UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~October 1, 2017~~September 30, 2018



¨	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 or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” ~~and~~ “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:



Large accelerated filer	¨	Accelerated filer	¨

Non-accelerated filer	ý	Smaller reporting company	¨

Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

As of October 31, ~~2017,~~2018, 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
PART I FINANCIAL INFORMATION

ITEM 1. Financial Statements (Unaudited)

Consolidated Balance Sheets at ~~October 1, 2017~~September 30, 2018 and ~~January 1,~~December 31, 2017	3

Consolidated Statements of Earnings for the three and nine months ended September 30, 2018 and October 1, 2017 ~~and October 2, 2016 and the nine months ended October 1, 2017 and October 2, 2016~~	4

Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2018 and October 1, 2017 ~~and October 2, 2016 and the nine months ended October 1, 2017 and October 2, 2016~~	5

Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and October 1, 2017 ~~and October 2, 2016~~	6

Notes to Consolidated Financial Statements	8

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2930

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	4245

ITEM 4. Controls and Procedures	4246

PART II OTHER INFORMATION

ITEM 1. Legal Proceedings	4447

ITEM 1A. Risk Factors	4447

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	4447

ITEM 6. Exhibits	4548

SIGNATURES

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements.

CEC ENTERTAINMENT, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share information)


	October 1, 2017			January 1, 2017			September 30, 2018			December 31, 2017
ASSETS
Current assets:
Cash and cash equivalents	$	79,427		$	61,023		$	84,429		$	67,200
Restricted cash	219			268			23			112
Accounts receivable	17,086			20,495			18,898			20,061
Income taxes receivable							9,749			10,960
Inventories	22,624			21,677			22,069			22,000
Prepaid expenses	20,487			21,498			24,579			20,398
Total current assets	139,843			124,961			159,747			140,731
Property and equipment, net	582,928			592,886			542,896			570,021
Goodwill	484,438			483,876			484,438			484,438
Intangible assets, net	481,278			484,083			477,872			480,377
Other noncurrent assets	20,170			24,306			21,104			19,477
Total assets	$	1,708,657		$	1,710,112		$	1,686,057		$	1,695,044
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Bank indebtedness and other long-term debt, current portion	$	7,600		$	7,613		$	7,600		$	7,600
Capital lease obligations, current portion	571			467			634			596
Accounts payable	32,473			33,202			36,140			31,374
Accrued expenses	38,658			40,098			37,927			36,616
Unearned revenues	21,353			16,381			17,787			21,050
Accrued interest	3,163			8,155			2,760			8,277
Other current liabilities	4,666			4,275			5,000			4,776
Total current liabilities	108,484			110,191			107,848			110,289
Capital lease obligations, less current portion	13,162			13,602			12,528			13,010
Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion	965,976			968,266			962,402			965,213
Deferred tax liability	180,789			186,290			110,921			114,186
Accrued insurance	8,784			9,183			9,484			8,311
Other noncurrent liabilities	222,092			216,575			226,652			221,887
Total liabilities	1,499,287			1,504,107			1,429,835			1,432,896
Stockholder’s equity:
Common stock, $0.01 par value; authorized 1,000 shares; 200 shares issued as of October 1, 2017 and January 1, 2017	—			—
Common stock, $0.01 par value; authorized 1,000 shares; 200 shares issued as of September 30, 2018 and December 31, 2017							—			—
Capital in excess of par value	359,144			357,166			359,411			359,233
Accumulated deficit	(148,065		)	(148,265		)	(101,430		)	(95,199		)
Accumulated other comprehensive loss	(1,709		)	(2,896		)	(1,759		)	(1,886		)
Total stockholder’s equity	209,370			206,005			256,222			262,148
Total liabilities and stockholder’s equity	$	1,708,657		$	1,710,112		$	1,686,057		$	1,695,044

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

CEC ENTERTAINMENT, INC.

COSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

(in thousands)


	Three Months Ended						Nine Months Ended				Three Months Ended						Nine Months Ended
	October 1, 2017			October 2, 2016			October 1, 2017		October 2, 2016		September 30, 2018			October 1, 2017			September 30, 2018			October 1, 2017
REVENUES:
Food and beverage sales	$	98,255		$	101,984		$	320,085	$	321,591	$	94,023		$	98,255		$	308,658		$	320,085
Entertainment and merchandise sales	110,633			121,764			356,274		383,978		121,611			110,633			368,633			356,274
Total company venue sales	208,888			223,748			676,359		705,569		215,634			208,888			677,291			676,359
Franchise fees and royalties	4,459			4,322			13,731		13,440		5,311			4,459			15,917			13,731
Total revenues	213,347			228,070			690,090		719,009		220,945			213,347			693,208			690,090
OPERATING COSTS AND EXPENSES:
Company venue operating costs:
Cost of food and beverage (exclusive of items shown separately below)	23,974			25,507			75,014		80,702
Cost of entertainment and merchandise (exclusive of items shown separately below)	7,430			8,014			22,771		25,004
Company venue operating costs (excluding Depreciation and amortization):
Cost of food and beverage											22,520			23,974			72,774			75,014
Cost of entertainment and merchandise											9,874			7,430			27,676			22,771
Total cost of food, beverage, entertainment and merchandise	31,404			33,521			97,785		105,706		32,394			31,404			100,450			97,785
Labor expenses	61,220			61,721			187,958		191,170		65,028			61,220			194,994			187,958
Depreciation and amortization	25,289			27,667			77,492		85,029
Rent expense	24,259			24,120			71,484		72,318		23,851			24,259			72,615			71,484
Other venue operating expenses	40,561			38,757			113,277		112,143		38,232			40,561			113,363			113,277
Total company venue operating costs	182,733			185,786			547,996		566,366		159,505			157,444			481,422			470,504
Other costs and expenses:
Advertising expense	12,083			11,515			37,702		36,777		11,058			12,083			38,010			37,702
General and administrative expenses	15,422			17,284			48,237		51,222		13,193			13,575			39,519			42,665
Depreciation and amortization											24,739			27,136			76,804			83,064
Transaction, severance and related litigation costs	128			166			698		1,349		(263		)	128			463			698
Asset impairments	1,843			772			1,843		772		5,344			1,843			6,935			1,843
Total operating costs and expenses	212,209			215,523			636,476		656,486		213,576			212,209			643,153			636,476
Operating income	1,138			12,547			53,614		62,523		7,369			1,138			50,055			53,614
Interest expense	17,451			17,237			51,574		51,419		19,069			17,451			56,740			51,574
Income (loss) before income taxes	(16,313		)	(4,690		)	2,040		11,104		(11,700		)	(16,313		)	(6,685		)	2,040
Income tax expense (benefit)	(5,221		)	(2,286		)	1,840		4,645		(2,213		)	(5,221		)	(454		)	1,840
Net income (loss)	$	(11,092	)	$	(2,404	)	$	200	$	6,459	$	(9,487	)	$	(11,092	)	$	(6,231	)	$	200

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

CEC ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)


