Document
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
_______________________________________________________________________
FORM 10-Q 
______________________________________________________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 3, 2016
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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
¨
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
ý
Smaller reporting company
¨
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 August 1, 2016, an aggregate of 200 shares of the registrant’s common stock, par value $0.01 per share were outstanding.

Table of Contents

CEC ENTERTAINMENT, INC.
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2
Table of Contents

PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements.
CEC ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share information)
 
 
July 3,
2016
 
January 3,
2016
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
75,591

 
$
50,654

Restricted cash
 
1,303

 
—

Accounts receivable
 
16,322

 
25,936

Inventories
 
24,738

 
23,275

Prepaid expenses
 
21,672

 
18,223

Total current assets
 
139,626

 
118,088

Property and equipment, net
 
606,646

 
629,047

Goodwill
 
483,876

 
483,876

Intangible assets, net
 
486,041

 
488,095

Other noncurrent assets
 
21,449

 
13,929

Total assets
 
$
1,737,638

 
$
1,733,035

LIABILITIES AND STOCKHOLDER’S EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Bank indebtedness and other long-term debt
 
$
7,639

 
$
7,650

Capital lease obligations
 
454

 
421

Accounts payable
 
38,303

 
44,090

Accrued expenses
 
44,134

 
38,284

Unearned revenues
 
10,953

 
10,233

Accrued interest
 
8,895

 
9,757

Other current liabilities
 
3,877

 
3,678

Total current liabilities
 
114,255

 
114,113

Capital lease obligations, less current portion
 
14,813

 
15,044

Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion
 
969,793

 
971,333

Deferred tax liability
 
195,452

 
201,734

Accrued insurance
 
9,664

 
9,737

Other noncurrent liabilities
 
214,989

 
212,528

Total liabilities
 
1,518,966

 
1,524,489

Stockholder’s equity:
 
 
 
 
Common stock, $0.01 par value; authorized 1,000 shares; 200 shares issued as of July 3, 2016 and January 3, 2016
 
—

 
—

Capital in excess of par value
 
356,808

 
356,460

Accumulated deficit
 
(135,735
)
 
(144,598
)
Accumulated other comprehensive loss
 
(2,401
)
 
(3,316
)
Total stockholder’s equity
 
218,672

 
208,546

Total liabilities and stockholder’s equity
 
$
1,737,638

 
$
1,733,035


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

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Table of Contents

CEC ENTERTAINMENT, INC.
COSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands)
 
 
Three Months Ended
 
July 3,
2016
 
June 28,
2015
REVENUES:
 
 
 
Food and beverage sales
$
97,404

 
$
94,145

Entertainment and merchandise sales
114,657

 
113,861

Total company store sales
212,061

 
208,006

Franchise fees and royalties
4,560

 
4,073

Total revenues
216,621

 
212,079

OPERATING COSTS AND EXPENSES:
 
 
 
Company store operating costs:
 
 
 
Cost of food and beverage (exclusive of items shown separately below)
24,673

 
23,951

Cost of entertainment and merchandise (exclusive of items shown separately below)
8,240

 
7,015

Total cost of food, beverage, entertainment and merchandise
32,913

 
30,966

Labor expenses
60,405

 
59,234

Depreciation and amortization
29,733

 
28,970

Rent expense
24,049

 
24,260

Other store operating expenses
37,376

 
35,330

Total company store operating costs
184,476

 
178,760

Other costs and expenses:
 
 
 
Advertising expense
12,162

 
14,596

General and administrative expenses
15,922

 
17,807

Transaction, severance and related litigation costs
434

 
1,104

Total operating costs and expenses
212,994

 
212,267

Operating income (loss)
3,627

 
(188
)
Interest expense
17,121

 
17,324

Loss before income taxes
(13,494
)
 
(17,512
)
Income tax benefit
(4,442
)
 
(7,620
)
Net loss
$
(9,052
)
 
$
(9,892
)
The accompanying notes are an integral part of these unaudited interim Consolidated Financial Statements.














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Table of Contents

CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands)
 
 
Six Months Ended
 
July 3,
2016
 
June 28,
2015
REVENUES:
 
 
 
Food and beverage sales
$
219,607

 
$
210,681

Entertainment and merchandise sales
262,214

 
258,605

Total company store sales
481,821

 
469,286

Franchise fees and royalties
9,118

 
8,300

Total revenues
490,939

 
477,586

OPERATING COSTS AND EXPENSES:
 
 
 
Company store operating costs:
 
 
 
Cost of food and beverage (exclusive of items shown separately below)
55,195

 
53,176

Cost of entertainment and merchandise (exclusive of items shown separately below)
16,989

 
15,537

Total cost of food, beverage, entertainment and merchandise
72,184

 
68,713

Labor expenses
129,448

 
126,407

Depreciation and amortization
57,362

 
58,211

Rent expense
48,199

 
48,719

Other store operating expenses
73,387

 
68,848

Total company store operating costs
380,580

 
370,898

Other costs and expenses:
 
 
 
Advertising expense
25,261

 
26,048

General and administrative expenses
33,939

 
34,030

Transaction, severance and related litigation costs
1,184

 
2,112

Total operating costs and expenses
440,964

 
433,088

Operating income
49,975

 
44,498

Interest expense
34,182

 
34,822

Income before income taxes
15,793

 
9,676

Income tax expense
6,930

 
4,826

Net income
$
8,863

 
$
4,850

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













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

 
Three Months Ended
 
July 3,
2016
 
June 28,
2015
Net loss
$
(9,052
)
 
$
(9,892
)
Components of other comprehensive loss, net of tax:
 
