Document
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
_______________________________________________________________________
FORM 10-Q 
______________________________________________________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2019
OR 
¨
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)
____________________________________
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 every Interactive Data File required to be submitted 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 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:
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
ý
Smaller reporting company
¨
 
 
Emerging growth company
¨

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 October 30, 2019, an aggregate of 200 shares of the registrant’s common stock, par value $0.01 per share were outstanding.


Table of Contents

CEC ENTERTAINMENT, INC.
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements.
CEC ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share information)
 
 
September 29,
2019
 
December 30,
2018
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
105,059

 
$
63,170

Restricted cash
 
212

 
151

Accounts receivable
 
20,576

 
24,020

Income taxes receivable
 

 
10,160

Inventories
 
27,579

 
23,807

Prepaid expenses
 
14,274

 
25,424

Total current assets
 
167,700

 
146,732

Property and equipment, net
 
525,107

 
539,185

Operating lease right-of-use assets, net
 
536,057

 

Goodwill
 
484,438

 
484,438

Intangible assets, net
 
469,218

 
477,085

Other noncurrent assets
 
16,794

 
18,725

Total assets
 
$
2,199,314

 
$
1,666,165

LIABILITIES AND STOCKHOLDER’S EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Bank indebtedness and other long-term debt, current portion
 
$
7,600

 
$
7,600

Operating lease liability, current portion
 
49,203

 

Accounts payable
 
43,701

 
31,410

Accrued expenses
 
44,156

 
36,030

Unearned revenues
 
21,869

 
18,124

Accrued interest
 
8,223

 
7,463

Other current liabilities
 
4,548

 
5,955

Total current liabilities
 
179,300

 
106,582

Operating lease obligations, less current portion
 
522,380

 

Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion
 
958,986

 
961,514

Deferred tax liability
 
102,721

 
107,058

Other noncurrent liabilities
 
196,030

 
248,440

Total liabilities
 
1,959,417

 
1,423,594

Stockholder’s equity:
 
 
 
 
Common stock, $0.01 par value; authorized 1,000 shares; 200 shares issued as of September 29, 2019 and December 30, 2018
 

 

Capital in excess of par value
 
359,930

 
359,570

Accumulated deficit
 
(118,482
)
 
(115,660
)
Accumulated other comprehensive loss
 
(1,551
)
 
(1,339
)
Total stockholder’s equity
 
239,897

 
242,571

Total liabilities and stockholder’s equity
 
$
2,199,314

 
$
1,666,165


The accompanying notes are an integral part of these unaudited interim Consolidated Financial Statements.

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Table of Contents

CEC ENTERTAINMENT, INC.
COSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands)
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2019
 
September 30,
2018
 
September 29,
2019
 
September 30,
2018
REVENUES:
 
 
 
 
 
 
 
Food and beverage sales
$
92,645

 
$
94,023

 
$
302,111

 
$
308,658

Entertainment and merchandise sales
119,688

 
121,611

 
386,778

 
368,633

Total company venue sales
212,333


215,634

 
688,889

 
677,291

Franchise fees and royalties
5,261

 
5,311

 
17,194

 
15,917

Total revenues
217,594


220,945

 
706,083

 
693,208

OPERATING COSTS AND EXPENSES:

 
 
 
 
 
 
Company venue operating costs and expenses (excluding Depreciation and amortization):


 
 
 
 
 
 
Cost of food and beverage
21,302

 
22,520

 
69,239

 
72,774

Cost of entertainment and merchandise
10,113

 
9,874

 
31,311

 
27,676

Total cost of food, beverage, entertainment and merchandise
31,415


32,394

 
100,550

 
100,450

Labor expenses
63,213

 
65,028

 
199,693

 
194,994

Lease costs
27,559

 
23,851

 
82,102

 
72,615

Other venue operating expenses
34,586


38,232

 
102,536

 
113,363

Total company venue operating costs and expenses
156,773

 
159,505

 
484,881

 
481,422

Other costs and expenses:
 
 
 
 
 
 


Advertising expense
10,803

 
11,058

 
34,033

 
38,010

General and administrative expenses
13,051

 
13,193

 
42,944

 
39,519

Depreciation and amortization
24,622

 
24,739

 
73,074

 
76,804

Transaction, severance and related litigation costs
371

 
(263
)
 
402

 
463

Asset impairments
8,202

 
5,344

 
9,487

 
6,935

Total operating costs and expenses
213,822


213,576

 
644,821

 
643,153

Operating income
3,772


7,369

 
61,262

 
50,055

Interest expense
22,029

 
19,069

 
61,816

 
56,740

Loss on extinguishment of debt
2,910

 


2,910

 

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.


