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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 April 2, 2017
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
¨
 
 
 
 
Emerging growth 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 May 1, 2017, an aggregate of 200 shares of the registrant’s common stock, par value $0.01 per share were outstanding.

Table of Contents

CEC ENTERTAINMENT, INC.
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Table of Contents

PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements.
CEC ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share information)
 
 
April 2,
2017
 
January 1,
2017
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
94,926

 
$
61,023

Restricted cash
 
276

 
268

Accounts receivable
 
16,007

 
20,495

Inventories
 
24,104

 
21,677

Prepaid expenses
 
25,195

 
21,498

Total current assets
 
160,508

 
124,961

Property and equipment, net
 
588,531

 
592,886

Goodwill
 
483,876

 
483,876

Intangible assets, net
 
483,137

 
484,083

Other noncurrent assets
 
23,167

 
24,306

Total assets
 
$
1,739,219

 
$
1,710,112

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

 
$
7,613

Capital lease obligations, current portion
 
507

 
467

Accounts payable
 
39,652

 
33,202

Accrued expenses
 
48,369

 
40,098

Unearned revenues
 
19,522

 
16,381

Accrued interest
 
3,035

 
8,155

Other current liabilities
 
4,378

 
4,275

Total current liabilities
 
123,063

 
110,191

Capital lease obligations, less current portion
 
13,457

 
13,602

Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion
 
967,503

 
968,266

Deferred tax liability
 
185,418

 
186,290

Accrued insurance
 
7,940

 
9,183

Other noncurrent liabilities
 
216,893

 
216,575

Total liabilities
 
1,514,274

 
1,504,107

Stockholder’s equity:
 
 
 
 
Common stock, $0.01 par value; authorized 1,000 shares; 200 shares issued as of April 2, 2017 and January 1, 2017
 
—

 
—

Capital in excess of par value
 
358,767

 
357,166

Accumulated deficit
 
(131,045
)
 
(148,265
)
Accumulated other comprehensive loss
 
(2,777
)
 
(2,896
)
Total stockholder’s equity
 
224,945

 
206,005

Total liabilities and stockholder’s equity
 
$
1,739,219

 
$
1,710,112


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

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CEC ENTERTAINMENT, INC.
COSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands)
 
 
Three Months Ended
 
April 2,
2017
 
April 3,
2016
REVENUES:
 
 
 
Food and beverage sales
$
124,419

 
$
122,202

Entertainment and merchandise sales
135,917

 
147,557

Total company venue sales
260,336

 
269,759

Franchise fees and royalties
4,623

 
4,559

Total revenues
264,959

 
274,318

OPERATING COSTS AND EXPENSES:
 
 
 
Company venue operating costs:
 
 
 
Cost of food and beverage (exclusive of items shown separately below)
28,218

 
30,521

Cost of entertainment and merchandise (exclusive of items shown separately below)
8,487

 
8,750

Total cost of food, beverage, entertainment and merchandise
36,705

 
39,271

Labor expenses
66,388

 
69,043

Depreciation and amortization
26,412

 
27,629

Rent expense
23,319

 
24,150

Other venue operating expenses
36,750

 
36,010

Total company venue operating costs
189,574

 
196,103

Other costs and expenses:
 
 
 
Advertising expense
13,382

 
13,100

General and administrative expenses
17,264

 
18,018

Transaction, severance and related litigation costs
80

 
749

Total operating costs and expenses
220,300

 
227,970

Operating income
44,659

 
46,348

Interest expense
17,061

 
17,061

Income before income taxes
27,598

 
29,287

Income tax expense
10,378

 
11,372

Net income
$
17,220

 
$
17,915

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
(Unaudited)
(in thousands)
 

 
Three Months Ended
 
April 2,
2017
 
April 3,
2016
Net income
$
17,220

 
$
17,915

Components of other comprehensive income, net of tax:
 
 
 
Foreign currency translation adjustments
119

 
754

Comprehensive income
$
17,339

 
$
18,669

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)
 
Three Months Ended
 
April 2,
2017
 
April 3,
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
17,220

 
$
17,915

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
  Depreciation and amortization
28,305

 
28,998

  Deferred income taxes
(861
)
 
(8,287
)
  Stock-based compensation expense
151

 
135

  Amortization of lease related liabilities
(139
)
 
12

  Amortization of original issue discount and deferred debt financing costs
1,137

 
1,136

  Loss on asset disposals, net
1,755

 
2,177

  Non-cash rent expense
832

 
1,730

  Other adjustments
1

 
27

  Changes in operating assets and liabilities:
 
 
 
  Restricted cash
(8
)
 
(4,142
)
  Accounts receivable
3,942

 
5,011

  Inventories
(7,624
)
 
(3,287
)
  Prepaid expenses
(1,316
)
 