	Three Months Ended						Nine Months Ended				Three Months Ended						Nine Months Ended
	October 1, 2017			October 2, 2016			October 1, 2017		October 2, 2016		September 30, 2018			October 1, 2017			September 30, 2018			October 1, 2017
Net income (loss)	$	(11,092	)	$	(2,404	)	$	200	$	6,459	$	(9,487	)	$	(11,092	)	$	(6,231	)	$	200
Components of other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	648			(212		)	1,187		703		(172		)	648			127			1,187
Comprehensive income (loss)	$	(10,444	)	$	(2,616	)	$	1,387	$	7,162	$	(9,659	)	$	(10,444	)	$	(6,104	)	$	1,387

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

CEC ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)


	Nine Months Ended						Nine Months Ended
	October 1, 2017			October 2, 2016			September 30, 2018			October 1, 2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	200		$	6,459
Adjustments to reconcile net income to net cash provided by operating activities:
Net income (loss)							$	(6,231	)	$	200
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	83,064			90,167			76,804			83,064
Deferred income taxes	(5,220		)	(10,329		)	(3,314		)	(5,220		)
Stock-based compensation expense	520			522			169			520
Amortization of lease related liabilities	(411		)	(17		)	(749		)	(411		)
Amortization of original issue discount and deferred debt financing costs	3,410			3,410			3,284			3,410
Loss on asset disposals, net	5,457			6,298			2,551			5,457
Asset impairments	1,843			772			6,935			1,843
Non-cash rent expense	3,562			5,261			4,109			3,562
Other adjustments	18			237			531			18
Changes in operating assets and liabilities:
Restricted cash	49			(196		)
Accounts receivable	2,678			5,938			2,016			2,678
Inventories	(4,499		)	(1,867		)	(84		)	(4,499		)
Prepaid expenses	1,195			(321		)	(3,479		)	1,195
Accounts payable	1,775			(3,973		)	886			1,775
Accrued expenses	(2,097		)	3,424			3,847			(2,097		)
Unearned revenues	5,952			4,386			(3,263		)	5,952
Accrued interest	(4,891		)	(5,784		)	(5,291		)	(4,891		)
Income taxes payable	425			5,400
Income taxes receivable							1,994			425
Deferred landlord contributions	1,210			1,467			1,760			1,210
Net cash provided by operating activities	94,240			111,254			82,475			94,191
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(71,910		)	(66,535		)	(55,202		)	(71,910		)
Development of internal use software	(2,520		)	(8,788		)	(1,992		)	(2,520		)
Proceeds from sale of property and equipment	424			426			464			424
Net cash used in investing activities	(74,006		)	(74,897		)	(56,730		)	(74,006		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on senior term loan	(5,700		)	(5,700		)	(5,700		)	(5,700		)
Repayments on note payable	(13		)	(37		)	—			(13		)
Proceeds from sale leaseback transaction	4,073			—			—			4,073
Payment of debt financing costs							(395		)	—
Payments on capital lease obligations	(340		)	(311		)	(442		)	(340		)
Payments on sale leaseback obligations	(1,789		)	(1,466		)	(2,119		)	(1,789		)
Excess tax benefit realized from stock-based compensation	—			4

Table of Contents

CEC ENTERTAINMENT, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS, CONT'D

(Unaudited)

(in thousands)


Return of capital	1,447			—			—			1,447
Net cash used in financing activities	(2,322		)	(7,510		)	(8,656		)	(2,322		)
Effect of foreign exchange rate changes on cash	492			356			51			492
Change in cash and cash equivalents	18,404			29,203
Cash and cash equivalents at beginning of period	61,023			50,654
Cash and cash equivalents at end of period	$	79,427		$	79,857
Change in cash, cash equivalents and restricted cash							17,140			18,355
Cash, cash equivalents and restricted cash at beginning of period							67,312			61,291
Cash, cash equivalents and restricted cash at end of period							$	84,452		$	79,646


	Nine Months Ended						Nine Months Ended
	October 1, 2017			October 2, 2016			September 30, 2018			October 1, 2017
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	$	53,076		$	53,971		$	59,229		$	53,076
Income taxes paid, net	$	6,635		$	9,569		$	867		$	6,635
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accrued construction costs	$	2,772		$	2,926		$	1,659		$	2,772

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

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 1314 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. We eliminate the intercompany portion of transactions with VIEs from our financial results. The assets, liabilities and operating results of the Association are not material to our Consolidated Financial Statements.

~~Because the~~The Association Funds are required to be segregated and used for specified purposes, we do not reflect franchisee contributions to the Association Funds as revenue, but rather record franchisee contributions as an offset to reported advertising expenses. Our contributions to the Association Funds are eliminated in consolidation. Contributions to the advertising, entertainment and media funds from our franchisees were $1.7 million for both the nine months ended ~~October 1, 2017~~ ~~and October 2, 2016, respectively.~~purposes. 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. Contributions to the advertising, entertainment and media funds from our franchisees were $1.8 million and $1.7 million for the nine months ended September 30, 2018 and October 1, 2017, respectively. Our contributions to the Association Funds are eliminated in consolidation. On January 1, 2018 we adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (ASC Topic 606). As a result of the adoption of ASU 2016-15, Statement of Cash Flows (Topic 230) and ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, on January 1, 2018, certain reclassifications have been made in our Consolidated Statements of Cash Flows to conform with the current period presentation.

For further details regarding the impact of these new accounting standards on our Consolidated financial statements see “Recently Issued Accounting Guidance” - “Accounting Guidance Adopted” - below.

We reclassified $1.8 million and $5.6 million, respectively, of depreciation and amortization for the three and nine months ended October 1, 2017 which was previously included in “General and administrative expenses” and we reclassified “Depreciation and amortization” of $25.3 million and $77.5 million, respectively, for the three and nine months ended October 1, 2017 from “Company venue operating costs” to a single classification as “Depreciation and amortization” now shown in “Other costs and expenses” in our Consolidated Statements of Earnings, to conform to the current period’s presentation.

The preparation of these unaudited Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States (“U.S. 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.

Table of Contents

CEC ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Interim Financial Statements

The accompanying Consolidated Financial Statements as of and for the three and nine months ended September 30, 2018 and October 1, 2017 ~~and October 2, 2016~~ are unaudited and are presented in accordance with the requirements for quarterly reports on Form 10-Q and, consequently, do not include all of the information and footnote disclosures required by GAAP. In the opinion of management, the Consolidated Financial Statements include all adjustments (consisting solely of normal recurring adjustments) necessary for the fair statement of its consolidated results of operations, financial position and cash flows as of the dates and for the periods presented in accordance with GAAP and the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). All intercompany accounts have been eliminated in consolidation.

Consolidated results of operations for interim periods are not necessarily indicative of results for the full year. The unaudited Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended ~~January 1,~~December 31, 2017, filed with the SEC on March ~~16, 2017.~~28, 2018.