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CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(in thousands)

 
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

Comprehensive loss
$
(15,261
)
 
$
(9,659
)
 
$
(3,034
)
 
$
(6,104
)

The accompanying notes are an integral part of these unaudited interim Consolidated Financial Statements.



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CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
 
Nine Months Ended
 
September 29,
2019
 
September 30,
2018
CASH FLOWS FROM 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

 

  Depreciation and amortization
73,074

 
76,804

  Deferred income taxes
(4,261
)
 
(3,314
)
  Stock-based compensation expense
1,985

 
169

  Amortization of lease related liabilities

 
(749
)
  Amortization of original issue discount and deferred debt financing costs
3,544

 
3,284

  Debt refinancing costs
694

 

  Loss on asset disposals, net
2,903

 
2,551

  Asset impairments
9,487

 
6,935

  Non-cash lease costs
2,438

 
4,109

  Change in operating lease liabilities
(1,219
)
 

  Other adjustments
(170
)
 
531

  Changes in operating assets and liabilities:
 
 
 
  Accounts receivable
4,222

 
2,016

  Inventories
(3,871
)
 
(84
)
  Prepaid expenses
2,167

 
(3,479
)
  Accounts payable
7,356

 
886

  Accrued expenses
932

 
3,847

  Unearned revenues
3,740

 
(3,263
)
  Accrued interest
972

 
(5,291
)
  Income taxes payable
11,563

 
1,994

  Deferred landlord contributions

 
1,760

Net cash provided by operating activities
115,644

 
82,475

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(60,388
)
 
(55,202
)
Development of internal use software
(787
)
 
(1,992
)
Proceeds from sale of property and equipment
160

 
464

Net cash used in investing activities
(61,015
)
 
(56,730
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from refinancing of senior term loan
479,449

 

Repayments on senior term loan
(473,749
)
 
(5,700
)
Payment of debt financing costs
(15,375
)
 
(395
)
Payments on financing lease obligations
(530
)
 
(442
)
Payments on sale leaseback obligations
(2,469
)
 
(2,119
)

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CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONT'D
(Unaudited)
(in thousands)

Net cash used in financing activities
(12,674
)
 
(8,656
)
Effect of foreign exchange rate changes on cash
(5
)
 
51

Change in cash, cash equivalents and restricted cash
41,950

 
17,140

Cash, cash equivalents and restricted cash at beginning of period
63,321

 
67,312

Cash, cash equivalents and restricted cash at end of period
$
105,271

 
$
84,452

 
 
 
 
 
 
 
 
 
Nine Months Ended
 
September 29,
2019
 
September 30,
2018
SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
Interest paid
$
57,232

 
$
59,229

Income taxes (refunded) paid, net
$
(7,944
)
 
$
867

Non cash portion of Loss on debt extinguishment
2,364

 

NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Accrued construction costs
$
5,687

 
$
1,659

 

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the statements of financial position that sum to the total of the same such amounts shown in the statements of cash flows.
 
September 29,
2019
 
September 30,
2018
Cash and cash equivalents
$
105,059

 
$
84,429

Restricted cash(1)
212

 
23

Cash, cash equivalents and restricted cash
$
105,271

 
$
84,452

__________________
(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.

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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 and Peter Piper Pizza family dining and entertainment venues in 47 states and 15 foreign countries and territories. As of September 29, 2019, we and our franchisees operated a total of 738 venues, of which 553 were Company-operated venues located in 44 states and Canada. Our franchisees operated a total of 185 venues located in 14 states and 14 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 September 29, 2019, a total of 181 Chuck E. Cheese venues are located in California, Texas, and Florida (178 are Company-operated and three are franchised locations), and a total of 118 Peter Piper Pizza venues are located in Arizona, Texas, and Mexico (33 are Company-operated and 85 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 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 $2.3 million and $1.8 million for the nine months ended September 29, 2019 and 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 September 29, 2019 and 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

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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”). ASU 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. 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 ASU 2016-02 at the adoption date and recognize a cumulative adjustment to the opening balance sheet in the period of adoption. The cumulative impact of adopting ASU 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”) 840 Leases (Topic 840). The adoption of 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 September 29, 2019 include $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 September 30, 2018 includes common area maintenance charges of $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 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 nine months ended September 29, 2019:
 
Balance at
 
 
 