(1,899
)
  Accounts payable
8,821

 
(7,551
)
  Accrued expenses
(2,050
)
 
165

  Unearned revenues
3,895

 
316

  Accrued interest
(5,079
)
 
(5,951
)
  Income taxes payable
9,429

 
16,717

  Deferred landlord contributions
384

 
550

Net cash provided by operating activities
58,795

 
43,772

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(22,793
)
 
(18,823
)
Development of internal use software
(1,129
)
 
(3,625
)
Proceeds from sale of property and equipment
105

 
79

Net cash used in investing activities
(23,817
)
 
(22,369
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Repayments on senior term loan
(1,900
)
 
(1,900
)
Repayments on note payable
(13
)
 
(7
)
Payments on capital lease obligations
(106
)
 
(101
)
Payments on sale leaseback obligations
(570
)
 
(474
)
Excess tax benefit realized from stock-based compensation
—

 
4


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

  Return of capital
1,447

 
—

Net cash used in financing activities
(1,142
)
 
(2,478
)
Effect of foreign exchange rate changes on cash
67

 
419

Change in cash and cash equivalents
33,903

 
19,344

Cash and cash equivalents at beginning of period
61,023

 
50,654

Cash and cash equivalents at end of period
$
94,926

 
$
69,998

 
 
 
 
 
 
 
 
 
Three Months Ended
 
April 2,
2017
 
April 3,
2016
SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
Interest paid
$
21,097

 
$
21,994

Income taxes paid, net
$
1,809

 
$
2,949

NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Accrued construction costs
$
1,805

 
$
783

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

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CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of Business and Summary of Significant Accounting Policies:
Description of Business
The use of the terms “CEC Entertainment,” the “Company,” “we,” “us” and “our” throughout these unaudited notes to the interim Consolidated Financial Statements refer to CEC Entertainment, Inc. and its subsidiaries.
We currently operate and franchise Chuck E. Cheese’s and Peter Piper Pizza family dining and entertainment venues in a total of 47 states and 12 foreign countries and territories. Our venues provide our guests with a variety of family entertainment and dining alternatives. All of our venues utilize a consistent restaurant-entertainment format that features both family dining and entertainment areas with a mix of food, entertainment and merchandise. The economic characteristics, products and services, preparation processes, distribution methods and types of customers are substantially similar for each of our venues. Therefore, we aggregate each venue’s operating performance into one reportable segment for financial reporting purposes.
Basis of Presentation
The Company has a controlling financial interest in International Association of CEC Entertainment, Inc. (the “Association”), a variable interest entity (“VIE”). The Association primarily administers the collection and disbursement of funds (the “Association Funds”) used for advertising, entertainment and media programs that benefit both us and our Chuck E. Cheese’s franchisees. We and our franchisees are required to contribute a percentage of gross sales to these funds and could be required to make additional contributions to fund any deficits that may be incurred by the Association. We include the Association in our Consolidated Financial Statements, as we concluded that we are the primary beneficiary of its variable interests because we (a) have the power to direct the majority of its significant operating activities; (b) provide it unsecured lines of credit; and (c) own the majority of the venues that benefit from the Association’s advertising, entertainment and media expenditures. 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 $0.7 million and $0.6 million for the three months ended April 2, 2017 and April 3, 2016, 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.
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 April 2, 2017 and for the three months ended April 2, 2017 and April 3, 2016 are unaudited and are presented in accordance with the requirements for quarterly reports on Form 10-Q and, consequently, do not include all of the information and footnote disclosures required by GAAP. In the opinion of management, the Consolidated Financial Statements include all adjustments (consisting solely of normal recurring adjustments) necessary for the fair statement of its consolidated results of operations, financial position and cash flows as of the dates and for the periods presented in accordance with GAAP and the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). All intercompany accounts have been eliminated in consolidation.
Consolidated results of operations for interim periods are not necessarily indicative of results for the full year. The unaudited Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended January 1, 2017, filed with the SEC on March 16, 2017.