~~Table of Contents~~

~~CEC ENTERTAINMENT, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(Unaudited)~~

Recently Issued Accounting Guidance

Accounting Guidance Adopted:

Effective January ~~2, 2017~~1, 2018, we adopted the following Accounting Standards ~~Update (“ASU”) 2015-11,~~Updates:

(i) ASU 2016-04, ~~Inventory (Topic 330): Simplifying the Measurement~~Liabilities—Extinguishments of ~~Inventory.~~Liabilities (Subtopic 405-20). This amendment provides a narrow scope exception to Liabilities—Extinguishment of Liabilities (Subtopic 405-20) that requires ~~entities~~breakage for those liabilities to ~~measure most inventory at~~be accounted for in accordance with the ~~“lower~~breakage guidance in ASU 2014-09 Revenue From Contracts With Customers (Topic 606). Under the new guidance, if an entity expects to be entitled to a breakage amount for a liability resulting from the sale of ~~cost or net realizable value,” thereby simplifying~~a prepaid stored-value product, the ~~former guidance under which entities measured inventory at~~entity shall derecognize the ~~lower~~amount related to the expected breakage in proportion to the pattern of ~~cost or market (market in this context was defined as one~~rights expected to be exercised by the product holder only to the extent that it is probable that a significant reversal of ~~three different measures, one~~the recognized breakage amount will not subsequently occur. If an entity does not expect to be entitled to a breakage amount for a prepaid stored-value product, the entity shall derecognize the amount related to the breakage when the likelihood of ~~which was net realizable value).~~the product holder exercising its remaining rights becomes remote. The adoption of this amendment did not have a significant impact on our Consolidated Financial Statements.

~~Effective January 2, 2017 we adopted ASU 2016-09,~~ ~~Compensation—Stock Compensation (Topic 718)~~. This amendment requires that (i) all excess tax benefits and deficiencies (including tax benefits of dividends on share-based payment awards) be recognized as income tax expense or benefit on the income statement, (ii) the tax effects of exercised or vested awards be treated as discrete items in the reporting period in which they occur, and (iii) an entity recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period or not. On the statement of cash flows excess tax benefits are classified along with other income tax cash flows as an operating activity. As allowed by the amendment we have elected to account for forfeitures when they occur. The threshold for an award to qualify for equity classification permits withholding up to the maximum statutory tax rate in applicable jurisdictions, and the cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity on the statement of cash flows. The adoption of this amendment did not have a significant impact on our Consolidated Financial Statements.

~~Accounting Guidance Not Yet Adopted:~~

~~In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02~~,~~Leases (Topic 842)~~. This new standard introduces a new lease model that requires the recognition of lease assets and lease liabilities on the balance sheet and the disclosure of key information about leasing arrangements. While this new standard retains most of the principles of the existing lessor model under U.S. GAAP, it aligns many of those principles with ~~Accounting Standards Codification (“ASC”) 606: Revenue from Contracts with Customers~~. The new guidance will be effective for us beginning on December 31, 2018. Early adoption will be permitted for all entities. We are currently evaluating the impact of the adoption of this guidance on our Consolidated Financial Statements, but we expect this will have a material effect on our balance sheet since the Company has a significant amount of operating and capital lease arrangements.

~~In April 2016, the FASB issued~~ ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing(“ASU 2016-10”). 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,~~We elected the ~~amount~~modified retrospective method to apply this standard. Under the modified retrospective method, results for reporting periods beginning on 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. Weafter January 1, 2018 are currently in the process of completing our assessment of all potential impacts of this amendment on our revenues, including: (i) our accounting for franchise and development fees, and (ii) accounting for our national advertising costspresented under the Association Funds. Specifically, we expect the adoption of this amendment will require us to recognize initial and renewal franchise and development fees on a straight-line basis over the life of the franchise agreement. Historically, we have recognized revenue from initial franchise and development fees upon the opening of a franchised restaurant when we have completed all of our material obligations and initial services. Additionally, we expect to account for our national advertising fund revenues on a gross basis, instead of net. We do not expect the impact of recognizing initial franchise fees over the franchise agreement period and recognizing advertising expense upon adoption of this standard to have a material effect on our consolidated financial statements. We have determined that this amendment will not have an impact on our recognition of revenue related to our franchise royalties, which are based on a percentage of franchise sales and revenue from Company-operated venues. We will adopt the guidance in this amendment, ~~beginning~~while prior period amounts are not adjusted and continue to be reported in accordance with our ~~fiscal first quarter 2018~~historic accounting treatment. The cumulative impact of adopting this amendment was not material, and ~~will apply the guidance using the modified retrospective method, recognizing the cumulative effect of applying the new standard~~as such we did not record an adjustment to ~~new contracts and contracts that are not considered completed~~our opening accumulated deficit in our Consolidated Balance Sheet as of January 1, ~~2018, with no restatement of the comparative periods presented.~~2018. For further details, see Note 2. “Revenue.”

~~In January 2017,~~(iii) ASU 2016-15, Statement of Cash Flows (Topic 230) and ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash on a retrospective basis. Amounts generally described as restricted cash and restricted cash equivalents are now presented with cash and cash equivalents when reconciling the ~~FASB issued ASU 2017-01,~~ ~~Clarifying~~beginning-of-period and end-of-period total amounts shown on the ~~Definition~~statement of cash flows. Accordingly, as a ~~Business~~ ~~(Topic 805). The amendments in this update clarify the definition~~result of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The definition of a business affects many areas of accounting, including acquisitions, disposals, goodwill and consolidation. This ASU will be effective for us for annual and interim reporting periods beginning on January 1, 2018. We do not expect the adoption of ~~this amendment to have~~these amendments, we reclassified $0.1 million of restricted cash into cash, cash equivalents and restricted cash as of October 1, 2017 for a ~~significant~~total balance of $79.6 million, which resulted in a reduction in net cash provided by operating activities of less than $0.1 million in the Consolidated Statement of Cash Flows for the nine months ended October 1, 2017. The adoption of these amendments did not impact ~~on our Consolidated Financial Statements.~~net cash used in investing or financing activities for the six months ended October 1, 2017.

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CEC ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

~~In January~~The adoption of these amendments also requires us to reconcile our cash balance on our Consolidated Statements of Cash Flows to the cash balance on our Consolidated Balance Sheets, as well as make disclosures about the nature of restricted cash balances. A reconciliation of “Cash and cash equivalents” and “Restricted cash” as presented in our Consolidated Balance Sheets for the periods presented and “Cash, cash equivalents and restricted cash” as presented in our Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and October 1, 2017 ~~the FASB issued~~is as follows:



	September 30, 2018		December 31, 2017		October 1, 2017		January 1, 2017
	(in thousands)
Cash and cash equivalents	$	84,429	$	67,200	$	79,427	$	61,023
Restricted cash	23		112		219		268
Cash, cash equivalents and restricted cash	$	84,452	$	67,312	$	79,646	$	61,291

__________________


(1)	Restricted cash represents cash balances held by the Association that are restricted for use in our advertising, entertainment and media programs (see Note 1 “Description of Business and Summary of Significant Accounting Policies” for further discussion of the Association Funds).

