Company Quick10K Filing
Quick10K
CEC Entertainment
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-30 Annual: 2018-12-30
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-07-01 Quarter: 2018-07-01
10-Q 2018-04-01 Quarter: 2018-04-01
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-10-01 Quarter: 2017-10-01
10-Q 2017-07-02 Quarter: 2017-07-02
10-Q 2017-04-02 Quarter: 2017-04-02
10-K 2017-01-01 Annual: 2017-01-01
10-Q 2016-10-02 Quarter: 2016-10-02
10-Q 2016-07-03 Quarter: 2016-07-03
10-Q 2016-04-03 Quarter: 2016-04-03
10-K 2016-01-03 Annual: 2016-01-03
10-Q 2015-09-27 Quarter: 2015-09-27
10-Q 2015-06-28 Quarter: 2015-06-28
10-Q 2015-03-29 Quarter: 2015-03-29
10-K 2014-12-28 Annual: 2014-12-28
10-Q 2014-09-28 Quarter: 2014-09-28
10-K 2013-12-29 Annual: 2013-12-29
8-K 2019-08-30 Enter Agreement, Leave Agreement, Off-BS Arrangement
8-K 2019-08-15 Regulation FD
8-K 2019-08-14 Earnings, Exhibits
8-K 2019-08-01 Regulation FD
8-K 2019-08-01 Officers
8-K 2019-07-01 Earnings, Regulation FD, Exhibits
8-K 2019-06-21 Officers
8-K 2019-05-14 Earnings, Exhibits
8-K 2019-04-08 Earnings, Regulation FD, Exhibits
8-K 2019-03-20 Officers
8-K 2019-02-19 Earnings, Officers, Exhibits
8-K 2018-12-18 Officers
8-K 2018-11-08 Earnings, Exhibits
8-K 2018-10-12 Officers
8-K 2018-09-10 Officers, Exhibits
8-K 2018-08-09 Earnings, Exhibits
PKKW Parkway Acquisition 80
PMHG Prime Meridian Holding 58
DTRM Determine 22
BDMS Birner Dental Management Services 13
WLKR Walker Innovation 10
VIDE Video Display 6
AASP All American Sportpark 5
JFU 9F 0
TXHD Textmunication Holdings 0
CSAF Campbell Strategic Allocation Fund 0
CEC 2019-06-30
Part I - Financial Information
Item 1. Financial Statements.
Note 1. Description of Business and Summary of Significant Accounting Policies:
Note 2. Unearned Revenues:
Note 3. Property and Equipment
Note 4. Intangible Assets, Net:
Note 5. Leases:
Note 6. Accounts Payable:
Note 7. Indebtedness and Interest Expense:
Note 8. Fair Value of Financial Instruments:
Note 9. Other Noncurrent Liabilities:
Note 10. Income Taxes:
Note 11. Stock-Based Compensation Arrangements:
Note 12. Stockholder's Equity:
Note 14. Related Party Transactions:
Note 15. Commitments and Contingencies:
Note 16. Subsequent Events:
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II - Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 6. Exhibits.
EX-31.1 cecfy2019q2311.htm
EX-31.2 cecfy2019q2312.htm
EX-32.1 cecfy2019q2321.htm
EX-32.2 cecfy2019q2322.htm

CEC Entertainment Earnings 2019-06-30

CEC 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 cecfy201910-qq2.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 June 30, 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes   ý     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
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 July 29, 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)
 
 
June 30,
2019
 
December 30,
2018
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
113,636

 
$
63,170

Restricted cash
 
182

 
151

Accounts receivable
 
20,676

 
24,020

Income taxes receivable
 

 
10,160

Inventories
 
25,465

 
23,807

Prepaid expenses
 
21,252

 
25,424

Total current assets
 
181,211

 
146,732

Property and equipment, net
 
523,617

 
539,185

Operating lease right-of-use assets, net
 
537,031

 

Goodwill
 
484,438

 
484,438

Intangible assets, net
 
469,730

 
477,085

Other noncurrent assets
 
17,781

 
18,725

Total assets
 
$
2,213,808

 
$
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
 
48,381

 

Accounts payable
 
35,879

 
31,410

Accrued expenses
 
44,173

 
36,030

Unearned revenues
 
20,749

 
18,124

Accrued interest
 
8,060

 
7,463

Other current liabilities
 
4,397

 
5,955

Total current liabilities
 
169,239

 
106,582

Operating lease obligations, less current portion
 
523,598

 

Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion
 
959,874

 
961,514

Deferred tax liability
 
106,646

 
107,058

Accrued insurance
 
8,815

 
9,861

Other noncurrent liabilities
 
190,541

 
238,579

Total liabilities
 
1,958,713

 
1,423,594

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

 