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


Recently Issued Accounting Guidance
Accounting Guidance Adopted:
In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This amendment requires entities to measure most inventory at the “lower of cost and net realizable value,” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market (market in this context is defined as one of three different measures, one of which is net realizable value). The amendment does not apply to inventories that are measured by using either the last-in, first-out method or the retail inventory method. For the Company, this amendment was effective for the fiscal year beginning January 1, 2017. The adoption of this amendment did not have a significant impact on our Consolidated Financial Statements.
In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718) . This amendment requires 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 are 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. For the Company, the amendments in this update were effective for the fiscal year beginning January 1, 2017. We have made the accounting policy election to account for forfeitures when they occur. The adoption of this amendment did not have a significant impact on our Consolidated Financial Statements.
Accounting Guidance Not Yet Adopted:
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This new standard introduces a new lease model that requires the recognition of lease assets and lease liabilities on the balance sheet and the disclosure of key information about leasing arrangements. While this new standard retains most of the principles of the existing lessor model under U.S. GAAP, it aligns many of those principles with Accounting Standards Codification (“ASC”) 606: Revenue from Contracts with Customers. The new guidance will be effective for public business entities for annual and interim periods beginning after December 15, 2018 (i.e., calendar periods beginning on January 1, 2019). Early adoption will be permitted for all entities. We are currently evaluating the impact of the adoption of this guidance on our Consolidated Financial Statements, but we expect this will have a material effect on our balance sheet since the Company has a significant amount of operating and capital lease arrangements.
In 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 and 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 do not believe this amendment will materially impact our recognition of revenue from company-operated venue sales or our recognition of continuing royalty revenues from franchisees, which are based on a percentage of franchise sales. We are continuing to evaluate the impact the adoption of this guidance will have on our business, including the recognition of revenue from the licensing of the Chuck E. Cheese's brand name to cheese products, the recognition of transactions such as franchise area development fees, and initial fees from franchisees, as well as the accounting for our national advertising funds under the Association Funds.
In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business (Topic 805). The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The definition of a business affects many areas of accounting, including acquisitions, disposals, goodwill and consolidation. The definition of a business in Topic

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

805, Business Combinations, has often been applied too broadly, resulting in many transactions being recorded as business acquisitions that are more akin to asset acquisitions. This ASU is effective for the Company for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. It should be applied prospectively. Early application of the amendments in this update is allowed as follows: (i) for transactions for which the acquisition date occurs before the issuance date or effective date of the amendment, only when the transaction has not been reported in financial statements that have been issued or made available for issuance; and (ii) for transactions in which a subsidiary is deconsolidated or a group of assets is derecognized that occur before the issuance date or effective date of the amendments, only when the transaction has not been reported in financial statements. We do not expect the adoption of this amendment to have a significant impact on our Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-04, Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This amendment eliminates Step 2, which measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill, from the goodwill impairment test. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. This ASU is effective for the Company for its annual or any interim goodwill impairment test in fiscal years beginning after December 15, 2020. An entity should apply the amendments in this update on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. 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 $28.3 million and $29.0 million for the three months ended April 2, 2017 and April 3, 2016, respectively, of which $1.9 million and $1.4 million, respectively, was included in “General and administrative expenses” in our Consolidated Statements of Earnings.
3. Intangible Assets, Net:
The following table presents our indefinite and definite-lived intangible assets at April 2, 2017:
 
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

 
(6,083
)
 
8,797

Franchise agreements
25
 
53,300

 
(5,660
)
 
47,640

 
 
 
$
494,880

 
$
(11,743
)
 
$
483,137

__________________
(1)
In connection with the Merger, as defined in Note 10 “Consolidating Guarantor Financial Information”, and the acquisition of Peter Piper Pizza in October 2014, we also recorded unfavorable lease liabilities of $10.2 million and $3.9 million, respectively, which are included in “Other current liabilities” and “Other noncurrent liabilities” in our Consolidated Balance Sheets. Such amounts are being amortized over a weighted average life of 10 years, and are included in “Rent expense” in our Consolidated Statements of Earnings.
Amortization expense related to favorable lease agreements was $0.4 million for the three months ended April 2, 2017 and $0.5 million for the three months ended April 3, 2016 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 April 2, 2017 and April 3, 2016 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:
 
April 2, 2017
 
January 1, 2017
 
(in thousands)
Trade and other amounts payable
$
30,705

 
$
24,615

Book overdraft
8,947

 
8,587

       Accounts payable
$
39,652

 
$
33,202


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 as of the dates presented:
 
April 2,
2017
 
January 1,
2017
 
(in thousands)
Term loan facility
$
737,200

 
$
739,100

Senior notes
255,000

 
255,000

Note payable
—

 
13

     Total debt outstanding
992,200

 
994,113

Less:
 
 
 
    Unamortized original issue discount
(2,100
)
 
(2,235
)
    Deferred financing costs, net
(14,997
)
 
(15,999
)
    Current portion
(7,600
)
 
