10-Q 1 cecfy201910-qq3.htm 10-Q Document

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.


CEC ENTERTAINMENT, INC.
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

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.

3

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.


4

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.



5

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
)

6
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.

7

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

8

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



9

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.
    

10

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.
    

11

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
 
—


12

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.


13

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

14

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.

15

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

16

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.

17

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.
    

18

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.

19

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

20

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.”

21

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.

22

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

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

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:

25

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

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

 
(17,096
)
 
(477,556
)
 
242,571

Total liabilities and stockholder's equity
 
$
1,594,173

 
$
685,146

 
$
12,491

 
$
(625,645
)
 
$
1,666,165



27

CEC Entertainment, Inc.
Consolidating Statement of Comprehensive Income (Loss)
For the Three Months Ended September 29, 2019
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
 
Food and beverage sales
 
$
77,475

 
$
13,866

 
$
1,304

 
$
—

 
$
92,645

Entertainment and merchandise sales
 
106,258

 
10,651

 
2,779

 
—

 
119,688

Total company venue sales
 
183,733

 
24,517

 
4,083

 
—

 
212,333

Franchise fees and royalties
 
448

 
4,249

 
564

 
—

 
5,261

International Association assessments and other fees
 
258

 
8,485

 
8,763

 
(17,506
)
 
—

Total revenues
 
184,439

 
37,251

 
13,410

 
(17,506
)
 
217,594

Operating Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
Company venue operating costs:
 
 
 
 
 
 
 
 
 
 
Cost of food and beverage
 
17,243

 
3,635

 
424

 
—

 
21,302

Cost of entertainment and merchandise
 
9,445

 
396

 
272

 
—

 
10,113

Total cost of food, beverage, entertainment and merchandise
 
26,688

 
4,031

 
696

 
—

 
31,415

Labor expenses
 
57,163

 
4,847

 
1,203

 
—

 
63,213

Lease costs
 
25,105

 
1,865

 
589

 
—

 
27,559

Other venue operating expenses
 
38,399

 
3,992

 
939

 
(8,744
)
 
34,586

Total company venue operating costs
 
147,355

 
14,735

 
3,427

 
(8,744
)
 
156,773

Advertising expense
 
8,649

 
1,190

 
9,726

 
(8,762
)
 
10,803

General and administrative expenses
 
4,240

 
8,561

 
250

 
—

 
13,051

Depreciation and Amortization
74,749

21,766

 
2,476

 
380

 
—

 
24,622

Transaction, severance and related litigation costs
 
371

 
—

 
—

 
—

 
371

Asset impairments
 
2,023

 
6,179

 
—

 
—

 
8,202

Total operating costs and expenses
 
184,404

 
33,141

 
13,783

 
(17,506
)
 
213,822

Operating income (loss)
 
35

 
4,110

 
(373
)
 
—

 
3,772

Equity in earnings in affiliates
 
658

 
—

 
—

 
(658
)
 
—

Interest expense
 
21,150

 
705

 
174

 
—

 
22,029

Loss on extinguishment of debt
 
2,910

 
—

 
—

 
—

 
2,910

Income (loss) before income taxes
 
(23,367
)
 
3,405

 
(547
)
 
(658
)
 
(21,167
)
Income tax expense (benefit)
 
(8,033
)
 
2,321

 
(121
)
 
—

 
(5,833
)
Net income (loss)
 
$
(15,334
)
 
$
1,084

 
$
(426
)
 
$
(658
)
 
$
(15,334
)

 
 
 
 
 
 
 
 
 
 
Components of other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
73

 


 
(73
)
 
73

 
73

Comprehensive income (loss)
 
$
(15,261
)
 
$
1,084

 
$
(499
)
 
$
(585
)
 
$
(15,261
)

28

CEC Entertainment, Inc.
Consolidating Statement of Comprehensive Income (Loss)
For the Three Months Ended September 30, 2018
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
 
Food and beverage sales
 
$
79,871

 
$
12,854

 
$
1,298

 
$
—

 
$
94,023

Entertainment and merchandise sales
 
108,461

 
10,380

 
2,770

 
—

 
121,611

Total company venue sales
 
188,332

 
23,234

 
4,068

 
—

 
215,634

Franchise fees and royalties
 
441

 
4,302

 
568

 
—

 
5,311

International Association assessments and other fees
 
221

 
9,588

 
8,862

 
(18,671
)
 
—

Total revenues
 
188,994

 
37,124

 
13,498

 
(18,671
)
 
220,945

Operating Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
Company venue operating costs:
 
 
 
 
 
 
 
 
 
 
Cost of food and beverage
 
18,700

 
3,348

 
472

 
—

 
22,520

Cost of entertainment and merchandise
 
9,306

 
391

 
177

 
—

 
9,874

Total cost of food, beverage, entertainment and merchandise
 
28,006

 
3,739

 
649

 
—

 
32,394

Labor expenses
 
58,818

 
4,976

 
1,234

 
—

 
65,028

Lease costs
 
21,719

 
1,630

 
502

 
—

 
23,851

Other venue operating expenses
 
43,711

 
3,500

 
830

 
(9,809
)
 
38,232

Total company venue operating costs
 
152,254

 
13,845

 
3,215

 
(9,809
)
 
159,505

Advertising expense
 
8,984

 
1,150

 
9,786

 
(8,862
)
 
11,058

General and administrative expenses
 
5,017

 
8,499

 
(323
)
 
—

 
13,193

Depreciation and amortization
 
21,429

 
2,807

 
503

 
—

 
24,739

Transaction, severance and related litigation costs
 
(262
)
 
(1
)
 
—

 
—

 
(263
)
Asset impairments
 
2,505

 
2,836

 
3

 
—

 
5,344

Total operating costs and expenses
 
189,927

 
29,136

 
13,184

 
(18,671
)
 
213,576

Operating income (loss)
 
(933
)
 
7,988

 
314

 
—

 
7,369

Equity in earnings in affiliates
 
5,444

 
—

 
—

 
(5,444
)
 
—

Interest expense
 
18,205

 
692

 
172

 
—

 
19,069

Income (loss) before income taxes
 
(13,694
)
 
7,296

 
142

 
(5,444
)
 
(11,700
)
Income tax expense (benefit)
 
(4,207
)
 
2,113

 
(119
)
 
—

 
(2,213
)
Net income (loss)
 
$
(9,487
)
 
$
5,183

 
$
261

 
$
(5,444
)
 
$
(9,487
)

 
 
 
 
 
 
 
 
 
 
Components of other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
(172
)
 
—

 
(172
)
 
172

 
(172
)
Comprehensive income (loss)
 
$
(9,659
)
 
$
5,183

 
$
89

 
$
(5,272
)
 
$
(9,659
)


29

CEC Entertainment, Inc.
Consolidating Statement of Comprehensive Income (Loss)
For the Nine Months Ended September 29, 2019
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
 
Food and beverage sales
 
$
256,765

 
$
41,416

 
$
3,930

 
$
—

 
$
302,111

Entertainment and merchandise sales
 
344,417

 
34,566

 
7,795

 
—

 
386,778

Total company venue sales
 
601,182

 
75,982

 
11,725

 
—

 
688,889

Franchise fees and royalties
 
1,784

 
13,235

 
2,175

 
—

 
17,194

International Association assessments and other fees
 
836

 
30,710

 
28,692

 
(60,238
)
 
—

Total revenues
 
603,802

 
119,927

 
42,592

 
(60,238
)
 
706,083

Operating Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
Company venue operating costs (excluding Depreciation and amortization):

 
 
 
 
 
 
 
 
 
 
Cost of food and beverage
 
57,048

 
10,870

 
1,321

 
—

 
69,239

Cost of entertainment and merchandise
 
29,315

 
1,266

 
730

 
—

 
31,311

Total cost of food, beverage, entertainment and merchandise
 
86,363

 
12,136

 
2,051

 
—

 
100,550

Labor expenses
 
181,397

 
14,591

 
3,705

 
—

 
199,693

Lease costs
 
74,749

 
5,587

 
1,766

 
—

 
82,102

Other venue operating expenses
 
119,942

 
11,617

 
2,549

 
(31,572
)
 
102,536

Total company venue operating costs
 
462,451

 
43,931

 
10,071

 
(31,572
)
 
484,881

Advertising expense
 
28,562

 
4,165

 
29,972

 
(28,666
)
 
34,033

General and administrative expenses
 
13,895

 
29,297

 
(248
)
 
—

 
42,944

Depreciation and amortization
 
64,461

 
7,414

 
1,199

 
—

 
73,074

Transaction, severance and related litigation costs
 
402

 
—

 
—

 
—

 
402

Asset Impairments
 
3,134

 
6,353

 
—

 
—

 
9,487

Total operating costs and expenses
 
572,905

 
91,160

 
40,994

 
(60,238
)
 