(iv) ASU 2017-04,, Goodwill and Other (Topic ~~350~~)350): Simplifying the Test for Goodwill Impairment. on a prospective basis.This amendment eliminates Step 2 from the goodwill impairment test, 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.~~goodwill. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ~~This ASU is effective for us for our annual or any interim goodwill impairment test in fiscal years beginning after December 15, 2020 and will be applied~~We early adopted this amendment 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~~2018. The adoption of this amendment todid not have a significant impact on our Consolidated Financial Statements.

Accounting Guidance Not Yet Adopted:

In ~~August 2017,~~February 2016, the FASB issued ASU ~~2017-12,~~ 2016-02~~Derivatives~~ ,Leases (Topic 842) and ~~Hedging~~subsequent amendment ASU 2018-11, Leases (Topic ~~815).~~842): Target Improvements. This ~~amendment expands and refines hedge accounting for both nonfinancial and financial risk components and aligns~~new standard introduces a new lease model that requires the recognition of lease assets and ~~presentation~~lease liabilities on the balance sheet and the disclosure of key information about leasing arrangements. While this new standard retains most of the ~~effects~~principles of the ~~hedging instrument~~existing lessor model under U.S. GAAP, it aligns many of those principles with Accounting Standards Codification (“ASC”) 606: Revenue from Contracts with Customers. ASU 2018-11 allows entities

to change their date of initial application to the beginning of the period of adoption. The new guidance will be effective for us beginning December 31, 2018. 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 February 2018, the ~~hedged item in~~FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This standard provides companies with an option to reclassify stranded tax effects resulting from enactment of the ~~financial statements. It also includes certain targeted improvements~~Tax Cuts and Jobs Act ("TCJA") from accumulated other comprehensive income to ~~simplify the application of current guidance related to hedge accounting.~~retained earnings. This ASU will be effective for us for annual and interim ~~reporting~~ periods beginning on December 31, ~~2019, with early~~2019. Early adoption ~~permitted.~~of this standard is permitted and may be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the tax rate as a result of TCJA is recognized. We do not expect the adoption of this ~~amendment~~ASU to have a ~~significant~~material impact on our results of operations, financial position and cash flows.

In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Target Improvements. This standard allows entities to change their date of initial application to the beginning of the period of adoption. Additionally, this update amends ASC 842 to include a practical expedient under which lessors are not required to separate lease and nonlease components. The new guidance will be effective for us beginning December 31, 2018. We are currently evaluating the impact of the adoption of this guidance on our Consolidated Financial ~~Statements.~~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 August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This standard will require entities to disclose the amount of total gains or losses for the period recognized in other comprehensive income that is attributable to fair value changes in assets and liabilities held as of the balance sheet date and categorized within Level 3 of the fair value hierarchy. This ASU will be effective for us for annual and interim periods beginning on December 31, 2020. Early adoption of this standard is permitted.

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CEC ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

We do not expect the adoption of this ASU to have a material impact on our results of operations, financial position and cash flows.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract . Under this standard customers will apply the same criteria for capitalizing implementation costs as they would for an arrangement that has a software license. The adoption of this new guidance prescribes the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense, and additional quantitative and qualitative disclosures. This ASU will be effective for us for annual and interim periods beginning on December 30, 2020. Early adoption of this standard is permitted and may be applied either prospectively to eligible costs incurred on or after the date of the new guidance or retrospectively. We do not expect the adoption of this ASU to have a material impact on our results of operations, financial position and cash flows.

2. ~~Property~~Revenue:

Food, beverage and ~~Equipment:~~merchandise revenues from company-operated venues are recognized when sold. A portion of our entertainment revenue includes customer purchases of game play credits on Play Pass game cards. We recognize a liability for the estimated amount of unused game play credits which we believe our customers will utilize in the future, based on credits remaining on Play Pass cards and utilization patterns.

~~Total depreciation~~We sell gift cards to our customers in our venues and ~~amortization expense~~through certain third-party distributors, which do not expire and do not incur a service fee on unused balances. Gift card sales are recorded as deferred revenue when sold and are recognized as revenue when: (a) the gift card is redeemed by the guest or (b) the likelihood of the gift card being redeemed by the guest is remote (“gift card breakage”) and we determine that we do not have a legal obligation to remit the value of the unredeemed gift

card under applicable state unclaimed property escheat statutes. Gift card breakage is determined based upon historical redemption patterns of our gift cards.

On January 1, 2018 we adopted the revenue guidance set forth in ASU 2016-10. Under the new guidance, there is a five-step model to apply to revenue recognition. The five-steps consist of: (i) the determination of whether a contract, an agreement between two or more parties that creates legally enforceable rights and obligations, exists; (ii) the identification of the performance obligations in the contract; (iii) the determination of the transaction price; (iv) the allocation of the transaction price to the performance obligations in the contract; and (v) recognition of revenue when (or as) the performance obligation is satisfied.

ASU 2016-10 requires us to recognize initial and renewal franchise and development fees on a straight-line basis over the life of the related franchise agreement or the renewal period. Historically, we recognized revenue from initial franchise and development fees upon the opening of a franchised restaurant when we completed all of our material obligations and initial services. Additionally, our national advertising fund receipts from Association members are now accounted for on a gross basis as “Franchise fees and royalties,” when historically they were netted against “Advertising expense.” Revenue related to advertising contributions from our franchisees was ~~$27.1~~$0.8 million and ~~$29.9~~$2.6 million ~~for the three months ended October 1, 2017 and October 2, 2016, respectively, of which $1.8 million and $2.2 million, respectively, was included~~ in ~~“General and administrative expenses” in our Consolidated Statements of Earnings.~~

Total depreciation and amortization expense was $83.1 million and $90.2 million for the nine months ended October 1, 2017 and October 2, 2016, respectively, of which $5.6 million and $5.1 million, respectively, was included in “General and administrative expenses” in our Consolidated Statements of Earnings.

~~Asset Impairments~~

~~During~~ the three and nine months ended ~~October 1, 2017, we recognized asset impairment charges~~September 30, 2018, respectively, and is recorded in “Franchise fees and royalties” in our Consolidated Statement of ~~$1.8 million primarily related~~Earnings.

Liabilities relating to ~~five stores. During~~unused game credits, gift card liabilities and deferred franchise and development fees are included in “Unearned revenues” on our Consolidated Balance Sheets. The following table presents changes in the ~~three and~~Company’s Unearned revenue balances during the nine months ended October 2, 2016, we recognized asset impairment charges of $0.8 million primarily related to four stores. These impairment charges were the result of a decline in the stores’ financial performance, primarily related to various economic factors in the markets in which the stores are located. As of October 1, 2017, the aggregate remaining carrying value of the property and equipment at the venues impaired in 2017, after the impairment charges, was $1.6 million.September 30, 2018:



	Balance at							Balance at
	January 1, 2018		Revenue Deferred		Revenue Recognized			September 30, 2018
	(in thousands)
PlayPass related deferred revenue	$	12,035	$	48,368	$	(52,119	)	$	8,284
Gift card related deferred revenue	3,868		4,215		(4,912		)	3,171
Unearned franchise and development fees	4,274		534		(62		)	4,746
Other unearned revenues	873		19,726		(19,013		)	1,586
Total unearned revenue	$	21,050	$	72,843	$	(76,106	)	$	17,787

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

3. Property and Equipment

Asset Impairments

During the three and nine months ended September 30, 2018 we recognized impairment charges of $5.3 million and $6.9 million, primarily related to eight and nine venues, respectively. During the three and nine months ended October 1, 2017, we recognized asset impairment charges of $1.8 million primarily related to five venues. These impairment charges were the result of a decline in the venues’ financial performance, primarily related to various competitive and economic factors in the market in which the venues are located. As of September 30, 2018, the aggregate carrying value of the property and equipment at impaired venues, after the impairment charge, was $5.1 million for venues impaired in 2018.