 
 
Balance at
 
December 31, 2018
 
Revenue Deferred
 
Revenue Recognized
 
September 29, 2019
 
(in thousands)
PlayPass and ticket related deferred revenue
$
5,561

 
$
36,541

 
$
(35,331
)
 
$
6,771

Gift card related deferred revenue
5,253

 
7,814

 
(8,003
)
 
5,064

Unearned franchise and development fees
6,321

 
2,324

 
(145
)
 
8,500

Other unearned revenues
989

 
19,944

 
(19,399
)
 
1,534

Total unearned revenues
$
18,124

 
$
66,623

 
$
(62,878
)
 
$
21,869



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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 September 29, 2019:
 
Weighted Average Life (Years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
 
 
(in thousands)
Chuck E. Cheese tradename
Indefinite
 
$
400,000

 

 
$
400,000

Peter Piper Pizza tradename
Indefinite
 
26,700

 

 
26,700

Franchise agreements
25
 
53,300

 
(10,782
)
 
42,518

 
 
 
$
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 5. “Leases” for further discussion on the adoption of ASU 2016-02.
Amortization expense related to favorable lease agreements was $0.3 million and $1.0 million for the three and nine-month periods ended 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 September 29, 2019 and 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 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 covenants.
    

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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.
 
 
September 29, 2019
 
Balance Sheet Classification
(in thousands)
Assets
 
 
Operating
Operating lease right-of-use assets, net (1)
$
536,057

Finance
Property and equipment, net (2)
9,346

Total leased assets
 
$
545,403

 
 
 
Liabilities
 
 
Current
 
 
Operating
Operating lease liability, current portion
$
49,203

Finance
Other current liabilities
803

Noncurrent
 
 
Operating
Operating lease obligations, less current portion
522,380

Finance
Other noncurrent liabilities
11,675

Total leased liabilities
 
$
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 $5.7 million as of 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 Facilities at commencement date in determining the present value of lease payments.
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
 
September 29, 2019
 
September 29, 2019
 
 
Statement of Earnings Classification
 
(in thousands)
 
(in thousands)
Operating lease cost (1)
 
Lease costs
 
$
27,559

 
$
82,102

Operating lease cost (2)
 
General and administrative
 
326

 
976

Finance lease cost
 
 
 
 
 
 
Amortization of leased assets
 
Depreciation and amortization
 
246

 
742

Interest on lease liabilities
 
Net interest expense
 
366

 
1,123

Net lease cost
 
 
 
$
28,497

 
$
84,943

__________________
(1) Includes common area maintenance charges of $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.
    

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The following table illustrates the Company’s future minimum rental payments for non-cancelable leases as of September 29, 2019:
 
 
Operating
Leases (1)
 
Finance
Leases (2)
 
Total
 
 
(in thousands)
Remainder of 2019
 
$
22,694

 
$
548

 
$
23,242

2020
 
91,537

 
2,194

 
93,731

2021
 
89,203

 
2,173

 
91,376

2022
 
87,221

 
2,147

 
89,368

2023
 
84,861

 
1,920

 
86,781

After 2023
 
472,432

 
12,931

 
485,363

Total lease payments
 
847,948

 
21,913

 
869,861

Less: interest
 
276,365

 
9,435

 
285,800

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
September 29, 2019
Weighted average remaining lease term (years):
 
Operating leases
 
10

Finance leases
 
11

Weighted average discount rate:
 
 
Operating leases
 
8.0
%
Finance leases
 
13.2
%
The following table includes supplemental cash flow information related to leases:
 
 
Nine Months Ended
 
September 29, 2019
 
 
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows for operating leases
$
64,237

Operating cash flows for finance leases
1,123

Financing cash flows for finance leases
488

Right-of-use assets obtained in exchange for lease obligations:
 
Operating lease liabilities
 
17,397

Finance lease liabilities
 


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The following table illustrates the Company’s future minimum rental payments for non-cancelable leases as of December 30, 2018:
 
Financing
 
Operating
Fiscal Years
(in thousands)
2019
2,182

 
92,435

2020
2,214

 
90,983

2021
2,201

 
88,914

2022
2,184

 
87,183

2023
1,956

 
84,806

After 2023
13,266

 
457,277

Future minimum lease payments
24,003

 
901,598

Less amounts representing interest
(10,996
)
 
 
Present value of future minimum lease payments
13,007

 
 
Less current portion
(677
)
 
 
Finance lease liability, net of current portion
$
12,330

 
 

Note 6. Accounts Payable:
Accounts payable consisted of the following as of the dates presented:
 
September 29,
2019
 
December 30, 2018
 
(in thousands)
Trade and other amounts payable
$
33,312

 
$
20,685

Book overdraft
10,389

 
10,725

       Accounts payable
$
43,701

 
$
31,410


The book overdraft balance represents payments we have issued but that have not cleared the banks.