644,821

Operating income
 
30,897

 
28,767

 
1,598

 
—

 
61,262

Equity in earnings in affiliates
 
20,677

 
—

 
—

 
(20,677
)
 
—

Interest expense
 
59,093

 
2,210

 
513

 
—

 
61,816

Loss on debt extinguishment
 
2,910

 
—

 
—

 
—

 
2,910

Income before income taxes
 
(10,429
)
 
26,557

 
1,085

 
(20,677
)
 
(3,464
)
Income tax expense
 
(7,607
)
 
6,880

 
85

 
—

 
(642
)
Net income
 
$
(2,822
)
 
$
19,677

 
$
1,000

 
$
(20,677
)
 
$
(2,822
)

 


 


 


 


 


Components of other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
(212
)
 
—

 
(212
)
 
212

 
(212
)
Comprehensive income (loss)
 
$
(3,034
)
 
$
19,677

 
$
788

 
$
(20,465
)
 
$
(3,034
)

30

CEC Entertainment, Inc.
Consolidating Statement of Comprehensive Income (Loss)
For the Nine Months Ended September 30, 2018
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
 
Food and beverage sales
 
$
264,130

 
$
40,250

 
$
4,278

 
$
—

 
$
308,658

Entertainment and merchandise sales
 
324,231

 
36,255

 
8,147

 
—

 
368,633

Total company venue sales
 
588,361

 
76,505

 
12,425

 
—

 
677,291

Franchise fees and royalties
 
1,441

 
12,661

 
1,815

 
—

 
15,917

International Association assessments and other fees
 
794

 
28,339

 
27,951

 
(57,084
)
 
—

Total revenues
 
590,596

 
117,505

 
42,191

 
(57,084
)
 
693,208

Operating Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
Company venue operating costs (excluding Depreciation and amortization):
 
 
 
 
 
 
 
 
 
 
Cost of food and beverage
 
60,432

 
10,845

 
1,497

 
—

 
72,774

Cost of entertainment and merchandise
 
25,972

 
1,238

 
466

 
—

 
27,676

Total cost of food, beverage, entertainment and merchandise
 
86,404

 
12,083

 
1,963

 
—

 
100,450

Labor expenses
 
176,106

 
15,065

 
3,823

 
—

 
194,994

Lease costs
 
65,417

 
5,638

 
1,560

 
—

 
72,615

Other venue operating expenses
 
129,006

 
10,882

 
2,634

 
(29,159
)
 
113,363

Total company venue operating costs
 
456,933

 
43,668

 
9,980

 
(29,159
)
 
481,422

Advertising expense
 
28,742

 
4,511

 
32,682

 
(27,925
)
 
38,010

General and administrative expenses
 
13,539

 
25,336

 
644

 
—

 
39,519

Depreciation and amortization
 
67,073

 
8,253

 
1,478

 
—

 
76,804

Transaction, severance and related litigation costs
 
197

 
266

 
—

 
—

 
463

Asset impairment
 
2,591

 
4,341

 
3

 
—

 
6,935

Total operating costs and expenses
 
569,075

 
86,375

 
44,787

 
(57,084
)
 
643,153

Operating income (loss)
 
21,521

 
31,130

 
(2,596
)
 
—

 
50,055

Equity in earnings in affiliates
 
19,869

 
—

 
—

 
(19,869
)
 
—

Interest expense
 
53,833

 
2,446

 
461

 
—

 
56,740

Income (loss) before income taxes
 
(12,443
)
 
28,684

 
(3,057
)
 
(19,869
)
 
(6,685
)
Income tax expense
 
(6,212
)
 
6,526

 
(768
)
 
—

 
(454
)
Net income (loss)
 
$
(6,231
)
 
$
22,158

 
$
(2,289
)
 
$
(19,869
)
 
$
(6,231
)
 
 
 
 
 
 
 
 
 
 
 
Components of other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
127

 
—

 
127

 
(127
)
 
127

Comprehensive income (loss)
 
$
(6,104
)
 
$
22,158

 
$
(2,162
)
 
$
(19,996
)
 
$
(6,104
)





31

CEC Entertainment, Inc.
Consolidating Statement of Cash Flows
For the Nine Months Ended September 29, 2019
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Consolidated
Cash flows provided by operating activities:
 
$
104,719

 
$
9,292

 
$
1,633

 
$
115,644

 
 
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
 
  Purchases of property and equipment
 
(52,180
)
 
(7,701
)
 
(507
)
 
(60,388
)
  Development of internal use software
 
(183
)
 
(604
)
 
—

 
(787
)
  Proceeds from sale of property and equipment
 
160

 
—

 
—

 
160

Cash flows used in investing activities
 
(52,203
)
 
(8,305
)
 
(507
)
 
(61,015
)
 
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
 
 
  Net proceeds from senior term loan, net of original issue discount
 
479,449

 
—

 
—

 
479,449

  Repayments on senior term loan
 
(473,749
)
 
—

 
—

 
(473,749
)
  Payment of debt financing costs
 
(15,375
)
 
—

 
—

 
(15,375
)
  Payments on financing lease obligations
 
(520
)
 
—

 
(10
)
 
(530
)
  Payments on sale leaseback transactions
 
(2,469
)
 
—

 
—

 
(2,469
)
Cash flows used in financing activities
 
(12,664
)
 
—

 
(10
)
 
(12,674
)
Effect of foreign exchange rate changes on cash
 
—

 
—

 
(5
)
 
(5
)
Change in cash, cash equivalents and restricted cash
 
39,852

 
987

 
1,111

 
41,950

Cash, cash equivalents and restricted cash at beginning of period
 
54,775

 
6,725

 
1,821

 
63,321

Cash, cash equivalents and restricted cash at end of period
 
$
94,627

 
$
7,712

 
$
2,932

 
$
105,271



32

CEC Entertainment, Inc.
Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2018
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Consolidated
Cash flows provided by (used in) operating activities:
 
$
68,801

 
$
17,888

 
$
(4,214
)
 
$
82,475

 
 
 
 

 

 

Cash flows from investing activities:
 

 

 

 

  Purchases of property and equipment
 
(38,536
)
 
(15,512
)
 
(1,154
)
 
(55,202
)
  Development of internal use software
 
(1,484
)
 
(508
)
 
—

 
(1,992
)
  Proceeds from the sale of property and equipment
 
464

 


 
—

 
464

Cash flows used in investing activities
 
(39,556
)
—

(16,020
)
—

(1,154
)
—

(56,730
)
 
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 Repayments on senior term loan
 
(5,700
)
 
—

 
—

 
(5,700
)
 Payment of debt financing costs
 
(395
)
 
—

 
—

 
(395
)
 Payments on capital lease obligations
 
(436
)
 
—

 
(6
)
 
(442
)
 Payments on sale leaseback transactions
 
(2,119
)
 
—

 
—

 
(2,119
)
Cash flows used in financing activities
 
(8,650
)
—

—

—

(6
)
—

(8,656
)
Effect of foreign exchange rate changes on cash
 
—

 
—

 
51

 
51

Change in cash, cash equivalents and restricted cash
 
20,595

—

1,868

—

(5,323
)
—

17,140

Cash, cash equivalents and restricted cash at beginning of period
 
59,948

 
410

 
6,954

 
67,312

Cash, cash equivalents and restricted cash at end of period
 
$
80,543

 
$
2,278

 
$
1,631

 
$
84,452

Note 14. Related Party Transactions:
We reimburse Apollo Management, L.P. for certain out-of-pocket expenses incurred in connection with travel and Board of Directors related expenses. In addition, CEC Entertainment engages Apollo portfolio companies to provide various services, including security services to its venues, licensed music video content for use in its venues, and employment screening services to its recruiting functions. Included in our Total operating costs and expenses are related expenses totaling $1.1 million and $0.4 million for the three months ended September 29, 2019 and September 30, 2018, respectively, and $1.8 million and $1.2 million, respectively, for the nine months ended September 29, 2019 and September 30, 2018.
In connection with the 2019 Secured Credit Facilities, an affiliate of Apollo received an arrangement fee of $1.1 million related to the 2019 Term Loan Facility (see Note 7 “Indebtedness and Interest Expense” for further discussion of the 2019 Secured Credit Facilities).
Included in our Accounts Receivable balance are amounts due from Parent totaling $3.0 million and $2.6 million at September 29, 2019 and December 30, 2018, respectively, primarily related to various general and administrative and transaction related expenses paid on behalf of Parent. Our Accrued Expenses balance includes amounts payable to Parent totaling $0.3 million and $0.1 million at September 29, 2019 and December 30, 2018, respectively, primarily related to stock bonus awards granted to certain officers of the Company (see Note 11 “Stock-Based Compensation Arrangements” for further discussion of stock bonus awards granted to officers).
Note 15. Commitments and Contingencies:
Legal Proceedings
From time to time, we are involved in various inquiries, investigations, claims, lawsuits and other legal proceedings that are incidental to the conduct of our business. These matters typically involve claims from customers, employees or other third parties involved in operational issues common to the retail, restaurant and entertainment industries. Such matters typically represent actions with respect to contracts, intellectual property, taxation, employment, employee benefits, personal injuries and