Capital in excess of par value
 
359,867

 
359,570

Accumulated deficit
 
(103,148
)
 
(115,660
)
Accumulated other comprehensive loss
 
(1,624
)
 
(1,339
)
Total stockholder’s equity
 
255,095

 
242,571

Total liabilities and stockholder’s equity
 
$
2,213,808

 
$
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
 
Six Months Ended
 
June 30,
2019
 
July 1,
2018
 
June 30,
2019
 
July 1,
2018
REVENUES:
 
 
 
 
 
 
 
Food and beverage sales
$
91,650

 
$
96,258

 
$
209,466

 
$
214,635

Entertainment and merchandise sales
117,413

 
115,904

 
267,090

 
247,021

Total company venue sales
209,063


212,162

 
476,556

 
461,656

Franchise fees and royalties
6,113

 
5,196

 
11,933

 
10,606

Total revenues
215,176


217,358

 
488,489

 
472,262

OPERATING COSTS AND EXPENSES:

 
 
 
 
 
 
Company venue operating costs (excluding Depreciation and amortization):


 
 
 
 
 
 
Cost of food and beverage
21,285

 
22,894

 
47,937

 
50,254

Cost of entertainment and merchandise
9,452

 
8,421

 
21,198

 
17,802

Total cost of food, beverage, entertainment and merchandise
30,737


31,315

 
69,135

 
68,056

Labor expenses
63,975

 
62,618

 
136,480

 
129,966

Lease costs
27,516

 
24,714

 
54,543

 
48,764

Other venue operating expenses
32,653


37,069

 
67,950

 
75,132

Total company venue operating costs
154,881

 
155,716

 
328,108

 
321,918

Other costs and expenses:
 
 
 
 
 
 
 
Advertising expense
10,977

 
12,977

 
23,230

 
26,952

General and administrative expenses
14,649

 
13,416

 
29,893

 
26,325

Depreciation and amortization
24,118

 
25,493

 
48,452

 
52,065

Transaction, severance and related litigation costs
8

 
191

 
31

 
725

Asset impairments
1,285

 
1,591

 
1,285

 
1,591

Total operating costs and expenses
205,918


209,384

 
430,999

 
429,576

Operating income
9,258


7,974

 
57,490

 
42,686

Interest expense
19,979

 
19,113

 
39,787

 
37,671

Income (loss) before income taxes
(10,721
)

(11,139
)
 
17,703

 
5,015

Income tax expense (benefit)
(1,987
)
 
(2,174
)
 
5,191

 
1,759

Net income (loss)
$
(8,734
)

$
(8,965
)
 
$
12,512

 
$
3,256


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


4


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

 
Three Months Ended
 
Six Months Ended
 
June 30,
2019
 
July 1,
2018
 
June 30,
2019
 
July 1,
2018
Net income (loss)
$
(8,734
)
 
$
(8,965
)
 
$
12,512

 
$
3,256

Foreign currency translation adjustments
(130
)
 
145

 
(285
)
 
300

Comprehensive income (loss)
$
(8,864
)
 
$
(8,820
)
 
$
12,227

 
$
3,556


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)
 
Six Months Ended
 
June 30,
2019
 
July 1,
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
12,512

 
$
3,256

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
  Depreciation and amortization
48,452

 
52,065

  Deferred income taxes
(309
)
 
(3,626
)
  Stock-based compensation expense
2,096

 
227

  Amortization of lease related liabilities

 
(508
)
  Amortization of original issue discount and deferred debt financing costs
2,117

 
2,226

  Loss on asset disposals, net
1,983

 
2,038

  Asset impairments
1,285

 
1,591

  Non-cash lease costs
1,663

 
2,931

  Change in operating lease liabilities
(945
)
 

  Other adjustments
(270
)
 
348

  Changes in operating assets and liabilities:
 
 
 
 
 
 
 
  Accounts receivable
4,200

 
2,380

  Inventories
(1,771
)
 
1,314

  Prepaid expenses
(1,925
)
 
(7,430
)
  Accounts payable
4,045

 
1,439

  Accrued expenses
1,059

 
1,134

  Unearned revenues
2,619

 
(1,089
)
  Accrued interest
745

 
14

  Income taxes receivable
13,516

 
4,964

  Deferred landlord contributions

 
1,751

Net cash provided by operating activities
91,072

 
65,025

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(34,342
)
 
(36,808
)
Development of internal use software
(609
)
 