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Note 7. Indebtedness and Interest Expense:
 Our long-term debt consisted of the following as of the dates presented:
 
September 29,
2019
 
December 30,
2018
 
(in thousands)
Term loan facility
$
760,000

 
$
723,900

Revolving credit facility

 

Senior notes
255,000

 
255,000

     Total debt outstanding
1,015,000

 
978,900

Less:
 
 
 
    Deferred financing costs, net
(18,003
)
 
(8,633
)
    Unamortized original issue discount
(30,411
)
 
(1,153
)
    Current portion of Term Loan Facility
(7,600
)
 
(7,600
)
Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion
$
958,986

 
$
961,514

We were in compliance with the debt covenants in effect as of September 29, 2019 for both the Secured Credit Facilities and the 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
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:

(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 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 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

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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 repricing event as described below, subject to customary “breakage” costs with respect to LIBOR rate loans. Any refinancing through the issuance or repricing 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 twelve months following August 30, 2019 will be accompanied by a 1.00% prepayment premium or fee, as applicable.
The 2019 Term Loan Facility requires scheduled quarterly payments equal to $1.9 million (0.25% of the original principal amount) from December 2019 to June 2026, with the remaining balance due at maturity, August 30, 2026.

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As of September 29, 2019, we had no borrowings outstanding and an $8.5 million letter of credit 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 related to the 2014 Senior Secured Facilities.
Borrowings under the 2019 Secured Credit Facilities bear interest at a rate equal to, at the option of the Company, either:
(a) a LIBOR rate determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowing, adjusted for certain additional costs, subject to a 1.00% floor; or
(b) a base rate determined by reference to the highest of (i) the federal funds rate plus 0.50%, (ii) the prime rate of Credit Suisse AG, Cayman Islands Branch, and (iii) the one-month adjusted LIBOR plus 1.00%.
In each case the interest rate is also subject to an applicable margin determined 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 period from August 30, 2019 through September 29, 2019 the applicable margin for LIBOR borrowings under the 2019 Secured Credit Facilities was 6.50%. During the period from December 31, 2018 through August 29, 2019 and the nine months ended September 30, 2018, the applicable margin for LIBOR borrowings under the 2014 Secured Credit Facilities was 3.25%.
In addition to paying interest on outstanding principal under both the 2019 and 2014 Secured Credit Facilities, the Company is required to pay a commitment fee to the lenders under the respective revolving credit facilities in respect of any unutilized commitments thereunder. The applicable commitment fee rate under the 2019 Revolving Credit Facility is 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 nine months ended September 29, 2019 and September 30, 2018 the commitment fee rate was 0.50%.
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 each letter of credit.
During 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 2019 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

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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 2019 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 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 Revolving Credit Facility that would result in more than 30% drawn thereunder.
Senior Unsecured Debt
Our senior unsecured debt consists of $255.0 million aggregate principal amount borrowings of 8.0% Senior Notes due 2022 (the “Senior Notes”). The Senior Notes bear interest at a rate of 8.0% per year payable February 15th and August 15th each year and mature on February 15, 2022. We may call some or all of the Senior Notes at 102% on or after February 15, 2019 and at 100% on or after February 15, 2020 as set forth in the indenture governing the Senior Notes (the “indenture”).
We paid $6.4 million in debt issuance costs related to the Senior Notes, which we capitalized in “Bank indebtedness and other long-term debt, net of deferred financing costs” on our Consolidated Balance Sheets. The deferred financing costs are being amortized over the life of the Senior Notes and are included in “Interest expense” in our Consolidated Statements of Earnings.
Our obligations under the Senior Notes are fully and unconditionally guaranteed, jointly and severally, by our present and future direct and indirect wholly-owned material domestic subsidiaries that guarantee our 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.

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Interest Expense
Interest expense consisted of the following for the periods presented:
 
Three Months Ended
 
September 29, 2019
 
September 30, 2018
 
(in thousands)
Term Loan Facility (1)
$
12,776

 
$
9,946

Senior notes
5,083

 
5,083

Finance lease obligations
366

 
394

Sale leaseback obligations
2,393

 
2,628

Amortization of deferred financing costs
970

 
923

Other
441

 
95

Total interest expense
$
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 2019 and 2014 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 7.0% for the nine months ended September 29, 2019 and 6.3% for the nine months ended September 30, 2018, respectively.
Note 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.
    

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The following table presents information on our financial instruments as of the periods presented:
 
 
September 29, 2019
 
 
December 30, 2018
 
 
Carrying Amount (1) 
 
Estimated Fair Value
 
 
Carrying Amount (1) 
 
Estimated Fair Value
 
 
(in thousands)
Financial Liabilities:
 
 
 
 
 
 
 
 
 
Bank indebtedness and other long-term debt:
 
 
 
 
 
 
 
 
 
     Current portion
 
$
7,600

 
$
7,464

 
 
$
7,600

 
$
7,051

     Long-term portion (2)
 
1,007,400

 
980,882

 
 
971,300

 
885,212

Bank indebtedness and other long-term debt:
 
$
1,015,000

 
$
988,346

 
 
$
978,900

 
$
892,263

 _________________
(1)    Excluding net deferred financing costs and original issue discount.
(2)    The unamortized portion of original issue 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 2019 and 2014 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 both our 2019 and 2014 Secured Credit Facilities and our Senior Notes was determined by using their respective average of the ask and bid price 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 nine months ended September 29, 2019 and September 30, 2018, there were no significant transfers among Level 1, 2 or 3 fair value determinations.
Note 9. Other Noncurrent Liabilities:
Other noncurrent liabilities consisted of the following as of the dates presented:
 
 
September 29, 2019
 
December 30, 2018
 
 
(in thousands)
Sale leaseback obligations, less current portion (1)
 
$
171,729

 
$
174,520

Lease related liabilities (2)
 

 
45,195

Financing lease obligations, less current portion

 
11,675

 
12,330

Accrued insurance
 
6,724

 
9,861

Other
 
5,902

 
6,534

Total other noncurrent liabilities
 
$
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. See Note 1. “Description of Business and Summary of Significant Accounting Policies - Recently Adopted Accounting Guidance” and Note 5. “Leases” for further discussion on the adoption of ASU 2016-02.

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Note 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
)
 
Nine Months Ended
 
September 29, 2019
 
September 30, 2018
 
(in thousands)
Federal and state income taxes
$
(1,334
)
 
$
(1,167
)
Foreign income taxes (1)
692

 
713

      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 September 29, 2019 and September 30, 2018, respectively. Our effective income tax rate for the three months ended September 29, 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 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

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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 September 29, 2019 and $4.3 million as of December 30, 2018 and if recognized would decrease our provision for income taxes by $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 December 30, 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.”

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Note 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 September 29, 2019 and the activity for the nine months ended 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
(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 September 29, 2019, we had $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 3.9 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.

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The following tables summarize stock-based compensation expense and the associated tax benefit recognized in the Consolidated Financial Statements for the periods presented:
 
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.

23

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Note 12. Stockholder’s Equity:
The following tables summarize the changes in stockholder’s equity during the three and nine-month periods ended September 29, 2019 and September 30, 2018, respectively:
 
 
 
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 30, 2018
 
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
 

 
$

 
$

 
$
(15,334
)
 
$

 
$
(15,334
)
Other comprehensive income
 

 

 

 

 
73

 
73

Stock-based compensation costs related to stock awards
 

 

 
63

 

 

 
63

Balance September 29, 2019
 
200

 
$

 
$
359,930

 
$
(118,482
)
 
$
(1,551
)
 
$
239,897


 
 
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



24

Table of Contents

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, Inc. (“Apollo”) 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:

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Table of Contents

CEC Entertainment, Inc.
Condensed Consolidating Balance Sheet
As of September 29, 2019
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
94,627

 
$
7,712

 
$
2,720

 
$

 
$
105,059

Restricted cash
 

 

 
212

 

 
212

Accounts receivable
 
13,098

 
6,644

 
4,620

 
(3,786
)
 
20,576

Inventories
 
20,420

 
6,862

 
297

 

 
27,579

Prepaid expenses
 
6,754

 
6,776

 
744

 

 
14,274

Total current assets
 
134,899

 
27,994

 
8,593

 
(3,786
)
 
167,700

Property and equipment, net
 
456,798

 
63,281

 
5,028

 

 
525,107

Operating lease right-of-use assets, net
 
478,836

 
47,677

 
9,544

 

 
536,057

Goodwill
 
433,024

 
51,414

 