 
 
Foreign currency translation adjustments
161

 
777

Comprehensive loss
$
(8,891
)
 
$
(9,115
)


 
Six Months Ended
 
July 3,
2016
 
June 28,
2015
Net income
$
8,863

 
$
4,850

Components of other comprehensive income, net of tax:
 
 
 
Foreign currency translation adjustments
915

 
(865
)
Comprehensive income
$
9,778

 
$
3,985


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



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CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
 
Six Months Ended
 
July 3,
2016
 
June 28,
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
8,863

 
$
4,850

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
  Depreciation and amortization
60,282

 
60,248

  Deferred income taxes
(6,449
)
 
(11,909
)
  Stock-based compensation expense
337

 
570

  Amortization of lease related liabilities
23

 
61

  Amortization of original issue discount and deferred debt financing costs
2,273

 
2,273

  Loss on asset disposals, net
4,073

 
3,042

  Non-cash rent expense
3,507

 
4,289

  Other adjustments
172

 
(494
)
  Changes in operating assets and liabilities:
 
 
 
        Restricted cash
(1,303
)
 
—

        Accounts receivable
5,527

 
416

        Inventories
(3,645
)
 
(219
)
        Prepaid expenses
(2,208
)
 
(4,568
)
        Accounts payable
(4,542
)
 
547

        Accrued expenses
1,763

 
2,181

        Unearned revenues
713

 
1,860

        Accrued interest
(868
)
 
(2
)
        Income taxes payable
7,803

 
3,569

        Deferred landlord contributions
1,417

 
657

Net cash provided by operating activities
77,738

 
67,371

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Acquisition of Peter Piper Pizza
—

 
(663
)
Purchases of property and equipment
(42,400
)
 
(38,628
)
Development of internal use software
(6,223
)
 
(1,571
)
Proceeds from sale of property and equipment
318

 
82

Net cash used in investing activities
(48,305
)
 
(40,780
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
  Repayments on senior term loan
(3,800
)
 
(3,800
)
  Repayments on note payable
(24
)
 
(22
)
  Payments on capital lease obligations
(204
)
 
(209
)
  Payments on sale leaseback obligations
(956
)
 
(771
)
  Excess tax benefit realized from stock-based compensation
4

 
—


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Table of Contents
CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS, CONT'D
(Unaudited)
(in thousands)

Net cash used in financing activities
(4,980
)
 
(4,802
)
Effect of foreign exchange rate changes on cash
484

 
(428
)
Change in cash and cash equivalents
24,937

 
21,361

Cash and cash equivalents at beginning of period
50,654

 
110,994

Cash and cash equivalents at end of period
$
75,591

 
$
132,355

 
 
 
 
 
 
 
 
 
Six Months Ended
 
July 3,
2016
 
June 28,
2015
SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
Interest paid
$
32,960

 
$
32,610

Income taxes paid, net
$
5,572

 
$
13,180

NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Accrued construction costs
$
1,436

 
$
2,922

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

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Table of Contents

CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of Business and Summary of Significant Accounting Policies:
Description of Business
The use of the terms “CEC Entertainment,” the “Company,” “we,” “us” and “our” throughout these unaudited notes to the interim Consolidated Financial Statements refer to CEC Entertainment, Inc. and its subsidiaries.
We currently operate and franchise Chuck E. Cheese’s and Peter Piper Pizza family dining and entertainment centers (also referred to as “stores”) in a total of 47 states and 12 foreign countries and territories. Our stores provide our guests with a variety of family entertainment and dining alternatives. All of our stores utilize a consistent restaurant-entertainment format that features both family dining and entertainment areas with the same general mix of food, beverages, entertainment and merchandise. The economic characteristics, products and services, preparation processes, distribution methods and types of customers are substantially similar for each of our stores. Therefore, we aggregate each store’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 VIE. The Association primarily administers the collection and disbursement of funds (the “Association Funds”) used for advertising, entertainment and media programs that benefit both us and our Chuck E. Cheese’s franchisees. We and our franchisees are required to contribute a percentage of gross sales to these funds and could be required to make additional contributions to fund any deficits that may be incurred by the Association. We include the Association in our Consolidated Financial Statements, as we concluded that we are the primary beneficiary of its variable interests because we (a) have the power to direct the majority of its significant operating activities; (b) provide it unsecured lines of credit; and (c) own the majority of the stores that benefit from the Association’s advertising, entertainment and media expenditures. The assets, liabilities and operating results of the Association are not material to our Consolidated Financial Statements.
Because the Association Funds are required to be segregated and used for specified purposes, we do not reflect franchisee contributions to the Association Funds as revenue, but rather record franchisee contributions as an offset to reported advertising expenses. Our contributions to the Association Funds are eliminated in consolidation. Contributions to the advertising, entertainment and media funds from our franchisees were $1.2 million and $1.1 million for the six months ended July 3, 2016 and June 28, 2015, respectively. 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 at July 3, 2016.
The preparation of these unaudited Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States (“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.
Interim Financial Statements
The accompanying Consolidated Financial Statements as of July 3, 2016 and for the three and six months ended July 3, 2016 and June 28, 2015 are unaudited and are presented in accordance with the requirements for quarterly reports on Form 10-Q and, consequently, do not include all of the information and footnote disclosures required by GAAP. In the opinion of management, the Consolidated Financial Statements include all adjustments (consisting solely of normal recurring adjustments) necessary for the fair statement of its consolidated results of operations, financial position and cash flows as of the dates and for the periods presented in accordance with GAAP and the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Our Consolidated Financial Statements include all necessary reclassification adjustments to conform prior year results to the current period presentation.
We reclassified $1.2 million and $2.0 million of litigation costs related to the Merger, respectively (as defined in Note 12. “Commitments and Contingencies”) in our Consolidated Statement of Earnings for the three and six months ended June 28, 2015, respectively, from “General and administrative expenses” to “Transaction, severance and litigation related costs” to conform to the current period’s presentation.
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