(1,022
)
Proceeds from sale of property and equipment
141

 
412

Net cash used in investing activities
(34,810
)
 
(37,418
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Repayments on senior term loan
(3,800
)
 
(3,800
)
Payment of debt financing costs

 
(395
)
Payments on financing lease obligations
(344
)
 
(295
)
Payments on sale leaseback obligations
(1,619
)
 
(1,384
)

6

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

Net cash used in financing activities
(5,763
)
 
(5,874
)
Effect of foreign exchange rate changes on cash
(2
)
 
49

Change in cash, cash equivalents and restricted cash
50,497

 
21,782

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

 
67,312

Cash, cash equivalents and restricted cash at end of period
$
113,818

 
$
89,094

 
 
 
 
 
 
 
 
 
Six Months Ended
 
June 30,
2019
 
July 1,
2018
SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
Interest paid
$
36,994

 
$
35,906

Income taxes (refunded) paid, net
$
(8,016
)
 
$
421

NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Accrued construction costs
$
324

 
$
1,352

 

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.
 
June 30,
2019
 
July 1,
2018
Cash and cash equivalents
$
113,636

 
$
88,887

Restricted cash(1)
182

 
207

Cash, cash equivalents and restricted cash
$
113,818

 
$
89,094

__________________
(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 14 foreign countries and territories. As of June 30, 2019, we and our franchisees operated a total of 749 venues, of which 554 were Company-operated venues located in 44 states and Canada. Our franchisees operated a total of 195 venues located in 14 states and 13 foreign countries and territories, including Chile, Colombia, Costa Rica, Guam, Guatemala, Honduras, Mexico, Panama, Peru, Puerto Rico, Saudi Arabia, Trinidad & Tobago, and the United Arab Emirates. As of June 30, 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 132 Peter Piper Pizza venues are located in Arizona, Texas, and Mexico (33 are Company-operated and 99 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 $1.7 million and $1.3 million for the six months ended June 30, 2019 and July 1, 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-month and six-month periods ended June 30, 2019 and July 1, 2018 are for the 13-week and 26-week periods ended June 30, 2019 and July 1, 2018, respectively.
Interim Financial Statements
The accompanying Consolidated Financial Statements as of and for the three and six months ended June 30, 2019 and July 1, 2018 are unaudited and are presented in accordance with the requirements for quarterly reports on Form 10-Q and, consequently, do not include all of the information and footnote disclosures required by GAAP. In the opinion of management, the Consolidated Financial Statements include all adjustments (consisting solely of normal recurring adjustments) necessary for the fair statement of its consolidated results of operations, financial position and cash flows as of the dates and for the periods

8


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 six months ended June 30, 2019 include $3.6 million and $7.1 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 six months ended July 1, 2018 includes common area maintenance charges of $3.4 million and $7.0 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 six months ended June 30, 2019:
 
Balance at
 
 
 
 
 
Balance at
 
December 31, 2018
 
Revenue Deferred
 
Revenue Recognized
 
June 30, 2019
 
(in thousands)
PlayPass and ticket related deferred revenue
$
5,561

 
$
25,433

 
$
(24,892
)
 
$
6,102

Gift card related deferred revenue
5,253

 
5,248

 
(5,016
)
 
5,485

Unearned franchise and development fees
6,321

 
1,399

 
(63
)
 
7,657

Other unearned revenues
989

 
14,213

 
(13,697
)
 
1,505

Total unearned revenues
$
18,124

 
$
46,293

 
$
(43,668
)
 
$
20,749



9


Note 3. Property and Equipment
Asset Impairments
During the three and six months ended June 30, 2019, we recognized impairment charges of $1.1 million primarily related to two venues. During the three and six months ended July 1, 2018, we recognized an asset impairment charge of  $1.6 million primarily related to one venue. 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 June 30, 2019, the aggregate carrying value of the property and equipment at impaired venues, after the impairment charges, was $0.7 million for venues impaired in 2019.
Note 4. Intangible Assets, Net:
The following table presents our indefinite and definite-lived intangible assets at June 30, 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

 
(10,270
)
 
43,030

 
 
 
$
480,000

 
$
(10,270
)
 
$
469,730

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 for the three months ended July 1, 2018, 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 June 30, 2019 and July 1, 2018, respectively, and $1.0 million for both the six months ended June 30, 2019 and July 1, 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.
 