 

 
484,438

Intangible assets, net
 
8,152

 
461,066

 

 

 
469,218

Intercompany
 
41,679

 
96,942

 

 
(138,621
)
 

Investment in subsidiaries
 
497,945

 

 

 
(497,945
)
 

Other noncurrent assets
 
6,741

 
10,036

 
17

 

 
16,794

Total assets
 
$
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

Operating lease liability, current portion
 
44,413

 
3,749

 
1,041

 

 
49,203

Accounts payable, accrued expenses and unearned revenues
 
66,180

 
46,049

 
5,720

 

 
117,949

Other current liabilities
 
4,530

 

 
18

 

 
4,548

Total current liabilities
 
122,723

 
49,798

 
6,779

 

 
179,300

Operating lease obligations, less current portion
 
458,412

 
55,100

 
8,868

 

 
522,380

Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion
 
958,986

 

 

 

 
958,986

Deferred tax liability
 
86,918

 
17,577

 
(1,774
)
 

 
102,721

Intercompany
 

 
116,739

 
25,668

 
(142,407
)
 

Other noncurrent liabilities
 
191,138

 
4,868

 
24

 

 
196,030

Total liabilities
 
1,818,177

 
244,082

 
39,565

 
(142,407
)
 
1,959,417

Stockholder's equity:
 
 
 
 
 
 
 
 
 
 
Common stock
 

 

 

 

 

Capital in excess of par value
 
359,930

 
466,114

 
3,241

 
(469,355
)
 
359,930

Accumulated earnings (deficit)
 
(118,482
)
 
48,214

 
(18,073
)
 
(30,141
)
 
(118,482
)
Accumulated other comprehensive income (loss)
 
(1,551
)
 

 
(1,551
)
 
1,551

 
(1,551
)
Total stockholder's equity
 
239,897

 
514,328

 
(16,383
)
 
(497,945
)
 
239,897

Total liabilities and stockholder's equity
 
$
2,058,074

 
$
758,410

 
$
23,182

 
$
(640,352
)
 
$
2,199,314


26

Table of Contents

CEC Entertainment, Inc.
Condensed Consolidating Balance Sheet
As of December 30, 2018
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
54,775

 
$
6,725

 
$
1,670

 
$

 
$
63,170

Restricted cash
 

 

 
151

 

 
151

Accounts receivable
 
28,421

 
4,956

 
4,117

 
(3,314
)
 
34,180

Inventories
 
16,896

 
6,617

 
294

 

 
23,807

Prepaid expenses
 
14,264

 
10,562

 
598

 

 
25,424

Total current assets
 
114,356

 
28,860

 
6,830

 
(3,314
)
 
146,732

Property and equipment, net
 
468,827

 
64,721

 
5,637

 

 
539,185

Goodwill
 
433,024

 
51,414

 

 

 
484,438

Intangible assets, net
 
14,716

 
462,369

 

 

 
477,085

Intercompany
 
78,402

 
66,373

 

 
(144,775
)
 

Investment in subsidiaries
 
477,556

 

 

 
(477,556
)
 

Other noncurrent assets
 
7,292

 
11,409

 
24

 

 
18,725

Total assets
 
$
1,594,173

 
$
685,146

 
$
12,491

 
$
(625,645
)
 
$
1,666,165

Current liabilities:
 
 
 
 
 
 
 
 
 
 
Bank indebtedness and other long-term debt, current portion
 
$
7,600

 
$

 
$

 
$

 
$
7,600

Accounts payable, accrued expenses and unearned revenues
 
56,277

 
34,429

 
2,321

 

 
93,027

Other current liabilities
 
5,429

 
510

 
16

 

 
5,955

Total current liabilities
 
69,306

 
34,939

 
2,337

 

 
106,582

Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion
 
961,514

 

 

 

 
961,514

Deferred tax liability
 
91,049

 
17,866

 
(1,857
)
 

 
107,058

Intercompany
 

 
119,498

 
28,591

 
(148,089
)
 

Other noncurrent liabilities
 
229,733

 
18,191

 
516

 

 
248,440

Total liabilities
 
1,351,602

 
190,494

 
29,587

 
(148,089
)
 
1,423,594

Stockholder's equity:
 
 
 
 
 
 
 
 
 
 
Common stock
 

 

 

 

 

Capital in excess of par value
 
359,570

 
466,114

 
3,241

 
(469,355
)
 
359,570

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
)
Total stockholder's equity
 
242,571

 
494,652