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Table of Contents
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

related notes included in our Annual Report on Form 10-K for the fiscal year ended January 3, 2016, filed with the SEC on March 2, 2016.
Recently Issued Accounting Guidance
Accounting Guidance Not Yet Adopted:
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This new standard introduces a new lease model that requires the recognition of lease assets and lease liabilities on the balance sheet and the disclosure of key information about leasing arrangements. While this new standard retains most of the principles of the existing lessor model under U.S. GAAP, it aligns many of those principles with ASC 606: Revenue from Contracts with Customers. The new guidance will be effective for public business entities for annual periods beginning after December 15, 2018 (i.e., calendar periods beginning on January 1, 2019), and interim periods therein. For all other entities, the ASU will be effective for annual periods beginning after December 15, 2019 (i.e., calendar periods beginning on January 1, 2020), and interim periods thereafter. Early adoption will be permitted for all entities. We are currently assessing the impact of adopting this new guidance on our Consolidated Financial Statements.
In March 2016, The FASB issued ASU 2016-04, Liabilities - Extinguishments of Liabilities (Subtopic 405-20). This amendment provides a narrow scope exception to Liabilities - Extinguishment of Liabilities (Subtopic 405-20) that requires breakage for those liabilities to be accounted for in accordance with the breakage guidance in Revenue From Contracts With Customers (Topic 606). There is currently no guidance in GAAP, or pending guidance, regarding the derecognition of prepaid stored-value product liabilities within the scope of the amendments in this update. Under the new guidance, if an entity expects to be entitled to a breakage amount for a liability resulting from the sale of a prepaid stored-value product, the entity shall derecognize the amount related to the expected breakage in proportion to the pattern of rights expected to be exercised by the product holder only to the extent that it is probable that a significant reversal of the recognized breakage amount will not subsequently occur. If an entity does not expect to be entitled to a breakage amount for a prepaid stored-value product, the entity shall derecognize the amount related to the breakage when the likelihood of the product holder exercising its remaining rights becomes remote. This change to an entity’s estimated breakage amount shall be accounted for as a change in accounting estimate. The amendments in this update are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. We are currently assessing the impact of adopting this new guidance on our Consolidated Financial Statements.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718). This amendment will require that (i) all excess tax benefits and deficiencies (including tax benefits of dividends on share-based payment awards) be recognized as income tax expense or benefit on the income statement, (ii) the tax effects of exercised or vested awards be treated as discrete items in the reporting period in which they occur, and (iii) an entity recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period or not. On the statement of cash flows excess tax benefits should be classified along with other income tax cash flows as an operating activity. This amendment allows an entity to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur. The threshold for an award to qualify for equity classification permits withholding up to the maximum statutory tax rate in applicable jurisdictions, and the cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity on the statement of cash flows. Nonpublic entities can make an accounting policy election to apply a practical expedient to estimate the expected term for all awards with performance or service conditions that meet certain conditions. For public entities, the amendments in this update are effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. We are currently assessing the impact of adopting this new guidance on our Consolidated Financial Statements.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. This amendment updates the revenue guidance on identifying performance obligations and accounting for licenses of intellectual property, changing the FASB’s previous proposals on right-of-use licenses and contractual restrictions. For an entity that licenses intellectual property, the amount or timing of revenue recognition the timing and pattern of revenue recognition for intellectual property licenses, including the application of the sale- and usage-based royalties exception may be significantly different from current practice. Additionally, an entity will need to evaluate which contractual restrictions are attributes of a license and which give rise to separate performance obligations. This amendment is effective for annual reporting periods beginning after December 15, 2017 and for interim periods therein. Early application is permitted, but only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods therein. We are currently assessing the impact of adopting this new guidance on our Consolidated Financial Statements.

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CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This amendment changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowances for losses. For public companies that are SEC filers, the amendments in this update are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Entities may early adopt the amendments in this update as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We do not expect the adoption of this amendment to have a significant impact on our Consolidated Financial Statements.
2. Property and Equipment:
Total depreciation and amortization expense was $31.3 million and $29.8 million for the three months ended July 3, 2016 and June 28, 2015, respectively, of which $1.6 million and $0.9 million, respectively, was included in “General and administrative expenses” in our Consolidated Statements of Earnings. Total depreciation and amortization expense for both the three months ended July 3, 2016 and June 28, 2015, includes approximately $0.5 million related to the amortization of franchise agreements (see Note 3. “Intangible Assets, Net”).
Total depreciation and amortization expense was $60.3 million and $60.2 million for the six months ended July 3, 2016 and June 28, 2015, respectively, of which $2.9 million and $2.0 million, respectively, was included in “General and administrative expenses” in our Consolidated Statements of Earnings. Total depreciation and amortization expense for both the six months ended July 3, 2016 and June 28, 2015, includes approximately $1.0 million and related to the amortization of franchise agreements (see Note 3. “Intangible Assets, Net”).
3. Intangible Assets, Net:
The following table presents our indefinite and definite-lived intangible assets at July 3, 2016:
 
Weighted Average Life (Years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
 
 
(in thousands)
Chuck E. Cheese's tradename
Indefinite
 
$
400,000

 