4. Intangible Assets, Net:

The following table presents our indefinite and definite-lived intangible assets at ~~October 1, 2017:~~September 30, 2018:


	Weighted Average Life (Years)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Life (Years)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
		(in thousands)								(in thousands)
Chuck E. Cheese's tradename	Indefinite	$	400,000				$	400,000	Indefinite	$	400,000				$	400,000
Peter Piper Pizza tradename	Indefinite	26,700					26,700		Indefinite	26,700					26,700
Favorable lease agreements ⁽¹⁾	10	14,880		(6,917		)	7,963		10	14,880		(8,274		)	6,606
Franchise agreements	25	53,300		(6,685		)	46,615		25	53,300		(8,734		)	44,566
		$	494,880	$	(13,602	)	$	481,278		$	494,880	$	(17,008	)	$	477,872

__________________

(1)

In connection with the Merger, as defined in Note 12 “Consolidating Guarantor Financial Information”, and the acquisition of Peter Piper Pizza in October 2014, we also recorded unfavorable lease liabilities of $10.2 million and $3.9 million, respectively, which are included in “Other current liabilities” and “Other noncurrent liabilities” in our Consolidated Balance Sheets. Such amounts are being amortized over a weighted average life of 10 years, and are included in “Rent expense” in our Consolidated Statements of Earnings.

Amortization expense related to favorable lease agreements was ~~$0.4~~$0.3 million and ~~$0.5~~$0.4 million for the three months ended September 30, 2018 and October 1, 2017, ~~and October 2, 2016,~~ respectively, and ~~$1.3~~$1.0 million and ~~$1.5~~$1.3 million for the nine months ended September 30, 2018 and October 1, 2017, ~~and October 2, 2016,~~ respectively, and is included in “Rent expense” in our Consolidated Statements of Earnings. Amortization expense related to franchise agreements was $0.5 million for both the three months ended September 30, 2018 and October 1, 2017, ~~and October 2, 2016,~~ respectively, and $1.5 million for both the nine months ended September 30, 2018 and October 1, 2017, ~~and October 2, 2016,~~ respectively, and is included in ~~“General~~“Depreciation and ~~administrative expenses”~~amortization” in our Consolidated Statements of Earnings.

4.5. Accounts Payable:

Accounts payable consisted of the following as of the dates presented:


	October 1, 2017		January 1, 2017		September 30, 2018		December 31, 2017
	(in thousands)				(in thousands)
Trade and other amounts payable	$	22,107	$	24,615	$	25,476	$	20,492
Book overdraft	10,366		8,587		10,664		10,882
Accounts payable	$	32,473	$	33,202	$	36,140	$	31,374

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

5.6. Indebtedness and Interest Expense:

Our long-term debt consisted of the following as of the dates presented:

October 1,
2017 January 1,
2017
(in thousands)
Term loan facility $ 733,400
$ 739,100
Senior notes 255,000
255,000
Note payable —
13
     Total debt outstanding 988,400
994,113
Less:
    Unamortized original issue discount (1,829 ) (2,235 )
    Deferred financing costs, net (12,995 ) (15,999 )
    Current portion (7,600 ) (7,613 )
Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion $ 965,976
$ 968,266

We were in compliance with the debt covenants in effect as of October 1, 2017 for both the secured credit facilities and the senior notes. For further discussion regarding the debt covenants, see Secured Credit Facilities and Senior Unsecured Notes sections below.



	September 30, 2018			December 31, 2017
	(in thousands)
Term loan facility	$	725,800		$	731,500
Senior notes	255,000			255,000
Total debt outstanding	980,800			986,500
Less:
Unamortized original issue discount	(1,288		)	(1,694		)
Deferred financing costs, net	(9,510		)	(11,993		)
Current portion of term loan facility	(7,600		)	(7,600		)
Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion	$	962,402		$	965,213

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 aan original 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~~term loan facility requires scheduled quarterly payments ~~on the term loan facility~~ equal to 0.25% of the original principal amount ~~of the term loan facility~~ from July 2014 to December 2020, with the remaining balance paid at maturity, February 14, 2021. ~~As of October 1, 2017 and January 1, 2017, we~~We had no borrowings outstanding and $9.0 million and $9.9 million, respectively of issued but undrawn letters of credit ~~issued but undrawn~~ under the revolving credit ~~facility.~~facility as of September 30, 2018 and December 31, 2017, respectively.

On May 8, 2018 we entered into an incremental assumption agreement with certain of our revolving credit facility lenders to extend the maturity on $95.0 million of the revolving credit facility through November 16, 2020. In connection with the extension of the maturity date, we agreed to the following covenants for the benefit of the revolving credit facility lenders: (a) with respect to each fiscal year (commencing with the fiscal year ending December 30, 2018), to the extent we have excess cash flow (as defined in the secured credit facilities agreement), we are required to make a mandatory prepayment of term loan principal equal to at least 75% (subject to step-downs based on our net first lien senior secured leverage ratio) of the amount of excess cash flow that exceeds $10 million less any optional prepayments of principal that may have occurred during the fiscal year and (b) we shall not incur additional first lien debt in connection with certain acquisitions, mergers or consolidations unless our net first lien senior secured leverage ratio is not greater than 3.65 to 1.00 on a pro forma basis. The maturity date of the amount of the revolving credit facility that was not extended remains February 14, 2019.

The term loan was issued net of $3.8 million of original issue discount. We also paid $17.8 million and ~~$3.4~~$3.8 million in debt financing costs related to the term loan facility and revolving credit facility ~~respectively, which we~~(inclusive of costs incurred in connection with the May 8, 2018 incremental assumption agreement), respectively. All debt financing costs were 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 related to the term loan facility are amortized over the ~~lives~~life of the ~~facilities~~term loan facility, and the deferred financing costs related to the revolving credit facility are being amortized through November 16, 2020, and are included in “Interest expense” on our Consolidated Statements of Earnings.

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~~is 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~~is subject to two step-downs from 3.25% to 3.00% and 2.75% based on our net first lien senior secured leverage ratio. Effective March 4, 2016, the applicable margin for both our term loan facility and revolving credit facilities stepped down to 3.0%. During the fourth quarter of 2017, the applicable margin for LIBOR borrowings under both the term loan facility and the revolving credit facility will return to their previous level of 3.25%.