 
June 30, 2019
 
Balance Sheet Classification
(in thousands)
Assets
 
 
Operating
Operating lease right-of-use assets, net (1)
$
537,031

Finance
Property and equipment, net (2)
9,593

Total leased assets
 
$
546,624

 
 
 
Liabilities
 
 
Current
 
 
Operating
Operating lease liability, current portion
$
48,381

Finance
Other current liabilities
777

Noncurrent
 
 
Operating
Operating lease obligations, less current portion
523,598

Finance
Other noncurrent liabilities
11,888

Total leased liabilities
 
$
584,644

__________________
(1) During the three and six months ended June 30, 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 $5.5 million as of June 30, 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
 
Six Months Ended
 
 
 
 
June 30, 2019
 
June 30, 2019
 
 
Statement of Earnings Classification
 
(in thousands)
 
(in thousands)
Operating lease cost (1)
 
Lease costs
 
$
27,516

 
$
54,543

Operating lease cost (2)
 
General and administrative
 
327

 
650

Finance lease cost
 
 
 
 
 
 
Amortization of leased assets
 
Depreciation and amortization
 
248

 
496

Interest on lease liabilities
 
Net interest expense
 
376

 
757

Net lease cost
 
 
 
$
28,467

 
$
56,446

__________________
(1) Includes common area maintenance charges of $3.6 million and $7.1 million for the three and six months ended June 30, 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 June 30, 2019:
 
 
Operating
Leases (1)
 
Finance
Leases (2)
 
Total
 
 
(in thousands)
Remainder of 2019
 
$
46,438

 
$
2,152

 
$
48,590

2020
 
92,308

 
2,164

 
94,472

2021
 
89,789

 
2,148

 
91,937

2022
 
87,200

 
2,147

 
89,347

2023
 
84,750

 
1,920

 
86,670

After 2023
 
461,590

 
13,331

 
474,921

Total lease payments
 
862,075

 
23,862

 
885,937

Less: interest
 
290,096

 
11,197

 
301,293

Present value of minimum lease payments (3)
 
$
571,979

 
$
12,665

 
$
584,644

__________________
(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 $48.4 million and $523.6 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 $11.9 million are included in “Other current liabilities” and “Other noncurrent liabilities”, respectively, in our Consolidated Balance Sheet.

 
 
Six Months Ended
Lease Term and Discount Rate
June 30, 2019
Weighted average remaining lease term (years):
 
Operating leases
 
10.2

Finance leases
 
11.2

Weighted average discount rate:
 
 
Operating leases
 
8.0
%
Finance leases
 
13.6
%
The following table includes supplemental cash flow information related to leases:
 
 
Six Months Ended
 
June 30, 2019
 
 
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows for operating leases
$
43,888

Operating cash flows for finance leases
757

Financing cash flows for finance leases
347

Right-of-use assets obtained in exchange for lease obligations:
 
Operating lease liabilities
 
5,940

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:
 
June 30,
2019
 
December 30, 2018
 
(in thousands)
Trade and other amounts payable
$
25,037

 
$
20,685

Book overdraft
10,842

 
10,725

       Accounts payable
$
35,879

 
$
31,410


The book overdraft balance represents checks issued but not yet presented to banks.


13


Note 7. Indebtedness and Interest Expense:
 Our long-term debt consisted of the following as of the dates presented:
 
June 30,
2019
 
December 30,
2018
 
(in thousands)
Term loan facility
$
720,100

 
$
723,900

Senior notes
255,000

 
255,000

     Total debt outstanding
975,100

 
978,900

Less:
 
 
 
    Deferred financing costs, net
(6,743
)
 
(8,633
)
    Unamortized original issue discount
(883
)
 