33

other matters. A number of such claims may exist at any given time, and there are currently a number of claims and legal proceedings pending against us.
In the opinion of our management, after consultation with legal counsel, the amount of liability with respect to claims or proceedings currently pending against us is not expected to have a material effect on our consolidated financial condition, results of operations or cash flows. All necessary loss accruals based on the probability and estimate of loss have been recorded.
Litigation Related to the Merger: Following the January 16, 2014 announcement that CEC Entertainment had entered into an agreement (“Merger Agreement”), pursuant to which an entity controlled by Apollo Global Management, Inc. 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”). On October 8, 2018, the Plaintiff in the Consolidated Shareholder Litigation appealed the District Court’s decision to dismiss the lawsuit in its entirety, but after conducting oral arguments, on September 27, 2019 the Kansas Court of Appeals affirmed the trial court’s dismissal of the case, and Plaintiff did not file a notice of appeal from this last decision before the expiration of the deadline to do so.
Note 16. Subsequent Events:
The Company has evaluated subsequent events through November 11, 2019, and determined that there have been no events that have occurred that would require adjustments to our disclosures in the consolidated financial statements.


34


ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
As used in this report, the terms “CEC Entertainment,” the “Company,” “we,” “us” and “our” refer to CEC Entertainment, Inc. and its subsidiaries.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide the readers of our Consolidated Financial Statements with a narrative from the perspective of our management on our consolidated financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A should be read in conjunction with (i) our Consolidated Financial Statements and related notes included in Part I, Item 1. “Financial Statements” of this report and (ii) Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 8. “Financial Statements and Supplementary Data” in our Annual Report on Form 10-K for the fiscal year ended December 30, 2018, filed with the Securities and Exchange Commission (“SEC”) on March 12, 2019. Our MD&A includes the following sub-sections:
•
Presentation of Operating Results;
•
Executive Summary;
•
Key Measure of Our Financial Performance and Key Non-GAAP Measures;
•
Key Income Statement Line Item Descriptions;
•
Results of Operations;
•
Financial Condition, Liquidity and Capital Resources;
•
Off-Balance Sheet Arrangements and Contractual Obligations;
•
Critical Accounting Policies and Estimates;
•
Recently Issued Accounting Guidance;
•
Non-GAAP Financial Measures; and
•
Cautionary Statement Regarding Forward-Looking Statements.

Presentation of Operating Results
We operate on a 52 or 53 week fiscal year that ends on the Sunday nearest to December 31. Each quarterly period has 13 weeks, except for a 53 week year when the fourth quarter has 14 weeks. Our current fiscal year, which ends on December 29, 2019, and our fiscal year ended December 30, 2018, each consist of 52 weeks. References to the three-month and nine-month periods ended September 29, 2019 and September 30, 2018 are for the 13-week and 39-week periods ended September 29, 2019 and September 30, 2018, respectively.
Seasonality and Variation in Quarterly Results
Our operating results fluctuate seasonally due to the timing of school vacations, holidays and changing weather conditions. As a result, we typically generate higher sales volumes during the first quarter of each fiscal year. School operating schedules, holidays and weather conditions may affect sales volumes in some operating regions differently than others. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.
Executive Summary
General
We develop, operate and franchise family dining and entertainment centers (also referred to as “venues”) under the names “Chuck E. Cheese” (“Where A Kid Can Be A Kid”) and “Peter Piper Pizza” (“Pizza Made Fresh, Families Made Happy”). Our venues deliver a lively, kid-friendly atmosphere that feature a broad array of entertainment offerings including arcade-style and skill-oriented games, rides, live entertainment shows, and other attractions, with the opportunity for kids to win tickets that they can redeem for prizes. We combine this memorable entertainment experience with a broad and creative menu that combines kid-friendly classics as well as a selection of more sophisticated options for adults. We operate 553 venues and have an additional 185 venues operating under franchise arrangements across 47 states and 15 foreign countries and territories as of September 29, 2019.

35

The following table summarizes information regarding the number of Company-operated and franchised venues for the periods presented:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 29,
2019
 
September 30,
2018
 
September 29,
2019
 
September 30,
2018
Number of Company-operated venues:
 
 
 
 
 
 
 
 
Beginning of period
 
554

 
559

 
554

 
562

       New
 
1

 
1

 
1

 
1

Acquired from franchisee (1)
 
—

 
—

 
1

 
—

       Closed
 
(2
)
 
(3
)
 
(3
)
 
(6
)
End of period
 
553

 
557

 
553

 
557

Number of franchised venues:
 
 
 
 
 
 
 
 
Beginning of period
 
195

 
196

 
196

 
192

       New
 
4

 
1

 
7

 
7

Acquired from franchisee (1)
 
—

 
—

 
(1
)
 
—

       Closed
 
(14
)
 
—

 
(17
)
 
(2
)
End of period
 
185

 
197

 
185

 
197

Total number of venues:
 
 
 
 
 
 
 
 
Beginning of period
 
749

 
755

 
750

 
754

       New
 
5

 
2

 
8

 
8

Acquired from franchisee
 
—

 
—

 
—

 
—

       Closed
 
(16
)
 
(3
)
 
(20
)
 
(8
)
End of period
 
738

 
754

 
738

 
754

__________________
(1)
The number of new Company-operated venues and closed franchised venues during the nine months ended September 29, 2019 included one store that was acquired from a franchisee.
Key Measure of Our Financial Performance and Key Non-GAAP Measures
Comparable venue sales. We define “comparable venue sales” as the sales for our domestic Company-operated venues that have been open for more than 18 months as of the beginning of each respective fiscal year or acquired venues we have operated for at least 12 months as of the beginning of each respective fiscal year. Comparable venue sales excludes sales for our domestic Company-operated venues that are expected to be temporarily closed for more than three months primarily as a result of natural disasters, fires, floods and property damage. Company-operated venues that were temporarily closed for more than three months are included in comparable venue sales once they have been reopened for at least 12 months as of the beginning of each respective fiscal year. We define “comparable venue sales change” as the percentage change in comparable venue sales for each respective fiscal period. We believe comparable venue sales change to be a key performance indicator used within our industry; it is a critical factor when evaluating our performance, as it is indicative of acceptance of our strategic initiatives and local economic and consumer trends.
Adjusted EBITDA and Margin. We define Adjusted EBITDA, a measure used by management to assess operating performance, as net income (loss) plus interest expense, income tax expense (benefit), depreciation and amortization expense, impairments, gains and losses on asset disposals, and stock based compensation. In addition, Adjusted EBITDA excludes other items we consider unusual or non-recurring and certain other adjustments required or permitted in calculating covenant compliance under the indenture governing our Senior Notes and/or our 2019 and 2014 Secured Credit Facilities (as defined under “Financial Condition, Liquidity and Capital Resources - Debt Financing”). Adjusted EBITDA Margin represents Adjusted EBITDA as a percentage of total revenues.
Key Income Statement Line Item Descriptions
Revenues. Our primary source of revenues is sales at our Company-operated venues (“company venue sales”), which consist of the sale of food, beverages, unlimited game-play time blocks, game-play credits, and merchandise. A portion of our company venue sales are from sales of value-priced combination packages generally comprised of food, beverage, and through the end of the second quarter of 2018, game plays and/or time blocks, which we promote through in-venue menu pricing, our website and coupon offerings. Beginning in the third quarter of 2018, we offer combination packages comprised of food and beverage only (“Package Deals”), with game plays and/or time blocks available for purchase separately. Prior to the bifurcation