(7,613
)
Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion
$
967,503

 
$
968,266


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

We were in compliance with the debt covenants in effect as of April 2, 2017 for both the secured credit facilities and the senior notes. For further discussion regarding the debt covenants, see Secured Credit Facilities and Senior Unsecured Notes sections 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 $150.0 million senior secured revolving credit facility with a maturity date of February 14, 2019, which includes a letter of credit sub-facility and a $30.0 million swingline loan sub-facility (the “revolving credit facility” and together with the term loan facility, the “secured credit facilities”). The secured credit facilities require scheduled quarterly payments on the term loan facility equal to 0.25% of the original principal amount of the term loan facility from July 2014 to December 2020, with the remaining balance paid at maturity, February 14, 2021. As of April 2, 2017 and January 1, 2017, we had no borrowings outstanding under the revolving credit facility and $9.9 million of letters of credit issued but undrawn under the secured credit facilities.
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. 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 was 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 was subject to two step-downs from 3.25% to 3.00% and 2.75% based on our net first lien senior secured leverage ratio. Effective March 4, 2016, the applicable margin for both our term loan facility and revolving credit facilities stepped down to 3.0%.
During the three months ended April 2, 2017, the federal funds rate ranged from 0.55% to 0.91%, the prime rate ranged from 3.75% to 4.00% and the one-month LIBOR ranged from 0.76% to 0.98%.
The weighted average effective interest rate incurred on our borrowings under our secured credit facilities was 4.6% and 4.7% for the three months ended April 2, 2017 and April 3, 2016, 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.
In addition to paying interest on outstanding principal under the secured credit facilities, we are required to pay a commitment fee to the lenders under the revolving credit facility with respect to the unutilized commitments thereunder. The base applicable commitment fee rate under the revolving credit facility was 0.50% per annum and was subject to one step-down from 0.50% to 0.375% based on our net first lien senior secured leverage ratio. Effective March 4, 2016, the commitment fee rate stepped down to 0.375%. We are also required to pay customary agency fees, as well as letter of credit participation fees computed at a rate per annum equal to the applicable margin for LIBOR rate borrowings on the dollar equivalent of the daily stated amount of outstanding letters of credit, plus such letter of credit issuer’s customary documentary and processing fees and charges and a fronting fee computed at a rate equal to 0.125% per annum on the daily stated amount of such letter of credit.
All obligations under the secured credit facilities are unconditionally guaranteed by our 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; sel

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

l assets; enter into certain transactions with our affiliates; enter into sale-leaseback transactions; change our lines of business; restrict dividends from our subsidiaries or restrict liens; change our fiscal year; and modify the terms of certain debt or organizational agreements.
Our revolving credit facility includes a springing financial maintenance covenant that requires our net first lien senior secured leverage ratio not to exceed 6.25 to 1.00 (the ratio of consolidated net debt secured by first-priority liens on the collateral to the last twelve months’ EBITDA, as defined in the senior credit facilities). The covenant will be tested quarterly if the revolving credit facility is more than 30% drawn (excluding outstanding letters of credit) and will be a condition to drawings under the revolving credit facility that would result in more than 30% drawn thereunder.
Senior Unsecured Debt
Our senior unsecured debt consists of $255.0 million aggregate principal amount borrowings of 8.000% Senior Notes due 2022 (the “senior notes”) issued in a private offering. The senior notes bear interest at a rate 8.000% per year and mature on February 15, 2022. 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 could have redeemed (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.
On December 2, 2014 we completed an exchange offer whereby the original senior notes were exchanged for new notes (the “exchange notes”) which are identical to the initial senior notes except that the issuance of the exchange notes is registered under the Securities Act, the exchange notes do not bear legends restricting their transfer and they are not entitled to registration rights under our registration rights agreement. We refer to the senior notes and the exchange notes collectively as the “senior notes.”
We paid $6.4 million in debt issuance costs related to the senior notes issued in February 2014, 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: (i) incur additional debt or issue certain preferred shares; (ii) create liens on certain assets; make certain loans or investments (including acquisitions); (iii)pay dividends on or make distributions in respect of our capital stock or make other restricted payments; (iv) consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; (v) sell assets; (vi) enter into certain transactions with our affiliates; (vii) and restrict dividends from our subsidiaries.
The weighted average effective interest rate incurred on borrowings under our senior notes was 8.2% for the three months ended April 2, 2017 and 8.3% the three months ended April 3, 2016, which included amortization of debt issuance costs and other fees related to our senior notes.
Interest Expense

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

Interest expense consisted of the following for the periods presented:
 
Three Months Ended
 
April 2, 2017
 
April 3, 2016
 
(in thousands)
Term loan facility (1)
$
7,608

 
$
8,157

Senior notes
5,083

 
5,157

Capital lease obligations
417

 
440

Sale leaseback obligations
2,638

 
2,758

Amortization of debt issuance costs
1,001

 
1,001

Other
314

 
(452
)
Total interest expense
$
17,061

 
$
17,061

 __________________
(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 5.5% and 5.6% for the three months ended April 2, 2017 and April 3, 2016, respectively.

