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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 October 1, 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 October 31, 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)
 
 
October 1,
2017
 
January 1,
2017
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
79,427

 
$
61,023

Restricted cash
 
219

 
268

Accounts receivable
 
17,086

 
20,495

Inventories
 
22,624

 
21,677

Prepaid expenses
 
20,487

 
21,498

Total current assets
 
139,843

 
124,961

Property and equipment, net
 
582,928

 
592,886

Goodwill
 
484,438

 
483,876

Intangible assets, net
 
481,278

 
484,083

Other noncurrent assets
 
20,170

 
24,306

Total assets
 
$
1,708,657

 
$
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
 
571

 
467

Accounts payable
 
32,473

 
33,202

Accrued expenses
 
38,658

 
40,098

Unearned revenues
 
21,353

 
16,381

Accrued interest
 
3,163

 
8,155

Other current liabilities
 
4,666

 
4,275

Total current liabilities
 
108,484

 
110,191

Capital lease obligations, less current portion
 
13,162

 
13,602

Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion
 
965,976

 
968,266

Deferred tax liability
 
180,789

 
186,290

Accrued insurance
 
8,784

 
9,183

Other noncurrent liabilities
 
222,092

 
216,575

Total liabilities
 
1,499,287

 
1,504,107

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

 
—

Capital in excess of par value
 
359,144

 
357,166

Accumulated deficit
 
(148,065
)
 
(148,265
)
Accumulated other comprehensive loss
 
(1,709
)
 
(2,896
)
Total stockholder’s equity
 
209,370

 
206,005

Total liabilities and stockholder’s equity
 
$
1,708,657

 
$
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
 
Nine Months Ended
 
October 1,
2017
 
October 2,
2016
 
October 1,
2017
 
October 2,
2016
REVENUES:
 
 
 
 
 
 
 
Food and beverage sales
$
98,255

 
$
101,984

 
$
320,085

 
$
321,591

Entertainment and merchandise sales
110,633

 
121,764

 
356,274

 
383,978

Total company venue sales
208,888

 
223,748

 
676,359

 
705,569

Franchise fees and royalties
4,459

 
4,322

 
13,731

 
13,440

Total revenues
213,347

 
228,070

 
690,090

 
719,009

OPERATING COSTS AND EXPENSES:
 
 
 
 

 

Company venue operating costs:
 
 
 
 

 

Cost of food and beverage (exclusive of items shown separately below)
23,974

 
25,507

 
75,014

 
80,702

Cost of entertainment and merchandise (exclusive of items shown separately below)
7,430

 
8,014

 
22,771

 
25,004

Total cost of food, beverage, entertainment and merchandise
31,404

 
33,521

 
97,785

 
105,706

Labor expenses
61,220

 
61,721

 
187,958

 
191,170

Depreciation and amortization
25,289

 
27,667

 
77,492

 
85,029

Rent expense
24,259

 
24,120

 
71,484

 
72,318

Other venue operating expenses
40,561

 
38,757

 
113,277

 
112,143

Total company venue operating costs
182,733

 
185,786

 
547,996

 
566,366

Other costs and expenses:
 
 
 
 

 

Advertising expense
12,083

 
11,515

 
37,702

 
36,777

General and administrative expenses
15,422

 
17,284

 
48,237

 
51,222

Transaction, severance and related litigation costs
128

 
166

 
698

 
1,349

Asset impairments
1,843

 
772

 
1,843

 
772

Total operating costs and expenses
212,209

 
215,523

 
636,476

 
656,486

Operating income
1,138

 
12,547

 
53,614

 
62,523

Interest expense
17,451

 
17,237

 
51,574

 
51,419

Income (loss) before income taxes
(16,313
)
 
(4,690
)
 
2,040

 
11,104

Income tax expense (benefit)
(5,221
)
 
(2,286
)
 
1,840

 
4,645

Net income (loss)
$
(11,092
)
 
$
(2,404
)
 
$
200

 
$
6,459

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
 
Nine Months Ended
 
October 1,
2017
 
October 2,
2016
 
October 1,
2017
 
October 2,
2016
Net income (loss)
$
(11,092
)
 
$
(2,404
)
 
$
200

 
$
6,459

Components of other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
648

 
(212
)
 
1,187

 
703

Comprehensive income (loss)
$
(10,444
)
 
$
(2,616
)
 
$
1,387

 
$
7,162


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



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CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
 
Nine Months Ended
 
October 1,
2017
 
October 2,
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
200

 
$
6,459

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
  Depreciation and amortization
83,064

 
90,167

  Deferred income taxes
(5,220
)
 
(10,329
)
  Stock-based compensation expense
520

 
522

  Amortization of lease related liabilities
(411
)
 
(17
)
  Amortization of original issue discount and deferred debt financing costs
3,410

 
3,410

  Loss on asset disposals, net
5,457

 
6,298

  Asset impairments
1,843

 
772

  Non-cash rent expense
3,562

 
5,261

  Other adjustments
18

 
237

  Changes in operating assets and liabilities:
 
 
 
  Restricted cash
49

 
(196
)
  Accounts receivable
2,678

 
5,938

  Inventories
(4,499
)
 
(1,867
)
  Prepaid expenses
1,195

 
(321
)
  Accounts payable
1,775

 
(3,973
)
  Accrued expenses
(2,097
)
 
3,424

  Unearned revenues
5,952

 
4,386

  Accrued interest
(4,891
)
 
(5,784
)
  Income taxes payable
425

 
5,400

  Deferred landlord contributions
1,210

 
1,467

Net cash provided by operating activities
94,240

 
111,254

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(71,910
)
 
(66,535
)
Development of internal use software
(2,520
)
 
(8,788
)
Proceeds from sale of property and equipment
424

 
426

Net cash used in investing activities
(74,006
)
 
(74,897
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Repayments on senior term loan
(5,700
)
 
(5,700
)
Repayments on note payable
(13
)
 
(37
)
Proceeds from sale leaseback transaction
4,073

 
—

Payments on capital lease obligations
(340
)
 
(311
)
Payments on sale leaseback obligations
(1,789
)
 
(1,466
)
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
(2,322
)
 
(7,510
)
Effect of foreign exchange rate changes on cash
492

 
356

Change in cash and cash equivalents
18,404

 
29,203

Cash and cash equivalents at beginning of period
61,023

 
50,654

Cash and cash equivalents at end of period
$
79,427

 
$
79,857

 
 
 
 
 
 
 
 
 
Nine Months Ended
 
October 1,
2017
 
October 2,
2016
SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
Interest paid
$
53,076

 
$
53,971

Income taxes paid, net
$
6,635

 
$
9,569

NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Accrued construction costs
$
2,772

 
$
2,926

 
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 13 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 $1.7 million for both the nine months ended October 1, 2017 and October 2, 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 and for the three and nine months ended October 1, 2017 and October 2, 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:
Effective January 2, 2017 we adopted 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 or net realizable value,” thereby simplifying the former guidance under which entities measured inventory at the lower of cost or market (market in this context was defined as one of three different measures, one of which was net realizable value). The adoption of this amendment did not have a significant impact on our Consolidated Financial Statements.
Effective January 2, 2017 we adopted 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. As allowed by the amendment we have elected to 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. 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 Financial Accounting Standards Board (“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 us beginning on December 31, 2018. 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. We are currently in the process of completing our assessment of all potential impacts of this amendment on our revenues, including: (i) our accounting for franchise and development fees, and (ii) accounting for our national advertising costs under the Association Funds. Specifically, we expect the adoption of this amendment will require us to recognize initial and renewal franchise and development fees on a straight-line basis over the life of the franchise agreement. Historically, we have recognized revenue from initial franchise and development fees upon the opening of a franchised restaurant when we have completed all of our material obligations and initial services. Additionally, we expect to account for our national advertising fund revenues on a gross basis, instead of net. We do not expect the impact of recognizing initial franchise fees over the franchise agreement period and recognizing advertising expense upon adoption of this standard to have a material effect on our consolidated financial statements. We have determined that this amendment will not have an impact on our recognition of revenue related to our franchise royalties, which are based on a percentage of franchise sales and revenue from Company-operated venues. We will adopt the guidance in this amendment beginning with our fiscal first quarter 2018 and will apply the guidance using the modified retrospective method, recognizing the cumulative effect of applying the new standard to new contracts and contracts that are not considered completed as of January 1, 2018, with no restatement of the comparative periods presented.
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 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. This ASU will be effective for us for annual and interim reporting periods beginning on January 1, 2018. We do not expect the adoption of this amendment to have a significant impact on our Consolidated Financial Statements.

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

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 us for our annual or any interim goodwill impairment test in fiscal years beginning after December 15, 2020 and will be applied 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.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815). This amendment expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. It also includes certain targeted improvements to simplify the application of current guidance related to hedge accounting. This ASU will be effective for us for annual and interim reporting periods beginning on December 31, 2019, with early adoption permitted. 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 $27.1 million and $29.9 million for the three months ended October 1, 2017 and October 2, 2016, respectively, of which $1.8 million and $2.2 million, respectively, was included in “General and administrative expenses” in our Consolidated Statements of Earnings.
Total depreciation and amortization expense was $83.1 million and $90.2 million for the nine months ended October 1, 2017 and October 2, 2016, respectively, of which $5.6 million and $5.1 million, respectively, was included in “General and administrative expenses” in our Consolidated Statements of Earnings.
Asset Impairments
During the three and nine months ended October 1, 2017, we recognized asset impairment charges of $1.8 million primarily related to five stores. During the three and nine months ended October 2, 2016, we recognized asset impairment charges of $0.8 million primarily related to four stores. These impairment charges were the result of a decline in the stores’ financial performance, primarily related to various economic factors in the markets in which the stores are located. As of October 1, 2017, the aggregate remaining carrying value of the property and equipment at the venues impaired in 2017, after the impairment charges, was $1.6 million.


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

3. Intangible Assets, Net:
The following table presents our indefinite and definite-lived intangible assets at October 1, 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

 
(6,917
)
 
7,963

Franchise agreements
25
 
53,300

 
(6,685
)
 
46,615

 
 
 
$
494,880

 
$
(13,602
)
 
$
481,278

__________________
(1)
In connection with the Merger, as defined in Note 12 “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 and $0.5 million for the three months ended October 1, 2017 and October 2, 2016, respectively, and $1.3 million and $1.5 million for the nine months ended October 1, 2017 and October 2, 2016, respectively, 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 October 1, 2017 and October 2, 2016, respectively, and $1.5 million for both the nine months ended October 1, 2017 and October 2, 2016, respectively, 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:
 
October 1, 2017
 
January 1, 2017
 
(in thousands)
Trade and other amounts payable
$
22,107

 
$
24,615

Book overdraft
10,366

 
8,587

       Accounts payable
$
32,473

 
$
33,202


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


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

5. Indebtedness and Interest Expense:
 Our long-term debt consisted of the following as of the dates presented:
 
October 1,
2017
 
January 1,
2017
 
(in thousands)
Term loan facility
$
733,400

 
$
739,100

Senior notes
255,000

 
255,000

Note payable
—

 
13

     Total debt outstanding
988,400

 
994,113

Less:
 
 
 
    Unamortized original issue discount
(1,829
)
 
(2,235
)
    Deferred financing costs, net
(12,995
)
 
(15,999
)
    Current portion
(7,600
)
 
(7,613
)
Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion
$
965,976

 
$
968,266

We were in compliance with the debt covenants in effect as of October 1, 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 October 1, 2017 and January 1, 2017, we had no borrowings outstanding and $9.9 million of letters of credit issued but undrawn under the revolving credit facility.
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 fourth quarter of 2017, the applicable margin for LIBOR borrowings under both the term loan facility and the revolving credit facility will return to their previous level of 3.25%.
During the nine months ended October 1, 2017, the federal funds rate ranged from 0.55% to 1.16%, the prime rate ranged from 3.75% to 4.25% and the one-month LIBOR ranged from 0.76% to 1.24% .
The weighted average effective interest rate incurred on our borrowings under our secured credit facilities was 4.7% and 4.6% for the nine months ended October 1, 2017 and October 2, 2016, respectively, which includes amortization of debt

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

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%. During the fourth quarter of 2017, the commitment fee rate will return to it previous level of 0.50%. We are also required to pay customary agency fees, as well as letter of credit participation fees computed at a rate per annum equal to the applicable margin for LIBOR rate borrowings on the dollar equivalent of the daily stated amount of outstanding letters of credit, plus such letter of credit issuer’s customary documentary 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; sell assets; enter into certain transactions with our affiliates; enter into sale-leaseback transactions; change our lines of business; restrict dividends from our subsidiaries or restrict liens; change our fiscal year; and modify the terms of certain debt or organizational agreements.
Our revolving credit facility includes a springing financial maintenance covenant that requires our net first lien senior secured leverage ratio not to exceed 6.25 to 1.00 (the 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”). The senior notes bear interest at a rate 8.000% per year and mature on February 15, 2022. 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”).
We paid $6.4 million in debt issuance costs related to the senior notes, which we capitalized in “Bank indebtedness and other long-term debt, net of deferred financing costs” on our Consolidated Balance Sheets. The deferred financing costs are being amortized over the life of the senior notes and are included in “Interest expense” 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; and (vii) restrict dividends from our subsidiaries.
The weighted average effective interest rate incurred on borrowings under our senior notes was 8.2% for the nine months ended October 1, 2017 and 8.3% for the nine months ended October 2, 2016, which included amortization of debt issuance costs and other fees related to our senior notes.

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


Interest Expense
Interest expense consisted of the following for the periods presented:
 
Three Months Ended
 
October 1, 2017
 
October 2, 2016
 
(in thousands)
Term loan facility (1)
$
8,014

 
$
7,646

Senior notes
5,083

 
5,157

Capital lease obligations
434

 
436

Sale leaseback obligations
2,647

 
2,674

Amortization of debt issuance costs
1,001

 
1,001

Other
272

 
323

Total interest expense
$
17,451

 
$
17,237

 
Nine Months Ended
 
October 1, 2017
 
October 2, 2016
 
(in thousands)
Term loan facility (1)
$
23,240

 
$
23,303

Senior notes
15,248

 
15,470

Capital lease obligations
1,264

 
1,315

Sale leaseback obligations
7,949

 
8,067

Amortization of debt issuance costs
3,004

 
3,004

Other
869

 
260

Total interest expense
$
51,574

 
$
51,419

 __________________
(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% for both the nine months ended October 1, 2017 and October 2, 2016, respectively.

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

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

The following table presents information on our financial instruments as of the periods presented:
 
 
October 1, 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

 
$
7,562

 
 
$
7,613

 
$
7,623

     Long-term portion (2)
 
978,971

 
987,972

 
 
984,265

 
993,311

Bank indebtedness and other long-term debt:
 
$
986,571

 
$
995,534

 
 
$
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, restricted cash, accounts receivable and accounts payable approximates fair value because of their short maturities. The estimated fair value of our secured credit facilities, term loan facility and senior notes was determined by using the respective average of the ask and bid price of our outstanding borrowings under our term loan facility and the senior notes as of the nearest open market date preceding the reporting period end. The average of the ask and bid price are classified as Level 2 in the fair value hierarchy.
Our non-financial assets, which include long-lived assets, including property, plant and equipment, goodwill and intangible assets, are reported at carrying value and are not required to be measured at fair value on a recurring basis. However, on a periodic basis, or whenever events or changes in circumstances indicate that their carrying value may not be recoverable, we assess our long-lived assets for impairment.
During the nine months ended October 1, 2017 and October 2, 2016, there were no significant transfers among Level 1, 2 or 3 fair value determinations.
Note 7. Other Noncurrent Liabilities:
Other noncurrent liabilities consisted of the following as of the dates presented:
 
 
October 1, 2017
 
January 1, 2017
 
 
(in thousands)
Sale leaseback obligations, less current portion (1)
 
$
178,724

 
$
176,831

Deferred rent liability
 
26,342

 
21,784

Deferred landlord contributions
 
6,237

 
5,702

Long-term portion of unfavorable leases
 
5,917

 
7,308

Other
 
4,872

 
4,950

Total other noncurrent liabilities
 
$
222,092

 
$
216,575

__________________
(1)
See Note 8 “Sale Leaseback Transaction” for further discussion on the sale leaseback transaction completed in the nine months ended October 1, 2017.
Note 8. Sale Leaseback Transaction:
On April 25, 2017, we closed a sale leaseback transaction with NADG NNN Acquisitions, Inc. (“NADG NNN”). Pursuant to the sale leaseback transaction, we sold our property located in Conyers, Georgia to NADG NNN, and we leased the property back from NADG NNN pursuant to a master lease on a triple-net basis for its continued use as Chuck-E-Cheese’s family dining and entertainment venue. The lease has an initial term of 20 years, with four five-year options to renew. For accounting purposes, this sale-leaseback transaction is accounted for under the financing method rather than as a completed

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

sale. Under the financing method, we (i) include the sales proceeds received in other long-term liabilities until our continuing involvement with the properties is terminated, (ii) report the associated property as owned assets, (iii) continue to depreciate the assets over their remaining useful lives, and (iv) record the rental payments as interest expense and a reduction of the sale leaseback obligation. When and if our continuing involvement with a property terminates and the sale of that property is recognized for accounting purposes, we expect to record a gain equal to the excess of the proceeds received over the remaining net book value of the property. The aggregate purchase price for the property in connection with the sale leaseback transaction was approximately $4.1 million million in cash, and the net proceeds realized were approximately $3.9 million.
9. Income Taxes:
Our income tax expense (benefit) consists of the following for the periods presented:
 
Three Months Ended
 
October 1, 2017
 
October 2, 2016
 
(in thousands, except %)
Federal and state income taxes
$
(5,533
)
 
$
(2,662
)
Foreign income taxes (1)
312

 
376

      Income tax expense (benefit)
$
(5,221
)
 
$
(2,286
)
 
Nine Months Ended
 
October 1, 2017
 
October 2, 2016
 
(in thousands, except %)
Federal and state income taxes
$
1,145

 
$
4,051

Foreign income taxes (1)
695

 
594

      Income tax expense (benefit)
$
1,840

 
$
4,645

_________________
(1)    Including foreign taxes withheld.
Our effective income tax rate for the three and nine months ended October 1, 2017 differs from the statutory rate primarily due to the favorable impact of employment related federal income tax credits offset by the unfavorable impact of a true-up related to prior year’s estimate of employment related tax credits versus actuals, the negative impact of non-deductible litigation costs related to the Merger (see Note 12 “Consolidating Guarantor Financial Information” for a definition of the Merger), non-deductible Canadian interest expense, and unfavorable adjustments to our deferred tax liability resulting from changes to state income tax apportionment factors and rates.
Our effective income tax rate for the three and nine months ended October 2, 2016 differs from the statutory rate primarily due to the favorable impact of employment related federal income tax credits, the impact in of a true-up to the prior year’s estimated tax provision versus actuals, offset by the negative impact of non-deductible litigation costs related to the Merger (see Note 12 “Consolidating Guarantor Financial Information” for a definition of the Merger), non-deductible Canadian interest expense, and an increase in the liability for uncertain tax positions.
For the periods presented herein, we have used the year-to-date effective tax rate (the “discrete method”), as prescribed by ASC 740-270, Accounting for Income Taxes-Interim Reporting when a reliable estimate of the estimated annual rate cannot be made. We believe at this time, the use of the discrete method is more appropriate than the annual effective tax rate method due to significant variations in the customary relationship between income tax expense and projected annual pre-tax income or 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 October 1, 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.

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

Total accrued interest and penalties related to unrecognized tax benefits as of October 1, 2017 and January 1, 2017, was $1.3 million and $1.2 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.”
10. 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 October 1, 2017 and the activity for the nine months ended October 1, 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
92,620

$15.93


     Options Forfeited
(33,385
)
$11.53


Outstanding stock options, October 1, 2017
2,460,149

$8.98
6.8
$
20,427

Stock options expected to vest, October 1, 2017
1,827,408

$9.09
6.8
$
14,963

Exercisable stock options, October 1, 2017
429,697

$8.43
6.5
$
3,801

 
 
 
 
 
__________________
(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 October 1, 2017, we had $1.8 million of total unrecognized share-based compensation expense related to unvested options, which is expected to be amortized over the remaining weighted-average period of 1.5 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
 
October 1,
2017
 
October 2,
2016
 
(in thousands)
Stock-based compensation costs
$
187

 
$
188

Portion capitalized as property and equipment (1)
(3
)
 
(3
)
Stock-based compensation expense recognized
$
184

 
$
185

 
Nine Months Ended
 
October 1,
2017
 
October 2,
2016
 
(in thousands)
Stock-based compensation costs
$
531

 
$
532

Portion capitalized as property and equipment (1)
(11
)
 
(10
)
Stock-based compensation expense recognized
$
520

 
$
522

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.
11. Stockholder’s Equity:
The following table summarizes the changes in stockholder’s equity during the nine months ended October 1, 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
 
—

 
—

 
—

 
200

 
—

 
200

Other comprehensive income
 
—

 
—

 
—

 
—

 
1,187

 
1,187

Stock-based compensation costs
 
—

 
—

 
531

 
—

 
—

 
531

Return of capital
 
—

 
—

 
1,447

 
—

 
—

 
1,447

Balance October 1, 2017
 
200

 
$
—

 
$
359,144

 
$
(148,065
)
 
$
(1,709
)
 
$
209,370


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

CEC Entertainment, Inc.
Condensed Consolidating Balance Sheet
As of October 1, 2017
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
70,041

 
$
1,850

 
$
7,536

 
$
—

 
$
79,427

Restricted cash
 
—

 
—

 
219

 
—

 
219

Accounts receivable
 
13,676

 
2,644

 
4,040

 
(3,274
)
 
17,086

Inventories
 
18,480

 
3,859

 
285

 
—

 
22,624

Prepaid expenses
 
13,683

 
5,359

 
1,445

 
—

 
20,487

Total current assets
 
115,880

 
13,712

 
13,525

 
(3,274
)
 
139,843

Property and equipment, net
 
513,147

 
63,203

 
6,578

 
—

 
582,928

Goodwill
 
433,024

 
51,414

 
—

 
—

 
484,438

Intangible assets, net
 
17,337

 
463,941

 
—

 
—

 
481,278

Intercompany
 
84,420

 
—

 
—

 
(84,420
)
 
—

Investment in subsidiaries
 
465,766

 
—

 
—

 
(465,766
)
 
—

Other noncurrent assets
 
7,747

 
12,180

 
243

 
—

 
20,170

Total assets
 
$
1,637,321

 
$
604,450

 
$
20,346

 
$
(553,460
)
 
$
1,708,657

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

 
$
—

 
$
—

 
$
—

 
$
7,600

Capital lease obligations, current portion
 
562

 
—

 
9

 
—

 
571

Accounts payable and accrued expenses
 
60,104

 
30,447

 
5,096

 
—

 
95,647

Other current liabilities
 
4,155

 
511

 
—

 
—

 
4,666

Total current liabilities
 
72,421

 
30,958

 
5,105

 
—

 
108,484

Capital lease obligations, less current portion
 
13,105

 
—

 
57

 
—

 
13,162

Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion
 
965,976

 
—

 
—

 
—

 
965,976

Deferred tax liability
 
159,582

 
24,022

 
(2,815
)
 
—

 
180,789

Intercompany
 
—

 
60,498

 
27,196

 
(87,694
)
 
—

Other noncurrent liabilities
 
216,867

 
13,588

 
421

 
—

 
230,876

Total liabilities
 
1,427,951

 
129,066

 
29,964

 
(87,694
)
 
1,499,287

Stockholder's equity:
 
 
 
 
 
 
 
 
 
 
Common stock
 
—

 
—

 
—

 
—

 
—

Capital in excess of par value
 
359,144

 
466,114

 
3,241

 
(469,355
)
 
359,144

Retained earnings (deficit)
 
(148,065
)
 
9,270

 
(11,150
)
 
1,880

 
(148,065
)
Accumulated other comprehensive income (loss)
 
(1,709
)
 
—

 
(1,709
)
 
1,709

 
(1,709
)
Total stockholder's equity
 
209,370

 
475,384

 
(9,618
)
 
(465,766
)
 
209,370

Total liabilities and stockholder's equity
 
$
1,637,321

 
$
604,450

 
$
20,346

 
$
(553,460
)
 
$
1,708,657


19
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



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 October 1, 2017
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
 
Food and beverage sales
 
$
83,413

 
$
13,234

 
$
1,608

 
$
—

 
$
98,255

Entertainment and merchandise sales
 
88,551

 
19,174

 
2,908

 
—

 
110,633

Total company venue sales
 
171,964

 
32,408

 
4,516

 
—

 
208,888

Franchise fees and royalties
 
506

 
3,953

 
—

 
—

 
4,459

International Association assessments and other fees
 
364

 
7,702

 
8,294

 
(16,360
)
 
—

Total revenues
 
172,834

 
44,063

 
12,810

 
(16,360
)
 
213,347

Operating Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
Company venue operating costs:
 
 
 
 
 
 
 
 
 
 
Cost of food and beverage
 
19,916

 
3,519

 
539

 
—

 
23,974

Cost of entertainment and merchandise
 
6,807

 
432

 
191

 
—

 
7,430

Total cost of food, beverage, entertainment and merchandise
 
26,723

 
3,951

 
730

 
—

 
31,404

Labor expenses
 
55,252

 
4,729

 
1,239

 
—

 
61,220

Depreciation and amortization
 
23,789

 
1,064

 
436

 
—

 
25,289

Rent expense
 
22,066

 
1,624

 
569

 
—

 
24,259

Other venue operating expenses
 
43,731

 
3,817

 
1,079

 
(8,066
)
 
40,561

Total company venue operating costs
 
171,561

 
15,185

 
4,053

 
(8,066
)
 
182,733

Advertising expense
 
8,670

 
1,085

 
10,622

 
(8,294
)
 
12,083

General and administrative expenses
 
4,863

 
10,454

 
105

 
—

 
15,422

Transaction, severance and related litigation costs
 
128

 
—

 
—

 
—

 
128

Asset impairments
 
1,824

 
14

 
5

 


 
1,843

Total operating costs and expenses
 
187,046

 
26,738

 
14,785

 
(16,360
)
 
212,209

Operating income (loss)
 
(14,212
)
 
17,325

 
(1,975
)
 
—

 
1,138

Equity in earnings (loss) in affiliates
 
(10,551
)
 
—

 
—

 
10,551

 
—

Interest expense
 
15,902

 
1,353

 
196

 
—

 
17,451

Income (loss) before income taxes
 
(40,665
)
 
15,972

 
(2,171
)
 
10,551

 
(16,313
)
Income tax expense (benefit)
 
(29,573
)
 
25,067

 
(715
)
 
—

 
(5,221
)
Net income (loss)
 
$
(11,092
)
 
$
(9,095
)
 
$
(1,456
)
 
$
10,551

 
$
(11,092
)

 
 
 
 
 
 
 
 
 
 
Components of other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
648

 
—

 
648

 
(648
)
 
648

Comprehensive income (loss)
 
$
(10,444
)
 
$
(9,095
)
 
$
(808
)
 
$
9,903

 
$
(10,444
)

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 October 2, 2016
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
 
Food and beverage sales
 
$
88,557

 
$
11,892

 
$
1,535

 
$
—

 
$
101,984

Entertainment and merchandise sales
 
112,306

 
6,703

 
2,755

 
—

 
121,764

Total company venue sales
 
200,863

 
18,595

 
4,290

 
—

 
223,748

Franchise fees and royalties
 
292

 
4,030

 
—

 
—

 
4,322

International Association assessments and other fees
 
273

 
615

 
8,431

 
(9,319
)
 
—

Total revenues
 
201,428

 
23,240

 
12,721

 
(9,319
)
 
228,070

Operating Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
Company venue operating costs:
 
 
 
 
 
 
 
 
 
 
Cost of food and beverage
 
21,773

 
3,194

 
540

 
—

 
25,507

Cost of entertainment and merchandise
 
7,391

 
428

 
195

 
—

 
8,014

Total cost of food, beverage, entertainment and merchandise
 
29,164

 
3,622

 
735

 
—

 
33,521

Labor expenses
 
56,386

 
4,039

 
1,296

 
—

 
61,721

Depreciation and amortization
 
26,501

 
650

 
516

 
—

 
27,667

Rent expense
 
22,235

 
1,331

 
554

 
—

 
24,120

Other venue operating expenses
 
35,659

 
3,033

 
953

 
(888
)
 
38,757

Total company venue operating costs
 
169,945

 
12,675

 
4,054

 
(888
)
 
185,786

Advertising expense
 
8,967

 
828

 
10,151

 
(8,431
)
 
11,515

General and administrative expenses
 
6,741

 
10,270

 
273

 
—

 
17,284

Transaction, severance and related litigation costs
 
166

 
—

 
—

 
—

 
166

Asset impairments
 
709

 
—

 
63

 
—

 
772

Total operating costs and expenses
 
186,528

 
23,773

 
14,541

 
(9,319
)
 
215,523

Operating income (loss)
 
14,900

 
(533
)
 
(1,820
)
 
—

 
12,547

Equity in earnings (loss) in affiliates
 
(2,299
)
 
—

 
—

 
2,299

 
—

Interest expense
 
15,685

 
1,440

 
112

 
—

 
17,237

Income (loss) before income taxes
 
(3,084
)
 
(1,973
)
 
(1,932
)
 
2,299

 
(4,690
)
Income tax expense (benefit)
 
(680
)
 
(935
)
 
(671
)
 
—

 
(2,286
)
Net income (loss)
 
$
(2,404
)
 
$
(1,038
)
 
$
(1,261
)
 
$
2,299

 
$
(2,404
)

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

 
(212
)
 
212

 
(212
)
Comprehensive income (loss)
 
$
(2,616
)
 
$
(1,038
)
 
$
(1,473
)
 
$
2,511

 
$
(2,616
)


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 Nine Months Ended October 1, 2017
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
 
Food and beverage sales
 
$
274,411

 
$
40,959

 
$
4,715