36

of the “Food and beverage sales” and “Entertainment and merchandise sales” components of combination packages, we allocated the revenues recognized from the sale of combination packages and coupons between “Food and beverage sales” and “Entertainment and merchandise sales” based upon the price charged for each component when it is sold separately, or in limited circumstances, our best estimate of selling price if a component is not sold on a stand-alone basis, which we believe approximates each component’s fair value.
Food and beverage sales include all revenues recognized with respect to stand-alone food and beverage sales, and through the end of the second quarter of 2018, the portion of revenues allocated from combination packages and coupons that relate to food and beverage sales. Entertainment and merchandise sales include all revenues recognized with respect to stand-alone sales of game-play credits and unlimited game-play time blocks, and through the end of the second quarter of 2018, a portion of revenues allocated from combination packages and coupons that relate to entertainment and merchandise.
Franchise fees and royalties are another source of revenues. We earn monthly royalties from our franchisees based on a percentage of each franchise venue’s sales. We also receive development and initial franchise fees to establish new franchised venues, as well as earn fees from the sale of equipment and other items or services to franchisees. We recognize initial and renewal development and franchise fees as revenues on a straight-line basis over the life of the franchise agreement starting when the franchise venue has opened. Our national advertising fund receipts from members of the International Association of CEC Entertainment, Inc. (the “Association”) are accounted for on a gross basis as revenue from franchisees.
Company venue operating costs. Certain of our costs and expenses relate only to the operation of our Company-operated venues. These costs and expenses are listed and described below:
•
Cost of food and beverage includes all direct costs of food, beverages and costs of related paper and birthday supplies, less rebates from suppliers;
•
Cost of entertainment and merchandise includes all direct costs of tickets issued, stored-value PlayPass and All You Can Play (“AYCP”) cards, prizes provided and merchandise sold to our customers.
•
Labor expenses consist of salaries and wages, bonuses, related payroll taxes and benefits for venue personnel;
•
Lease costs include lease costs for Company-operated venues and, effective the first day of Fiscal 2019, in connection with the adoption of a new lease accounting standards, lease costs include common area maintenance (“CAM”) charges; and
•
Other venue operating expenses primarily include utilities, repair and maintenance costs, liability and property insurance, property taxes, credit card processing fees, licenses, preopening expenses, venue asset disposal gains and losses, CAM charges (through the end of Fiscal 2018 as discussed under Lease costs above) and all other costs directly related to the operation of a venue.
“Cost of food and beverage” and “Cost of entertainment and merchandise,” as a percentage of Total company venue sales, are influenced both by the cost of products and by the overall mix of our Package Deals and coupon offerings. “Entertainment and merchandise sales” have higher margins than “Food and beverage sales.”
Advertising expense. Advertising expense includes production costs for television commercials, newspaper inserts, Internet advertising, coupons, media expenses for national and local advertising, consulting fees and other forms of advertising such as social media.
General and administrative expenses. General and administrative expenses represent all costs associated with operating our corporate office, including regional and district management and corporate personnel payroll and benefits, back-office support systems, costs of outsourced functions, and other administrative costs not directly related to the operation of our Company-operated venues.
Depreciation and amortization. Depreciation and amortization includes expenses that are (i) directly related to our Company-operated venues’ property and equipment, including leasehold improvements, game and ride equipment, furniture, fixtures and other equipment, and (ii) depreciation and amortization of corporate assets and intangibles.

37


Results of Operations
The following table summarizes our principal sources of company venue sales expressed in dollars and as a percentage of total company venue sales for the periods presented:
 
 
Three Months Ended
 
 
September 29, 2019
 
September 30, 2018
 
 
(in thousands, except percentages)
Food and beverage sales
 
$
92,645

 
43.6
%
 
$
94,023

 
43.6
%
Entertainment and merchandise sales
 
119,688

 
56.4
%
 
121,611

 
56.4
%
Total company venue sales
 
$
212,333

 
100.0
%
 
$
215,634

 
100.0
%
 
 
Nine Months Ended
 
 
September 29, 2019
 
September 30, 2018
 
 
(in thousands, except percentages)
Food and beverage sales
 
$
302,111

 
43.9
%
 
$
308,658

 
45.6
%
Entertainment and merchandise sales
 
386,778

 
56.1
%
 
368,633

 
54.4
%
Total company venue sales
 
$
688,889

 
100.0
%
 
$
677,291

 
100.0
%



The following table summarizes our revenues and expenses expressed in dollars and as a percentage of Total revenues (except as otherwise noted) for the periods presented:
 
 
Three Months Ended
 
 
September 29, 2019
 
September 30, 2018
 
 
(in thousands, except percentages (4))
Total company venue sales
 
$
212,333

 
97.6
 %
 
$
215,634

 
97.6
 %
Franchise fees and royalties
 
5,261

 
2.4
 %
 
5,311

 
2.4
 %
Total revenues
 
217,594

 
100.0
 %
 
220,945

 
100.0
 %
Operating Costs and Expenses:
 
 
 
 
 
 
 
 
Cost of food and beverage (1)
 
21,302

 
23.0
 %
 
22,520

 
24.0
 %
Cost of entertainment and merchandise (2)
 
10,113

 
8.4
 %
 
9,874

 
8.1
 %
Total cost of food, beverage, entertainment and merchandise (3)
 
31,415

 
14.8
 %
 
32,394

 
15.0
 %
Labor expenses (3)
 
63,213

 
29.8
 %
 
65,028

 
30.2
 %
Lease costs (3)
 
27,559

 
13.0
 %
 
23,851

 
11.1
 %
Other venue operating expenses (3)
 
34,586

 
16.3
 %
 
38,232

 
17.7
 %
Total company venue operating costs and expenses (3)
 
156,773

 
73.8
 %
 
159,505

 
74.0
 %
Other costs and expenses:
 
 
 
 
 
 
 
 
Advertising expense
 
10,803

 
5.0
 %
 
11,058

 
5.0
 %
General and administrative expenses
 
13,051

 
6.0
 %
 
13,193

 
6.0
 %
Depreciation and amortization
 
24,622

 
11.3
 %
 
24,739

 
11.2
 %
Transaction, severance and related litigation costs
 
371

 
0.2
 %
 
(263
)
 
(0.1
)%
Asset impairments
 
8,202

 
3.8
 %
 
5,344

 
2.4
 %
Total operating costs and expenses
 
213,822

 
98.3
 %
 
213,576

 
96.7
 %
Operating income
 
3,772

 
1.7
 %
 
7,369

 
3.3
 %
Interest expense
 
22,029

 
10.1
 %
 
19,069

 
8.6
 %
Loss on extinguishment of debt
 
2,910

 
1.3
 %
 
—

 
—
 %
Loss before income taxes
 
$
(21,167
)
 
(9.7
)%
 
$
(11,700
)
 
(5.3
)%

38

 
 
Nine Months Ended
 
 
September 29, 2019
 
September 30, 2018
 
 
(in thousands, except percentages (4))
Total company venue sales
 
$
688,889

 
97.6
 %
 
$
677,291

 
97.7
 %
Franchise fees and royalties
 
17,194

 
2.4
 %
 
15,917

 
2.3
 %
Total revenues
 
706,083

 
100.0
 %
 
693,208

 
100.0
 %
Operating Costs and Expenses:
 
 
 
 
 
 
 
 
Cost of food and beverage (1)
 
69,239

 
22.9
 %
 
72,774

 
23.6
 %
Cost of entertainment and merchandise (2)
 
31,311

 
8.1
 %
 
27,676

 
7.5
 %
Total cost of food, beverage, entertainment and merchandise (3)
 
100,550

 
14.6
 %
 
100,450

 
14.8
 %
Labor expenses (3)
 
199,693

 
29.0
 %
 
194,994

 
28.8
 %
Lease costs (3)
 
82,102

 
11.9
 %
 
72,615

 
10.7
 %
Other venue operating expenses (3)
 
102,536

 
14.9
 %
 
113,363

 
16.7
 %
Total company venue operating costs and expenses (3)
 
484,881

 
70.4
 %
 
481,422

 
71.1
 %
Other costs and expenses:
 
 
 
 
 
 
 
 
Advertising expense
 
34,033

 
4.8
 %
 
38,010

 
5.5
 %
General and administrative expenses
 
42,944

 
6.1
 %
 
39,519

 
5.7
 %
Depreciation and amortization
 
73,074

 
10.3
 %
 
76,804

 
11.1
 %
Transaction, severance and related litigation costs
 
402

 
0.1
 %
 
463

 
0.1
 %
Asset impairments
 
9,487

 
1.3
 %
 
6,935

 
1.0
 %
Total operating costs and expenses
 
644,821

 
91.3
 %
 
643,153

 
92.8
 %
Operating income
 
61,262

 
8.7
 %
 
50,055

 
7.2
 %
Interest expense
 
61,816

 
8.8
 %
 
56,740

 
8.2
 %
Loss on extinguishment of debt
 
$
2,910

 
0.4
 %
 
$
—

 
—
 %
Loss before income taxes
 
$
(3,464
)
 
(0.5
)%
 
$
(6,685
)
 