 
$
400,000

Peter Piper Pizza tradename
Indefinite
 
26,700

 

 
26,700

Favorable lease agreements (1)
10
 
14,880

 
(4,715
)
 
10,165

Franchise agreements
25
 
53,300

 
(4,124
)
 
49,176

 
 
 
$
494,880

 
$
(8,839
)
 
$
486,041

__________________
(1)
In connection with the Merger and the acquisition of Peter Piper Pizza (“PPP”), we also recorded unfavorable lease liabilities of $10.2 million and $3.9 million, respectively, which are included in “Other current liabilities” and “Other noncurrent liabilities” in our Consolidated Balance Sheets. Such amounts are being amortized over a weighted average life of 10 years, and are included in “Rent expense” in our Consolidated Statements of Earnings.
Amortization expense related to favorable lease agreements was $0.5 million for both the three months ended July 3, 2016 and June 28, 2015 and $1.0 million for both the six months ended July 3, 2016 and June 28, 2015, and is included in “Rent expense” in our Consolidated Statements of Earnings. Amortization expense related to franchise agreements was $0.5 million for both the three months ended July 3, 2016 and June 28, 2015, and $1.0 million for both the six months ended July 3, 2016 and June 28, 2015 and is included in “General and administrative expenses” in our Consolidated Statements of Earnings.
4. Accounts Payable:
Accounts payable consisted of the following as of the dates presented:

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CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

 
July 3, 2016
 
January 3, 2016
 
(in thousands)
Trade and other amounts payable
$
29,408

 
$
35,228

Book overdraft
8,895

 
8,862

       Accounts Payable
$
38,303

 
$
44,090


The book overdraft balance represents checks issued but not yet presented to banks.
5. Indebtedness and Interest Expense:
 Our long-term debt consisted of the following for the periods presented:
 
July 3,
2016
 
January 3,
2016
 
(in thousands)
Term loan facility
$
742,900

 
$
746,700

Senior notes
255,000

 
255,000

Note payable
39

 
63

     Total debt outstanding
997,939

 
1,001,763

Less:
 
 
 
    Unamortized original issue discount
(2,506
)
 
(2,776
)
    Deferred financing costs, net
(18,001
)
 
(20,004
)
    Current portion
(7,639
)
 
(7,650
)
Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion
$
969,793

 
$
971,333

We were in compliance with the debt covenants in effect as of July 3, 2016 for both the Secured Credit Facilities and the senior notes. For further discussion regarding the debt covenants, see Secured Credit Facilities and Senior Unsecured Debt sections below.
Secured Credit Facilities
As of July 3, 2016, we had $742.9 million (excluding the original issue discount) outstanding under the Term loan facility, no borrowings outstanding under the revolving credit facility and $9.9 million of letters of credit issued but undrawn. The Secured Credit Facilities require scheduled quarterly payments on the term loan equal to 0.25% of the original principal amount of the Term loan from July 2014 to December 2020, with the remaining balance paid at maturity, February 14, 2021.
The term loan was issued net of $3.8 million of original issue discount. We also paid $17.8 million and $3.4 million in debt financing costs related to the term loan facility and revolving credit facility, respectively, which we 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 are amortized over the lives of the facilities 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. During the six months ended July 3, 2016, the federal funds rate ranged from 0.25% to 0.41%, the prime rate was 3.5% and the one-month LIBOR ranged from 0.42% to 0.47%.
The weighted average effective interest rate incurred on our borrowings under our Secured Credit Facilities was 4.7% and 4.6% for the six months ended July 3, 2016 and June 28, 2015, respectively, which includes amortization of debt issuance 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.

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CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

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 0.5% per annum and is subject to one step-down from 0.5% to 0.375% based on our net first lien senior secured leverage ratio. We are also required to pay customary agency fees, as well as letter of credit participation fees computed at a rate per annum equal to the applicable margin for LIBOR rate borrowings on the dollar equivalent of the daily stated amount of outstanding letters of credit, plus such letter of credit issuer’s customary documentary and processing fees and charges and a fronting fee computed at a rate equal to 0.125% per annum on the daily stated amount of letter of credit.
As a result of a decrease in our net first lien secured leverage ratio reported for the year ended January 3, 2016, effective March 4, 2016, the applicable margin for borrowings under the term loan facility stepped down from 3.25% to 3.00%, the applicable margin for borrowings under the revolving credit facility stepped down from 3.25% to 3.00%, and the applicable commitment fee rate stepped down from 0.5% to 0.375%. Effective April 8, 2016, the balance of our letters of credit issued but undrawn was reduced from $10.9 million to $9.9 million.
The Secured Credit Facilities also contain customary affirmative covenants and events of default, negative covenants 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.
All obligations under the 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.
Our revolving credit facility includes a springing financial maintenance covenant that requires our net first lien senior secured leverage ratio not to exceed 6.25 to 1.00 (the ratio of consolidated net debt secured by first-priority liens on the collateral to the last twelve months’ EBITDA, as defined in the Senior Credit Facilities). The covenant will be tested quarterly if the revolving credit facility is more than 30% drawn (excluding outstanding letters of credit) and will be a condition to drawings under the revolving credit facility that would result in more than 30% drawn thereunder.
As of July 3, 2016, the borrowings under the revolving credit facility were less than 30% of the outstanding commitments; therefore, the springing financial maintenance covenant under our revolving credit facility was not in effect.
Senior Unsecured Debt
Our senior unsecured debt consists of $255.0 million aggregate principal amount borrowings of 8.000% Senior Notes due 2022 (the “senior notes”) and maturing on February 15, 2022. The senior notes are registered under the Securities Act, do not bear legends restricting their transfer and are not entitled to registration rights under our registration rights agreement. On or after February 15, 2017, we may redeem some or all of the senior notes at certain redemption prices set forth in the indenture governing the senior notes (the “indenture”). Prior to February 15, 2017, we may redeem (i) up to 40% of the original aggregate principal amount of the senior notes with the net cash proceeds of one or more equity offerings at a price equal to 108% of the principal amount thereof, plus accrued and unpaid interest, or (ii) some or all of the notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, plus the applicable “make-whole” premium set forth in 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 amortized over the life of the senior notes and are included in “Interest expense” on 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: 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 in respect of our capital stock or make other restricted payments; consolidate, merge, sell or otherwise

