|
|
|
68,056
|
|
Labor expenses
|
|
117,290
|
|
|
10,088
|
|
|
2,588
|
|
|
—
|
|
|
129,966
|
|
Rent expense
|
|
43,697
|
|
|
4,008
|
|
|
1,059
|
|
|
—
|
|
|
48,764
|
|
Other venue operating expenses
|
|
85,295
|
|
|
7,382
|
|
|
1,806
|
|
|
(19,351
|
)
|
|
75,132
|
|
Total company venue operating costs
|
|
304,680
|
|
|
29,823
|
|
|
6,766
|
|
|
(19,351
|
)
|
|
321,918
|
|
Advertising expense
|
|
19,758
|
|
|
3,361
|
|
|
22,897
|
|
|
(19,064
|
)
|
|
26,952
|
|
General and administrative expenses
|
|
8,521
|
|
|
16,837
|
|
|
967
|
|
|
—
|
|
|
26,325
|
|
Depreciation and amortization
|
|
45,645
|
|
|
5,445
|
|
|
975
|
|
|
—
|
|
|
52,065
|
|
Transaction, severance and related litigation costs
|
|
459
|
|
|
266
|
|
|
—
|
|
|
—
|
|
|
725
|
|
Asset Impairments
|
|
86
|
|
|
1,505
|
|
|
—
|
|
|
—
|
|
|
1,591
|
|
Total operating costs and expenses
|
|
379,149
|
|
|
57,237
|
|
|
31,605
|
|
|
(38,415
|
)
|
|
429,576
|
|
Operating income (loss)
|
|
22,454
|
|
|
23,143
|
|
|
(2,911
|
)
|
|
—
|
|
|
42,686
|
|
Equity in earnings (loss) in affiliates
|
|
14,423
|
|
|
—
|
|
|
—
|
|
|
(14,423
|
)
|
|
—
|
|
Interest expense
|
|
35,627
|
|
|
1,755
|
|
|
289
|
|
|
—
|
|
|
37,671
|
|
Income (loss) before income taxes
|
|
1,250
|
|
|
21,388
|
|
|
(3,200
|
)
|
|
(14,423
|
)
|
|
5,015
|
|
Income tax expense
|
|
(2,006
|
)
|
|
4,414
|
|
|
(649
|
)
|
|
—
|
|
|
1,759
|
|
Net income (loss)
|
|
$
|
3,256
|
|
|
$
|
16,974
|
|
|
$
|
(2,551
|
)
|
|
$
|
(14,423
|
)
|
|
$
|
3,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
300
|
|
|
—
|
|
|
300
|
|
|
(300
|
)
|
|
300
|
|
Comprehensive income (loss)
|
|
$
|
3,556
|
|
|
$
|
16,974
|
|
|
$
|
(2,251
|
)
|
|
$
|
(14,723
|
)
|
|
$
|
3,556
|
|
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CEC Entertainment, Inc.
|
Consolidating Statement of Comprehensive Income (Loss)
|
For the Six Months Ended July 2, 2017
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Food and beverage sales
|
|
$
|
190,998
|
|
|
$
|
27,725
|
|
|
$
|
3,107
|
|
|
$
|
—
|
|
|
$
|
221,830
|
|
Entertainment and merchandise sales
|
|
207,645
|
|
|
32,923
|
|
|
5,073
|
|
|
—
|
|
|
245,641
|
|
Total company venue sales
|
|
398,643
|
|
|
60,648
|
|
|
8,180
|
|
|
—
|
|
|
467,471
|
|
Franchise fees and royalties
|
|
904
|
|
|
8,368
|
|
|
—
|
|
|
—
|
|
|
9,272
|
|
International Association assessments and other fees
|
|
689
|
|
|
21,088
|
|
|
18,607
|
|
|
(40,384
|
)
|
|
—
|
|
Total revenues
|
|
400,236
|
|
|
90,104
|
|
|
26,787
|
|
|
(40,384
|
)
|
|
476,743
|
|
Operating Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
Company venue operating costs:
|
|
|
|
|
|
|
|
|
|
|
Cost of food and beverage
|
|
42,931
|
|
|
7,152
|
|
|
957
|
|
|
—
|
|
|
51,040
|
|
Cost of entertainment and merchandise
|
|
14,230
|
|
|
804
|
|
|
307
|
|
|
—
|
|
|
15,341
|
|
Total cost of food, beverage, entertainment and merchandise
|
|
57,161
|
|
|
7,956
|
|
|
1,264
|
|
|
—
|
|
|
66,381
|
|
Labor expenses
|
|
114,837
|
|
|
9,379
|
|
|
2,522
|
|
|
—
|
|
|
126,738
|
|
Rent expense
|
|
43,104
|
|
|
3,053
|
|
|
1,068
|
|
|
—
|
|
|
47,225
|
|
Other venue operating expenses
|
|
85,680
|
|
|
6,545
|
|
|
2,295
|
|
|
(21,804
|
)
|
|
72,716
|
|
Total company venue operating costs
|
|
300,782
|
|
|
26,933
|
|
|
7,149