(1.0
)%
 __________________
(1)
Percent amount expressed as a percentage of Food and beverage sales.
(2)
Percent amount expressed as a percentage of Entertainment and merchandise sales.
(3)
Percent amount expressed as a percentage of Total company venue sales.
(4)
Due to rounding, percentages presented in the table above may not sum to total. The percentage amounts for the components of Cost of food and beverage and the Cost of entertainment and merchandise may not sum to total due to the fact that Cost of food and beverage and Cost of entertainment and merchandise are expressed as a percentage of related Food and beverage sales and Entertainment and merchandise sales, as opposed to Total company venue sales. 
Three months ended September 29, 2019 Compared to the Three months ended September 30, 2018
Revenues
Company venue sales were $212.3 million and $215.6 million for the third quarter of 2019 and the third quarter of 2018, respectively. The decrease in company venue sales was primarily attributable to a 0.9% decrease in comparable venue sales, and net revenue deferrals related to a net Play Pass revenue deferral of $0.7 million for the third quarter of 2019 compared to $1.7 million in net breakage for the third quarter of 2018.
Franchise fees and royalties were $5.3 million for both the third quarter of 2019 and 2018.
Company Venue Operating Costs
The cost of food, beverage, entertainment and merchandise, as a percentage of Total company venue sales, was 14.8% and 15.0% for the third quarter of 2019 and 2018, respectively.
The cost of food and beverage, as a percentage of food and beverage sales, was 23.0% and 24.0% for the third quarter of 2019 and 2018, respectively. The decrease in the cost of food and beverage on a percentage basis in the third quarter of 2019 was primarily driven by higher average selling prices and favorability in commodity volume.

39

The cost of entertainment and merchandise, as a percentage of entertainment and merchandise sales, was 8.4% and 8.1% for the third quarter of 2019 and 2018, respectively. The increase in the cost of entertainment and merchandise on a percentage of sales basis in the third quarter of 2019 reflects the impact of the AYCP and More Tickets initiatives we launched nationally in all of our Chuck E. Cheese Company-operated venues during the third quarter of 2018.
Gross profit, which represents Total revenues less total cost of food, beverage, entertainment and merchandise, as a percentage of Total revenues was 85.6% and 85.3% for the third quarter of 2019 and 2018, respectively.
Labor expenses, as a percentage of sales, were 29.8% and 30.2% for the third quarter of 2019 and 2018, respectively, as the favorable impact of a decrease in labor hours exceeded wage pressures. Our sales per labor hour improved approximately 4.0% in the third quarter of 2019 from the third quarter of 2018.
Lease costs, as a percentage of sales, were 13.0% and 11.1%, for the third quarter of 2019 and 2018, respectively. Lease costs for the third quarter of 2019 were impacted by the adoption of a new lease standard effective December 31, 2018, the first day of Fiscal 2019, that requires us to recognize lease and non-lease components, such as CAM charges, as lease costs, rather than reflecting CAM charges as Other venue operating expenses. Excluding CAM charges, Lease costs, as a percentage of sales, would have been 11.4% for the third quarter of 2019, primarily reflecting a decrease in Company venue sales.
Other venue operating expenses, as a percentage of sales, were 16.3% and 17.7% for the third quarter of 2019 and 2018, respectively. Other venue operating expenses for the third quarter of 2019 were impacted by the adoption of a new lease standard, as discussed in the previous paragraph under Lease costs. Other venue operating expenses as a percentage of sales, including the impact of CAM charges, would have been 17.9% for the third quarter of 2019, increasing primarily as a result of an increase in insurance costs associated with general liability claims.
Advertising Expense
Advertising expense was $10.8 million and $11.1 million for the third quarter of 2019 and 2018, respectively, due to a planned shift in our marketing strategy away from television to targeted digital and social media platforms.
General and Administrative Expenses
General and administrative expenses were $13.1 million and $13.2 million for the third quarter of 2019 and 2018, respectively. The decrease in general and administrative expenses for the third quarter of 2019 is primarily due to a decrease in miscellaneous professional services fees.
Transaction, severance and related litigation costs
Transaction, severance and related litigation costs were $0.4 million and $(0.3) million for the third quarter of 2019 and 2018, respectively. The Transaction, severance and related litigation costs for the third quarter of 2019 relate to third-party costs incurred in connection with the refinancing of our Secured Credit Facilities. See further discussion of the refinancing of our senior secured facilities in “Financial Condition, Liquidity and Capital Resources - Debt Financing” of this report. The Transaction, severance and related litigation costs for the third quarter of 2018 reflect an insurance settlement received relating to legal fees incurred in prior years.
Asset Impairments
In the third quarter of 2019 we recognized an asset impairment charge of $8.2 million primarily related to ten venues, of which none were previously impaired. In the third quarter of 2018, we recognized an asset impairment charge of $5.3 million related to eight venues, of which one was previously impaired. We continue to operate all of the venues that were impaired in the third quarter of 2019 and all but two of the venues that were impaired in the third quarter of 2018. The impairment charge was based on the determination that the financial performance of these venues was adversely impacted by various competitive and economic factors in the markets in which the venues are located.
Interest Expense
Interest expense was $22.0 million and $19.1 million for the third quarter of 2019 and 2018, respectively. The increase in interest expense is related to an increase in the weighted average effective rate incurred on our borrowings under our 2019 and 2014 Secured Credit Facilities driven by the increase in LIBOR rates and a higher interest margin on our recently refinanced secured credit facilities. The weighted average effective interest rate incurred on our borrowings under our secured credit facilities was 7.3% and 5.9% for the third quarter of 2019 and 2018, respectively, which includes amortization of deferred financing costs related to our secured credit facilities, amortization of our 2019 and 2014 Term Loan Facility original issue discount and commitment and other fees related to our secured credit facilities. See further discussion of the refinancing of our senior secured facilities in “Financial Condition, Liquidity and Capital Resources - Debt Financing” of this report.

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Loss on Extinguishment of Debt
In the third quarter of 2019 we recognized a Loss on Extinguishment of Debt of $2.9 million in connection with the refinancing of our 2014 Secured Credit Facilities. See further discussion of the refinancing of our senior secured facilities in “Financial Condition, Liquidity and Capital Resources - Debt Financing” of this report.
Income Taxes
Our effective income tax rate was 27.6% and 18.9% for the third quarter of 2019 and 2018, respectively. Our effective income tax rate for the third quarter of 2019 differs from the statutory rate primarily due to state income taxes and the unfavorable impact of nondeductible litigation costs related to the Merger (as defined in Note 13. “Consolidating Guarantor Financial Information”), foreign income taxes (withheld on royalties and franchise fees earned from international franchisees not offset by foreign tax credits due to the foreign tax credit limitation), and certain nondeductible penalties and other expenses, partially offset by the favorable impact of employment-related federal income tax credits.
Our effective income tax rate for the third quarter of 2018, differs from the statutory tax rate primarily due to state income taxes, nondeductible litigation costs related to the Merger, foreign income taxes (withheld on royalties and franchise fees earned from international franchisees not offset by foreign tax credits due to the foreign tax credit limitation), non-deductible penalties and other expenses, and an increase in the reserve for uncertain tax positions, partially offset by the favorable impact of employment-related federal income tax credits.
Nine months ended September 29, 2019 Compared to Nine months ended September 30, 2018
Revenues
Company venue sales were $688.9 million and $677.3 million for the first nine months of 2019 and 2018, respectively. The increase in company venue sales for the first nine months of 2019 was primarily attributable to a 2.7% increase in comparable venue sales, partially offset by a $2.0 million decrease in company venue sales due to temporary store closures and a net reduction of four Company-operated venues. In addition, net revenue deferrals related to PlayPass were $1.2 million for the first nine months of 2019 compared to $3.7 million in net revenue breakage for the first nine months of 2018, which further offset the increase in comparable venue sales.
Franchise fees and royalties increased from $15.9 million to $17.2 million primarily due to a net increase in average franchise locations during the first nine months of 2019.
Company Venue Operating Costs
The cost of food, beverage, entertainment and merchandise, as a percentage of Total company venue sales, was 14.6% and 14.8% for the first nine months of 2019 and 2018, respectively, as a sales shift towards higher margin Entertainment and merchandise sales from food and beverage sales was offset by cost pressures, primarily related to the impact of new initiatives launched by the Company in the third quarter of 2018.
The cost of food and beverage, as a percentage of food and beverage sales, was 22.9% and 23.6% for the first nine months of 2019 and 2018, respectively. The decrease in the cost of food and beverage on a percentage basis in the first nine months of 2019 was driven by an increase in average selling prices and favorability in commodity prices and volume.
The cost of entertainment and merchandise, as a percentage of entertainment and merchandise sales, was 8.1% and 7.5% for the first nine months of 2019 and 2018, respectively. The cost of entertainment and merchandise on a percentage basis for the first nine months of 2019 compared to the first nine months of 2018 was impacted by a combination of the impact of AYCP and More Tickets, which were launched nationally during the third quarter of 2018.
Gross profit, which represents Total revenues less total cost of food, beverage, entertainment and merchandise, as a percentage of Total revenues, was 85.8% and 85.5% for the first nine months of 2019 and 2018, respectively.
Labor expenses, as a percentage of sales, were 29.0% and 28.8% for the first nine months of 2019 and 2018, respectively, as wage pressures exceeded the favorable impact of a decrease in labor hours on higher sales. Our sales per labor hour improved approximately 5.2% in the first nine months of 2019 from the first nine months of 2018.
Lease costs, as a percentage of sales, were 11.9% and 10.7%, for the first nine months of 2019 and 2018, respectively. Lease costs for the first nine months of 2019 were impacted by the adoption of a new lease standard effective December 31, 2018, the first day of Fiscal 2019, that requires us to recognize lease and non-lease components, such as CAM charges, as lease costs, rather than reflecting CAM charges as Other venue operating expenses. Excluding CAM charges, Lease costs, as a percentage of sales, would have been 10.4% for the first nine months of 2019, reflecting an increase in Company venue sales.