(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
$
959,874

 
$
961,514

We were in compliance with the debt covenants in effect as of June 30, 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.
On August 1, 2019, the Company announced that it is seeking to obtain a new first lien senior secured credit facility to refinance in full its existing secured credit facilities (as defined below).
Secured Credit Facilities
Our secured credit facilities include (i) a $760.0 million term loan facility with a maturity date of February 14, 2021 (the “term loan facility”) and (ii) a $95.0 million senior secured revolving credit facility with a maturity date of November 16, 2020 (as discussed in more detail below, $95.0 million of our original $150.0 million revolving credit facility maturing on February 14, 2019, was extended to November 16, 2020). The revolving credit facility includes a letter of credit sub-facility and a $30.0 million swingline loan sub-facility (the “revolving credit facility” and together with the term loan facility, the “secured credit facilities”). The term loan facility requires scheduled quarterly payments equal to 0.25% of the original principal amount from July 2014 to December 2020, with the remaining balance due at maturity, February 14, 2021.
As of June 30, 2019, we had no borrowings outstanding and an $8.5 million letter of credit issued but undrawn under the revolving credit facility, and a $9.0 million letter of credit issued but undrawn under the revolving credit facility, as of December 30, 2018. On May 8, 2018 we entered into an incremental assumption agreement with certain of our revolving credit facility lenders to extend the maturity on $95.0 million of the revolving credit facility through November 16, 2020.  In connection with the extension of the maturity date, we agreed to the following covenants for the benefit of the revolving credit facility lenders:  (a) with respect to each fiscal year (commencing with the fiscal year ending December 30, 2018), to the extent we have excess cash flow (as defined in the secured credit facilities agreement), we are required to make a mandatory prepayment of term loan principal to the extent that 75% times our excess cash flow (as defined in the secured credit facilities agreement) and subject to step-downs based on our net first lien senior secured leverage ratio (the ratio of consolidated debt secured by first-priority liens on the collateral less unrestricted cash (“net first lien debt”) to the last twelve months’ EBITDA, as defined in the senior credit facilities debt agreement) exceeds $10 million with any such required mandatory payment reduced by any optional prepayments of principal that may have occurred during the fiscal year, and (b) we shall not incur additional first lien debt in connection with certain acquisitions, mergers or consolidations unless our net first lien senior secured leverage ratio is greater than 3.65 to 1.00 on a pro forma basis. The remaining $55.0 million of the original revolving credit facility matured on February 14, 2019 with no borrowings outstanding thereunder. All borrowings under our revolving credit facility are subject to the satisfaction of customary conditions, including the absence of a default and the accuracy of representations and warranties.

14


The term loan was issued net of $3.8 million of original issue discount. We also paid $17.8 million and $3.8 million in debt financing costs related to the term loan facility and revolving credit facility (inclusive of costs incurred in connection with the May 8, 2018 incremental assumption agreement), respectively. All debt financing costs were capitalized in “Bank indebtedness and other long-term debt, net of deferred financing costs” on our Consolidated Balance Sheets. The original issue discount and deferred financing costs related to the term loan facility are amortized over the life of the term loan facility, and the deferred financing costs related to the revolving credit facility are being amortized through November 16, 2020, and are included in “Interest expense” on our Consolidated Statements of Earnings.
Borrowings under the secured credit facilities bear interest at a rate equal to, at our option, either (a) a London Interbank Offered Rate (“LIBOR”) determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowings, adjusted for certain additional costs, subject to a 1.00% floor in the case of term loans or (b) a base rate determined by reference to the highest of (i) the federal funds effective rate plus 0.50%; (ii) the prime rate of Deutsche Bank AG New York Branch; and (iii) the one-month adjusted LIBOR plus 1.00%, in each case plus an applicable margin. The base applicable margin is 3.25% with respect to LIBOR borrowings and 2.25% with respect to base rate borrowings under the
term loan facility and base rate borrowings and swingline borrowings under the revolving credit facility. The applicable margin
for LIBOR borrowings under the term loan facility is subject to one step-down from 3.25% to 3.00% based on our net first lien senior secured leverage ratio and the applicable margin for LIBOR borrowings under the revolving credit facility is subject to two step-downs from 3.25% to 3.00% and 2.75% based on our net first lien senior secured leverage ratio. During the six months ended June 30, 2019 and July 1, 2018, the applicable margin for LIBOR borrowings under both the term loan facility and the revolving credit facility was 3.25%.
In addition to paying interest on outstanding principal under the secured credit facilities, we are required to pay a commitment fee to the lenders under the revolving credit facility with respect to the unutilized commitments thereunder. The base applicable commitment fee rate under the revolving credit facility is 0.50% per annum and is subject to one step-down from 0.50% to 0.375% based on our net first lien senior secured leverage ratio. During the six months ended June 30, 2019 and July 1, 2018 the commitment fee rate was 0.50%. We are also required to pay customary agency fees, as well as letter of credit participation fees computed at a rate per annum equal to the applicable margin for LIBOR rate borrowings on the dollar equivalent of the daily stated amount of outstanding letters of credit, plus such letter of credit issuer’s customary documentary, processing, and fronting fees computed at a rate equal to 0.125% per annum on the daily stated amount of such letter of credit.
During the six months ended June 30, 2019, the federal funds rate ranged from 2.36% to 2.45%, the prime rate was 5.50% and the one-month LIBOR ranged from 2.38% to 2.52%.
The weighted average effective interest rate incurred on our borrowings under our secured credit facilities was 6.3% and 5.6% for the six months ended June 30, 2019 and July 1, 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.
Obligations under the secured credit facilities are unconditionally guaranteed by Queso Holdings Inc. (“Parent”) on a limited-recourse basis and each of our existing and future direct and indirect material, wholly-owned domestic subsidiaries, subject to certain exceptions. The obligations are secured by a pledge of our capital stock and substantially all of our assets and those of each subsidiary guarantor, including capital stock of the subsidiary guarantors and 65% of the capital stock of the first-tier foreign subsidiaries that are not subsidiary guarantors, in each case subject to exceptions. Such security interests consist of first priority liens with respect to the collateral.
The secured credit facilities also contain customary affirmative and negative covenants, and events of default, which limit our ability to, among other things: incur additional debt or issue certain preferred shares; create liens on certain assets; make certain loans or investments (including acquisitions); pay dividends on or make distributions with respect to our capital stock or make other restricted payments; consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; sell assets; enter into certain transactions with our affiliates; enter into sale-leaseback transactions; change our lines of business; restrict dividends from our subsidiaries or restrict liens; change our fiscal year; and modify the terms of certain debt or organizational agreements.
Our revolving credit facility includes a springing financial maintenance covenant that requires our net first lien senior secured leverage ratio not to exceed 6.25 to 1.00. The covenant will be tested quarterly if the revolving credit facility is more than 30% drawn (excluding outstanding letters of credit) and will be a condition to drawings under the revolving credit facility that would result in more than 30% drawn thereunder.