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CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

dispose of all or substantially all of our assets; sell assets; enter into certain transactions with our affiliates; and restrict dividends from our subsidiaries.
The weighted average effective interest rate incurred on borrowings under our senior notes was 8.3% for both the six months ended July 3, 2016 and the six months ended June 28, 2015, which included amortization of debt issuance costs and other fees related to our senior notes.
Interest Expense
Interest expense consisted of the following for the periods presented:
 
Three Months Ended
 
July 3, 2016
 
June 28, 2015
 
(in thousands)
Term loan facility (1)
$
7,500

 
$
7,743

Senior notes
5,157

 
5,157

Capital lease obligations
439

 
447

Sale leaseback obligations
2,636

 
2,783

Amortization of debt issuance costs
1,001

 
1,001

Other
388

 
193

Total interest expense
$
17,121

 
$
17,324

 
Six Months Ended
 
July 3, 2016
 
June 28, 2015
 
(in thousands)
Term loan facility (1)
$
15,657

 
$
15,505

Senior notes
10,313

 
10,313

Capital lease obligations
879

 
902

Sale leaseback obligations
5,394

 
5,566

Amortization of debt issuance costs
2,002

 
2,002

Other
(63
)
 
534

Total interest expense
$
34,182

 
$
34,822

 __________________
(1)    Includes amortization of original issue discount.
The weighted average effective interest rate incurred on our combined borrowings under our Secured Credit Facilities and senior notes was 5.6% and 5.5% for the six months ended July 3, 2016, and June 28, 2015, respectively.

14
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CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)



6. Fair Value of Financial Instruments:
The following table presents information on our financial instruments as of the periods presented:
 
 
July 3, 2016
 
 
January 3, 2016
 
 
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
 
$
7,639

 
$
7,430

 
 
$
7,650

 
$
7,451

     Long-term portion
 
987,794

 
963,067

 
 
991,337

 
962,600

Bank indebtedness and other long-term debt:
 
$
995,433

 
$
970,497

 
 
$
998,987

 
$
970,051

 _________________
(1)    Excluding net deferred financing costs
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, accounts receivable and accounts payable approximates fair value because of their short maturities. The estimated fair value of our Secured Credit Facilities' term loan and senior notes was determined by using the 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.
During the six months ended July 3, 2016 and June 28, 2015, there were no significant transfers among level 1, 2 or 3 fair value determinations.
7. Income Taxes:
Our income tax expense (benefit) consists of the following for the periods presented:
 
Three Months Ended
 
July 3, 2016
 
June 28, 2015
 
(in thousands, except %)
Federal and state income taxes
$
(4,551
)
 
$
(8,101
)
Foreign income taxes(1)
109

 
481

      Income tax benefit
$
(4,442
)
 
$
(7,620
)
      Effective rate
32.9
%
 
43.5
%

 
Six Months Ended
 
July 3, 2016
 
June 28, 2015
 
(in thousands, except %)
Federal and state income taxes
$
6,712

 
$
4,074

Foreign income taxes(1)
218

 
752

      Income tax expense
$
6,930

 
$
4,826

      Effective rate
43.9
%
 
49.9
%
_________________
(1)    Including foreign taxes withheld.
Our effective income tax rate of 32.9% for the three months ended July 3, 2016, and 43.5% for the three months ended June 28, 2015, differs from the statutory rate primarily due to the favorable impact of employment related federal income tax credits and the unfavorable impact of non-deductible litigation and settlement costs related to the Merger. Our effective income tax rate of 43.9% for the six months ended July 3, 2016, and 49.9% for the six months ended June 28, 2015 differs from the statutory rate primarily due to the favorable impact of employment related federal income tax credits and the unfavorable impact of non-deductible litigation and settlement costs related to the Merger. In addition, both the three-month and six-month periods ended July 3, 2016, were negatively impacted by an increase in the liability for uncertain tax posi

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CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

tions and a change in state income tax rates.
Our quarterly provision for income taxes has historically been calculated using the annual effective rate method which applies an estimated annual effective tax rate to pre-tax income or loss. However, for the three and six month periods ended July 3, 2016, we have used the actual year-to-date effective tax rate (the “discrete method”), as required by ASC 740-270, Accounting for Income Taxes-Interim Reporting when a reliable estimate cannot be made. We believe that at this time, the use of the discrete method is more appropriate than the annual effective tax rate method due to significant variations in the customary relationship between income tax expense and projected annual pre-tax income or loss which occurs when projected pre-tax income or loss nears a relatively small amount in comparison to the differences between financial statement versus tax accounting. Using the discrete method, we have determined our current and deferred income tax expense as if the interim period were an annual period.
Our liability for uncertain tax positions (excluding interest and penalties) was $3.9 million and $3.3 million as of July 3, 2016 and January 3, 2016, respectively, and if recognized would decrease our provision for income taxes by $1.6 million. Within the next twelve months, we could settle or otherwise conclude income tax audits. As such, it is reasonably possible that the liability for uncertain tax positions could decrease by as much as $0.6 million as a result of settlements with certain taxing authorities and expiring statutes of limitations within the next twelve months.
Total accrued interest and penalties related to unrecognized tax benefits as of July 3, 2016 and January 3, 2016, was $1.0 million and $1.7 million, respectively. On the Consolidated Balance Sheets, we include current interest related to unrecognized tax benefits in “Accrued interest,” current penalties in “Accrued expenses” and noncurrent accrued interest and penalties in “Other noncurrent liabilities.”
8. Stock-Based Compensation Arrangements:
The 2014 Equity Incentive Plan provides Queso Holdings Inc. (“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 option activity under the equity incentive plan as of July 3, 2016 and the activity for the six months ended July 3, 2016 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, January 3, 2016
2,393,084