6. Fair Value of Financial Instruments:
Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy) has been established.

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


The following table presents information on our financial instruments as of the periods presented:
 
 
April 2, 2017
 
 
January 1, 2017
 
 
Carrying Amount (1) 
 
Estimated Fair Value
 
 
Carrying Amount (1) 
 
Estimated Fair Value
 
 
(in thousands)
Financial Liabilities:
 
 
 
 
 
 
 
 
 
Bank indebtedness and other long-term debt:
 
 
 
 
 
 
 
 
 
     Current portion
 
$
7,600

 
$
7,534

 
 
$
7,613

 
$
7,623

     Long-term portion (2)
 
982,500

 
989,683

 
 
984,265

 
993,311

Bank indebtedness and other long-term debt:
 
$
990,100

 
$
997,217

 
 
$
991,878

 
$
1,000,934

 _________________
(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, accounts receivable and accounts payable approximates fair value because of their short maturities. The estimated fair value of our secured credit facilities' term loan facility and senior notes was determined by using the respective average of the ask and bid price of our outstanding borrowings under our term loan facility and the senior notes as of the nearest open market date preceding the reporting period end. The average of the ask and bid price are classified as Level 2 in the fair value hierarchy.
Our non-financial assets, which include long-lived assets, including property, plant and equipment, goodwill and intangible assets, are reported at carrying value and are not required to be measured at fair value on a recurring basis. However, on a periodic basis, or whenever events or changes in circumstances indicate that their carrying value may not be recoverable, we assess our long-lived assets for impairment.
During the three months ended April 2, 2017 and April 3, 2016, there were no significant transfers among Level 1, 2 or 3 fair value determinations.
7. Income Taxes:
Our income tax expense consists of the following for the periods presented:
 
Three Months Ended
 
April 2, 2017
 
April 3, 2016
 
(in thousands, except %)
Federal and state income taxes
$
10,098

 
$
11,263

Foreign income taxes(1)
280

 
109

      Income tax expense
$
10,378

 
$
11,372

      Effective rate
37.6
%
 
38.8
%
_________________
(1)    Including foreign taxes withheld.
Our effective income tax rate for the three month period ended April 2, 2017 differs from the statutory rate primarily due to the favorable impact of employment-related federal income tax credits. Our effective income tax rate for three month period ended April 3, 2016 differs from the statutory rate primarily due to the favorable impact of employment related federal income tax credits partially offset by the impact of non-deductible litigation costs related to the Merger (see Note 10 “Consolidating Guarantor Financial Information” for a definition of the Merger).
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 month period ended April 2, 2017, we have used the actual year-to-date effective tax rate (the “discrete method”), as required by ASC 740-270, Accounting

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

for Income Taxes-Interim Reporting when a reliable estimate cannot be made. We believe at this time, the use of the discrete method is more appropriate than the annual effective tax rate method due to significant variations in the customary relationship between income tax expense and projected annual pre-tax income or loss which occurs when annual projected pre-tax income or loss nears a relatively small amount in comparison to the differences between income and deductions determined for financial statement purposes versus income tax purposes. Using the discrete method, we have determined our current and deferred income tax expense as if the interim period were an annual period.
Our liability for uncertain tax positions (excluding interest and penalties) was $3.0 million and $3.1 million as of April 2, 2017 and January 1, 2017, respectively, and if recognized would decrease our provision for income taxes by $1.5 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 $1.0 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 April 2, 2017 and January 1, 2017, was $1.2 million. 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 options outstanding under the equity incentive plan as of April 2, 2017 and the activity for the three months ended April 2, 2017 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 1, 2017
2,400,914

$8.74


     Options Granted
53,771

$14.86


     Options Forfeited
(21,855
)
$12.68


Outstanding stock options, April 2, 2017
2,432,830

$8.96
7.0
$
19,512

Stock options expected to vest, April 2, 2017
1,804,267

$8.55
7.0
$
15,206

Exercisable stock options, April 2, 2017
428,089

$8.43
7.0
$
3,662

 
 
 
 
 
__________________
(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 April 2, 2017, we had $2.1 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 2.2 years.

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


The following table summarizes stock-based compensation expense and the associated tax benefit recognized in the Consolidated Financial Statements for the periods presented:
 
Three Months Ended
 
April 2,
2017
 
April 3,
2016
 
(in thousands)
Stock-based compensation costs
$
154

 
$
168

Portion capitalized as property and equipment (1)
(3
)
 
(33
)
Stock-based compensation expense recognized
$
151

 
$
135

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 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.

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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 three months ended April 2, 2017:
 
 
 
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 1, 2017
 
200

 
$
—

 
$
357,166

 
$
(148,265
)
 
$
(2,896
)
 
$
206,005

Net income
 
—

 
—

 
—

 
17,220

 
—

 
17,220

Other comprehensive income
 
—

 
—

 
—

 
—

 
119

 
119

Stock-based compensation costs
 
—

 
—

 
154

 
—

 
—

 
154

Return of capital
 
—

 
—

 
1,447

 
—

 
—

 
1,447

Balance April 2, 2017
 
200

 
$
—

 
$
358,767

 
$
(131,045
)
 
$
(2,777
)
 
$
224,945



10. Consolidating Guarantor Financial Information:
On February 14, 2014, CEC Entertainment, Inc. 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 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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CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