During the nine ~~months ended October 1, 2017, the federal funds rate ranged from 0.55% to 1.16%, the prime rate ranged from 3.75% to 4.25% and the one-month LIBOR ranged from 0.76% to 1.24% .~~

The weighted average effective interest rate incurred on our borrowings under our secured credit facilities was 4.7% and 4.6% for the nine months ended October 1, 2017 and October 2, 2016, respectively, which includes amortization of debt

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CEC ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

~~issuance costs related to our secured credit facilities, amortization of our~~months ended September 30, 2018, the applicable margin for LIBOR borrowings under both the term loan facility ~~original issue discount~~ and ~~commitment and other fees related to our secured~~the revolving credit ~~facilities.~~facility was 3.25%.

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~~is 0.50% per annum and ~~was~~is 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,~~During the nine months ended September 30, 2018 the commitment fee rate ~~stepped down to 0.375%. During the fourth quarter of 2017, the commitment fee rate will return to it previous level of~~was 0.50%. We are also required to pay customary agency fees, as well as letter of credit participation fees computed at a rate per annum equal to the applicable margin for LIBOR rate borrowings on the dollar equivalent of the daily stated amount of outstanding letters of credit, plus such letter of credit issuer’s customary documentary and processing fees and charges and a fronting fee computed at a rate equal to 0.125% per annum on the daily stated amount of such letter of credit.

~~All obligations~~During the nine months ended September 30, 2018, the federal funds rate ranged from 1.34% to 2.18%, the prime rate ranged from 4.50% to 5.25% and the one-month LIBOR ranged from 1.55% to 2.26%.

The weighted average effective interest rate incurred on our borrowings under our secured credit facilities was 5.7% and 4.7% for the nine months ended September 30, 2018 and October 1, 2017, respectively, which includes amortization of deferred financing 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.

Obligations under the secured credit facilities are unconditionally guaranteed by ~~our Parent~~Queso Holdings Inc. (“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%~~8.0% Senior Notes due 2022 (the “senior notes”). The senior notes bear interest at a rate ~~8.000%~~of 8.0% per year payable February 15th and August 15th each 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” onin 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; (iii) make certain loans or investments (including acquisitions); ~~(iii)~~(iv) pay dividends on or make distributions in respect of our capital stock or make other restricted payments; ~~(iv)~~(v) consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; ~~(v)~~(vi) sell assets; ~~(vi)~~(vii) enter into certain transactions with our affiliates; and ~~(vii)~~(viii) restrict dividends from our subsidiaries.

The weighted average effective interest rate incurred on borrowings under our senior notes was 8.2% for the nine months ended October 1, 2017 and 8.3% for the nine months ended October 2, 2016, which included amortization of debt issuance costs and other fees related to our senior notes.

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CEC ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

The weighted average effective interest rate incurred on borrowings under our senior notes was 8.2% for both the nine months ended September 30, 2018 and October 1, 2017, which included amortization of deferred financing costs and other fees related to our senior notes.

Interest Expense

Interest expense consisted of the following for the periods presented:


	Three Months Ended				Three Months Ended
	October 1, 2017		October 2, 2016		September 30, 2018		October 1, 2017
	(in thousands)				(in thousands)
Term loan facility ⁽¹⁾	$	8,014	$	7,646	$	9,946	$	8,014
Senior notes	5,083		5,157		5,083		5,083
Capital lease obligations	434		436		394		434
Sale leaseback obligations	2,647		2,674		2,628		2,647
Amortization of debt issuance costs	1,001		1,001
Amortization of deferred financing costs					923		1,001
Other	272		323		95		272
Total interest expense	$	17,451	$	17,237	$	19,069	$	17,451


	Nine Months Ended				Nine Months Ended
	October 1, 2017		October 2, 2016		September 30, 2018		October 1, 2017
	(in thousands)				(in thousands)
Term loan facility ⁽¹⁾	$	23,240	$	23,303	$	28,747	$	23,240
Senior notes	15,248		15,470		15,248		15,248
Capital lease obligations	1,264		1,315		1,253		1,264
Sale leaseback obligations	7,949		8,067		7,880		7,949
Amortization of debt issuance costs	3,004		3,004
Amortization of deferred financing costs					2,878		3,004
Other	869		260		734		869
Total interest expense	$	51,574	$	51,419	$	56,740	$	51,574

__________________

(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 (including amortized debt issuance costs, amortization of original issue discount, commitment and other fees related to the secured credit facilities and senior notes) was 6.3% for the nine months ended September 30, 2018 and 5.6% for ~~both~~ the nine months ended October 1, 2017, respectively.

We were in compliance with the debt covenants in effect as of September 30, 2018 for both the secured credit facilities and ~~October 2, 2016, respectively.~~the senior notes.

6.7. Fair Value of Financial Instruments:

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

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


	October 1, 2017				January 1, 2017				September 30, 2018				December 31, 2017
	Carrying Amount ⁽¹⁾		Estimated Fair Value		Carrying Amount ⁽¹⁾		Estimated Fair Value		Carrying Amount ⁽¹⁾		Estimated Fair Value		Carrying Amount ⁽¹⁾		Estimated Fair Value
	(in thousands)								(in thousands)
Financial Liabilities:
Bank indebtedness and other long-term debt:
Current portion	$	7,600	$	7,562	$	7,613	$	7,623	$	7,600	$	7,366	$	7,600	$	7,220
Long-term portion ⁽²⁾	978,971		987,972		984,265		993,311		971,912		930,715		977,206		937,662
Bank indebtedness and other long-term debt:	$	986,571	$	995,534	$	991,878	$	1,000,934	$	979,512	$	938,081	$	984,806	$	944,882

_________________

(1) Excluding net deferred financing costs.

(2) Net of original issue discount.

Our financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, our secured credit facilities and our senior notes. The carrying amount of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximates fair value because of their short maturities. The estimated fair value of our secured credit facilities, term loan facility and senior notes was determined by using the respective average of the ask and bid price of our outstanding borrowings under our term loan facility and the senior notes as of the nearest open market date preceding the reporting period end. The average of the ask and bid price are classified as Level 2 in the fair value hierarchy.

Our non-financial assets, which include long-lived assets, including property, plant and equipment, goodwill and intangible assets, are reported at carrying value and are not required to be measured at fair value on a recurring basis. However, on a periodic basis, or whenever events or changes in circumstances indicate that their carrying value may not be recoverable, we assess our long-lived assets for impairment.

During the nine months ended September 30, 2018 and October 1, 2017, ~~and October 2, 2016,~~ there were no significant transfers among Level 1, 2 or 3 fair value determinations.