41

Other venue operating costs, as a percentage of sales, were 14.9% and 16.7% for the first nine months of 2019 and 2018, respectively. Other venue operating expenses for the first nine months of 2019 were impacted by the adoption of a new lease standard, as discussed in the previous paragraph under Lease costs. Other venue operating expenses as a percentage of sales, including the impact of CAM charges, would have been 16.4% for the first nine months of 2019, reflecting savings initiatives and efficiencies in general operating costs. The favorable impact of these savings was partially offset by an increase in bank and credit card service fees, as the percentage of credit card sales increased in the first nine months of 2019 from the first nine months of 2018.
Advertising Expense
Advertising expense was $34.0 million and $38.0 million for the first nine months of 2019 and 2018, respectively, due to a planned shift in our marketing strategy away from television to targeted digital and social media platforms.
General and Administrative Expenses
General and administrative expenses were $42.9 million and $39.5 million for the first nine months of 2019 and 2018, respectively. The increase in general and administrative expenses in the first nine months of 2019 is primarily due to an increase in performance-based compensation as a result of improved operating results.
Depreciation and Amortization
Depreciation and amortization was $73.1 million and $76.8 million for the first nine months of 2019 and 2018, respectively. The decrease in depreciation and amortization is primarily due to the impact of six venue closures and non-cash venue impairments recorded in 2018.
Transaction, Severance and Related Litigation Costs
Transaction, severance and related litigation costs were $0.4 million and $0.5 million for the first nine months of 2019 and 2018, respectively. The Transaction, severance and related litigation costs for the first nine months of 2019 relate to legal fees incurred in connection with Merger related litigation costs. The Transaction, severance and related litigation costs for the first nine months of 2018 relate to $0.2 million in legal fees incurred in connection with Merger related litigation, and severance payments of $0.3 million.
Asset Impairments
In the first nine months of 2019 we recognized an asset impairment charge of $9.5 million primarily related to 12 venues, of which none were previously impaired. In the first nine months of 2018, we recognized an asset impairment charge of $6.9 million related to 9 venues, of which one was previously impaired. We continue to operate all of the venues that were impaired in the first nine months of 2019 and all but three of the venues that were impaired in the first nine months of 2018. The impairment charge was based on the determination that the financial performance of these venues was adversely impacted by various competitive and economic factors in the markets in which the venues are located.
Interest Expense
Interest expense was $61.8 million and $56.7 million for the first nine months of 2019 and 2018, respectively. The increase in interest expense is related to an increase in the weighted average effective rate incurred on our borrowings under both our 2019 and 2014 Secured Credit Facilities, driven by the increase in LIBOR rates and a higher interest margin on our recently refinanced secured credit facilities. The weighted average effective interest rate incurred on our borrowings under our secured credit facilities was 6.6% and 5.7% for the first nine months of 2019 and 2018, respectively, which includes amortization of deferred financing costs related to both our 2019 and 2014 Secured Credit Facilities, amortization of our 2019 and 2014 Term Loan Facility original issue discount and commitment and other fees related to our secured credit facilities. See further discussion of the refinancing of our senior secured facilities in “Financial Condition, Liquidity and Capital Resources - Debt Financing” of this report.
Loss on Extinguishment of Debt
In the first nine months of 2019 we recognized a Loss on Extinguishment of Debt of $2.9 million in connection with the refinancing of our 2014 Secured Credit Facilities. See further discussion of the refinancing of our senior secured facilities in “Financial Condition, Liquidity and Capital Resources - Debt Financing” of this report.

42


Income Taxes
Our effective income tax rate was 18.5% and 6.8% for the first nine months of 2019 and 2018, respectively. Our effective income tax rate for the first nine months of 2019 differs from the statutory rate primarily due to state taxes net of the favorable impact of certain state tax legislation enacted during the second quarter of 2019 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 first nine months of 2018 differs from the statutory tax rate primarily due to state income taxes including the impact of certain state tax legislation enacted during the second quarter of 2018 that increased the amount of income subject to state taxation, nondeductible litigation costs related to the Merger, foreign income taxes (withheld on royalties and franchise fees earned from international franchisees not offset by foreign tax credits due to the foreign tax credit limitation), certain non-deductible penalties and other expenses, an increase in the reserve for uncertain tax positions, an increase in a valuation allowance for deferred tax assets associated with a carryforward of certain state tax credits and deferred tax assets relating to our Canada operations that could expire before they are utilized, partially offset by the favorable impact of employment-related federal income tax credits, adjustments to the provisional estimate provided at the end of Fiscal 2017 to account for the impact of the TCJA enacted on December 22, 2017 pursuant to SAB 118, a one-time adjustment to deferred tax (the tax effect of the cumulative foreign currency translation adjustment existing as of January 1, 2018) resulting from the change in our intent to no longer indefinitely reinvest monies loaned to our Canadian subsidiary.
Financial Condition, Liquidity and Capital Resources
Overview of Liquidity
We finance our business activities through cash flows provided by our operations.
The primary components of working capital are as follows:
•
our guests pay for their purchases in cash or credit cards at the time of the sale and the cash from these sales is typically received before our related accounts payable to suppliers and employee payroll become due;
•
frequent inventory turnover results in a limited investment required in inventories; and
•
our accounts payable cash management strategies.
As a result of these factors, our requirement for working capital is not significant and we are able to operate with a net working capital deficit (current liabilities in excess of current assets), similar to other companies in the restaurant industry. As part of our capital allocation strategy, we may elect from time to time to retire certain of our debt obligations through voluntary prepayments or open market purchases.

43

Sources and Uses of Cash
The following tables present summarized consolidated financial information that we believe is helpful in evaluating our liquidity and capital resources as of and for the periods presented:
 
 
Nine Months Ended
 
 
September 29,
2019
 
September 30,
2018
 
 
(in thousands)
Net cash provided by operating activities
 
$
115,644

 
$
82,475

Net cash used in investing activities
 
(61,015
)
 
(56,730
)
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

Interest paid
 
$
57,232

 
$
59,229

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

 
 
September 29,
2019
 
December 30,
2018
 
 
($ in thousands)
Cash and cash equivalents
 
$
105,059

 
$
63,170

Restricted cash
 
212

 
151

Available unused commitments under Revolving Credit Facility
 
105,538

 
141,000

Total cash, cash equivalents, restricted cash and available unused commitments under Revolving Credit Facility
 
$
210,809

 
$
204,321

Term loan facility
 
760,000

 
723,900

Senior notes
 
255,000

 
255,000

Sources and Uses of Cash - Nine months ended September 29, 2019 Compared to the Nine months ended September 30, 2018
Net cash provided by operating activities was $115.6 million and $82.5 million in the nine months ended September 29, 2019 and September 30, 2018, respectively. The increase in net cash provided by operating activities is primarily due to income tax refunds and favorable fluctuations in our working capital.
Net cash used in investing activities was $61.0 million and $56.7 million in the nine months ended September 29, 2019 and September 30, 2018, respectively. Net cash used in investing activities in the nine months ended September 29, 2019 and September 30, 2018 relates primarily to capital expenditures.
Net cash used in financing activities was $12.7 million and $8.7 million in the nine months ended September 29, 2019 and September 30, 2018, respectively. The net cash used in financing activities for the nine months ended September 29, 2019 includes (i) $5.9 million in loan costs and third party legal and other professional fees paid, net of proceeds received, in connection with the refinancing of our secured credit facilities occurring in the third quarter of 2019, (ii) principal payments on our 2014 Secured Credit Facilities and (iii) other lease related obligations. See further discussion below under Debt Financing - Secured Credit Facilities. Net cash used in financing activities for the nine months ended September 30, 2018 relates primarily to principal payments on our 2014 Secured Credit Facilities and other lease related obligations.
Debt Financing
Secured Credit Facilities
On August 30, 2019 the Company entered into a new credit agreement and related security agreements with Credit Suisse AG, Cayman Islands Branch, as administrative and collateral agent. The new credit agreement provides senior secured financing consisting of:

(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

44

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 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,

45

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.
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%.