|
|
|
(21,804
|
)
|
|
313,060
|
|
Advertising expense
|
|
19,252
|
|
|
3,259
|
|
|
21,688
|
|
|
(18,580
|
)
|
|
25,619
|
|
General and administrative expenses
|
|
10,137
|
|
|
18,803
|
|
|
150
|
|
|
—
|
|
|
29,090
|
|
Depreciation and amortization
|
|
50,044
|
|
|
4,820
|
|
|
1,064
|
|
|
—
|
|
|
55,928
|
|
Transaction, severance and related litigation costs
|
|
570
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
570
|
|
Total operating costs and expenses
|
|
380,785
|
|
|
53,815
|
|
|
30,051
|
|
|
(40,384
|
)
|
|
424,267
|
|
Operating income (loss)
|
|
19,451
|
|
|
36,289
|
|
|
(3,264
|
)
|
|
—
|
|
|
52,476
|
|
Equity in earnings (loss) in affiliates
|
|
38,647
|
|
|
—
|
|
|
—
|
|
|
(38,647
|
)
|
|
—
|
|
Interest expense
|
|
31,828
|
|
|
1,992
|
|
|
303
|
|
|
—
|
|
|
34,123
|
|
Income (loss) before income taxes
|
|
26,270
|
|
|
34,297
|
|
|
(3,567
|
)
|
|
(38,647
|
)
|
|
18,353
|
|
Income tax expense (benefit)
|
|
14,978
|
|
|
(6,803
|
)
|
|
(1,114
|
)
|
|
—
|
|
|
7,061
|
|
Net income (loss)
|
|
$
|
11,292
|
|
|
$
|
41,100
|
|
|
$
|
(2,453
|
)
|
|
$
|
(38,647
|
)
|
|
$
|
11,292
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
539
|
|
|
—
|
|
|
539
|
|
|
(539
|
)
|
|
539
|
|
Comprehensive income (loss)
|
|
$
|
11,831
|
|
|
$
|
41,100
|
|
|
$
|
(1,914
|
)
|
|
$
|
(39,186
|
)
|
|
$
|
11,831
|
|
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CEC Entertainment, Inc.
|
Consolidating Statement of Cash Flows
|
For the Six Months Ended July 1, 2018
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
Cash flows provided by operating activities:
|
|
$
|
55,435
|
|
|
$
|
14,473
|
|
|
$
|
(4,883
|
)
|
|
$
|
—
|
|
|
$
|
65,025
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
(22,876
|
)
|
|
(12,792
|
)
|
|
(1,140
|
)
|
|
—
|
|
|
(36,808
|
)
|
Development of internal use software
|
|
(973
|
)
|
|
(49
|
)
|
|
—
|
|
|
—
|
|
|
(1,022
|
)
|
Proceeds from sale of property and equipment
|
|
570
|
|
|
(158
|
)
|
|
—
|
|
|
—
|
|
|
412
|
|
Cash flows provided by (used in) investing activities
|
|
(23,279
|
)
|
|
(12,999
|
)
|
|
(1,140
|
)
|
|
—
|
|
|
(37,418
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Repayments on senior term loan
|
|
(3,800
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,800
|
)
|
Payment of debt financing costs
|
|
(395
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(395
|
)
|
Payments on capital lease obligations
|
|
(291
|
)
|
|
—
|
|
|
(4
|
)
|
|
—
|
|
|
(295
|
)
|
Payments on sale leaseback transactions
|
|
(1,384
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,384
|
)
|
Cash flows provided by (used in) financing activities
|
|
(5,870
|
)
|
|
—
|
|
|
(4
|
)
|
|
—
|
|
|
(5,874
|
)
|
Effect of foreign exchange rate changes on cash
|
|
—
|
|
|
—
|
|
|
49
|
|
|
—
|
|
|
49
|
|
Change in cash, cash equivalents and restricted cash
|
|
26,286
|
|
|
1,474
|
|
|
(5,978
|
)
|
|
—
|
|
|
21,782
|
|
Cash, cash equivalents and restricted cash at beginning of period
|
|
59,948
|
|
|
410
|
|
|
6,954
|
|
|
—
|
|
|
67,312
|
|
Cash, cash equivalents and restricted cash at end of period
|
|
$
|
86,234
|
|
|
$
|
1,884
|
|
|
$
|
976
|
|
|
$
|
—
|
|
|
$
|
89,094
|
|
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CEC Entertainment, Inc.