    
CEC Entertainment, Inc.
Condensed Consolidating Balance Sheet
As of April 2, 2017
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
85,204

 
$
2,719

 
$
7,003

 
$
—

 
$
94,926

Restricted cash
 
—

 
—

 
276

 
—

 
276

Accounts receivable
 
12,599

 
2,814

 
5,101

 
(4,507
)
 
16,007

Inventories
 
20,181

 
3,639

 
284

 
—

 
24,104

Prepaid expenses
 
13,458

 
10,197

 
1,540

 
—

 
25,195

Total current assets
 
131,442

 
19,369

 
14,204

 
(4,507
)
 
160,508

Property and equipment, net
 
530,252

 
51,480

 
6,799

 
—

 
588,531

Goodwill
 
432,462

 
51,414

 
—

 
—

 
483,876

Intangible assets, net
 
18,539

 
464,598

 
—

 
—

 
483,137

Intercompany
 
109,662

 
—

 
—

 
(109,662
)
 
—

Investment in subsidiaries
 
447,256

 
—

 
—

 
(447,256
)
 
—

Other noncurrent assets
 
9,999

 
12,847

 
321

 
—

 
23,167

Total assets
 
$
1,679,612

 
$
599,708

 
$
21,324

 
$
(561,425
)
 
$
1,739,219

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

 
$
—

 
$
—

 
$
—

 
$
7,600

Capital lease obligations, current portion
 
500

 
—

 
7

 
—

 
507

Accounts payable and accrued expenses
 
82,638

 
22,378

 
5,562

 
—

 
110,578

Other current liabilities
 
3,867

 
511

 
—

 
—

 
4,378

Total current liabilities
 
94,605

 
22,889

 
5,569

 
—

 
123,063

Capital lease obligations, less current portion
 
13,399

 
—

 
58

 
—

 
13,457

Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion
 
967,503

 
—

 
—

 
—

 
967,503

Deferred tax liability
 
167,602

 
18,975

 
(1,159
)
 
—

 
185,418

Intercompany
 
—

 
90,554

 
23,615

 
(114,169
)
 
—

Other noncurrent liabilities
 
211,558

 
12,932

 
343

 
—

 
224,833

Total liabilities
 
1,454,667

 
145,350

 
28,426

 
(114,169
)
 
1,514,274

Stockholder's equity:
 
 
 
 
 
 
 
 
 
 
Common stock
 
—

 
—

 
—

 
—

 
—

Capital in excess of par value
 
358,767

 
466,114

 
3,241

 
(469,355
)
 
358,767

Retained earnings (deficit)
 
(131,045
)
 
(11,756
)
 
(7,566
)
 
19,322

 
(131,045
)
Accumulated other comprehensive income (loss)
 
(2,777
)
 
—

 
(2,777
)
 
2,777

 
(2,777
)
Total stockholder's equity
 
224,945

 
454,358

 
(7,102
)
 
(447,256
)
 
224,945

Total liabilities and stockholder's equity
 
$
1,679,612

 
$
599,708

 
$
21,324

 
$
(561,425
)
 
$
1,739,219


18
Table of Contents
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

CEC Entertainment, Inc.
Condensed Consolidating Balance Sheet
As of January 1, 2017
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
53,088

 
$
1,158

 
$
6,777

 
$
—

 
$
61,023

Restricted cash
 
—

 
—

 
268

 
—

 
268

Accounts receivable
 
16,922

 
3,220

 
2,455

 
(2,102
)
 
20,495

Inventories
 
18,255

 
3,151

 
271

 
—

 
21,677

Prepaid expenses
 
14,294

 
6,077

 
1,127

 
—

 
21,498

Total current assets
 
102,559

 
13,606

 
10,898

 
(2,102
)
 
124,961

Property and equipment, net
 
538,195

 
47,906

 
6,785

 
—

 
592,886

Goodwill
 
432,462

 
51,414

 
—

 
—

 
483,876

Intangible assets, net
 
19,157

 
464,926

 
—

 
—

 
484,083

Intercompany
 
127,107

 
317

 
—

 
(127,424
)
 
—

Investment in subsidiaries
 
436,483

 
—

 
—

 
(436,483
)
 
—

Other noncurrent assets
 
6,888

 
17,025

 
393

 
—

 
24,306

Total assets
 
$
1,662,851

 
$
595,194

 
$
18,076

 
$
(566,009
)
 
$
1,710,112

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

 
$
13

 
$
—

 
$
—

 
$
7,613

Capital lease obligations, current portion
 
460

 
—

 
7

 
—

 
467

Accounts payable and accrued expenses
 
84,207

 
11,445

 
2,184

 
—

 
97,836

Other current liabilities
 
3,764

 
511

 
—

 
—

 
4,275

Total current liabilities
 
96,031

 
11,969

 
2,191

 
—

 
110,191

Capital lease obligations, less current portion
 
13,542

 
—

 
60

 
—

 
13,602

Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion
 
968,266

 
—

 
—

 
—

 
968,266

Deferred tax liability
 
166,064

 
21,234

 
(1,008
)
 