46

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 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 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.

Capital Expenditures
We focus our capital expenditures on reinvestment into our existing Company-operated Chuck E. Cheese and Peter Piper Pizza venues through various planned capital initiatives and the development or acquisition of additional Company-

47

operated venues. During the nine months ended September 29, 2019, we completed 252 game enhancements and 20 major remodels related to the re-imaging effort to update Chuck E. Cheese locations to a new look and feel.
We have funded and expect to continue to fund our capital expenditures through existing cash flows from operations. Capital expenditures in the first nine months of 2019 totaled approximately $61.2 million.
The following table reconciles the approximate total capital spend by initiative to our Consolidated Statements of Cash Flows for the periods presented:
 
 
Nine Months Ended
 
 
September 29, 2019

September 30, 2018
 
 
(in thousands)
Growth capital spend (1)
 
$
23,390

 
$
21,157

Maintenance capital spend (2)
 
35,264

 
33,048

IT capital spend
 
2,521

 
2,989

Total Capital Spend
 
$
61,175

 
$
57,194

__________________
(1)
Growth capital spend includes major remodels, including the re-imaging effort to update Chuck E. Cheese venues to a new look and feel, venue expansions, new venue development, including relocations, and franchise acquisitions.
(2)    Maintenance capital spend includes game enhancements, general venue capital expenditures and corporate capital expenditures.
We currently estimate our capital expenditures in 2019 will total approximately $95 million to $105 million, inclusive of maintenance capital, growth capital and IT related capital.
Off-Balance Sheet Arrangements and Contractual Obligations
As of September 29, 2019, we had no off-balance sheet financing arrangements as described in Regulation S-K Item 303(a)(4)(ii).
For information regarding our contractual obligations, refer to “Off Balance Sheet Arrangements and Contractual Obligations” in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 30, 2018, filed with the SEC on March 12, 2019.
See further discussion of our indebtedness and future debt obligations in “Financial Condition, Liquidity and Capital Resources - Debt Financing” of this report. There have been no other material changes to our contractual obligations since December 30, 2018.
Critical Accounting Policies and Estimates
Information with respect to our critical accounting policies and estimates, which we believe could have the most significant effect on our reported consolidated results and require difficult, subjective or complex judgment by management are described under “Critical Accounting Policies and Estimates” in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 30, 2018, filed with the SEC on March 12, 2019. Except for the adoption of Accounting Standards Update ASU 2016-12, Leases (Topic 842) and subsequent amendment ASU 2018-11, Leases (Topic 842): Target Improvements, there has been no other material change to the information concerning our critical accounting policies and estimates since December 30, 2018 (see Note 1. “Description of Business and Summary of Significant Accounting Policies” to our Consolidated Financial Statements included in Part I, Item 1. “Financial Statements” of this report).
Recently Issued Accounting Guidance
Refer to Note 1 “Description of Business and Summary of Significant Accounting Policies” to our Consolidated Financial Statements included in Part I, Item 1. “Financial Statements” of this report for a description of recently issued accounting guidance.

48

Non-GAAP Financial Measures
Adjusted EBITDA, a measure used by management to assess operating performance, is defined as Net income (loss) plus interest expense, income tax expense (benefit), depreciation and amortization expense, impairments, gains and losses on asset disposals, and stock based compensation. In addition, Adjusted EBITDA excludes other items we consider unusual or non-recurring and certain other adjustments required or permitted in calculating covenant compliance under our Secured Credit Facilities and the indenture governing our Senior Notes (see discussion of our Senior Notes in Note 7. “Indebtedness and Interest Expense” to our Consolidated Financial Statements included in Part I, Item 1. “Financial Statements” and above under the heading “Financial Condition, Liquidity and Capital Resources - Debt Financing”).
Adjusted EBITDA is presented because we believe that it provides useful information to investors regarding our operating performance and our capacity to incur and service debt and fund capital expenditures. We believe that Adjusted EBITDA is used by many investors, analysts and rating agencies as a measure of performance. We also present Adjusted EBITDA because it is substantially similar to Credit Agreement EBITDA, a measure used in calculating financial ratios and other calculations under our debt agreements, except for excluding (i) the annualized full year effect of Company-operated and franchised venues that were opened and closed during the year, (ii) the projected annualized run-rate expected to be achieved from major remodels under development, and (iii) the full-year effect of costs savings resulting from contract negotiations with suppliers, and investments in productivity enhancements or other operational initiatives. By reporting Adjusted EBITDA, we provide a basis for comparison of our business operations between current, past and future periods by excluding items that we do not believe are indicative of our core operating performance.
Our definition of Adjusted EBITDA allows for the exclusion of certain non-cash and other income and expense items that are used in calculating net income (loss) from continuing operations. However, these are items that may recur, vary greatly and can be difficult to predict. They can represent the effect of long-term strategies as opposed to short-term results. In addition, certain of these items can represent the reduction of cash that could be used for other corporate purposes. These measures should not be considered as alternatives to operating income, cash flows from operating activities or any other performance measures derived in accordance with GAAP as measures of operating performance, or cash flows as measures of liquidity. These measures have important limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. Because of these limitations, we rely primarily on our U.S. GAAP results and use Adjusted EBITDA and Adjusted EBITDA Margin, only supplementally.

49


The following table sets forth a reconciliation of Net loss to Adjusted EBITDA and Adjusted EBITDA Margin for the periods presented:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 29,
2019
 
September 30,
2018
 
September 29,
2019
 
September 30,
2018
 
 
(in thousands, except percentages)
Total revenues
 
$
217,594

 
$
220,945

 
$
706,083

 
$
693,208

Net loss as reported
 
$
(15,334
)

$
(9,487
)

$
(2,822
)

$
(6,231
)
   Interest expense
 
22,029


19,069


61,816


56,740

   Income tax benefit
 
(5,833
)

(2,213
)

(642
)

(454
)
   Depreciation and amortization
 
24,622


24,739


73,074


76,804

EBITDA
 
25,484

 
32,108

 
131,426

 
126,859

Asset impairments
 
8,202


5,344


9,487


6,935

Loss on asset disposals, net (1)
 
920


513


2,903


2,551

Unrealized (gain) loss on foreign exchange (2)
 
168

 
(412
)
 
(469
)
 
283

Non-cash stock-based compensation (3)
 
(111
)

(58
)

2,000


169

Rent expense book to cash (4)
 
783


945


2,481


5,133

Franchise revenue, net cash received (5)
 
464


(30
)

1,634


712

Impact of purchase accounting (6)
 
31


—


31


—

Venue pre-opening costs (7)
 
170


81


386


105

One-time and unusual items (8)
 
2,781


44


3,566


1,511

Adjusted EBITDA
 
$
38,892

 
$
38,535

 
$
153,445

 
$
144,258

Adjusted EBITDA Margin
 
17.9
%
 
17.4
%
 
21.7
%
 
20.8
%
____________
(1)
Relates primarily to gains or losses upon disposal of property or equipment.
(2)
Relates to unrealized gains or losses on the revaluation of our indebtedness with our Canadian subsidiary.
(3)
Represents non-cash equity-based compensation expense.
(4)
Represents (i) the removal of the non-cash portion of rent expense relating to the impact of straight-line rent and the amortization of cash incentives and allowances received from landlords, plus (ii) the actual cash received from landlord incentives and allowances in the period in which it was received.
(5)
Represents the actual cash received for franchise fees received in the period for post-acquisition franchise development agreements, which we do not start recognizing into revenue until the franchise venue is opened.
(6)
Represents revenue related to unearned franchise fees that were removed in purchase accounting, and therefore were not recorded as revenue.
(7)
Relates to start-up and marketing costs incurred prior to the opening of new Company-operated venues and generally consists of payroll, recruiting, training, supplies and rent incurred prior to venue opening.
(8)
Represents non-recurring income and expenses primarily related to (i) legal fees, claims and settlements related to litigation in respect of the Merger; (ii) severance expense and executive termination benefits; (iii) legal claims and settlements related to employee class action lawsuits and settlements; (iv) one-time loss on extinguishment of debt related to the refinancing of our 2014 Secured Credit Facilities; (v) professional and legal fees incurred in connection with our 2019 Secured Credit Facilities; (vi) sales and use taxes relating to prior periods; (vii) professional fees incurred in connection with one-time strategic corporate and tax initiatives, such as accounting and consulting fees related to the acquisition of Peter Piper Pizza (such as transfer pricing and cost segregation); (viii) legal fees incurred in connection with certain potential transactions the Company did not pursue; (ix) removing current period property losses and insurance recoveries relating to prior period business interruption losses at certain venues, primarily relating to disaster recoveries, such as natural disasters, fires, floods and property damage; (x) one-time costs related to the early termination of a supplier contract in connection with the transition to a new supplier; (xi) one-time marketing expenses related to the grand openings of our re-imaged Chuck E. Cheese venues; and (xii) one-time training and travel-related costs incurred in connection with training venue employees in connection with the implementation of our PlayPass initiative and the re-imaging effort of the venues in our Chuck E. Cheese portfolio.
    