~~Note 7.~~8. Other Noncurrent Liabilities:

Other noncurrent liabilities consisted of the following as of the dates presented:

October 1, 2017 January 1, 2017
(in thousands)
Sale leaseback obligations, less current portion ⁽¹⁾
$ 178,724
$ 176,831
Deferred rent liability 26,342
21,784
Deferred landlord contributions 6,237
5,702
Long-term portion of unfavorable leases 5,917
7,308
Other 4,872
4,950
Total other noncurrent liabilities $ 222,092
$ 216,575

~~__________________~~


~~(1)~~	~~See Note 8 “Sale Leaseback Transaction” for further discussion on the sale leaseback transaction completed in the nine months ended October 1, 2017.~~

~~Note 8. Sale Leaseback Transaction:~~

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



	September 30, 2018		December 31, 2017
	(in thousands)
Sale leaseback obligations, less current portion	$	175,589	$	177,933
Deferred rent liability	30,946		27,951
Deferred landlord contributions	8,276		6,282
Long-term portion of unfavorable leases	4,176		5,453
Other	7,665		4,268
Total other noncurrent liabilities	$	226,652	$	221,887

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

sale. Under the financing method, we (i) include the sales proceeds received in other long-term liabilities until our continuing involvement with the properties is terminated, (ii) report the associated property as owned assets, (iii) continue to depreciate the assets over their remaining useful lives, and (iv) record the rental payments as interest expense and a reduction of the sale leaseback obligation. When and if our continuing involvement with a property terminates and the sale of that property is recognized for accounting purposes, we expect to record a gain equal to the excess of the proceeds received over the remaining net book value of the property. The aggregate purchase price for the property in connection with the sale leaseback transaction was approximately $4.1 million million in cash, and the net proceeds realized were approximately $3.9 million.

9. Income Taxes:

Our income tax expense ~~(benefit)~~ consists of the following for the periods presented:

Three Months Ended
October 1, 2017 October 2, 2016
(in thousands, except %)
Federal and state income taxes $ (5,533 ) $ (2,662 )
Foreign income taxes ⁽¹⁾
312
376
Income tax expense (benefit) $ (5,221 ) $ (2,286 )


	Nine Months Ended				Three Months Ended
	October 1, 2017		October 2, 2016		September 30, 2018			October 1, 2017
	(in thousands, except %)				(in thousands)
Federal and state income taxes	$	1,145	$	4,051	$	(2,451	)	$	(5,533	)
Foreign income taxes ⁽¹⁾	695		594		238			312
Income tax expense (benefit)	$	1,840	$	4,645
Income tax benefit					$	(2,213	)	$	(5,221	)



	Nine Months Ended
	September 30, 2018			October 1, 2017
	(in thousands)
Federal and state income taxes	$	(1,167	)	$	1,145
Foreign income taxes ⁽¹⁾	713			695
Income tax expense (benefit)	$	(454	)	$	1,840

_________________

(1) Including foreign taxes withheld.

Our effective income tax ~~rate~~rates for the three and nine months ended September 30, 2018 were 18.9% and 6.8%, respectively, as compared to 32.0% and 90.2%, respectively, for the three and nine months ended October 1, 2017 differs from the statutory rate primarily due to the favorable impact of employment related federal income tax credits offset by the unfavorable impact of a true-up related to prior year’s estimate of employment related tax credits versus actuals, the negative impact of non-deductible litigation costs related to the Merger (see Note 12 “Consolidating Guarantor Financial Information” for a definition of the Merger), non-deductible Canadian interest expense, and unfavorable adjustments to our deferred tax liability resulting from changes to state income tax apportionment factors and rates.

2017. Our effective income tax rate for the three and nine months ended September 30, 2018 was impacted by the reduction in the U.S. federal statutory corporate income tax rate from 35% to 21% resulting from the Tax Cuts and Jobs Act (TCJA) signed into law on December 22, 2017, return-to-provision adjustments including those related to the true up of provisional estimates provided in 2017 to account for the impact of the TCJA pursuant to SAB118, and the impact of employment-related federal income tax credits, offset by the negative impact of nondeductible litigation costs related to the Merger, nondeductible penalties, a net increase in our liability for uncertain tax positions, and state and foreign taxes. Our effective income tax rate for the nine months ended September 30, 2018 was further impacted by the unfavorable results of state tax legislation enacted during the second quarter that increased the amount of income subject to state taxation and a one-time adjustment to deferred taxes (the tax effect of the cumulative foreign currency translation adjustment existing as of January 1, 2018) resulting from the change in our intent to no longer indefinitely reinvest monies previously loaned to our Canadian subsidiary recorded in the first quarter. Our effective income tax rates for the three and nine months ended October ~~2, 2016 differs~~1, 2017 differed from the statutory rate primarily due to state income taxes and the favorable impact of ~~employment related~~employment-related federal income tax ~~credits,~~credits.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed to complete the accounting for certain income tax effects of the TCJA. Pursuant to SAB118, we included provisional estimates for the impact of the TJCA in ~~of a true-up~~our consolidated financial statements for the fiscal year ended December 31, 2017, noting that actual results may differ from the provisional estimates, due to, among other things, changes in our interpretations and assumptions relating to the ~~prior year’s estimated tax provision versus actuals, offset~~changes made by the ~~negative impact~~TCJA and additional guidance that is anticipated to be issued by the U.S. Treasury and Internal Revenue Service regarding (i) the newly enacted increase in bonus depreciation for qualifying assets acquired and placed in service after September 27, 2017, (ii) the expansion of ~~non-deductible litigation costs related~~the limitation under Section 162(m) relating to the ~~Merger (see Note 12 “Consolidating Guarantor Financial Information” for a definition~~deductibility of executive compensation in excess of $1.0 million, and (iii) the ~~Merger), non-deductible Canadian interest expense,~~one-time transition tax, net of foreign tax credits and ~~an increase~~operating losses, on earnings of foreign subsidiaries that were previously deferred from U.S. tax. SAB118 further states that any adjustments made to the provisional amounts under SAB 118 should be recorded as discrete adjustments in the ~~liability~~period identified and not to extend beyond the one-year measurement provided in SAB 118. During the nine months ended September 30, 2018, we recognized a $0.5 million return-to-provision adjustment discrete tax benefit relating to the provisional estimates required to account for ~~uncertain~~TCJA that normally would not have impacted our effective tax ~~positions.~~rate (deductions in 2017’s tax return at 35% with the offset to deferred taxes at 21%). The final adjustments to the provisional estimates will be completed in the fourth quarter of 2018.

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

Table of Contents

CEC ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

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~~$4.6 million as of ~~October 1,~~September 30, 2018 and $3.9 million as of December 31, 2017 ~~and January 1, 2017, respectively,~~ and if recognized would decrease our provision for income taxes by ~~$1.5~~$3.3 million. Within the next twelve months, we could settle or otherwise conclude certain ongoing income tax ~~audits.~~audits and resolve uncertain tax positions as a result of expiring statutes of limitations or payment. As such, it is reasonably possible that the liability for uncertain tax positions could decrease by as much as ~~$1.0~~$3.9 million ~~as a result of settlements with certain taxing authorities and expiring statutes of limitations~~ within the next twelve months.