$8.59


     Options Granted
101,110

$12.51


     Options Exercised
(13,399
)
$8.86


     Options Forfeited
(34,646
)
$9.15


Outstanding stock options, July 3, 2016
2,446,149

$8.79
7.90
$
11,550

Stock options expected to vest, July 3, 2016
2,201,534

$8.79
7.90
$
10,395

Exercisable stock options, July 3, 2016
312,141

$8.34
7.67
$
2,910

 
 
 
 
 
__________________
(1)    The weighted average exercise price reflects the original grant date fair value per option as adjusted for the dividend payment made in August 2015.
As of July 3, 2016, we had $2.7 million of total unrecognized share-based compensation expense related to unvested options, net of expected forfeitures, which is expected to be amortized over the remaining weighted-average period of 3.3 years.
The following table summarizes stock-based compensation expense and the associated tax benefit recognized in the Consolidated Financial Statements for the periods presented:

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CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

 
Three Months Ended
 
July 3,
2016
 
June 28,
2015
 
(in thousands)
Stock-based compensation costs
$
206

 
$
180

Portion capitalized as property and equipment (1)
(4
)
 
(2
)
Stock-based compensation expense recognized
$
202

 
$
178

Excess tax benefit recognized from exercise of stock-based compensation awards
$
—

 
$
—


 
Six Months Ended
 
July 3,
2016
 
June 28,
2015
 
(in thousands)
Stock-based compensation costs
$
344

 
$
576

Portion capitalized as property and equipment (1)
(7
)
 
(6
)
Stock-based compensation expense recognized
$
337

 
$
570

Excess tax benefit recognized from exercise of stock-based compensation awards
$
4

 
$
—

 __________________
(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 store development projects, such as the design and construction of a new store and the remodeling and expansion of our existing stores. Capitalized stock-based compensation costs attributable to our store development projects are included in “Property and equipment, net” in the Consolidated Balance Sheets.


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CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

9. Stockholder’s Equity:
The following table summarizes the changes in stockholder’s equity during the six months ended July 3, 2016:
 
 
 
Common Stock
 
Capital In
Excess of
Par Value
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive
Loss
 
 
 
 
Shares
 
Amount
 
 
 
 
Total
 
 
(in thousands, except share information)
Balance at January 3, 2016
 
200

 
$
—

 
$
356,460

 
$
(144,598
)
 
$
(3,316
)
 
$
208,546

Net income
 
—

 
—

 
—

 
8,863

 
—

 
8,863

Other comprehensive income
 
—

 
—

 
—

 
—

 
915

 
915

Stock-based compensation costs
 
—

 
—

 
344

 
—

 
—

 
344

Excess tax benefit realized from exercise of stock options
 
—

 
—

 
4

 
—

 
—

 
4

Balance at July 3, 2016
 
200

 
$
—

 
$
356,808

 
$
(135,735
)
 
$
(2,401
)
 
$
218,672

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

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Table of Contents
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

CEC Entertainment, Inc.
Condensed Consolidating Balance Sheet
As of July 3, 2016
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
68,377

 
$
747

 
$
6,467

 
$
—

 
$
75,591

Restricted cash
 
—

 
—

 
1,303

 
—

 
1,303

Accounts receivable
 
13,903

 
1,855

 
7,557

 
(6,993
)
 
16,322

Inventories
 
21,358

 
3,091

 
289

 
—

 
24,738

Other current assets
 
14,743

 
5,800

 
1,129

 
—

 
21,672

Total current assets
 
118,381

 
11,493

 
16,745

 
(6,993
)
 
139,626

Property and equipment, net
 
555,394

 
42,846

 
8,406

 
—

 
606,646

Goodwill
 
432,462

 
51,414

 
—

 
—

 
483,876

Intangible assets, net
 
20,458

 
465,583

 
—

 
—

 
486,041

Intercompany
 
138,609

 
32,976

 
—

 
(171,585
)
 
—

Investment in subsidiaries
 
417,528

 
—

 
—

 
(417,528
)
 
—

Other noncurrent assets
 
2,370

 
18,448

 
631

 
—

 
21,449

Total assets
 
$
1,685,202

 
$
622,760

 
$
25,782

 
$
(596,106
)
 
$
1,737,638

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

 
$
39

 
$
—

 
$
—

 
$
7,639

Capital lease obligations, current portion
 
449

 
—

 
5

 
—

 
454

Accounts payable and accrued expenses
 
85,813

 
13,198

 
3,274

 
—

 
102,285

Other current liabilities
 
3,549

 
328

 
—

 
—

 
3,877

Total current liabilities
 
97,411

 
13,565

 
3,279

 
—

 
114,255

Capital lease obligations, less current portion
 
14,747

 
—

 
66

 
—

 
14,813

Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion
 
969,793

 
—

 
—

 
—

 
969,793

Deferred tax liability
 
172,323

 
23,247

 
(118
)
 