15



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 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 six months ended June 30, 2019 and July 1, 2018, which included amortization of deferred financing costs and other fees related to our senior notes.
Interest Expense
Interest expense consisted of the following for the periods presented:
 
Three Months Ended
 
June 30, 2019
 
July 1, 2018
 
(in thousands)
Term loan facility (1)
$
10,577

 
$
9,681

Senior notes
5,083

 
5,083

Finance lease obligations
376

 
431

Sale leaseback obligations
2,683

 
2,623

Amortization of deferred financing costs
923

 
954

Other
337

 
341

Total interest expense
$
19,979

 
$
19,113

 
Six Months Ended
 
June 30, 2019
 
July 1, 2018
 
(in thousands)
Term loan facility (1)
$
21,243

 
$
18,800

Senior notes
10,165

 
10,165

Finance lease obligations
757

 
859

Sale leaseback obligations
5,377

 
5,252

Amortization of deferred financing costs
1,847

 
1,955

Other
398

 
640

Total interest expense
$
39,787

 
$
37,671

 __________________
(1)    Includes amortization of original issue discount.

16


The weighted average effective interest rate incurred on our borrowings under our secured credit facilities and senior notes (including amortized debt issuance costs, amortization of original issue discount, commitment and other fees related to the secured credit facilities and senior notes) was 6.8% for the six months ended June 30, 2019 and 6.3% for the six months ended July 1, 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.
The following table presents information on our financial instruments as of the periods presented:
 
 
June 30, 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

 
$
7,548

 
 
$
7,600

 
$
7,051

     Long-term portion (2)
 
966,617

 
967,221

 
 
970,147

 
885,212

Bank indebtedness and other long-term debt:
 
$
974,217

 
$
974,769

 
 
$
977,747

 
$
892,263

 _________________
(1)    Excluding net deferred financing costs.
(2)    Net of original issue discount.
Our financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, our secured credit facilities and our senior notes. The carrying amount of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximates fair value because of their short maturities. The estimated fair value of our secured credit facilities, term loan facility and senior notes was determined by using the respective average of the ask and bid price of our outstanding borrowings under our term loan facility and the senior notes as of the nearest open market date preceding the reporting period end. The average of the ask and bid price are classified as Level 2 in the fair value hierarchy.
Our non-financial assets, which include long-lived assets, including property, plant and equipment, 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 six months ended June 30, 2019 and July 1, 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:
 
 
June 30, 2019
 
December 30, 2018
 
 
(in thousands)
Sale leaseback obligations, less current portion (1)
 
$
172,704

 
$
174,520

Lease related liabilities (2)
 

 
45,195

Financing lease obligations, less current portion

 
11,888

 
12,330

Other
 
5,949

 
6,534

Total other noncurrent liabilities
 
$
190,541

 
$
238,579

 ________________
(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.

17


(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.
Note 10. Income Taxes:
Our income tax expense (benefit) consists of the following for the periods presented:
 
Three Months Ended
 
June 30, 2019
 
July 1, 2018
 
(in thousands)
Federal and state income taxes
$
(2,332
)
 
$
(2,251
)
Foreign income taxes (1)
345

 
77

      Income tax benefit
$
(1,987
)
 
$
(2,174
)
 
Six Months Ended
 
June 30, 2019
 
July 1, 2018
 
(in thousands)
Federal and state income taxes
$
4,566

 
$
1,284

Foreign income taxes (1)
625

 
475

      Income tax expense
$
5,191

 
$
1,759

__________________
(1)    Including foreign taxes withheld.
Our effective income tax rate was 18.5% and 29.3% for the three months ended June 30, 2019 and July 1, 2018, respectively. Our effective income tax rate for the three months ended June 30, 2019 differs from the statutory rate primarily due to state income taxes and the negative impact of nondeductible litigation costs related to the Merger (as defined in Note 13. “Consolidating Guarantor Financial Information”), nondeductible penalties, and 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), nondeductible penalties and other expenses, and foreign income taxes (taxes withheld on royalties and franchise fees earned from international franchisees not offset by foreign tax credits due to the foreign tax credit limitation) partially offset by the favorable impact of employment-related federal income tax credits. Our effective income tax rate for the three months ended July 1, 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, non-deductible penalties and other expenses partially offset by the favorable impact of employment-related federal income tax credits and an adjustment recorded during the three months ended July 1, 2018 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”).
Our effective income tax rate was 29.3% and 35.1% for the six-month periods ended June 30, 2019 and July 1, 2018, respectively. Our effective income tax rate for the six-month period ended June 30, 2019 differs from the statutory rate primarily due to state taxes and the negative impact of nondeductible litigation costs related to the Merger (as defined in Note 13. “Consolidating Guarantor Financial Information”), nondeductible penalties and other expenses, and foreign income taxes (withheld on royalties and franchise fees received from international franchisees not offset by foreign tax credits due to the foreign tax credit limitation) primarily offset by the favorable impact of employment-related tax credits. Our effective income tax rate for the six-month period ended July 1, 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, non-deductible penalties and other expenses partially offset by the favorable impact of employment-related federal income tax credits, an adjustment recorded during the second quarter of 2018 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 recorded in the first quarter of 2018, and an increase in a valuation allowance for deferred tax assets associated our Canadian operations that could expire before they are utilized.
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

18


due to significant variations in the customary relationship between income tax expense and projected annual pre-tax income or loss which occurs when annual projected pre-tax income or loss nears a relatively small amount in comparison to the differences between income and deductions determined for financial statement purposes versus income tax purposes. Using the discrete method, we have determined our current and deferred income tax expense as if the interim period were an annual period.
Our liability for uncertain tax positions (excluding interest and penalties) was $4.2 million as of June 30, 2019 and $4.3 million as of December 30, 2018 and if recognized would decrease our provision for income taxes by $3.3 million. Within the next twelve months, we could settle or otherwise conclude certain ongoing income tax audits 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 June 30, 2019 and $1.1 million as of December 30, 2018, respectively. On the Consolidated Balance Sheets, we include current interest related to unrecognized tax benefits in “Accrued interest,” current penalties in “Accrued expenses” and noncurrent accrued interest and penalties in “Other noncurrent liabilities.”
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 June 30, 2019 and the activity for the six months ended June 30, 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
(36,783
)
$10.46


Outstanding stock options, June 30, 2019
2,375,533

$8.84
5.9
$
3,013

Stock options expected to vest, June 30, 2019
1,599,290

$9.02
6.2
$
1,739

Exercisable stock options, June 30, 2019
598,545

$8.30
4.8
$
1,080

__________________
(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 June 30, 2019, we had $1.7 million of total unrecognized share-based compensation expense related to unvested options, which is expected to be amortized over the remaining weighted-average vesting period of 4.2 years.
Stock Awards
During the first quarter of 2019, certain officers of the Company were granted stock bonus awards under the 2014 Equity Incentive Plan. The number of common shares of Parent awarded was based on the fair market value of Parent’s common stock as of December 31, 2018. The shares granted to the officers were fully vested immediately on the date that they were granted. In addition, during 2019, the Company agreed to issue fully vested common shares of Parent to certain officers of the Company in the first quarter 2020 based on the Company’s financial performance for Fiscal 2019.
The following tables summarize stock-based compensation expense and the associated tax benefit recognized in the Consolidated Financial Statements for the periods presented:

19


 
Three Months Ended
 
June 30,
2019
 
July 1,
2018
 
(in thousands)
Stock-based compensation costs related to stock awards
$
782

 
$

Stock-based compensation costs related to incentive stock options
171

 
166

Portion capitalized as property and equipment (1)
(5
)
 
(3
)
Stock-based compensation expense recognized
$
948

 
$
163

Payroll taxes related to stock awards
$

 
$


 
Six Months Ended
 
June 30,
2019
 
July 1,
2018
 
(in thousands)
Stock-based compensation costs related to stock awards
$
1,814

 
$

Stock-based compensation costs related to incentive stock options
297

 
233

Portion capitalized as property and equipment (1)
(15
)
 
(6
)
Stock-based compensation expense recognized
$
2,096

 
$
227

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.

20


Note 12. Stockholder’s Equity:
The following tables summarize the changes in stockholder’s equity during the three and six-month periods ended June 30, 2019 and July 1, 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


 
 
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


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, LLC and its subsidiaries, which we refer to as the “Merger.” The senior notes issued by the Issuer, in conjunction with the Merger, are our unsecured obligations and are fully and unconditionally, jointly and severally guaranteed by all of our 100% wholly-owned U.S. subsidiaries (the “Guarantors”). Our wholly-owned foreign subsidiaries and our less-than-wholly-owned U.S. subsidiaries are not a party to the guarantees (the “Non-Guarantors”). The following schedules present the condensed consolidating financial statements of the Issuer, Guarantors and Non-Guarantors, as well as consolidated results, for the periods presented:

21


CEC Entertainment, Inc.
Condensed Consolidating Balance Sheet
As of June 30, 2019
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
104,179

 
$
7,236

 
$
2,221

 
$

 
$
113,636

Restricted cash
 

 

 
182

 

 
182

Accounts receivable
 
13,600

 
6,393

 
4,689

 
(4,006
)
 
20,676

Inventories
 
19,184

 
5,980

 
301

 

 
25,465

Prepaid expenses
 
8,090

 
11,779

 
1,383

 

 
21,252

Total current assets
 
145,053

 
31,388

 
8,776

 
(4,006
)
 
181,211

Property and equipment, net
 
450,358

 
67,913

 
5,346

 

 
523,617

Operating lease right-of-use assets, net
 
479,758

 
47,267

 
10,006

 

 
537,031

Goodwill
 
433,024

 
51,414

 

 

 
484,438

Intangible assets, net
 
8,368

 
461,362

 

 

 
469,730

Intercompany
 
53,882

 
87,166

 

 
(141,048
)
 

Investment in subsidiaries
 
497,187

 

 

 
(497,187
)
 

Other noncurrent assets
 
6,913

 
10,854

 
14

 

 
17,781

Total assets
 
$
2,074,543

 
$
757,364

 
$
24,142

 
$
(642,241
)
 
$
2,213,808

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

 
$

 
$

 
$

 
$
7,600

Operating lease liability, current portion
 
43,701

 
3,552

 
1,128

 

 
48,381

Accounts payable, accrued expenses and unearned revenues
 
60,090

 
44,790

 
3,981

 

 
108,861

Other current liabilities
 
4,381

 

 
16

 

 
4,397

Total current liabilities
 
115,772

 
48,342

 
5,125

 

 
169,239

Operating lease obligations, less current portion
 
459,293

 
55,072

 
9,233

 

 
523,598

Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion
 
959,874

 

 

 

 
959,874

Deferred tax liability
 
90,098

 
18,201

 
(1,653
)
 

 
106,646

Intercompany
 

 
117,590

 
27,464

 
(145,054
)
 

Other noncurrent liabilities
 
194,411

 
4,915

 
30

 

 
199,356

Total liabilities
 
1,819,448

 
244,120

 
40,199

 
(145,054
)
 
1,958,713

Stockholder's equity:
 
 
 
 
 
 
 
 
 
 
Common stock
 

 

 

 

 

Capital in excess of par value
 
359,867

 
466,114

 
3,241

 
(469,355
)
 
359,867

Retained earnings (deficit)
 
(103,148
)
 
47,130

 
(17,674
)
 
(29,456
)
 
(103,148
)
Accumulated other comprehensive income (loss)
 
(1,624
)
 

 
(1,624
)
 
1,624

 
(1,624
)
Total stockholder's equity
 
255,095

 
513,244

 
(16,057
)
 
(497,187
)
 
255,095

Total liabilities and stockholder's equity
 
$
2,074,543

 
$
757,364

 
$
24,142

 
$
(642,241
)
 
$
2,213,808


22


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

Retained earnings (deficit)
 
(115,660
)
 
28,538

 
(18,691
)
 
(9,847
)
 
(115,660
)
Accumulated other comprehensive income (loss)
 
(1,339
)
 

 
(1,646
)
 
1,646

 
(1,339
)
Total stockholder's equity
 
242,571

 
494,652

 
(17,096
)
 
(477,556
)
 
242,571

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

 
$
685,146

 
$
12,491

 
$
(625,645
)
 
$
1,666,165



23


CEC Entertainment, Inc.
Consolidating Statement of Comprehensive Income (Loss)