50

Cautionary Statement Regarding Forward-Looking Statements
This report contains forward-looking statements, which involve risks and uncertainties. These forward-looking statements are generally identified by the use of forward-looking terminology, including the terms “anticipate,” “believe,” “could,” “estimate,” “expect,” “intent,” “may,” “plan,” “predict,” “potential,” “project,” “should,” “target,” “will,” “would” and, in each case, their negative or other various or comparable terminology. All statements other than statements of historical facts contained in this report, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objections of management and expected market growth are forward-looking statements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future events and, therefore, involve a number of assumptions, risks and uncertainties, including the risk factors described in Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 30, 2018, filed with the SEC on March 12, 2019. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ from those anticipated, estimated or expected. There are a number of important factors that could cause actual results or events to differ materially from those indicated by such forward-looking statements, including, but are not limited to:
•
our strategy, outlook and growth prospects;
•
our operational and financial targets and dividend policy;
•
our planned expansion of the venue base and the implementation of the new design in our existing venues;
•
general economic trends and trends in the industry and markets; and
•
the competitive environment in which we operate.
These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Important factors that could cause our results to vary from expectations include, but are not limited to:
•
negative publicity and changes in consumer preferences;
•
our ability to successfully expand and update our current venue base;
•
our ability to successfully implement our marketing strategy;
•
our ability to compete effectively in an environment of intense competition;
•
our ability to weather economic uncertainty and changes in discretionary spending;
•
increases in food, labor and other operating costs;
•
the impact of labor scheduling legislation;
•
our ability to successfully open international franchises and to operate under the United States and foreign anti-corruption laws that govern those international ventures;
•
risks related to our substantial indebtedness;
•
failure of our information technology systems to support our current and growing business;
•
disruptions to our commodity distribution system;
•
our dependence on third-party vendors to provide us with sufficient quantities of new entertainment-related equipment, prizes and merchandise at acceptable prices;
•
risks from product liability claims and product recalls;
•
the impact of governmental laws and regulations and the outcomes of legal proceedings;
•
potential liability under certain state property laws;
•
fluctuations in our financial results due to new venue openings;
•
local conditions, natural disasters, terrorist attacks and other events and public health issues;
•
the seasonality of our business;
•
inadequate insurance coverage;
•
labor shortages and immigration reform;
•
loss of certain personnel;
•
our ability to protect our trademarks or other proprietary rights;
•
our ability to pay our fixed rental payments;
•
impairment charges for goodwill, indefinite-lived intangible assets or other long-lived assets;
•
our ability to successfully integrate the operations of companies we acquire;

51

•
our failure to maintain adequate internal controls over our financial and management systems; and
•
other risks, uncertainties and factors set forth in Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 30, 2018, filed with the SEC on March 12, 2019.
The forward-looking statements made in this report reflect our views with respect to future events as of the date of this report and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, undue reliance should not be placed on these forward-looking statements. These forward-looking statements represent our estimates and assumptions only as of the date of this report and, except as required by law, we undertake no obligation to update or review publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this report. We anticipate that subsequent events and developments will cause our views to change. This report should be read completely and with the understanding that our actual future results may be materially different from what we expect. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may undertake. We qualify all of our forward-looking statements by these cautionary statements.


52

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to various types of market risk in the normal course of business, including the impact of interest rates, commodity price changes and foreign currency fluctuation.
Interest Rate Risk
We are exposed to market risk from changes in the variable interest rates related to borrowings from our 2019 Secured Credit Facilities. All of our borrowings outstanding under the 2019 Secured Credit Facilities, $760 million as of September 29, 2019, accrue interest at variable rates. Assuming the 2019 Revolving Credit Facility remains undrawn, each 1% change in assumed interest rates, excluding the impact of our 1% interest rate floor, would result in a $7.6 million change in annual interest expense on indebtedness under the 2019 Secured Credit Facilities.
Commodity Price Risk
We are exposed to commodity price changes related to certain food products that we purchase, primarily related to the prices of cheese and dough, which can vary throughout the year due to changes in supply, demand, and other factors. We have not entered into any hedging arrangements to reduce our exposure to commodity price volatility associated with such commodity prices; however, we typically enter into short-term purchasing contracts, which may contain pricing arrangements designed to minimize the impact of commodity price fluctuations, and derivative instruments such as futures contracts to mitigate our exposure to commodity price fluctuations.
For the three months ended September 29, 2019 and September 30, 2018, the average cost of a block of cheese was $1.94 and $1.77, respectively. The estimated increase in our food costs from a hypothetical 10% increase in the average cost of a block of cheese would have been $0.2 million and $0.3 million for the three months ended September 29, 2019 and September 30, 2018, respectively. For the nine months ended September 29, 2019 and September 30, 2018, the average cost of a block of cheese was $1.78 and $1.72, respectively. The estimated increase in our food costs from a hypothetical 10% increase in the average cost of a block of cheese would have been $0.7 million and $0.8 million for the nine months ended September 29, 2019 and September 30, 2018, respectively.
For the three and nine months ended September 29, 2019 and September 30, 2018, the average cost of dough per pound was $0.47. The estimated increase in our food costs from a hypothetical 10% increase in the average cost of dough per pound would have been $0.1 million for both the three months ended September 29, 2019 and September 30, 2018. The estimated increase in our food costs from a hypothetical 10% increase in the average cost of dough per pound would have been $0.3 million and $0.4 million for the nine months ended September 29, 2019 and September 30, 2018, respectively.
Foreign Currency Risk
We are exposed to foreign currency fluctuation risk associated with changes in the value of the Canadian dollar relative to the U.S. dollar as we operate a total of 10 Company-operated venues in Canada. For the three and nine months ended September 29, 2019, our Canadian venues generated operating income of less than $0.1 million and $0.7 million, respectively, compared to our consolidated operating income of $3.8 million and $61.3 million, respectively.
Changes in the currency exchange rate result in cumulative translation adjustments and are included in “Accumulated other comprehensive income (loss)” on our Consolidated Balance Sheets and potentially result in transaction gains or losses, which are included in our earnings. The low and high currency exchange rates for a Canadian dollar into a United States dollar for the three and nine months ended September 29, 2019 were $0.750. $0.767, $0.733 and $0.767, respectively. A hypothetical 10% devaluation in the average quoted U.S. dollar-equivalent of the Canadian dollar exchange rate during the three and nine months ended September 29, 2019 would have decreased our reported consolidated operating results by $0.1 million for both the three and nine months ended September 29, 2019.

53

ITEM 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, as of the end of the period covered by this report. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that our disclosure controls and procedures were effective as of September 29, 2019 to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, was (a) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms; and (b) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the quarterly period covered by this report there has been no change in our internal processes over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


54


PART II – OTHER INFORMATION
ITEM 1. Legal Proceedings.
Refer to Note 15 “Commitments and Contingencies” to our Consolidated Financial Statements included in Part I, Item 1. “Financial Statements” of this report for a discussion of our legal proceedings.
ITEM 1A. Risk Factors.
We believe there have been no material changes in our risk factors from those disclosed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 30, 2018, filed with the SEC on March 12, 2019.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.

NONE.


55

ITEM 6. Exhibits.
EXHIBIT INDEX
 
Exhibit
Number
 
Description
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.INS
 
XBRL Instance Document
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 __________________
*    Filed herewith.
**    Furnished herewith.
    

56

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
 
 
CEC ENTERTAINMENT, INC.
 
 
 
 
 
November 12, 2019
 
By:
 
/s/ James A. Howell
 
 
 
 
James A. Howell
 
 
 
 
Executive Vice President and Chief Financial Officer
 
 
 
 
 
(Principal Financial Officer)
 
 
 
 
 
November 12, 2019
 
By:
 
/s/ Tony Howard
 
 
 
 
Tony Howard
 
 
 
 
Vice President, Controller and Chief Accounting Officer
 
 
 
 
 
(Principal Accounting Officer)
 
 
 
 
 

57