—

 
186,290

Intercompany
 
—

 
106,131

 
23,395

 
(129,526
)
 
—

Other noncurrent liabilities
 
212,943

 
12,484

 
331

 
—

 
225,758

Total liabilities
 
1,456,846

 
151,818

 
24,969

 
(129,526
)
 
1,504,107

Stockholder's equity:
 
 
 
 
 
 
 
 
 
 
Common stock
 
—

 
—

 
—

 
—

 
—

Capital in excess of par value
 
357,166

 
466,114

 
3,241

 
(469,355
)
 
357,166

Retained earnings (deficit)
 
(148,265
)
 
(22,738
)
 
(7,238
)
 
29,976

 
(148,265
)
Accumulated other comprehensive income (loss)
 
(2,896
)
 
—

 
(2,896
)
 
2,896

 
(2,896
)
Total stockholder's equity
 
206,005

 
443,376

 
(6,893
)
 
(436,483
)
 
206,005

Total liabilities and stockholder's equity
 
$
1,662,851

 
$
595,194

 
$
18,076

 
$
(566,009
)
 
$
1,710,112



19
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 April 2, 2017
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
 
Food and beverage sales
 
$
108,190

 
$
14,402

 
$
1,827

 
$
—

 
$
124,419

Entertainment and merchandise sales
 
118,788

 
14,112

 
3,017

 
—

 
135,917

Total company venue sales
 
226,978

 
28,514

 
4,844

 
—

 
260,336

Franchise fees and royalties
 
441

 
4,182

 
—

 
—

 
4,623

International Association assessments and other fees
 
314

 
10,544

 
10,509

 
(21,367
)
 
—

Total revenues
 
227,733

 
43,240

 
15,353

 
(21,367
)
 
264,959

Operating Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
Company venue operating costs:
 
 
 
 
 
 
 
 
 
 
Cost of food and beverage
 
23,996

 
3,688

 
534

 
—

 
28,218

Cost of entertainment and merchandise
 
7,901

 
415

 
171

 
—

 
8,487

Total cost of food, beverage, entertainment and merchandise
 
31,897

 
4,103

 
705

 
—

 
36,705

Labor expenses
 
60,183

 
4,839

 
1,366

 
—

 
66,388

Depreciation and amortization
 
24,979

 
920

 
513

 
—

 
26,412

Rent expense
 
21,279

 
1,501

 
539

 
—

 
23,319

Other venue operating expenses
 
43,016

 
3,287

 
1,305

 
(10,858
)
 
36,750

Total company venue operating costs
 
181,354

 
14,650

 
4,428

 
(10,858
)
 
189,574

Advertising expense
 
10,936

 
1,846

 
11,109

 
(10,509
)
 
13,382

General and administrative expenses
 
6,082

 
11,034

 
148

 
—

 
17,264

Transaction, severance and related litigation costs
 
80

 
—

 
—

 
—

 
80

Total operating costs and expenses
 
198,452

 
27,530

 
15,685

 
(21,367
)
 
220,300

Operating income (loss)
 
29,281

 
15,710

 
(332
)
 
—

 
44,659

Equity in earnings (loss) in affiliates
 
10,654

 
—

 
—

 
(10,654
)
 
—

Interest expense
 
15,907

 
1,017

 
137

 
—

 
17,061

Income (loss) before income taxes
 
24,028

 
14,693

 
(469
)
 
(10,654
)
 
27,598

Income tax expense (benefit)
 
6,808

 
3,711

 
(141
)
 
—

 
10,378

Net income (loss)
 
$
17,220

 
$
10,982

 
$
(328
)
 
$
(10,654
)
 
$
17,220


 
 
 
 
 
 
 
 
 
 
Components of other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
119

 
—

 
119

 
(119
)
 
119

Comprehensive income (loss)
 
$
17,339

 
$
10,982

 
$
(209
)
 
$
(10,773
)
 
$
17,339


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 April 3, 2016
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
 
Food and beverage sales
 
$
107,822

 
$
12,788

 
$
1,592

 
$
—

 
$
122,202

Entertainment and merchandise sales
 
139,208

 
5,598

 
2,751

 
—

 
147,557

Total company venue sales
 
247,030

 
18,386

 
4,343

 
—

 
269,759

Franchise fees and royalties
 
598

 
3,961

 
—

 
—

 
4,559

International Association assessments and other fees
 
255

 
615

 
11,958

 
(12,828
)
 
—

Total revenues
 
247,883

 
22,962

 
16,301

 
(12,828
)
 
274,318

Operating Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
Company venue operating costs:
 