—

 
195,452

Intercompany
 
—

 
152,670

 
25,908

 
(178,578
)
 
—

Other noncurrent liabilities
 
212,256

 
12,111

 
286

 
—

 
224,653

Total liabilities
 
1,466,530

 
201,593

 
29,421

 
(178,578
)
 
1,518,966

Stockholder's equity:
 
 
 
 
 
 
 
 
 
 
Common stock
 
—

 
—

 
—

 
—

 
—

Capital in excess of par value
 
356,808

 
466,114

 
3,241

 
(469,355
)
 
356,808

Retained earnings (deficit)
 
(135,735
)
 
(44,947
)
 
(4,479
)
 
49,426

 
(135,735
)
Accumulated other comprehensive income (loss)
 
(2,401
)
 
—

 
(2,401
)
 
2,401

 
(2,401
)
Total stockholder's equity
 
218,672

 
421,167

 
(3,639
)
 
(417,528
)
 
218,672

Total liabilities and stockholder's equity
 
$
1,685,202

 
$
622,760

 
$
25,782

 
$
(596,106
)
 
$
1,737,638


19
Table of Contents
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

CEC Entertainment, Inc.
Condensed Consolidating Balance Sheet
As of January 3, 2016
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
42,235

 
$
1,797

 
$
6,622

 
$
—

 
$
50,654

Restricted cash
 
—

 
—

 
—

 
—

 
—

Accounts receivable
 
21,595

 
3,944

 
9,468

 
(9,071
)
 
25,936

Inventories
 
19,959

 
3,021

 
295

 
—

 
23,275

Other current assets
 
13,562

 
3,561

 
1,100

 
—

 
18,223

Total current assets
 
97,351

 
12,323

 
17,485

 
(9,071
)
 
118,088

Property and equipment, net
 
585,915

 
34,539

 
8,593

 
—

 
629,047

Goodwill
 
432,462

 
51,414

 
—

 
—

 
483,876

Intangible assets, net
 
21,855

 
466,240

 
—

 
—

 
488,095

Intercompany
 
129,151

 
30,716

 
—

 
(159,867
)
 
—

Investment in subsidiaries
 
422,407

 
—

 
—

 
(422,407
)
 
—

Other noncurrent assets
 
4,318

 
8,940

 
671

 
—

 
13,929

Total assets
 
$
1,693,459

 
$
604,172

 
$
26,749

 
$
(591,345
)
 
$
1,733,035

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

 
$
50

 
$
—

 
$
—

 
$
7,650

Capital lease obligations, current portion
 
418

 
—

 
3

 
—

 
421

Accounts payable and accrued expenses
 
71,320

 
27,774

 
3,270

 
—

 
102,364

Other current liabilities
 
3,350

 
328

 
—

 
—

 
3,678

Total current liabilities
 
82,688

 
28,152

 
3,273

 
—

 
114,113

Capital lease obligations, less current portion
 
14,980

 
—

 
64

 
—

 
15,044

Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion
 
971,320

 
13

 
—

 
—

 
971,333

Deferred tax liability
 
184,083

 
17,867

 
(216
)
 
—

 
201,734

Intercompany
 
20,580

 
121,850

 
26,508

 
(168,938
)
 
—

Other noncurrent liabilities
 
211,262

 
10,784

 
219

 
—

 
222,265

Total liabilities
 
1,484,913

 
178,666

 
29,848

 
(168,938
)
 
1,524,489

Stockholder's equity:
 
 
 
 
 
 
 
 
 
 
Common stock
 
—

 
—

 
—

 
—

 
—

Capital in excess of par value
 
356,460

 
466,114

 
3,241

 
(469,355
)
 
356,460

Retained earnings (deficit)
 
(144,598
)
 
(40,608
)
 
(3,024
)
 
43,632

 
(144,598
)
Accumulated other comprehensive income (loss)
 
(3,316
)
 
—

 
(3,316
)
 
3,316

 
(3,316
)
Total stockholder's equity
 
208,546

 
425,506

 
(3,099
)
 
(422,407
)
 
208,546

Total liabilities and stockholder's equity
 
$
1,693,459

 
$
604,172

 
$
26,749

 
$
(591,345
)
 
$
1,733,035



20
Table of Contents
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

CEC Entertainment, Inc.
Consolidating Statement of Comprehensive Income (Loss)
For the Three Months Ended July 3, 2016
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
 
Food and beverage sales
 
$
84,011

 
$
12,099

 
$
1,294

 
$
—

 
$
97,404

Entertainment and merchandise sales
 
106,678

 
5,850

 
2,129

 
—

 
114,657

Total company store sales
 
190,689

 
17,949

 
3,423

 
—

 
212,061

Franchise fees and royalties
 
672

 
3,888

 
—

 
—

 
4,560

International Association assessments and other fees
 
207

 
615

 
8,357

 
(9,179
)
 
—

Total revenues
 
191,568

 
22,452

 
11,780

 
(9,179
)
 
216,621

Operating Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
Company store operating costs:
 
 
 
 
 
 
 
 
 
 
Cost of food and beverage
 
21,014

 
3,140

 
519

 
—

 
24,673

Cost of entertainment and merchandise
 
7,639

 
457

 
144

 
—

 
8,240

Total cost of food, beverage, entertainment and merchandise
 
28,653

 
3,597

 
663

 
—

 
32,913

Labor expenses
 
55,375

 
3,803

 
1,227

 
—

 
60,405

Depreciation and amortization
 
28,596

 
628

 
509

 
—

 
29,733

Rent expense
 
22,110

 
1,379

 
560

 
—

 
24,049

Other store operating expenses
 
34,876

 
2,369

 
979

 
(848
)
 
