Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - CEC ENTERTAINMENT INCcecfy2017q2322.htm
EX-32.1 - EXHIBIT 32.1 - CEC ENTERTAINMENT INCcecfy2017q2321.htm
EX-31.2 - EXHIBIT 31.2 - CEC ENTERTAINMENT INCcecfy2017q2312.htm
EX-31.1 - EXHIBIT 31.1 - CEC ENTERTAINMENT INCcecfy2017q2311.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 July 2, 2017
OR 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                     
Commission File Number: 001-13687 
____________________________________
CEC ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
____________________________________
Kansas
(State or other jurisdiction of
incorporation or organization)
  
48-0905805
(IRS Employer
Identification No.)
 
 
 
1707 Market Place Blvd
Irving, Texas
  
75063
(Address of principal executive offices)
  
(Zip Code)
(972) 258-8507
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report) 
____________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes   ý     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes   ý     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
¨
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
ý
Smaller reporting company
¨
 
 
 
 
Emerging growth company
¨
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of July 31, 2017, 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)
 
 
July 2,
2017
 
January 1,
2017
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
89,462

 
$
61,023

Restricted cash
 
115

 
268

Accounts receivable
 
16,785

 
20,495

Inventories
 
24,708

 
21,677

Prepaid expenses
 
21,734

 
21,498

Total current assets
 
152,804

 
124,961

Property and equipment, net
 
586,043

 
592,886

Goodwill
 
484,438

 
483,876

Intangible assets, net
 
482,192

 
484,083

Other noncurrent assets
 
21,703

 
24,306

Total assets
 
$
1,727,180

 
$
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
 
549

 
467

Accounts payable
 
35,497

 
33,202

Accrued expenses
 
41,433

 
40,098

Unearned revenues
 
18,304

 
16,381

Accrued interest
 
8,128

 
8,155

Other current liabilities
 
4,559

 
4,275

Total current liabilities
 
116,070

 
110,191

Capital lease obligations, less current portion
 
13,304

 
13,602

Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion
 
966,739

 
968,266

Deferred tax liability
 
182,581

 
186,290

Accrued insurance
 
7,284

 
9,183

Other noncurrent liabilities
 
221,576

 
216,575

Total liabilities
 
1,507,554

 
1,504,107

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

 

Capital in excess of par value
 
358,956

 
357,166

Accumulated deficit
 
(136,973
)
 
(148,265
)
Accumulated other comprehensive loss
 
(2,357
)
 
(2,896
)
Total stockholder’s equity
 
219,626

 
206,005

Total liabilities and stockholder’s equity
 
$
1,727,180

 
$
1,710,112


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

3


CEC ENTERTAINMENT, INC.
COSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands)
 
 
Three Months Ended
 
July 2,
2017
 
July 3,
2016
REVENUES:
 
 
 
Food and beverage sales
$
97,411

 
$
97,404

Entertainment and merchandise sales
109,724

 
114,657

Total company venue sales
207,135

 
212,061

Franchise fees and royalties
4,649

 
4,560

Total revenues
211,784

 
216,621

OPERATING COSTS AND EXPENSES:
 
 
 
Company venue operating costs:
 
 
 
Cost of food and beverage (exclusive of items shown separately below)
22,823

 
24,673

Cost of entertainment and merchandise (exclusive of items shown separately below)
6,854

 
8,240

Total cost of food, beverage, entertainment and merchandise
29,677

 
32,913

Labor expenses
60,351

 
60,405

Depreciation and amortization
25,791

 
29,733

Rent expense
23,906

 
24,049

Other venue operating expenses
35,967

 
37,376

Total company venue operating costs
175,692

 
184,476

Other costs and expenses:
 
 
 
Advertising expense
12,237

 
12,162

General and administrative expenses
15,551

 
15,922

Transaction, severance and related litigation costs
490

 
434

Total operating costs and expenses
203,970

 
212,994

Operating income
7,814

 
3,627

Interest expense
17,061

 
17,121

Loss before income taxes
(9,247
)
 
(13,494
)
Income tax benefit
(3,317
)
 
(4,442
)
Net loss
$
(5,930
)
 
$
(9,052
)
The accompanying notes are an integral part of these unaudited interim Consolidated Financial Statements.









4



CEC ENTERTAINMENT, INC.
COSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands)
 
 
Six Months Ended
 
July 2,
2017
 
July 3,
2016
REVENUES:
 
 
 
Food and beverage sales
$
221,830

 
$
219,607

Entertainment and merchandise sales
245,641

 
262,214

Total company venue sales
467,471

 
481,821

Franchise fees and royalties
9,272

 
9,118

Total revenues
476,743

 
490,939

OPERATING COSTS AND EXPENSES:

 

Company venue operating costs:

 

Cost of food and beverage (exclusive of items shown separately below)
51,040

 
55,195

Cost of entertainment and merchandise (exclusive of items shown separately below)
15,341

 
16,989

Total cost of food, beverage, entertainment and merchandise
66,381

 
72,184

Labor expenses
126,738

 
129,448

Depreciation and amortization
52,203

 
57,362

Rent expense
47,225

 
48,199

Other venue operating expenses
72,716

 
73,387

Total company venue operating costs
365,263

 
380,580

Other costs and expenses:

 

Advertising expense
25,619

 
25,261

General and administrative expenses
32,815

 
33,939

Transaction, severance and related litigation costs
570

 
1,184

Total operating costs and expenses
424,267

 
440,964

Operating income
52,476

 
49,975

Interest expense
34,123

 
34,182

Income before income taxes
18,353

 
15,793

Income tax expense
7,061

 
6,930

Net income
$
11,292

 
$
8,863

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)
 

 
Three Months Ended
 
July 2,
2017
 
July 3,
2016
Net loss
$
(5,930
)
 
$
(9,052
)
Components of other comprehensive loss, net of tax:
 
 
 
Foreign currency translation adjustments
420

 
161

Comprehensive loss
$
(5,510
)
 
$
(8,891
)

 
Six Months Ended
 
July 2,
2017
 
July 3,
2016
Net income
$
11,292

 
$
8,863

Components of other comprehensive income, net of tax:
 
 
 
Foreign currency translation adjustments
539

 
915

Comprehensive income
$
11,831

 
$
9,778

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)
 
Six Months Ended
 
July 2,
2017
 
July 3,
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
11,292

 
$
8,863

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
  Depreciation and amortization
55,928

 
60,282

  Deferred income taxes
(3,589
)
 
(6,449
)
  Stock-based compensation expense
336

 
337

  Amortization of lease related liabilities
(237
)
 
23

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

 
2,273

  Loss on asset disposals, net
3,716

 
4,073

  Non-cash rent expense
2,101

 
3,507

  Other adjustments
9

 
172

  Changes in operating assets and liabilities:
 
 
 
  Restricted cash
153

 
(1,303
)
  Accounts receivable
2,770

 
5,527

  Inventories
(7,453
)
 
(3,645
)
  Prepaid expenses
(2,587
)
 
(2,208
)
  Accounts payable
8,031

 
(4,542
)
  Accrued expenses
(3,090
)
 
1,763

  Unearned revenues
2,905

 
713

  Accrued interest
54

 
(868
)
  Income taxes payable
2,933

 
7,803

  Deferred landlord contributions
1,210

 
1,417

Net cash provided by operating activities
76,755

 
77,738

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(47,045
)
 
(42,400
)
Development of internal use software
(2,075
)
 
(6,223
)
Proceeds from sale of property and equipment
237

 
318

Net cash used in investing activities
(48,883
)
 
(48,305
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Repayments on senior term loan
(3,800
)
 
(3,800
)
Repayments on note payable
(13
)
 
(24
)
Proceeds from sale leaseback transaction
4,073

 

Payments on capital lease obligations
(218
)
 
(204
)
Payments on sale leaseback obligations
(1,161
)
 
(956
)
Excess tax benefit realized from stock-based compensation

 
4


7

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

  Return of capital
1,447

 

Net cash provided by (used in) financing activities
328

 
(4,980
)
Effect of foreign exchange rate changes on cash
239

 
484

Change in cash and cash equivalents
28,439

 
24,937

Cash and cash equivalents at beginning of period
61,023

 
50,654

Cash and cash equivalents at end of period
$
89,462

 
$
75,591

 
 
 
 
 
 
 
 
 
Six Months Ended
 
July 2,
2017
 
July 3,
2016
SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
Interest paid
$
31,861

 
$
32,960

Income taxes paid, net
$
7,716

 
$
5,572

NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Accrued construction costs
$
2,214

 
$
1,436

 
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 venues in a total of 47 states and 12 foreign countries and territories. Our venues provide our guests with a variety of family entertainment and dining alternatives. All of our venues utilize a consistent restaurant-entertainment format that features both family dining and entertainment areas with a mix of food, entertainment and merchandise. The economic characteristics, products and services, preparation processes, distribution methods and types of customers are substantially similar for each of our venues. Therefore, we aggregate each venue’s operating performance into one reportable segment for financial reporting purposes.
Basis of Presentation
The Company has a controlling financial interest in International Association of CEC Entertainment, Inc. (the “Association”), a variable interest entity (“VIE”). The Association primarily administers the collection and disbursement of funds (the “Association Funds”) used for advertising, entertainment and media programs that benefit both us and our Chuck E. Cheese’s franchisees. We and our franchisees are required to contribute a percentage of gross sales to these funds and could be required to make additional contributions to fund any deficits that may be incurred by the Association. We include the Association in our Consolidated Financial Statements, as we concluded that we are the primary beneficiary of its variable interests because we (a) have the power to direct the majority of its significant operating activities; (b) provide it unsecured lines of credit; and (c) own the majority of the venues that benefit from the Association’s advertising, entertainment and media expenditures. The assets, liabilities and operating results of the Association are not material to our Consolidated Financial Statements.
Because the Association Funds are required to be segregated and used for specified purposes, we do not reflect franchisee contributions to the Association Funds as revenue, but rather record franchisee contributions as an offset to reported advertising expenses. Our contributions to the Association Funds are eliminated in consolidation. Contributions to the advertising, entertainment and media funds from our franchisees were $1.2 million for both the six months ended July 2, 2017 and July 3, 2016, respectively. Cash balances held by the Association are restricted for use in our advertising, entertainment and media programs, and are recorded as “Restricted cash” on our Consolidated Balance Sheets.
The preparation of these unaudited Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our unaudited Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Interim Financial Statements
The accompanying Consolidated Financial Statements as of and for the three and six months ended July 2, 2017 and July 3, 2016 are unaudited and are presented in accordance with the requirements for quarterly reports on Form 10-Q and, consequently, do not include all of the information and footnote disclosures required by GAAP. In the opinion of management, the Consolidated Financial Statements include all adjustments (consisting solely of normal recurring adjustments) necessary for the fair statement of its consolidated results of operations, financial position and cash flows as of the dates and for the periods presented in accordance with GAAP and the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). All intercompany accounts have been eliminated in consolidation.
Consolidated results of operations for interim periods are not necessarily indicative of results for the full year. The unaudited Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended January 1, 2017, filed with the SEC on March 16, 2017.

9

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 and net realizable value,” thereby simplifying the former guidance under which entities measured inventory at the lower of cost or market (market in this context is 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 January 1, 2019. Early adoption will be permitted for all entities. We are currently evaluating the impact of the adoption of this guidance on our Consolidated Financial Statements, but we expect this will have a material effect on our balance sheet since the Company has a significant amount of operating and capital lease arrangements.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. This amendment updates the revenue guidance on identifying performance obligations and accounting for licenses of intellectual property, changing the FASB's previous proposals on right-of-use licenses and contractual restrictions. For an entity that licenses intellectual property, the amount or timing of revenue recognition and the timing and pattern of revenue recognition for intellectual property licenses, including the application of the sale- and usage-based royalties exception, may be significantly different from current practice. Additionally, an entity will need to evaluate which contractual restrictions are attributes of a license and which give rise to separate performance obligations. This amendment will be effective for us for annual and interim reporting periods beginning after January 1, 2018. While we have completed a preliminary review of this amendment, we are continuing to assess all potential impacts of this amendment on our revenues. We currently believe the most significant effects will relate to: (i) our accounting for franchise and development fees, and (ii) accounting for our national advertising funds 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, which will impact franchise fee revenues. 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, as we have determined that we are the principal, since we control the funds and determine how the funds collected will be spent. 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, revenue from Company-operated venues, and revenue from the licensing of the Chuck E. Cheese brand name to cheese. 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.

10

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

In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business (Topic 805). The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The definition of a business affects many areas of accounting, including acquisitions, disposals, goodwill and consolidation. This ASU is effective for the Company for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. It should be applied prospectively. Early application of the amendments in this update is allowed as follows: (i) for transactions for which the acquisition date occurs before the issuance date or effective date of the amendment, only when the transaction has not been reported in financial statements that have been issued or made available for issuance; and (ii) for transactions in which a subsidiary (a) is deconsolidated or (b) a group of assets is derecognized that occur before the issuance date or effective date of the amendments, only when the transaction has not been reported in financial statements. We do not expect the adoption of this amendment to have a significant impact on our Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-04, Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This amendment eliminates Step 2, which measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill, from the goodwill impairment test. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. This ASU is effective for the Company for its annual or any interim goodwill impairment test in fiscal years beginning after December 15, 2020 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.
2. Property and Equipment:
Total depreciation and amortization expense was $27.6 million and $31.3 million for the three months ended July 2, 2017 and July 3, 2016, respectively, of which $1.8 million and $1.6 million, respectively, was included in “General and administrative expenses” in our Consolidated Statements of Earnings.
Total depreciation and amortization expense was $55.9 million and $60.3 million for the six months ended July 2, 2017 and July 3, 2016, respectively, of which $3.7 million and $2.9 million, respectively, was included in “General and administrative expenses” in our Consolidated Statements of Earnings.
3. Intangible Assets, Net:
The following table presents our indefinite and definite-lived intangible assets at July 2, 2017:

11

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

 
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

 
(6,516
)
 
8,364

Franchise agreements
25
 
53,300

 
(6,172
)
 
47,128

 
 
 
$
494,880

 
$
(12,688
)
 
$
482,192

__________________
(1)
In connection with the Merger, as defined in Note 10 “Consolidating Guarantor Financial Information”, and the acquisition of Peter Piper Pizza in October 2014, we also recorded unfavorable lease liabilities of $10.2 million and $3.9 million, respectively, which are included in “Other current liabilities” and “Other noncurrent liabilities” in our Consolidated Balance Sheets. Such amounts are being amortized over a weighted average life of 10 years, and are included in “Rent expense” in our Consolidated Statements of Earnings.
Amortization expense related to favorable lease agreements was $0.4 million and $0.5 million for the three months ended July 2, 2017 and July 3, 2016, respectively, and $0.9 million and $1.0 million for the six months ended July 2, 2017 and July 3, 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 July 2, 2017 and July 3, 2016, respectively, and $1.0 million for both the six months ended July 2, 2017 and July 3, 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:
 
July 2, 2017
 
January 1, 2017
 
(in thousands)
Trade and other amounts payable
$
26,676

 
$
24,615

Book overdraft
8,821

 
8,587

       Accounts payable
$
35,497

 
$
33,202


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


12

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:
 
July 2,
2017
 
January 1,
2017
 
(in thousands)
Term loan facility
$
735,300

 
$
739,100

Senior notes
255,000

 
255,000

Note payable

 
13

     Total debt outstanding
990,300

 
994,113

Less:
 
 
 
    Unamortized original issue discount
(1,965
)
 
(2,235
)
    Deferred financing costs, net
(13,996
)
 
(15,999
)
    Current portion
(7,600
)
 
(7,613
)
Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion
$
966,739

 
$
968,266

We were in compliance with the debt covenants in effect as of July 2, 2017 for both the secured credit facilities and the senior notes. For further discussion regarding the debt covenants, see Secured Credit Facilities and Senior Unsecured Notes sections below.
Secured Credit Facilities
Our secured credit facilities include (i) a $760.0 million term loan facility with a maturity date of February 14, 2021 (the “term loan facility”) and (ii) a $150.0 million senior secured revolving credit facility with a maturity date of February 14, 2019, which includes a letter of credit sub-facility and a $30.0 million swingline loan sub-facility (the “revolving credit facility” and together with the term loan facility, the “secured credit facilities”). The secured credit facilities require scheduled quarterly payments on the term loan facility equal to 0.25% of the original principal amount of the term loan facility from July 2014 to December 2020, with the remaining balance paid at maturity, February 14, 2021. As of July 2, 2017 and January 1, 2017, we had no borrowings outstanding under the revolving credit facility and $9.9 million of letters of credit issued but undrawn under the secured credit facilities.
The term loan was issued net of $3.8 million of original issue discount. We also paid $17.8 million and $3.4 million in debt financing costs related to the term loan facility and revolving credit facility, respectively, which we capitalized in “Bank indebtedness and other long-term debt, net of deferred financing costs” on our Consolidated Balance Sheets. The original issue discount and deferred financing costs are amortized over the lives of the facilities and are included in “Interest expense” on our Consolidated Statements of Earnings.
Borrowings under the secured credit facilities bear interest at a rate equal to, at our option, either (a) a London Interbank Offered Rate (“LIBOR”) determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowings, adjusted for certain additional costs, subject to a 1.00% floor in the case of term loans or (b) a base rate determined by reference to the highest of (i) the federal funds effective rate plus 0.50%; (ii) the prime rate of Deutsche Bank AG New York Branch; and (iii) the one-month adjusted LIBOR plus 1.00%, in each case plus an applicable margin. The base applicable margin is 3.25% with respect to LIBOR borrowings and 2.25% with respect to base rate borrowings under the
term loan facility and base rate borrowings and swingline borrowings under the revolving credit facility. The applicable margin
for LIBOR borrowings under the term loan facility was subject to one step-down from 3.25% to 3.00% based on our net first lien senior secured leverage ratio and the applicable margin for LIBOR borrowings under the revolving credit facility was subject to two step-downs from 3.25% to 3.00% and 2.75% based on our net first lien senior secured leverage ratio. Effective March 4, 2016, the applicable margin for both our term loan facility and revolving credit facilities stepped down to 3.0%.
During the six months ended July 2, 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 1.23% .
The weighted average effective interest rate incurred on our borrowings under our secured credit facilities was 4.6% and 4.7% for the six months ended July 2, 2017 and July 3, 2016, respectively, which includes amortization of debt issuance co

13

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

sts related to our secured credit facilities, amortization of our term loan facility original issue discount and commitment and other fees related to our secured credit facilities.
In addition to paying interest on outstanding principal under the secured credit facilities, we are required to pay a commitment fee to the lenders under the revolving credit facility with respect to the unutilized commitments thereunder. The base applicable commitment fee rate under the revolving credit facility was 0.50% per annum and was subject to one step-down from 0.50% to 0.375% based on our net first lien senior secured leverage ratio. Effective March 4, 2016, the commitment fee rate stepped down to 0.375%. We are also required to pay customary agency fees, as well as letter of credit participation fees computed at a rate per annum equal to the applicable margin for LIBOR rate borrowings on the dollar equivalent of the daily stated amount of outstanding letters of credit, plus such letter of credit issuer’s customary documentary and processing fees and charges and a fronting fee computed at a rate equal to 0.125% per annum on the daily stated amount of such letter of credit.
All obligations under the secured credit facilities are unconditionally guaranteed by our Parent on a limited-recourse basis and each of our existing and future direct and indirect material, wholly-owned domestic subsidiaries, subject to certain exceptions. The obligations are secured by a pledge of our capital stock and substantially all of our assets and those of each subsidiary guarantor, including capital stock of the subsidiary guarantors and 65% of the capital stock of the first-tier foreign subsidiaries that are not subsidiary guarantors, in each case subject to exceptions. Such security interests consist of first priority liens with respect to the collateral.
The secured credit facilities also contain customary affirmative and negative covenants, and events of default, which limit our ability to, among other things: incur additional debt or issue certain preferred shares; create liens on certain assets; make certain loans or investments (including acquisitions); pay dividends on or make distributions with respect to our capital stock or make other restricted payments; consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; 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 six months ended July 2, 2017 and 8.3% for the six months ended July 3, 2016, which included amortization of debt issuance costs and other fees related to our senior notes.

14

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
 
July 2, 2017
 
July 3, 2016
 
(in thousands)
Term loan facility (1)
$
7,619

 
$
7,500

Senior notes
5,083

 
5,157

Capital lease obligations
414

 
439

Sale leaseback obligations
2,663

 
2,636

Amortization of debt issuance costs
1,001

 
1,001

Other
281

 
388

Total interest expense
$
17,061

 
$
17,121

 
Six Months Ended
 
July 2, 2017
 
July 3, 2016
 
(in thousands)
Term loan facility (1)
$
15,226

 
$
15,657

Senior notes
10,165

 
10,313

Capital lease obligations
831

 
879

Sale leaseback obligations
5,302

 
5,394

Amortization of debt issuance costs
2,003

 
2,002

Other
596

 
(63
)
Total interest expense
$
34,123

 
$
34,182

 __________________
(1)    Includes amortization of original issue discount.
The weighted average effective interest rate incurred on our combined borrowings under our secured credit facilities and senior notes was 5.5% and 5.6% for the six months ended July 2, 2017 and July 3, 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.

15

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

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

 
$
7,572

 
 
$
7,613

 
$
7,623

     Long-term portion (2)
 
980,735

 
991,477

 
 
984,265

 
993,311

Bank indebtedness and other long-term debt:
 
$
988,335

 
$
999,049

 
 
$
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 six months ended July 2, 2017 and July 3, 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:
 
 
Successor
 
 
July 2,
2017
 
January 1,
2017
 
 
(in thousands)
Sale leaseback obligations, less current portion (1)
 
$
179,460

 
$
176,831

Deferred rent liability
 
24,574

 
21,784

Deferred landlord contributions
 
6,352

 
5,702

Long-term portion of unfavorable leases
 
6,380

 
7,308

Other
 
4,810

 
4,950

Total other noncurrent liabilities
 
$
221,576

 
$
216,575

__________________
(1)
See Note 8 “Sale Leaseback Transaction” for further discussion on the sale leaseback transaction completed in the six months ended July 2, 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

16

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

accounting purposes, this sale-leaseback transaction is accounted for under the financing method rather than as a completed 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
 
July 2, 2017
 
July 3, 2016
 
(in thousands, except %)
Federal and state income taxes
$
(3,420
)
 
$
(4,551
)
Foreign income taxes (1)
103

 
109

      Income tax expense (benefit)
$
(3,317
)
 
$
(4,442
)
 
Six Months Ended
 
July 2, 2017
 
July 3, 2016
 
(in thousands, except %)
Federal and state income taxes
$
6,678

 
$
6,712

Foreign income taxes (1)
383

 
218

      Income tax expense (benefit)
$
7,061

 
$
6,930

_________________
(1)    Including foreign taxes withheld.
Our effective income tax rate for the three months ended July 2, 2017 and July 3, 2016 differs from the statutory rate primarily due to the favorable impact of employment related federal income tax credits partially offset by the impact of non-deductible litigation costs related to the Merger (see Note 10 “Consolidating Guarantor Financial Information” for a definition of the Merger). Our effective income tax rate for the six months ended July 2, 2017 and July 3, 2016 differs from the statutory rate primarily due to the favorable impact of employment related federal income tax credits partially offset by the impact of non-deductible litigation costs related to the Merger. In addition, both the three-month and six-month periods ended July 3, 2016, were negatively impacted by an increase in the liability for uncertain tax positions and a change in state income tax rates.
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 July 2, 2017 and January 1, 2017, respectively, and if recognized would decrease our provision for income taxes by $1.5 million. Within the next twelve months, we could settle or otherwise conclude income tax audits. As such, it is reasonably possible that the liability for uncertain tax positions could decrease by as much as $0.5 million as a result of settlements with certain taxing authorities and expiring statutes of limitations within the next twelve months.
Total accrued interest and penalties related to unrecognized tax benefits as of July 2, 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.”

17

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

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 July 2, 2017 and the activity for the six months ended July 2, 2017 is presented below:
 
Stock Options
Weighted Average Exercise Price (1)
Weighted Average Remaining Contractual Term
Aggregate Intrinsic Value
 
 
($ per share)
 
($ in thousands)
Outstanding stock options, January 1, 2017
2,400,914

$8.74


     Options Granted
53,771

$14.86


     Options Forfeited
(26,165
)
$12.23


Outstanding stock options, July 2, 2017
2,428,520

$8.94
6.8
$
20,544

Stock options expected to vest, July 2, 2017
1,800,778

$8.52
6.8
$
15,998

Exercisable stock options, July 2, 2017
427,655

$8.42
6.8
$
3,840

 
 
 
 
 
__________________
(1)    The weighted average exercise price reflects the original grant date fair value per option as adjusted for the dividend payment made in August 2015.
As of July 2, 2017, we had $1.9 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 1.8 years.
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
 
July 2,
2017
 
July 3,
2016
 
(in thousands)
Stock-based compensation costs
$
189

 
$
206

Portion capitalized as property and equipment (1)
(3
)
 
(4
)
Stock-based compensation expense recognized
$
186

 
$
202

 
Six Months Ended
 
July 2,
2017
 
July 3,
2016
 
(in thousands)
Stock-based compensation costs
$
343

 
$
344

Portion capitalized as property and equipment (1)
(7
)
 
(7
)
Stock-based compensation expense recognized
$
336

 
$
337

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.

18

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

11. Stockholder’s Equity:
The following table summarizes the changes in stockholder’s equity during the six months ended July 2, 2017:
 
 
 
Common Stock
 
Capital In
Excess of
Par Value
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive
Loss
 
 
 
 
Shares
 
Amount
 
 
 
 
Total
 
 
(in thousands, except share information)
Balance at January 1, 2017
 
200

 
$

 
$
357,166

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

Net income
 

 

 

 
11,292

 

 
11,292

Other comprehensive income
 

 

 

 

 
539

 
539

Stock-based compensation costs
 

 

 
343

 

 

 
343

Return of capital
 

 

 
1,447

 

 

 
1,447

Balance July 2, 2017
 
200

 
$

 
$
358,956

 
$
(136,973
)
 
$
(2,357
)
 
$
219,626


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:

19

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

CEC Entertainment, Inc.
Condensed Consolidating Balance Sheet
As of July 2, 2017
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
77,470

 
$
5,334

 
$
6,658

 
$

 
$
89,462

Restricted cash
 

 

 
115

 

 
115

Accounts receivable
 
13,864

 
2,257

 
4,082

 
(3,418
)
 
16,785

Inventories
 
20,887

 
3,542

 
279

 

 
24,708

Prepaid expenses
 
13,056

 
7,529

 
1,149

 

 
21,734

Total current assets
 
125,277

 
18,662

 
12,283

 
(3,418
)
 
152,804

Property and equipment, net
 
521,750

 
57,705

 
6,588

 

 
586,043

Goodwill
 
433,024

 
51,414

 

 

 
484,438

Intangible assets, net
 
17,922

 
464,270

 

 

 
482,192

Intercompany
 
101,632

 

 

 
(101,632
)
 

Investment in subsidiaries
 
475,669

 

 

 
(475,669
)
 

Other noncurrent assets
 
8,112

 
13,295

 
296

 

 
21,703

Total assets
 
$
1,683,386

 
$
605,346

 
$
19,167

 
$
(580,719
)
 
$
1,727,180

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

 
$

 
$

 
$

 
$
7,600

Capital lease obligations, current portion
 
539

 

 
10

 

 
549

Accounts payable and accrued expenses
 
96,018

 
3,594

 
3,750

 

 
103,362

Other current liabilities
 
4,048

 
511

 

 

 
4,559

Total current liabilities
 
108,205

 
4,105

 
3,760

 

 
116,070

Capital lease obligations, less current portion
 
13,249

 

 
55

 

 
13,304

Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion
 
966,739

 

 

 

 
966,739

Deferred tax liability
 
160,581

 
24,241

 
(2,241
)
 

 
182,581

Intercompany
 

 
79,026

 
26,024

 
(105,050
)
 

Other noncurrent liabilities
 
214,986

 
13,497

 
377

 

 
228,860

Total liabilities
 
1,463,760

 
120,869

 
27,975

 
(105,050
)
 
1,507,554

Stockholder's equity:
 
 
 
 
 
 
 
 
 
 
Common stock
 

 

 

 

 

Capital in excess of par value
 
358,956

 
466,114

 
3,241

 
(469,355
)
 
358,956

Retained earnings (deficit)
 
(136,973
)
 
18,363

 
(9,692
)
 
(8,671
)
 
(136,973
)
Accumulated other comprehensive income (loss)
 
(2,357
)
 

 
(2,357
)
 
2,357

 
(2,357
)
Total stockholder's equity
 
219,626

 
484,477

 
(8,808
)
 
(475,669
)
 
219,626

Total liabilities and stockholder's equity
 
$
1,683,386

 
$
605,346

 
$
19,167

 
$
(580,719
)
 
$
1,727,180


20

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



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 July 2, 2017
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
 
Food and beverage sales
 
$
82,807

 
$
13,324

 
$
1,280

 
$

 
$
97,411

Entertainment and merchandise sales
 
88,857

 
18,811

 
2,056

 

 
109,724

Total company venue sales
 
171,664

 
32,135

 
3,336

 

 
207,135

Franchise fees and royalties
 
463

 
4,186

 

 

 
4,649

International Association assessments and other fees
 
375

 
10,544

 
8,098

 
(19,017
)
 

Total revenues
 
172,502

 
46,865

 
11,434

 
(19,017
)
 
211,784

Operating Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
Company venue operating costs:
 
 
 
 
 
 
 
 
 
 
Cost of food and beverage
 
18,936

 
3,464

 
423

 

 
22,823

Cost of entertainment and merchandise
 
6,329

 
389

 
136

 

 
6,854

Total cost of food, beverage, entertainment and merchandise
 
25,265

 
3,853

 
559

 

 
29,677

Labor expenses
 
54,654

 
4,541

 
1,156

 

 
60,351

Depreciation and amortization
 
24,394

 
962

 
435

 

 
25,791

Rent expense
 
21,825

 
1,552

 
529

 

 
23,906

Other venue operating expenses
 
42,664

 
3,259

 
990

 
(10,946
)
 
35,967

Total company venue operating costs
 
168,802

 
14,167

 
3,669

 
(10,946
)
 
175,692

Advertising expense
 
8,315

 
1,413

 
10,580

 
(8,071
)
 
12,237

General and administrative expenses
 
4,726

 
10,707

 
118

 

 
15,551

Transaction, severance and related litigation costs
 
490

 

 

 

 
490

Total operating costs and expenses
 
182,333

 
26,287

 
14,367

 
(19,017
)
 
203,970

Operating income (loss)
 
(9,831
)
 
20,578

 
(2,933
)
 

 
7,814

Equity in earnings (loss) in affiliates
 
27,993

 

 

 
(27,993
)
 

Interest expense
 
15,921

 
975

 
165

 

 
17,061

Income (loss) before income taxes
 
2,241

 
19,603

 
(3,098
)
 
(27,993
)
 
(9,247
)
Income tax expense (benefit)
 
8,171

 
(10,515
)
 
(973
)
 

 
(3,317
)
Net income (loss)
 
$
(5,930
)
 
$
30,118

 
$
(2,125
)
 
$
(27,993
)
 
$
(5,930
)

 
 
 
 
 
 
 
 
 
 
Components of other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
420

 

 
420

 
(420
)
 
420

Comprehensive income (loss)
 
$
(5,510
)
 
$
30,118

 
$
(1,705
)
 
$
(28,413
)
 
$
(5,510
)

22

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

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

 
$
12,099

 
$
1,294

 
$

 
$
97,404

Entertainment and merchandise sales
 
106,678

 
5,850

 
2,129

 

 
114,657

Total company venue sales
 
190,689

 
17,949

 
3,423

 

 
212,061

Franchise fees and royalties
 
672

 
3,888

 

 

 
4,560

International Association assessments and other fees
 
207

 
615

 
8,357

 
(9,179
)
 

Total revenues
 
191,568

 
22,452

 
11,780

 
(9,179
)
 
216,621

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

 
3,140

 
519

 

 
24,673

Cost of entertainment and merchandise
 
7,639

 
457

 
144

 

 
8,240

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

 
3,597

 
663

 

 
32,913

Labor expenses
 
55,375

 
3,803

 
1,227

 

 
60,405

Depreciation and amortization
 
28,596

 
628

 
509

 

 
29,733

Rent expense
 
22,110

 
1,379

 
560

 

 
24,049

Other venue operating expenses
 
34,876

 
2,369

 
979

 
(848
)
 
37,376

Total company venue operating costs
 
169,610

 
11,776

 
3,938

 
(848
)
 
184,476

Advertising expense
 
8,801

 
1,048

 
10,644

 
(8,331
)
 
12,162

General and administrative expenses
 
5,746

 
10,067

 
109

 

 
15,922

Transaction, severance and related litigation costs
 
427

 
7

 

 

 
434

Total operating costs and expenses
 
184,584

 
22,898

 
14,691

 
(9,179
)
 
212,994

Operating income (loss)
 
6,984

 
(446
)
 
(2,911
)
 

 
3,627

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

 

 
4,683

 

Interest expense
 
15,479

 
1,536

 
106

 

 
17,121

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

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

 
(901
)
 

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