 
 
 
 
 
 
 
 
 
Cost of food and beverage
 
26,644

 
3,297

 
580

 
—

 
30,521

Cost of entertainment and merchandise
 
8,119

 
445

 
186

 
—

 
8,750

Total cost of food, beverage, entertainment and merchandise
 
34,763

 
3,742

 
766

 
—

 
39,271

Labor expenses
 
63,734

 
3,999

 
1,310

 
—

 
69,043

Depreciation and amortization
 
26,563

 
607

 
459

 
—

 
27,629

Rent expense
 
22,257

 
1,333

 
560

 
—

 
24,150

Other venue operating expenses
 
33,763

 
2,166

 
951

 
(870
)
 
36,010

Total company venue operating costs
 
181,080

 
11,847

 
4,046

 
(870
)
 
196,103

Advertising expense
 
12,420

 
1,673

 
10,965

 
(11,958
)
 
13,100

General and administrative expenses
 
7,183

 
10,659

 
176

 
—

 
18,018

Transaction, severance and related litigation costs
 
701

 
48

 
—

 
—

 
749

Total operating costs and expenses
 
201,384

 
24,227

 
15,187

 
(12,828
)
 
227,970

Operating income (loss)
 
46,499

 
(1,265
)
 
1,114

 
—

 
46,348

Equity in earnings (loss) in affiliates
 
(1,112
)
 
—

 
—

 
1,112

 
—

Interest expense
 
16,602

 
351

 
108

 
—

 
17,061

Income (loss) before income taxes
 
28,785

 
(1,616
)
 
1,006

 
1,112

 
29,287

Income tax expense (benefit)
 
10,870

 
165

 
337

 
—

 
11,372

Net income (loss)
 
$
17,915

 
$
(1,781
)
 
$
669

 
$
1,112

 
$
17,915


 
 
 
 
 
 
 
 
 
 
Components of other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
754

 
—

 
754

 
(754
)
 
754

Comprehensive income (loss)
 
$
18,669

 
$
(1,781
)
 
$
1,423

 
$
358

 
$
18,669



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


CEC Entertainment, Inc.
Consolidating Statement of Cash Flows
For the Three Months Ended April 2, 2017
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Cash flows provided by (used in) operating activities:
 
$
47,762

 
$
10,342

 
$
691

 
$
—

 
$
58,795

 
 
 
 
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
  Purchases of property and equipment
 
(14,624
)
 
(7,639
)
 
(530
)
 
—

 
(22,793
)
  Development of internal use software
 
—

 
(1,129
)
 
—

 
—

 
(1,129
)
  Proceeds from sale of property and equipment
 
105

 
—

 
—

 
—

 
105

Cash flows provided by (used in) investing activities
 
(14,519
)
 
(8,768
)
 
(530
)
 
—

 
(23,817
)
 
 
 
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
  Repayments on senior term loan
 
(1,900
)
 
—

 
—

 
—

 
(1,900
)
  Repayments on note payable
 
—

 
(13
)
 
—

 
—

 
(13
)
  Payments on capital lease obligations
 
(104
)
 
—

 
(2
)
 
—

 
(106
)
  Payments on sale leaseback transactions
 
(570
)
 
—

 
—

 
—

 
(570
)
  Return of capital
 
1,447

 
—

 
—

 
—

 
1,447

Cash flows provided by (used in) financing activities
 
(1,127
)
 
(13
)
 
(2
)
 
—

 
(1,142
)
Effect of foreign exchange rate changes on cash
 
—

 
—

 
67

 
—

 
67

 
 
 
 
 
 
 
 
 
 
 
Change in cash and cash equivalents
 
32,116

 
1,561

 
226

 
—

 
33,903

Cash and cash equivalents at beginning of period
 
53,088

 
1,158

 
6,777

 
—

 
61,023

Cash and cash equivalents at end of period
 
$
85,204

 
$
2,719

 
$
7,003

 
$
—

 
$
94,926



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

CEC Entertainment, Inc.
Consolidating Statement of Cash Flows
For the Three Months Ended April 3, 2016
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Cash flows provided by (used in) operating activities:
 
$
40,445

 
$
3,662

 
$
(335
)
 
$
—

 
$
43,772

 
 
 
 

 

 

 

Cash flows from investing activities:
 

 

 

 

 

  Purchases of property and equipment
 
(18,342
)
 
(451
)
 
(30
)
 
—

 
(18,823
)
  Development of internal use software
 
(841
)
 
(2,784
)
 
—

 
—

 
(3,625
)
 Proceeds from the sale of property an equipment
 
79

 
—

 
—

 
—

 
79

Cash flows provided by (used in) investing activities
 
(19,104
)
—

(3,235
)
—

(30
)
—

—

—

(22,369
)
 
 
 
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 Repayments on senior term loan
 
(1,900
<