37,376

Total company store operating costs
 
169,610

 
11,776

 
3,938

 
(848
)
 
184,476

Advertising expense
 
8,801

 
1,048

 
10,644

 
(8,331
)
 
12,162

General and administrative expenses
 
5,746

 
10,067

 
109

 
—

 
15,922

Transaction, severance and related litigation costs
 
427

 
7

 
—

 
—

 
434

Total operating costs and expenses
 
184,584

 
22,898

 
14,691

 
(9,179
)
 
212,994

Operating income (loss)
 
6,984

 
(446
)
 
(2,911
)
 
—

 
3,627

Equity in earnings (loss) in affiliates
 
(4,683
)
 
—

 
—

 
4,683

 
—

Interest expense
 
15,479

 
1,536

 
106

 
—

 
17,121

Income (loss) before income taxes
 
(13,178
)
 
(1,982
)
 
(3,017
)
 
4,683

 
(13,494
)
Income tax expense (benefit)
 
(4,126
)
 
585

 
(901
)
 
—

 
(4,442
)
Net income (loss)
 
$
(9,052
)
 
$
(2,567
)
 
$
(2,116
)
 
$
4,683

 
$
(9,052
)

 
 
 
 
 
 
 
 
 
 
Components of other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
161

 
—

 
161

 
(161
)
 
161

Comprehensive income (loss)
 
$
(8,891
)
 
$
(2,567
)
 
$
(1,955
)
 
$
4,522

 
$
(8,891
)

21
Table of Contents
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

CEC Entertainment, Inc.
Consolidating Statement of Comprehensive Income (Loss)
For the Three Months Ended June 28, 2015
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
 
Food and beverage sales
 
$
81,022

 
$
11,745

 
$
1,378

 
$
—

 
$
94,145

Entertainment and merchandise sales
 
107,733

 
3,882

 
2,246

 
—

 
113,861

Total company store sales
 
188,755

 
15,627

 
3,624

 
—

 
208,006

Franchise fees and royalties
 
495

 
3,578

 
—

 
—

 
4,073

International Association assessments and other fees
 
227

 
761

 
11,351

 
(12,339
)
 
—

Total revenues
 
189,477

 
19,966

 
14,975

 
(12,339
)
 
212,079

Operating Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
Company store operating costs:
 
 
 
 
 
 
 
 
 
 
Cost of food and beverage
 
20,330

 
3,112

 
509

 
—

 
23,951

Cost of entertainment and merchandise
 
6,707

 
148

 
160

 
—

 
7,015

Total cost of food, beverage, entertainment and merchandise
 
27,037

 
3,260

 
669

 
—

 
30,966

Labor expenses
 
54,452

 
3,439

 
1,343

 
—

 
59,234

Depreciation and amortization
 
27,269

 
1,174

 
527

 
—

 
28,970

Rent expense
 
22,285

 
1,310

 
665

 
—

 
24,260

Other store operating expenses
 
33,161

 
2,103

 
1,054

 
(988
)
 
35,330

Total company store operating costs
 
164,204

 
11,286

 
4,258

 
(988
)
 
178,760

Advertising expense
 
11,995

 
1,266

 
12,686

 
(11,351
)
 
14,596

General and administrative expenses
 
5,882

 
11,771

 
154

 
—

 
17,807

Transaction, severance and litigation related costs
 
(185
)
 
1,289

 
—

 
—

 
1,104

Total operating costs and expenses
 
181,896

 
25,612

 
17,098

 
(12,339
)
 
212,267

Operating income (loss)
 
7,581

 
(5,646
)
 
(2,123
)
 
—

 
(188
)
Equity in earnings (loss) in affiliates
 
(3,036
)
 
—

 
—

 
3,036

 
—

Interest expense
 
16,568

 
621

 
135

 
—

 
17,324

Income (loss) before income taxes
 
(12,023
)
 
(6,267
)
 
(2,258
)
 
3,036

 
(17,512
)
Income tax expense (benefit)
 
(2,131
)
 
(5,102
)
 
(387
)
 
—

 
(7,620
)
Net income (loss)
 
$
(9,892
)
 
$
(1,165
)
 
$
(1,871
)
 
$
3,036

 
$
(9,892
)

 
 
 
 
 
 
 
 
 
 
Components of other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
777

 
—

 
777

 
(777
)
 
777

Comprehensive income (loss)
 
$
(9,115
)
 
$
(1,165
)
 
$
(1,094
)
 
$
2,259

 
$
(9,115
)


22
Table of Contents
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

CEC Entertainment, Inc.
Consolidating Statement of Comprehensive Income (Loss)
For the Six Months Ended July 3, 2016
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
 
Food and beverage sales
 
$
191,834

 
$
24,888

 
$
2,885

 
$
—

 
$
219,607

Entertainment and merchandise sales
 
245,886

 
11,448

 
4,880

 
—

 
262,214

Total company store sales
 
437,720

 
36,336

 
7,765

 
—

 
481,821

Franchise fees and royalties
 
1,268

 
7,850

 
—

 
—

 
9,118

International Association assessments and other fees
 
462

 
1,230

 
20,315

 
(22,007
)
 
—

Total revenues
 
439,450

 
45,416

 
28,080

 
(22,007
)
 
490,939

Operating Costs and Expenses: