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EX-32.1 - EXHIBIT 32.1 - CEC ENTERTAINMENT INCcecfy2015q3321.htm
EX-31.1 - EXHIBIT 31.1 - CEC ENTERTAINMENT INCcecfy2015q3311.htm
EX-32.2 - EXHIBIT 32.2 - CEC ENTERTAINMENT INCcecfy2015q3322.htm
EX-31.2 - EXHIBIT 31.2 - CEC ENTERTAINMENT INCcecfy2015q3312.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
_______________________________________________________________________
FORM 10-Q 
______________________________________________________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 2015
OR 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                     
Commission File Number: 001-13687 
____________________________________
CEC ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
____________________________________
Kansas
(State or other jurisdiction of
incorporation or organization)
  
48-0905805
(IRS Employer
Identification No.)
 
 
 
1707 Market Place Blvd
Irving, Texas
  
75063
(Address of principal executive offices)
  
(Zip Code)
(972) 258-8507
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report) 
____________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes   ý     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes   ý     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
¨
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
ý
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of October 26, 2015, an aggregate of 200 shares of the registrant’s common stock, par value $0.01 per share were outstanding.



CEC ENTERTAINMENT, INC.
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements.
CEC ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share information)
 
 
Successor
 
 
September 27,
2015
 
December 28,
2014
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
60,897

 
$
110,994

Accounts receivable
 
15,358

 
18,835

Inventories
 
23,165

 
18,979

Prepaid expenses
 
21,155

 
20,894

Deferred tax asset
 
3,943

 
3,943

Total current assets
 
124,518

 
173,645

Property and equipment, net
 
645,365

 
681,972

Goodwill
 
483,876

 
483,444

Intangible assets, net
 
489,149

 
491,400

Deferred financing costs, net
 
21,083

 
24,087

Other noncurrent assets
 
12,317

 
9,595

Total assets
 
$
1,776,308

 
$
1,864,143

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Bank indebtedness and other long-term debt, current portion
 
$
9,548

 
$
9,545

Capital lease obligations, current portion
 
408

 
408

Accounts payable
 
38,463

 
43,633

Accrued expenses
 
45,030

 
35,561

Unearned revenues
 
9,710

 
8,906

Accrued interest
 
10,970

 
16,152

Other current liabilities
 
3,590

 
2,990

Total current liabilities
 
117,719

 
117,195

Capital lease obligations, less current portion
 
15,157

 
15,476

Bank indebtedness and other long-term debt, less current portion
 
993,110

 
998,441

Deferred tax liability
 
203,281

 
222,915

Accrued insurance
 
9,199

 
12,146

Other noncurrent liabilities
 
214,765

 
205,384

Total liabilities
 
1,553,231

 
1,571,557

Stockholders’ equity:
 
 
 
 
Common stock, $0.01 par value; authorized 1,000 shares; 200 shares issued as of September 27, 2015 and December 28, 2014
 

 

Capital in excess of par value
 
356,329

 
355,587

Retained earnings (deficit)
 
(130,440
)
 
(62,088
)
Accumulated other comprehensive income (loss)
 
(2,812
)
 
(913
)
Total stockholders’ equity
 
223,077

 
292,586

Total liabilities and stockholders’ equity
 
$
1,776,308

 
$
1,864,143


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

3


CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands)
 
 
Successor
 
 
Three Months Ended
 
 
September 27,
2015
 
September 28,
2014
 
REVENUES:
 
 
 
 
Food and beverage sales
$
98,243

 
$
82,271

 
Entertainment and merchandise sales
118,753

 
115,885

 
Total company store sales
216,996

 
198,156

 
Franchise fees and royalties
4,941

 
1,533

 
Total revenues
221,937

 
199,689

 
OPERATING COSTS AND EXPENSES:
 
 
 
 
Company store operating costs:
 
 
 
 
Cost of food and beverage (exclusive of items shown separately below)
25,032

 
21,167

 
Cost of entertainment and merchandise (exclusive of items shown separately below)
7,863

 
6,669

 
Total cost of food, beverage, entertainment and merchandise
32,895

 
27,836

 
Labor expenses
59,998

 
57,086

 
Depreciation and amortization
28,394

 
31,622

 
Rent expense
23,979

 
22,587

 
Other store operating expenses
36,587

 
35,123

 
Total company store operating costs
181,853

 
174,254

 
Other costs and expenses:
 
 
 
 
Advertising expense
10,292

 
10,114

 
General and administrative expenses
16,140

 
13,820

 
Transaction and severance costs
278

 
5,742

 
Asset impairments
875

 

 
Total operating costs and expenses
209,438

 
203,930

 
Operating income (loss)
12,499

 
(4,241
)
 
Interest expense
17,209

 
15,974

 
Income (loss) before income taxes
(4,710
)
 
(20,215
)
 
Income tax expense (benefit)
(1,508
)
 
(6,936
)
 
Net income (loss)
$
(3,202
)
 
$
(13,279
)
 
The accompanying notes are an integral part of these unaudited interim Consolidated Financial Statements.















4



CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands)

 
Successor
 
 
Predecessor
 
Nine Months Ended
 
For the 226 Day Period Ended
 
 
For the 47 Day Period Ended
 
September 27,
2015
 
September 28,
2014
 
 
February 14,
2014
REVENUES:
 
 
 
 
 
 
Food and beverage sales
$
308,924

 
$
224,197

 
 
$
50,897

Entertainment and merchandise sales
377,358

 
300,149

 
 
62,659

Total company store sales
686,282

 
524,346

 
 
113,556

Franchise fees and royalties
13,241

 
3,493

 
 
687

Total revenues
699,523

 
527,839

 
 
114,243

OPERATING COSTS AND EXPENSES:
 
 
 
 
 
 
Company store operating costs:
 
 
 
 
 
 
Cost of food and beverage (exclusive of items shown separately below)
78,209

 
57,250

 
 
12,285

Cost of entertainment and merchandise (exclusive of items shown separately below)
23,399

 
17,426

 
 
3,729

Total cost of food, beverage, entertainment and merchandise
101,608

 
74,676

 
 
16,014

Labor expenses
186,405

 
143,781

 
 
31,998

Depreciation and amortization
86,606

 
84,141

 
 
9,733

Rent expense
72,698

 
53,012

 
 
12,365

Other store operating expenses
105,435

 
84,101

 
 
15,760

Total company store operating costs
552,752

 
439,711

 
 
85,870

Other costs and expenses:
 
 
 
 
 
 
Advertising expense
36,339

 
24,802

 
 
5,903

General and administrative expenses
52,199

 
32,576

 
 
7,963

Transaction and severance costs
360

 
43,263

 
 
11,634

Asset impairments
875

 

 
 

Total operating costs and expenses
642,525

 
540,352

 
 
111,370

Operating income (loss)
56,998

 
(12,513
)
 
 
2,873

Interest expense
52,031

 
43,256

 
 
1,151

Income (loss) before income taxes
4,967

 
(55,769
)
 
 
1,722

Income tax expense (benefit)
3,319

 
(15,834
)
 
 
1,018

Net income (loss)
$
1,648

 
$
(39,935
)
 
 
$
704

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




5


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

 
 
Successor
 
 
Three Months Ended
 
 
September 27,
2015
 
September 28,
2014
Net income (loss)
 
$
(3,202
)
 
$
(13,279
)
Components of other comprehensive income (loss), net of tax:
 
 
 
 
Foreign currency translation adjustments
 
(1,034
)
 
(652
)
Total components of other comprehensive income (loss), net of tax
 
(1,034
)
 
(652
)
Comprehensive income (loss)
 
$
(4,236
)
 
$
(13,931
)


 
 
 
Successor
 
 
Predecessor
 
 
Nine Months Ended
 
For the 226 Day Period Ended
 
 
For the 47 Day Period Ended
 
 
September 27,
2015
 
September 28,
2014
 
 
February 14,
2014
Net income (loss)
 
$
1,648

 
$
(39,935
)
 
 
$
704

Components of other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
(1,899
)
 
(151
)
 
 
(541
)
Total components of other comprehensive income (loss), net of tax
 
(1,899
)
 
(151
)
 
 
(541
)
Comprehensive income (loss)
 
$
(251
)
 
$
(40,086
)
 
 
$
163




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



6


CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
 
Successor
 
 
Predecessor
 
Nine Months Ended
 
For the 226 Day Period Ended
 
 
For the 47 Day Period Ended
 
September 27,
2015
 
September 28,
2014
 
 
February 14,
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income (loss)
$
1,648

 
$
(39,935
)
 
 
$
704

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
Depreciation and amortization
89,597

 
85,383

 
 
9,883

Deferred income taxes
(19,101
)
 
(56,431
)
 
 
(1,785
)
Stock-based compensation expense
733

 
191

 
 
12,225

Amortization of lease-related intangibles and liabilities, net
(2
)
 
287

 
 
(356
)
Amortization of original issue discount and deferred financing costs
3,410

 
2,824

 
 
58

Loss on asset disposals, net
4,867

 
5,223

 
 
294

Asset impairments
875

 

 
 

Non-cash rent expense
6,190

 
4,844

 
 
(916
)
Other adjustments
(908
)
 
378

 
 
144

Changes in operating assets and liabilities:
 
 
 
 
 
 
Accounts receivable
3,321

 
482

 
 
1,503

Inventories
(2,828
)
 
3,304

 
 
(2,472
)
Prepaid expenses
(2,504
)
 
(1,480
)
 
 
2,656

Accounts payable
(7,311
)
 
650

 
 
(270
)
Accrued expenses
2,163

 
4,239

 
 
(2,403
)
Unearned revenues
813

 
605

 
 
349

Accrued interest
(5,199
)
 
10,597

 
 
152

Income taxes payable
9,298

 
12,778

 
 
2,898

Deferred landlord contributions
3,236

 
3,523

 
 
(350
)
Net cash provided by operating activities
88,298

 
37,462

 
 
22,314

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
Acquisition of Predecessor

 
(946,898
)
 
 

Acquisition of Peter Piper Pizza
(663
)
 

 
 

Purchases of property and equipment
(56,994
)
 
(38,866
)
 
 
(9,710
)
Acquisition of franchisee

 
(1,529
)
 
 

Development of internal use software
(2,784
)
 

 
 

Proceeds from sale of property and equipment
261

 
350

 
 
51

Other investing activities

 

 
 

Net cash used in investing activities
(60,180
)
 
(986,943
)
 
 
(9,659
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
Proceeds from secured credit facilities, net of original issue discount

 
756,200

 
 

Proceeds from senior notes

 
255,000

 
 

Repayment of Predecessor Facility

 
(348,000
)
 
 

Repayments on senior term loan
(5,700
)
 
(1,900
)
 
 

Repayments on note payable
(34
)
 

 
 

Net repayments on revolving credit facility

 

 
 
(13,500
)
Proceeds from sale leaseback transaction

 
183,685

 
 

Payment of debt financing costs

 
(27,575
)
 
 

Payments on capital lease obligations
(308
)
 
(204
)
 
 
(164
)
Payments on sale leaseback obligations
(1,196
)
 

 
 


7

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

Dividends paid
(70,000
)
 
(890
)
 
 
(38
)
Excess tax benefit realized from stock-based compensation

 
5,043

 
 

Restricted stock returned for payment of taxes

 

 
 
(142
)
Equity contribution

 
350,000

 
 

Net cash provided by (used in) financing activities
(77,238
)
 
1,171,359

 
 
(13,844
)
Effect of foreign exchange rate changes on cash
(977
)
 
(77
)
 
 
(313
)
Change in cash and cash equivalents
(50,097
)
 
221,801

 
 
(1,502
)
Cash and cash equivalents at beginning of period
110,994

 
19,184

 
 
20,686

Cash and cash equivalents at end of period
$
60,897

 
$
240,985

 
 
$
19,184

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Successor
 
 
Predecessor
 
Nine Months Ended
 
For the 226 Day Period Ended
 
 
For the 47 Day Period Ended
 
September 27,
2015
 
September 28,
2014
 
 
February 14,
2014
SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
 
 
 
Interest paid (1)
$
53,868

 
$
29,914

 
 
$
938

Income taxes paid (refunded), net
$
13,142

 
$
22,777

 
 
$
(79
)
NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
 
 
 
Accrued construction costs
$
3,156

 
$
3,724

 
 
$
3,605

Dividends payable
$

 
$

 
 
$
890

Capital lease obligations
$

 
$
657

 
 
$

 
__________________
(1)
The 226 day period ended September 28, 2014 includes $4.9 million of debt issuance costs and interest expense related to the bridge loan.
The accompanying notes are an integral part of these unaudited interim Consolidated Financial Statements.

8


CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of Business and Summary of Significant Accounting Policies:
Description of Business
The use of the terms “CEC Entertainment,” the “Company,” “we,” “us” and “our” throughout these unaudited notes to the interim Consolidated Financial Statements refer to CEC Entertainment, Inc. and its subsidiaries.
We currently operate and franchise Chuck E. Cheese’s and Peter Piper Pizza family dining and entertainment centers (also referred to as “stores”) in a total of 47 states and 11 foreign countries and territories. Our stores provide our guests with a variety of family entertainment and dining alternatives. All of our stores utilize a consistent restaurant-entertainment format that features both family dining and entertainment areas with the same general mix of food, beverages, entertainment and merchandise. The economic characteristics, products and services, preparation processes, distribution methods and types of customers are substantially similar for each of our stores. Therefore, we aggregate each store’s operating performance into one reportable segment for financial reporting purposes.
Basis of Presentation
The accompanying interim Consolidated Financial Statements are presented for two periods, Predecessor and Successor, which relate to the accounting periods preceding and succeeding the completion of the merger of Q Merger Sub Inc., a Kansas corporation (“Merger Sub”) controlled by Apollo with and into CEC Entertainment on February 14, 2014 (the “Merger”). The Predecessor and Successor periods have been separated by a vertical line on the face of the Consolidated Financial Statements to highlight the fact that the financial information for such periods has been prepared under two different historical cost bases of accounting. For the purpose of presentation and disclosure, all references to the “Predecessor” relate to CEC Entertainment and its subsidiaries for periods prior to the Merger. All references to the “Successor” relate to CEC Entertainment and its subsidiaries, after giving effect to the Merger, for periods subsequent to the Merger. References to “CEC Entertainment,” the “Company,” “we,” “us” and “our” relate to the Predecessor for periods prior to the Merger and to the Successor for periods subsequent to the Merger.
In connection with our sale leaseback transaction that occurred in August 2014, the Company assigned a portion of its rights in the resulting purchase and sale agreement to a newly formed special purpose entity, a variable interest entity (“VIE”), created by a Qualified Intermediary to facilitate a like-kind exchange pursuant to Internal Revenue Code Section 1031. The assignment resulted in $12.1 million of the sales proceeds from the transaction being received by the VIE. We included the VIE in our Consolidated Financial Statements for the fiscal year ended December 28, 2014. In February 2015, we acquired the VIE, along with its capital improvements and remaining cash balance. The assets, liabilities and operating results of the acquired VIE are not material to our Consolidated Financial Statements.
The Company has a controlling financial interest in International Association of CEC Entertainment, Inc. (the “Association”), a VIE. The Association primarily administers the collection and disbursement of funds (the “Association Funds”) used for advertising, entertainment and media programs that benefit both us and our franchisees. We and our franchisees are required to contribute a percentage of gross sales to these funds and could be required to make additional contributions to fund any deficits that may be incurred by the Association. We include the Association in our Consolidated Financial Statements, as we concluded that we are the primary beneficiary of its variable interests because we (a) have the power to direct the majority of its significant operating activities; (b) provide it unsecured lines of credit; and (c) own the majority of the stores that benefit from the Association’s advertising, entertainment and media expenditures. The assets, liabilities and operating results of the Association are not material to our Consolidated Financial Statements.
Because the Association Funds are required to be segregated and used for specified purposes, we do not reflect franchisee contributions to the Association Funds as revenue, but rather record franchisee contributions as an offset to reported advertising expenses. Our contributions to the Association Funds are eliminated in consolidation. Contributions to the advertising, entertainment and media funds from our franchisees were $1.6 million for the nine months ended September 27, 2015, $1.5 million for the 226 day period ended September 28, 2014 and $0.4 million for the 47 day period ended February 14, 2014.
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.

9

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

Interim Financial Statements
The accompanying Consolidated Financial Statements as of September 27, 2015 and for the nine months ended September 27, 2015, the 226 day period ended September 28, 2014, the 47 day period ended February 14, 2014, and the three months ended September 27, 2015 and September 28, 2014 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 Company’s Consolidated Financial Statements include all adjustments (consisting solely of normal recurring adjustments) necessary for the fair statement of its consolidated results of operations, financial position and cash flows as of the dates and for the periods presented in accordance with GAAP and the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Our Consolidated Financial Statements include all necessary reclassification adjustments to conform prior year results to the current period presentation.
Consolidated results of operations for interim periods are not necessarily indicative of results for the full year. The unaudited Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 28, 2014, filed with the SEC on March 5, 2015.
Recently Issued Accounting Guidance
Accounting Guidance Not Yet Adopted: In January 2015, the FASB issued ASU 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20). This amendment eliminates the income statement concept of extraordinary items and the requirements for entities to consider whether an underlying event or transaction is extraordinary. This amendment is effective for fiscal years beginning after December 15, 2015, including interim periods therein. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. We do not expect the adoption of this amendment to have a significant impact on our Consolidated Financial Statements.
In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This amendment requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this amendment. This amendment is effective for fiscal years beginning after December 15, 2015, including interim periods therein. The amendment should be applied on a retrospective basis, wherein the balance sheet of each individual period should be adjusted to reflect the period-specific effects of applying the new guidance. Early adoption is permitted for financial statements that have not been previously issued. As of September 27, 2015, we have $21.1 million of net deferred financing costs that would be reclassified from a long-term asset to a reduction in the carrying amount of our debt.
In August 2015, the FASB issued ASU 2015-14, Revenue From Contracts With Customers (Topic 606): Deferral of the Effective Date. This amendment defers the effective date of the Board’s revenue standard, ASU 2014-09. The amendment defers the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017 and for interim periods therein. Early application is permitted, but only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods therein. We are currently assessing the impact of adopting this new guidance on our Consolidated Financial Statements.
In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. This amendment requires that an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The effect on earnings of changes in depreciation or amortization, or other income effects (if any) as a result of the change to the provisional amounts, calculated as if the accounting had been completed as of the acquisition date, must be recorded in the reporting period in which the adjustment amounts are determined rather than retrospectively. This amendment is effective for fiscal years beginning after December 15, 2015, including interim periods therein. Early adoption is permitted for financial statements that have not been previously issued. We do not expect the adoption of this amendment to have a significant impact on our Consolidated Financial Statements.
Note 2. Acquisition of Peter Piper Pizza:
In October 2014, the Company acquired Peter Piper Pizza (“PPP”), a leading pizza and entertainment restaurant chain operating in the southwestern United States and Mexico, for aggregate consideration paid of $113.1 million, net of cash acquired. During the nine months ended September 27, 2015, the Company made certain adjustments to the initial PPP purchase price allocation related to the final settlement of net working capital, the valuation of favorable and unfavorable lease

10

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

interests and PPP’s tradename, and the valuation of net operating losses acquired and other tax positions that resulted in a net increase to goodwill of $0.4 million.
The following table summarizes the final allocation of the purchase price to the estimated fair values of assets acquired and liabilities assumed at the date of the acquisition, as well as adjustments made during the measurement period (in thousands):


 
PPP Preliminary Purchase Price Allocation
 
Measurement Period Adjustments
 
PPP Final Purchase Price Allocation
Cash consideration paid
$
118,409

 
$
663

 
$
119,072

 
 
 
 
 
 
Fair value of assets acquired and liabilities assumed:
 
 
 
 
 
    Cash and cash equivalents
5,267

 

 
5,267

    Accounts receivable
511

 

 
511

    Inventories
820

 

 
820

    Other current assets
598

 

 
598

    Property, plant and equipment
14,383

 

 
14,383

    Favorable lease interests
2,000

 
(1,120
)
 
880

    Peter Piper Pizza's tradename
24,800

 
1,900

 
26,700

    Franchise agreements
39,300

 

 
39,300

    Other non-current assets
154

 

 
154

    Indebtedness
(120
)
 

 
(120
)
    Unfavorable lease interests
(3,290
)
 
(580
)
 
(3,870
)
    Deferred taxes
(12,935
)
 
31

 
(12,904
)
    Other current and non-current liabilities
(4,061
)
 

 
(4,061
)
Net assets acquired
67,427

 
231

 
67,658

Excess purchase price allocated to goodwill
$
50,982

 
$
432

 
$
51,414

The measurement period adjustments did not have a significant impact on our Consolidated Statements of Earnings for the three and nine months ended September 27, 2015. In addition, these adjustments did not have a significant impact on our Consolidated Balance Sheet as of December 28, 2014. Therefore, we have not retrospectively adjusted this financial information.
3. Property and Equipment:
Total depreciation and amortization expense was $29.4 million and $32.1 million for the three months ended September 27, 2015 and September 28, 2014, respectively, of which $1.0 million and $0.5 million, respectively, was included in “General and administrative expenses” in our Consolidated Statements of Earnings. Total depreciation and amortization expense for the three months ended September 27, 2015 and September 28, 2014, includes approximately $0.5 million and $0.2 million, respectively, related to the amortization of franchise agreements (see Note 4. “Goodwill and Intangible Assets, Net”).
Total depreciation and amortization expense was $89.6 million, $85.4 million, and $9.9 million for the nine months ended September 27, 2015, the 226 day period ended September 28, 2014 and the 47 day period ended February 14, 2014, respectively, of which $3.0 million, $1.2 million and $0.2 million, respectively, was included in “General and administrative expenses” in our Consolidated Statements of Earnings. Total depreciation and amortization expense for the nine months ended September 27, 2015 and the 226 day period ended September 28, 2014 includes approximately $1.5 million and $0.6 million, respectively, related to the amortization of franchise agreements (see Note 4. “Goodwill and Intangible Assets, Net”).
Asset Impairments
During the three and nine months ended September 27, 2015, we recognized an asset impairment charge of $0.9 million primarily related to ten stores. There were no impairment charges recognized in the three months ended September 28, 2014, the 226 day period ended September 28, 2014 and the 47 day period ended February 14, 2014. We continue to operate all of these stores. These impairment charges were the result of a decline in the stores’ financial performance, primarily due to various economic factors in the mar

11

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

kets in which the stores are located. As of September 27, 2015, the aggregate carrying value of the property and equipment at impaired stores, after the impairment charges, was $0.7 million for stores impaired in 2015.
4. Goodwill and Intangible Assets, Net:
The following table presents changes in the carrying value of goodwill for the nine months ended September 27, 2015 (in thousands):
 
Successor
Balance at December 28, 2014
$
483,444

Additions (1)
432

Balance at September 27, 2015
$
483,876

__________________
(1)
During the nine months ended September 27, 2015, we recorded certain adjustments to the initial PPP purchase price allocation related to the final settlement of net working capital, the valuation of favorable and unfavorable lease interests, the valuation of PPP’s tradename and the valuation of net operating losses acquired and other tax positions that resulted in a net increase to goodwill of $0.4 million. See Note 2 “Peter Piper Acquisition” for a discussion of the measurement period adjustments.
The following table presents our indefinite and definite-lived intangible assets at September 27, 2015:
 
Successor
 
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 (2)
Indefinite
 
26,700

 

 
26,700

Favorable lease agreements (1) (2)
10
 
14,880

 
(3,171
)
 
11,709

Franchise agreements
25
 
53,300

 
(2,560
)
 
50,740

 
 
 
$
494,880

 
$
(5,731
)
 
$
489,149

__________________
(1)
In connection with the Merger and the PPP Acquisition, 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 for the Successor periods.
(2)
In the first quarter of 2015 we recorded adjustments related to the valuation of the favorable lease agreements intangible asset and PPP’s tradename of $(1.1) million and $1.9 million, respectively, recorded in connection with the PPP Acquisition. See Note 2 “Acquisition of Peter Piper Pizza” for a discussion of these adjustments.
Amortization expense related to favorable lease agreements was $1.5 million for the nine months ended September 27, 2015, $1.1 million for the 226 day period ended September 28, 2014, $0.5 million for the third quarter of 2015, and $0.5 million for the third quarter of 2014 and is included in “Rent expense” in our Consolidated Statements of Earnings. Amortization expense related to franchise agreements was $1.5 million for the nine months ended September 27, 2015, $0.6 million for the 226 day period ended September 28, 2014, $0.5 million for the third quarter of 2015, and $0.2 million for the third quarter of 2014, and is included in “General and administrative expenses” in our Consolidated Statements of Earnings. As we did not have any intangible assets related to favorable lease agreements or franchise agreements prior to the Acquisition, we did not incur any amortization expense related to favorable lease agreements or franchise agreements for the 47 day period ended February 14, 2014.

12

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

5. Indebtedness and Interest Expense:
 Our long-term debt consisted of the following for the periods presented:
 
Successor
 
September 27,
2015
 
December 28,
2014
 
(in thousands)
Term loan facility
$
750,500

 
$
756,200

Senior notes
255,000

 
255,000

Note payable
80

 
113

     Total debt outstanding
1,005,580

 
1,011,313

Less:
 
 
 
    Unamortized original issue discount
(2,922
)
 
(3,327
)
    Current portion
(9,548
)
 
(9,545
)
Bank indebtedness and other long-term debt, less current portion
$
993,110

 
$
998,441

We were in compliance with the debt covenants in effect as of September 27, 2015 for both the Secured Credit Facilities and the senior notes. For further discussion regarding the debt covenants, see Secured Credit Facilities and Senior Unsecured Debt sections below.
Secured Credit Facilities
As of September 27, 2015, we had $750.5 million (excluding the original issue discount) outstanding under the Term loan facility, no borrowings outstanding under the revolving credit facility and $10.9 million of letters of credit issued but undrawn. The Secured Facilities require scheduled quarterly payments on the term loan equal to 0.25% of the original principal amount of the Term loan from July 2014 to December 2020, with the remaining balance paid at maturity, February 14, 2021.
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 applicable margin for borrowings is 3.00% with respect to LIBOR borrowings and 2.00% with respect to base rate borrowings under the term loan facility and base rate borrowings and swingline borrowings under the revolving credit facility. During the nine months ended September 27, 2015, the federal funds rate ranged from 0.06% to 0.15%, the prime rate was 3.25% and the one-month LIBOR ranged from 0.17% to 0.22%.
The weighted average effective interest rate incurred on our borrowings under our Secured Credit Facilities was 4.6% for the nine months ended September 27, 2015, and 4.8% for the 226 day period ended September 28, 2014, 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.
As of September 27, 2015, the borrowings under the revolving credit facility were less than 30% of the outstanding commitments; therefore, the springing financial maintenance covenant under our revolving credit facility was not in effect.
Senior Unsecured Debt
Our $255.0 million aggregate principal amount borrowings of 8.000% Senior Notes due 2022 (the “senior notes”) bear interest at a rate of 8.000% per year and mature on February 15, 2022.
Our obligations under the senior notes are fully and unconditionally guaranteed, jointly and severally, by our present and future direct and indirect wholly-owned material domestic subsidiaries that guarantee our Secured Credit Facilities.
The indenture contains restrictive covenants that limit our ability to, among other things: incur additional debt or issue certain preferred shares; create liens on certain assets; make certain loans or investments (including acquisitions); pay dividends on or make distributions in respect of our capital stock or make other restricted payments; consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; sell assets; enter into certain transactions with our affiliates; and restrict
dividends from our subsidiaries.

13

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

The weighted average effective interest rate incurred on borrowings under our senior notes was 8.3% for the nine months ended September 27, 2015 and 8.3% for the 226 day period ended September 28, 2014, which included amortization of debt issuance costs and other fees related to our senior notes.
Interest Expense
Interest expense consisted of the following for the periods presented:
 
Successor
 
Three Months Ended
 
September 27,
2015
 
September 28, 2014
 
(in thousands)
Term loan facility (1)
$
7,724

 
$
8,725

Senior notes
5,157

 
5,169

Capital lease obligations
447

 
469

Sale leaseback obligations
2,765

 
932

Amortization of debt issuance costs
1,002

 
1,001

Other
114

 
(322
)
 
$
17,209

 
$
15,974

 
Successor
 
 
Predecessor
 
Nine Months Ended
 
For the 226 Day Period Ended
 
 
For the 47 Day Period Ended
 
September 27,
2015
 
September 28, 2014
 
 
February 14, 2014
 
(in thousands)
Term loan facility (1)
$
23,229

 
$
21,586

 
 
$

Senior notes
15,470

 
12,592

 
 

Bridge Loan facility (2)

 
4,943

 
 

Predecessor Facility

 

 
 
745

Capital lease obligations
1,349

 
1,082

 
 
275

Sale leaseback obligations
8,331

 
932

 
 

Amortization of debt issuance costs
3,004

 
2,487

 
 
58

Other
648

 
(366
)
 
 
73

 
$
52,031

 
$
43,256

 
 
$
1,151

 __________________
(1)    Includes amortization of original issue discount.
(2)    The 226 day period ended September 28, 2014 includes Bridge Loan debt issuance costs of $4.7 million and interest of $0.2 million.
The weighted average effective interest rate incurred on our borrowings under our Secured Credit Facilities and senior notes was 5.5% for the nine months ended September 27, 2015, and 6.4% for the 226 day period ended September 28, 2014. Excluding the impact of $4.9 million of issuance costs and interest relating to the bridge loan facility, our weighted average effective rate would have been 5.7% for the 226 day period ended September 28, 2014. The weighted average effective interest rate incurred on our borrowings under our Predecessor Facility for the 47 day period ended February 14, 2014 was 1.6%.
6. Fair Value of Financial Instruments:
The following table presents information on our financial instruments as of the periods presented:

 
 
Successor
 
 
Successor
 
 
September 27, 2015
 
 
December 28, 2014
 
 
Carrying Amount
 
Estimated Fair Value
 
 
Carrying Amount
 
Estimated Fair Value
 
 
(in thousands)
Financial Liabilities:
 
 
 
 
 
 
 
 
 
Bank indebtedness and other long-term debt, less current portion
 
$
993,110

 
$
975,178

 
 
$
998,441

 
$
974,084


Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, our Secured Credit Facilities and our senior notes. The carrying amount of cash and cash equivalents, accounts receivable and accounts payable approximates fair value because of their short maturities. The estimated fair value of our Secured Credit Facilities' term loan and senior notes was determined by using estimated market prices of our outstanding borrowings under our term loan facility and the senior notes, which are classified as Level 2 in the fair value hierarchy.
During the nine months ended September 27, 2015, the 226 day period ended September 28, 2014, the 47 day period ended February 14, 2014, and the three months ended September 27, 2015 and September 28, 2014, there were no significant transfers among level 1, 2 or 3 fair value determinations.
7. Commitments and Contingencies:
Legal Proceedings
From time to time, we are involved in various inquiries, investigations, claims, lawsuits and other legal proceedings that are incidental to the conduct of our business. These matters typically involve claims from customers, employees or other third parties involved in operational issues common to the retail, restaurant and entertainment industries. Such matters typically represent actions with respect to contracts, intellectual property, taxation, employment, employee benefits, personal injuries and other matters. A number of such claims may exist at any given time, and there are currently a number of claims and legal proceedings pending against us.
In the opinion of our management, after consultation with legal counsel, the amount of liability with respect to claims or proceedings currently pending against us is not expected to have a material effect on our consolidated financial condition, results of operations or cash flows.
Employment-Related Litigation: On January 27, 2014, former store employee Franchesca Ford filed a purported class action lawsuit against the Company in San Francisco County Superior Court, California (the “Ford Litigation”). The plaintiff claims to represent other similarly-situated hourly non-exempt employees and former employees of the Company in California who were employed during the period January 27, 2010 to the present. She alleges violations of California state wage and hour laws governing vacation pay, meal and rest period pay, wages due upon termination, and waiting time penalties, and seeks an unspecified amount in damages. In March 2014, the Company removed the Ford Litigation to the U.S. District Court for the Northern District of California, San Francisco Division, and subsequently defeated the plaintiff’s motion to remand the case to California state court. On May 22, 2015, the parties reached an agreement to settle the lawsuit on a class-wide basis. The settlement would result in the plaintiffs’ dismissal of all claims asserted in the action, as well as certain related but unasserted claims, and grant of complete releases, in exchange for the Company’s settlement payment. The settlement currently awaits the Court’s approval. The Company has accrued for all probable and reasonably estimable losses associated with this claim. We currently believe that the final resolution of this action will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.
On March 24, 2014, Franchesca Ford and Isabel Rodriguez filed a purported class action lawsuit against the Company in the U.S. District Court, Southern District of California, San Diego Division. The plaintiffs claim to represent other similarly-situated applicants who were subject to pre-employment background checks with the Company in California and across the United States from March 24, 2012 to the present. The lawsuit alleges violations of the Fair Credit Reporting Act and the

14

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

California Consumer Credit Reporting and Investigative Reporting Agencies Act. On September 23, 2014, the Company reached an agreement to settle the lawsuit on a class-wide basis. The settlement would result in the plaintiffs’ dismissal of all claims asserted in the action, as well as certain related but unasserted claims, and grant of complete releases, in exchange for the Company’s settlement payment. On July 7, 2015, the Court entered an order preliminarily approving the settlement. The Company has accrued for all probable and reasonably estimable losses associated with this claim. We currently believe that the final resolution of this action will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.
On October 17, 2014, former store employee Wiley Wright filed a purported class action lawsuit against the Company in the United States District Court, Eastern District of New York, claiming to represent other similarly-situated salaried exempt current and former employees of the Company in the state of New York during the period October 17, 2008, as well as similarly-situated salaried exempt current and former employees throughout the remainder of the United States during the period October 17, 2011 to the present. The lawsuit alleges that current and former Assistant Managers and Senior Assistant Managers were unlawfully classified as exempt from overtime protections and worked more than 40 hours a week without overtime premium pay in violation of the Fair Labor Standards Act and New York Labor Law. The plaintiff seeks an unspecified amount in damages. On December 12, 2014, plaintiff moved for conditional certification of the putative class of employees; the Company filed its response to this motion on January 19, 2015. On July 16, 2015, the Court granted conditional certification of a collective group that included only the Assistant Managers and Senior Assistant Managers who worked in the four New York stores where plaintiff worked during his employment with the Company, while permitting plaintiff to obtain further discovery from the Company relating to his original motion. We believe the Company has meritorious defenses to this lawsuit and we intend to vigorously defend it. While no assurance can be given as to the ultimate outcome of this matter, we currently believe that the final resolution of this action will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources. We are currently attempting to schedule mediation of this case in November 2015. The parties have agreed to stay discovery until the completion of mediation.
On October 10, 2014, former store General Manager Richard Sinohui filed a purported class action lawsuit against the Company in the Superior Court of California, Riverside County (the “Sinohui Litigation”), claiming to represent other similarly-situated current and former General Managers of the Company in California during the period October 10, 2010 to the present. The lawsuit alleges current and former California General Managers were unlawfully classified as exempt from overtime protections and worked more than 40 hours a week without overtime premium pay, paid rest periods and paid meal periods, in violation of the California Labor Code, California Business and Professions Code, and the applicable Wage Order issued by the California Industrial Welfare Commission. The plaintiff seeks an unspecified amount in damages. On December 5, 2012, the Company removed the Sinohui Litigation to the U.S. District Court for the Central District of California, Southern Division. On December 30, 2014, the plaintiff petitioned the court to remand the Sinohui Litigation to California state court. On January 9, 2015, the Company filed a Motion to Dismiss Plaintiff’s Second, Third, Seventh and Eighth Causes of Action. The court has not ruled on this motion. On February 26, 2015, the Court overruled the plaintiff’s motion to remand. On October 9, 2015, Plaintiff filed its Motion for Class Certification. The Company’s response to this motion is due October 30, 2015. The Company’s investigation is ongoing. We believe the Company has meritorious defenses to this lawsuit and we intend to vigorously defend it. While no assurance can be given as to the ultimate outcome of this matter, we currently believe that the final resolution of this action will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.
Litigation Related to the Merger: Following the January 16, 2014 announcement that the Company had entered into the Merger Agreement, four putative shareholder class actions were filed in the District Court of Shawnee County, Kansas, on behalf of purported stockholders of the Company against the Company, its directors, Apollo, Parent and Merger Sub, in connection with the Merger Agreement and the transactions contemplated thereby. The first purported class action, styled Hilary Coyne v. Richard M. Frank et al. (the “Coyne Action”), was filed on January 21, 2014. The second, styled John Solak v. CEC Entertainment, Inc. et al. (the “Solak Action”), was filed on January 22, 2014. The third, styled Irene Dixon v. CEC Entertainment, Inc. et al. (the “Dixon Action”), was filed on January 24, 2014, and additionally names as defendants Apollo Management VIII, L.P. and the AP VIII Queso Holdings, L.P. The fourth, styled Louisiana Municipal Public Employees’ Retirement System v. Frank, et al. (the “LMPERS Action”), was filed on January 31, 2014, and additionally names as defendants, Apollo Management VIII, L.P. and AP VIII Queso Holdings, L.P. (collectively, Coyne, Solak, and Dixon Actions shall be referred to as the “Shareholder Actions”).
Each of the Shareholder Actions alleges that the Company’s directors breached their fiduciary duties to the Company’s stockholders in connection with their consideration and approval of the Merger Agreement by, among other things, agreeing to an inadequate tender price, the adoption on January 15, 2014 of the Rights Agreement, and certain provisions in the Merger Agreement that allegedly made it less likely that the Board would be able to consider alternative acquisition proposals. The

15

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

Coyne, Dixon and LMPERS Actions further allege that the Board was advised by a conflicted financial advisor. The Solak, Dixon and LMPERS Actions further allege that the Board was subject to material conflicts of interest in approving the Merger Agreement and that the Board breached its fiduciary duties in allowing allegedly conflicted members of management to negotiate the transaction. The Dixon and LMPERS Actions further allege that the Board breached its fiduciary duties in approving the Solicitation/Recommendation Statement on Schedule 14D-9 (together with the exhibits and annexes thereto, as it may be amended or supplemented, the “Statement”) filed with the SEC on January 22, 2014, which allegedly contained material misrepresentations and omissions.
Each of the Shareholder Actions allege that Apollo aided and abetted the Board’s breaches of fiduciary duties. The Solak and Dixon Actions allege that CEC also aided and abetted such breaches, and the Solak and LMPERS Actions further allege that Parent and the Merger Sub aided and abetted such actions. The LMPERS Action further alleges that Apollo Management VIII, L.P. and AP VIII Queso Holdings, L.P. aided and abetted such actions.
The Shareholder Actions seek, among other things, rescission of the transactions, damages, attorneys’ and experts’ fees and costs, and other unspecified relief.
On January 24, 2014, the plaintiff in the Coyne Action filed an amended complaint (the “Coyne Amended Complaint”), and on January 30, 2014, the plaintiff in the Solak Action filed an amended complaint (the “Solak Amended Complaint”) (together, the “Amended Complaints”). The Amended Complaints incorporated all of the allegations in the original complaints, added allegations that the Board-approved Statement omitted certain material information, in further violation of the Board’s fiduciary duties, and requested an order directing the Board to disclose such allegedly-omitted material information. The Solak Amended Complaint also added allegations that the Board breached its fiduciary duties in allowing an allegedly conflicted financial advisor and management to lead the sales process.
On March 7, 2014, the Coyne, Solak, Dixon and LMPERS Actions were consolidated into one action. On July 21, 2015 a consolidated class action petition was filed as the operative consolidated complaint by Twin City Pipe Trades Pension Trust that continued to assert claims against CEC and its former directors; added The Goldman Sachs Group (“Goldman Sachs”) as a defendant; and removed all Apollo entities as defendants (“Consolidated Class Action Petition”). The Consolidated Class Action Petition alleges that the Company’s directors breached their fiduciary duties to the Company’s stockholders in connection with their consideration and approval of the Merger Agreement by, among other things, conducting a deficient sales process, agreeing to an inadequate tender price, agreeing to certain provisions in the Merger Agreement, and filing materially deficient disclosures regarding the transaction. The Consolidated Class Action Petition also alleges that two members of the Company’s board who also served as the senior managers of the Company had material conflicts of interest and that Goldman Sachs aided and abetted the board’s breaches as a result of various conflicts of interest facing the bank. The Consolidated Class Action Petition seeks, among other things, to recover damages, attorneys’ fees and costs. The Company believes the Consolidated Class Action Petition is without merit and intends to defend it vigorously. While no assurance can be given as to the ultimate outcome of the consolidated matter, we currently believe that the final resolution of the action will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.
On June 10, 2014, Magnetar Global Event Driven Fund Ltd., Spectrum Opportunities Master Fund, Ltd., Magnetar Capital Master Fund, Ltd., and Blackwell Partners LLC, as the purported beneficial owners of shares held as of record by the nominal petitioner Cede & Co., (the “Appraisal Petitioners”), filed an action for statutory appraisal under Kansas state law against the Company in the U.S. District Court for the District of Kansas, captioned Magnetar Global Event Driven Master Fund Ltd, et al. v. CEC Entertainment, Inc., 2:14-cv-02279-RDR-KGS. The Appraisal Petitioners seek appraisal of 750,000 shares of common stock. The Company answered the complaint and filed a verified list of stockholders, as required under Kansas law. The parties have completed discovery in the case. On June 29, 2015, the court held a pretrial conference. Following this conference, on June 30, 2015, the court entered a pretrial order. No trial date has yet been set. The Company has accrued for all probable and reasonably estimable losses associated with this claim. The Company believes the lawsuit is without merit and intends to defend it vigorously. While no assurance can be given as to the ultimate outcome of this matter, we currently believe that the final resolution of this action will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.


16

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

8. Income Taxes:
Our income tax expense (benefit) consists of the following for the periods presented:
 
Successor
 
Three Months Ended
 
September 27, 2015
 
September 28, 2014
 
 
Federal and state income taxes
$
(1,643
)
 
$
(6,728
)
Foreign income taxes
135

 
(208
)
      Income tax expense (benefit)
$
(1,508
)
 
$
(6,936
)
      Effective rate
32.0
%
 
34.3
%

 
Successor
 
 
Predecessor
 
Nine Months Ended
 
For the 226 Day Period Ended
 
 
For the 47 Day Period Ended
 
September 27, 2015
 
September 28, 2014
 
 
February 14, 2014
 
 
Federal and state income taxes
$
2,431

 
$
(15,220
)
 
 
$
914

Foreign income taxes
888

 
(614
)
 
 
104

      Income tax expense (benefit)
$
3,319

 
$
(15,834
)
 
 
$
1,018

      Effective rate
66.8
%
 
28.4
%
 
 
59.1
%
Our effective income tax rate of 66.8% for the nine months ended September 27, 2015, 28.4% for the 226 day period ended September 28, 2014, and 59.1% for the 47 day period ended February 14, 2014, differs from the statutory rate primarily due to the unfavorable impact of non-deductible costs related to the Merger and Merger related litigation.
Our liability for uncertain tax positions (excluding interest and penalties) was $3.9 million and $1.9 million as of September 27, 2015 and December 28, 2014, respectively, and if recognized would decrease our provision for income taxes by $1.6 million. Within the next twelve months, we could settle or otherwise conclude income tax audits and/or have expiring statutes of limitations. As such, it is reasonably possible that the liability for uncertain tax positions could decrease by as much as $0.2 million as a result of settlements with certain taxing authorities and expiring statutes of limitations within the next twelve months.
The total accrued interest and penalties related to unrecognized tax benefits as of September 27, 2015 and December 28, 2014, was $1.9 million and $1.5 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.”

17

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

9. Stock-Based Compensation Arrangements:
The following tables summarize stock-based compensation expense and the associated tax benefit recognized in the Consolidated Financial Statements for the periods presented:
 
Successor
 
Three Months Ended
 
September 27,
2015
 
September 28,
2014
 
(in thousands)
Stock-based compensation costs
$
166

 
$
197

Portion capitalized as property and equipment (1)
(2
)
 
(6
)
Stock-based compensation expense recognized
$
164

 
$
191


 
 
Successor
 
 
Predecessor
 
 
Nine Months Ended
 
For the 226 Day Period Ended
 
 
For the 47 Day Period Ended
 
 
September 27,
2015
 
September 28,
2014
 
 
February 14,
2014
 
 
(in thousands)
Stock-based compensation costs
 
$
742

 
$
197

 
 
$
1,117

Portion capitalized as property and equipment (1)
 
(9
)
 
(6
)
 
 

Stock-based compensation costs related to the accelerated vesting of restricted stock awards in connection with the Merger
 

 

 
 
11,108

Stock-based compensation expense recognized
 
$
733

 
$
191

 
 
$
12,225

Tax benefit recognized from stock-based compensation awards (2)
 
$

 
$
5,043

 
 
$

 __________________
(1)
We capitalize the portion of stock-based compensation costs related to our design, construction, facilities and legal departments that are directly attributable to our store development projects, such as the design and construction of a new store and the remodeling and expansion of our existing stores. Capitalized stock-based compensation cost attributable to our store development projects is included in “Property and equipment, net” in the Consolidated Balance Sheets.
(2)
We recorded the $5.0 million tax benefit related to the accelerated vesting of restricted stock awards in the 226 day period ended September 28, 2014, as such tax benefits are deductible for income tax purposes on the Successor tax return for fiscal year 2014.
As of September 27, 2015, we had $2.8 million of total unrecognized share-based compensation expense related to unvested options, net of expected forfeitures, which is expected to be amortized over the remaining weighted-average period of 3.5 years.
10. Stockholders’ Equity:
The following table summarizes the changes in stockholders’ equity during the nine months ended September 27, 2015:
 
 
 
Common Stock
 
Capital In
Excess of
Par Value
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
 
 
 
Shares
 
Amount
 
 
 
 
Total
 
 
(in thousands, except share information)
Balance at December 29, 2014
 
200

 
$

 
$
355,587

 
$
(62,088
)
 
$
(913
)
 
$
292,586

Net income (loss)
 

 

 

 
1,648

 

 
1,648

Other comprehensive income (loss)
 

 

 

 

 
(1,899
)
 
(1,899
)
Stock-based compensation costs
 

 

 
742

 

 

 
742

Dividends paid
 

 

 

 
(70,000
)
 

 
(70,000
)
Balance at September 27, 2015
 
200

 
$

 
$
356,329

 
$
(130,440
)
 
$
(2,812
)
 
$
223,077


18

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

 In the third quarter of 2015, the Company declared and paid a cash dividend of $70.0 million.
11. Consolidating Guarantor Financial Information:
The senior notes issued by CEC Entertainment, Inc. (the “Issuer”) in conjunction with the Merger are our unsecured obligations and are fully and unconditionally, jointly and severally guaranteed by all of our 100% wholly-owned U.S. subsidiaries (the “Guarantors”). Our wholly-owned foreign subsidiaries and our less-than-wholly-owned U.S. subsidiaries are not a party to the guarantees (the “Non-Guarantors”). The following schedules present the condensed consolidating financial statements of the Issuer, Guarantors and Non-Guarantors, as well as consolidated results, for the periods presented:

19

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

CEC Entertainment, Inc.
Condensed Consolidating Balance Sheet
As of September 27, 2015
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Successor
 
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
53,482

 
$
327

 
$
7,088

 
$

 
$
60,897

Accounts receivable
 
12,126

 
2,564

 
4,783

 
(4,115
)
 
15,358

Inventories
 
9,672

 
13,286

 
207

 

 
23,165

Other current assets
 
19,626

 
3,882

 
1,590

 

 
25,098

Total current assets
 
94,906

 
20,059

 
13,668

 
(4,115
)
 
124,518

Property and equipment, net
 
600,121

 
36,052

 
9,192

 

 
645,365

Goodwill
 
432,462

 
51,414

 

 

 
483,876

Intangible assets, net
 
22,570

 
466,579

 

 

 
489,149

Intercompany
 
136,612

 
16,464

 

 
(153,076
)
 

Investment in subsidiaries
 
416,194

 

 

 
(416,194
)
 

Other noncurrent assets
 
25,870

 
6,957

 
573

 

 
33,400

Total assets
 
$
1,728,735

 
$
597,525

 
$
23,433

 
$
(573,385
)
 
$
1,776,308

Current liabilities:
 
 
 
 
 
 
 
 
 
 
Bank indebtedness and other long-term debt, current portion
 
$
9,500

 
$
48

 
$

 
$

 
$
9,548

Capital lease obligations, current portion
 
405

 

 
3

 

 
408

Accounts payable and accrued expenses
 
85,597

 
14,868

 
3,708

 

 
104,173

Other current liabilities
 
3,262

 
328

 

 

 
3,590

Total current liabilities
 
98,764

 
15,244

 
3,711

 

 
117,719

Capital lease obligations, less current portion
 
15,089

 

 
68

 

 
15,157

Bank indebtedness and other long-term debt, less current portion
 
993,078

 
32

 

 

 
993,110

Deferred tax liability
 
186,136

 
16,777

 
368

 

 
203,281

Intercompany
 

 
133,975

 
23,216

 
(157,191
)
 

Other noncurrent liabilities
 
212,591

 
11,121

 
252

 

 
223,964

Total liabilities
 
1,505,658

 
177,149

 
27,615

 
(157,191
)
 
1,553,231

Stockholders' equity:
 
 
 
 
 
 
 
 
 
 
Common stock
 

 

 

 

 

Capital in excess of par value
 
356,329

 
466,114

 
3,241

 
(469,355
)
 
356,329

Retained earnings (deficit)
 
(130,440
)
 
(45,738
)
 
(4,611
)
 
50,349

 
(130,440
)
Accumulated other comprehensive income (loss)
 
(2,812
)
 

 
(2,812
)
 
2,812

 
(2,812
)
Total stockholders' equity
 
223,077

 
420,376

 
(4,182
)
 
(416,194
)
 
223,077

Total liabilities and stockholders' equity
 
$
1,728,735

 
$
597,525

 
$
23,433

 
$
(573,385
)
 
$
1,776,308


20

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

CEC Entertainment, Inc.
Condensed Consolidating Balance Sheet
As of December 28, 2014
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Successor
 
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
97,020

 
$
6,427

 
$
7,547

 
$

 
$
110,994

Accounts receivable
 
13,209

 
5,487

 
3,797

 
(3,658
)
 
18,835

Inventories
 
15,008

 
3,596

 
375

 

 
18,979

Other current assets
 
19,086

 
3,711

 
2,040

 

 
24,837

Total current assets
 
144,323

 
19,221

 
13,759

 
(3,658
)
 
173,645

Property and equipment, net
 
638,239

 
33,064

 
10,669

 

 
681,972

Goodwill
 
432,462

 
50,982

 

 

 
483,444

Intangible assets, net
 
24,649

 
466,751

 

 

 
491,400

Intercompany
 
129,429

 
25,090

 
32,655

 
(187,174
)
 

Investment in subsidiaries
 
428,836

 

 

 
(428,836
)
 

Other noncurrent assets
 
27,770

 
5,875

 
37

 

 
33,682

Total assets
 
$
1,825,708

 
$
600,983

 
$
57,120

 
$
(619,668
)
 
$
1,864,143

Current liabilities:
 
 
 
 
 
 
 
 
 
 
Bank indebtedness and other long-term debt, current portion
 
$
9,500

 
$
45

 
$

 
$

 
$
9,545

Capital lease obligations, current portion
 
405

 

 
3

 

 
408

Accounts payable and accrued expenses
 
82,995

 
21,989

 
(248
)
 
(484
)
 
104,252

Other current liabilities
 
2,990

 

 

 

 
2,990

Total current liabilities
 
95,890

 
22,034

 
(245
)
 
(484
)
 
117,195

Capital lease obligations, less current portion
 
15,395

 

 
81

 

 
15,476

Bank indebtedness and other long-term debt
 
998,374

 
67

 

 

 
998,441

Deferred tax liability
 
207,258

 
14,877

 
780

 

 
222,915

Intercompany
 
6,309

 
126,497

 
57,542

 
(190,348
)
 

Other noncurrent liabilities
 
209,896

 
7,472

 
162

 

 
217,530

Total liabilities
 
1,533,122

 
170,947

 
58,320

 
(190,832
)
 
1,571,557

Stockholders' equity:
 
 
 
 
 
 
 
 
 
 
Common stock
 

 

 

 

 

Capital in excess of par value
 
355,587

 
465,451

 
3,089

 
(468,540
)
 
355,587

Retained earnings (deficit)
 
(62,088
)
 
(35,415
)
 
(3,376
)
 
38,791

 
(62,088
)
Accumulated other comprehensive income (loss)
 
(913
)
 

 
(913
)
 
913

 
(913
)
Total stockholders' equity
 
292,586

 
430,036

 
(1,200
)
 
(428,836
)
 
292,586

Total liabilities and stockholders' equity
 
$
1,825,708

 
$
600,983

 
$
57,120

 
$
(619,668
)
 
$
1,864,143



21

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

CEC Entertainment, Inc.
Consolidating Statement of Comprehensive Income (Loss)
For the Three Months Ended September 27, 2015
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Successor
 
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
 
Food and beverage sales
 
$
83,524

 
$
13,202

 
$
1,517

 
$

 
$
98,243

Entertainment and merchandise sales
 
112,266

 
3,808

 
2,679

 

 
118,753

Total company store sales
 
195,790

 
17,010

 
4,196

 

 
216,996

Franchise fees and royalties
 
493

 
4,438

 
10

 

 
4,941

International Association assessments and other fees
 
250

 
755

 
11,861

 
(12,866
)
 

Total revenues
 
196,533

 
22,203

 
16,067

 
(12,866
)
 
221,937

Operating Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
Company store operating costs:
 
 
 
 
 
 
 
 
 
 
Cost of food and beverage
 
21,459

 
3,061

 
512