|
Consolidating Statement of Cash Flows
|
For the Six Months Ended July 2, 2017
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
Cash flows provided by (used in) operating activities:
|
|
$
|
55,867
|
|
|
$
|
20,594
|
|
|
$
|
141
|
|
|
$
|
—
|
|
|
$
|
76,602
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
(32,066
|
)
|
|
(14,330
|
)
|
|
(649
|
)
|
|
—
|
|
|
(47,045
|
)
|
Development of internal use software
|
|
—
|
|
|
(2,075
|
)
|
|
—
|
|
|
—
|
|
|
(2,075
|
)
|
Proceeds from the sale of property and equipment
|
|
237
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
237
|
|
Cash flows provided by (used in) investing activities
|
|
(31,829
|
)
|
—
|
|
(16,405
|
)
|
—
|
|
(649
|
)
|
—
|
|
—
|
|
—
|
|
(48,883
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Repayments on senior term loan
|
|
(3,800
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,800
|
)
|
Repayments on note payable
|
|
—
|
|
|
(13
|
)
|
|
—
|
|
|
—
|
|
|
(13
|
)
|
Proceeds from sale leaseback transaction
|
|
4,073
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,073
|
|
Payments on capital lease obligations
|
|
(215
|
)
|
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
(218
|
)
|
Payments on sale leaseback transactions
|
|
(1,161
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,161
|
)
|
Return of capital
|
|
1,447
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,447
|
|
Cash flows provided by (used in) financing activities
|
|
344
|
|
—
|
|
(13
|
)
|
—
|
|
(3
|
)
|
—
|
|
—
|
|
—
|
|
328
|
|
Effect of foreign exchange rate changes on cash
|
|
—
|
|
|
—
|
|
|
239
|
|
|
—
|
|
|
239
|
|
Change in cash, cash equivalents and restricted cash
|
|
24,382
|
|
—
|
|
4,176
|
|
—
|
|
(272
|
)
|
—
|
|
—
|
|
—
|
|
28,286
|
|
Cash, cash equivalents and restricted cash at beginning of period
|
|
53,088
|
|
|
1,158
|
|
|
7,045
|
|
|
—
|
|
|
61,291
|
|
Cash, cash equivalents and restricted cash at end of period
|
|
$
|
77,470
|
|
|
$
|
5,334
|
|
|
$
|
6,773
|
|
|
$
|
—
|
|
|
$
|
89,577
|
|
13. Related Party Transactions:
We reimburse Apollo Management, L.P. for certain out-of-pocket expenses incurred in connection with travel and Board of Directors related expenses. These expenses totaled
$0.1 million
for the
three months ended
July 1, 2018
and
$0.2 million
for the
three months ended
July 2, 2017
and $
0.1 million
and $
0.3 million
for the
six months ended
July 1, 2018
and
July 2, 2017
, respectively, and are included in “General and administrative expenses” in our Consolidated Statements of Earnings.
We utilize an Apollo portfolio company to provide security services to certain of our venues. These expenses totaled approximately
$0.2 million
for both the
three months ended July 1, 2018
and
July 2, 2017
, respectively, and
$0.5 million
for both the
six months ended
July 1, 2018
and
July 2, 2017
, respectively, in connection with services provided by this Apollo portfolio company. These expenses are included in “Other venue operating expenses” in our Consolidated Statements of Earnings.
14. Commitments and Contingencies:
Legal Proceedings
From time to time, we are involved in various inquiries, investigations, claims, lawsuits and other legal proceedings that are incidental to the conduct of our business. These matters typically involve claims from customers, employees or other third parties involved in operational issues common to the retail, restaurant and entertainment industries. Such matters typically represent actions with respect to contracts, intellectual property, taxation, employment, employee benefits, personal injuries and other matters. A number of such claims may exist at any given time, and there are currently a number of claims and legal proceedings pending against us.
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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.
Employment-Related Litigation:
On October 10, 2014, former General Manager Richard Sinohui filed a purported class action lawsuit against CEC Entertainment in the Superior Court of California, Riverside County (the “Sinohui Litigation”), claiming to represent other similarly-situated current and former General Managers of CEC Entertainment in California during the period October 10, 2010 to the present. The lawsuit sought an unspecified amount in damages and to certify a class based on allegations that CEC Entertainment wrongfully classified current and former California General Managers as exempt from overtime protections; that such General Managers worked more than 40 hours a week without overtime premium pay, paid rest periods, and paid meal periods; and that CEC Entertainment failed to provide accurate itemized wage statements or to pay timely wages upon separation from employment, in violation of the California Labor Code, California Business and Professions Code, and the applicable Wage Order issued by the California Industrial Welfare Commission. The plaintiff also alleged that CEC Entertainment failed to reimburse General Managers for certain business expenses, including for personal cell phone usage and mileage, in violation of the California Labor Code; he also asserted a claim for civil penalties under the California Private Attorneys General Act (“PAGA”). On December 5, 2014, CEC Entertainment removed the Sinohui Litigation to the U.S. District Court for the Central District of California, Southern Division. On March 16, 2016, the Court issued an order denying in part and granting in part Plaintiff’s Motion for Class Certification. Specifically, the Court denied Plaintiff’s motion to the extent that he sought to certify a class on Plaintiff’s misclassification and wage statement claims, but certified a class with respect to Plaintiff’s claims that CEC Entertainment had wrongfully failed to reimburse him for cell phone expenses and/or mileage. On June 14, 2016, the Court dismissed Sinohui’s PAGA claim. After participating in mediation on April 19, 2017, the parties agreed to settle all of Sinohui’s individual and class claims. Pursuant to the basic terms of their settlement, Sinohui will grant a complete release to CEC Entertainment on behalf of himself and the class of all claims that he asserted or could have asserted against the Company, based on the facts that gave rise to the certified reimbursement claim in the Sinohui Litigation, in exchange for the Company’s settlement payment. On December 13, 2017, the Court entered its order granting preliminary approval of the parties’ settlement and setting a final fairness hearing for June 15, 2018. Pursuant to the order, Plaintiff filed his motion for final approval of the parties’ settlement on April 27, 2018; the Court then set the motion for hearing on June 15, 2018. By order dated June 6, 2018, the Court continued the hearing on the motion for final approval to September 21, 2018. The settlement of this lawsuit should not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.
On January 30, 2017, former Technical Manager Kevin French filed a purported class action lawsuit against the Company in the U. S. District Court for the Northern District of California (“the French Federal Court Lawsuit”), alleging that CEC Entertainment failed to pay overtime wages, failed to issue accurate itemized wage statements, failed to pay wages due upon separation of employment, and failed to reimburse for certain business expenses, including for mileage and personal cell phone usage, in violation of the California Labor Code and federal law, and seeking to certify separate classes on his federal and state claims. On October 30, 2017, the parties conducted a mediation. At the conclusion of the mediation, the parties agreed to settle all of French’s class and individual claims. Pursuant to the parties’ agreement, on November 14, 2017, the Federal Court Lawsuit was dismissed, and on November 15, 2017, Plaintiff filed a new lawsuit in Superior Court of San Bernadino County, California (the “French State Court Lawsuit”). The French State Court Lawsuit carried forward only the California state law claims alleging a failure to reimburse for business expenses, and sought to certify a class of CEC California Senior Assistant Managers, Assistant Managers, Technical Managers and Assistant Technical Managers who were authorized to drive on behalf of CEC from January 30, 2013 through April 27, 2018. On December 20, 2017, further pursuant to the parties’
settlement, Plaintiff filed a Notice of Settlement. The Court entered an order preliminarily approving of the parties’ settlement on May 17, 2018; in that same order, the Court set the final approval hearing for October 15, 2018. The settlement of this action will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.
Litigation Related to the Merger:
Following the January 16, 2014 announcement that CEC Entertainment had entered into an agreement (“Merger Agreement”), pursuant to which an entity controlled by Apollo Global Management, LLC and its subsidiaries merged with and into CEC Entertainment, with CEC Entertainment surviving the merger (“the Merger”),
four
putative shareholder class actions were filed in the District Court of Shawnee County, Kansas, on behalf of purported stockholders of CEC Entertainment, against A.P. VIII Queso Holdings, L.P., CEC Entertainment, CEC Entertainment's directors, Apollo and Merger Sub (as defined in the Merger Agreement), in connection with the Merger Agreement and the transactions contemplated thereby. These actions were consolidated into one action (the “Consolidated Shareholder Litigation”) in March 2014, and on July 21, 2015, a consolidated class action petition was filed as the operative consolidated complaint, asserting claims against CEC’s former directors, adding The Goldman Sachs Group (“Goldman Sachs”) as a defendant, and removing all Apollo entities as defendants (the “Consolidated Class Action Petition”). The Consolidated Class Action Petition alleges that CEC Entertainment’s directors breached their fiduciary duties to CEC Entertainment’s stockholders in connection
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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 in its entirety.
On March 17, 2017, Plaintiffs filed objections to the Special Master’s report and recommendation with the Kansas court and separately filed a motion with the Special Master to amend the complaint as to Goldman Sachs, but not objecting to the dismissal of CEC or its former directors. On November 20, 2017, the Special Master filed a Supplemental Report recommending to the Court that Plaintiffs’ motion for leave to amend be denied; if the District Court accepts the Special Master’s supplemental recommendations, the case will be dismissed in its entirety. Both remaining parties (Plaintiffs and Goldman Sachs) filed objections to the Supplemental Report on December 22, 2017, and the parties filed responses to these objections on February 16, 2018. The District Court has not yet set this case for trial. While no assurance can be given as to the ultimate outcome of the consolidated matter, we currently believe that the final resolution of the action will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.
Peter Piper, Inc. Litigation:
On September 8, 2016, Diane Jacobson filed a purported class action lawsuit against Peter Piper, Inc. (“Peter Piper”) in the U.S. District Court for the District of Arizona, Tucson Division (the “Jacobson Litigation”). The plaintiff claims to represent other similarly-situated consumers who, within the two years prior to the filing of the Jacobson Litigation, received a printed receipt on which Peter Piper allegedly printed more than the last five digits of the consumer’s credit/debit card number, in violation of the Fair and Accurate Credit Transactions Act. On November 11, 2016, Peter Piper filed a motion to dismiss the Jacobson Litigation. After the plaintiff filed her opposition to the Motion to Dismiss and Peter Piper filed its reply in support thereof, the motion was submitted to the Court for ruling on December 22, 2016. On February 2, 2017, the Court stayed the Jacobson Litigation pending the decision of the U.S. Ninth Circuit Court of Appeals in
Noble v. Nevada Check Cab Corp.
, a case that presented an issue for decision that is relevant to Peter Piper’s motion to dismiss. On March 9, 2018, the Ninth Circuit issued its decision in the Noble case, setting precedent that favors Peter Piper’s position in the Jacobson Litigation. Based on the appellate court’s decision in that case, on March 15, 2018 Peter Piper filed a motion to lift the stay and requesting that the trial court grant its motion to dismiss. On June 28, 2018, the magistrate judge issued a report recommending that the District Court grant Peter Piper’s motion to dismiss and dismiss the plaintiff’s claims without prejudice to their refiling. On August 3, 2018, the District Court accepted the magistrate judge’s recommendation and entered an order dismissing the lawsuit without prejudice to its refiling.