~~Table of Contents~~

~~CEC ENTERTAINMENT, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(Unaudited)~~

Total accrued interest and penalties related to unrecognized tax benefits as of ~~October 1,~~September 30, 2018 and December 31, 2017 ~~and~~ ~~January 1, 2017~~, was ~~$1.3~~$1.1 million and ~~$1.2~~$1.0 million, respectively. On the Consolidated Balance Sheets, we include current interest related to unrecognized tax benefits in “Accrued interest,” current penalties in “Accrued expenses” and noncurrent accrued interest and penalties in “Other noncurrent liabilities.”

10. Stock-Based Compensation Arrangements:

The 2014 Equity Incentive Plan provides ~~Queso Holdings Inc. (“Parent”)~~Parent authority to grant equity incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, stock bonus awards or performance compensation awards to certain directors, officers or employees of the Company. A summary of the options outstanding under the equity incentive plan as of ~~October 1, 2017~~September 30, 2018 and the activity for the nine months ended ~~October 1, 2017~~September 30, 2018 is presented below:

Stock Options
Weighted Average Exercise Price ⁽¹⁾
Weighted Average Remaining Contractual Term Aggregate Intrinsic Value
($ per share) ($ in thousands)
Outstanding stock options, January 1, 2017 2,400,914
$8.74

Options Granted 92,620
$15.93

Options Forfeited (33,385 ) $11.53

Outstanding stock options, October 1, 2017 2,460,149
$8.98 6.8 $ 20,427
Stock options expected to vest, October 1, 2017 1,827,408
$9.09 6.8 $ 14,963
Exercisable stock options, October 1, 2017 429,697
$8.43 6.5 $ 3,801



	Stock Options		Weighted Average Exercise Price ⁽¹⁾	Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
			($ per share)		($ in thousands)
Outstanding stock options, December 31, 2017	2,349,288		$9.00
Options Granted	112,769		$13.73
Options Exercised	(7,745	)	$9.96
Options Forfeited	(421,614	)	$10.47
Outstanding stock options, September 30, 2018	2,032,698		$8.93	5.8	$	—
Stock options expected to vest, September 30, 2018	1,386,999		$9.12	5.9	$	—
Exercisable stock options, September 30, 2018	491,588		$8.32	5.5	$	—

__________________

(1) The weighted average exercise price reflects the original grant date fair value per option as adjusted for the dividend payment made in August 2015.

As of ~~October 1, 2017,~~September 30, 2018, we had ~~$1.8~~$0.7 million of total unrecognized share-based compensation expense related to unvested options, which is expected to be amortized over the remaining weighted-average period of ~~1.5~~2.9 years.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

The following table summarizes stock-based compensation expense and the associated tax benefit recognized in the Consolidated Financial Statements for the periods presented:


	Three Months Ended						Three Months Ended
	October 1, 2017			October 2, 2016			September 30, 2018			October 1, 2017
	(in thousands)						(in thousands)
Stock-based compensation costs	$	187		$	188		$	(55	)	$	187
Portion capitalized as property and equipment ⁽¹⁾	(3		)	(3		)	(3		)	(3		)
Stock-based compensation expense recognized	$	184		$	185		$	(58	)	$	184


	Nine Months Ended						Nine Months Ended
	October 1, 2017			October 2, 2016			September 30, 2018			October 1, 2017
	(in thousands)						(in thousands)
Stock-based compensation costs	$	531		$	532		$	178		$	531
Portion capitalized as property and equipment ⁽¹⁾	(11		)	(10		)	(9		)	(11		)
Stock-based compensation expense recognized	$	520		$	522		$	169		$	520
Excess tax benefit recognized from exercise of stock-based compensation awards	$	—		$	4

__________________

(1)

We capitalize the portion of stock-based compensation costs related to our design, construction, facilities and legal departments that are directly attributable to our venue development projects, such as the design and construction of a new venue and the remodeling and expansion of our existing venues. Capitalized stock-based compensation costs attributable to our venue development projects are included in “Property and equipment, net” in the Consolidated Balance Sheets.

11. Stockholder’s Equity:

The following table summarizes the changes in stockholder’s equity during the nine months ended ~~October 1, 2017:~~September 30, 2018:

Common Stock Capital In
Excess of
Par Value Accumulated Deficit Accumulated
Other
Comprehensive
Loss
Shares Amount Total
(in thousands, except share information)
Balance at January 1, 2017 200
$ —
$ 357,166
$ (148,265 ) $ (2,896 ) $ 206,005
Net income —
—
—
200
—
200
Other comprehensive income —
—
—
—
1,187
1,187
Stock-based compensation costs —
—
531
—
—
531
Return of capital —
—
1,447
—
—
1,447
Balance October 1, 2017 200
$ —
$ 359,144
$ (148,065 ) $ (1,709 ) $ 209,370



	Common Stock			Capital In Excess of Par Value		Accumulated Deficit			Accumulated Other Comprehensive Loss
	Shares	Amount		Capital In Excess of Par Value		Accumulated Deficit			Accumulated Other Comprehensive Loss			Total
	(in thousands, except share information)
Balance at December 31, 2017	200	$	—	$	359,233	$	(95,199	)	$	(1,886	)	$	262,148
Net loss	—	—		—		(6,231		)	—			(6,231		)
Other comprehensive income	—	—		—		—			127			127
Stock-based compensation costs	—	—		178		—			—			178
Balance September 30, 2018	200	$	—	$	359,411	$	(101,430	)	$	(1,759	)	$	256,222

12. Consolidating Guarantor Financial Information:

On February 14, 2014, CEC Entertainment, Inc. (the “Issuer”) merged with and into an entity controlled by Apollo Global Management, LLC and its subsidiaries, which we refer to as the ~~“Merger”.~~“Merger.” The senior notes issued by ~~CEC Entertainment, Inc. (the “Issuer”),~~the Issuer, in conjunction with the Merger, are our unsecured obligations and are fully and unconditionally, jointly and severally guaranteed by all of our 100% wholly-owned U.S. subsidiaries (the “Guarantors”). Our wholly-owned foreign subsidiaries and our less-than-wholly-owned U.S. subsidiaries are not a party to the guarantees (the “Non-Guarantors”). The following schedules present the condensed consolidating financial statements of the Issuer, Guarantors and Non-Guarantors, as well as consolidated results, for the periods presented:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

																														CEC Entertainment, Inc.	Condensed Consolidating Balance Sheet
As of October 1, 2017
As of September 30, 2018															As of September 30, 2018
(in thousands)

	Issuer			Guarantors		Non-Guarantors			Eliminations			Consolidated				Issuer			Guarantors		Non-Guarantors			Eliminations			Consolidated
Current assets:
Cash and cash equivalents	$	70,041		$	1,850	$	7,536		$	—		$	79,427			$	80,543		$	2,278	$	1,608		$	—		$	84,429
Restricted cash	—			—		219			—			219				—			—		23			—			23
Accounts receivable	13,676			2,644		4,040			(3,274		)	17,086				24,805			3,058		4,465			(3,681		)	28,647
Inventories	18,480			3,859		285			—			22,624				16,854			4,937		278			—			22,069
Prepaid expenses	13,683			5,359		1,445			—			20,487				13,867			10,062		650			—			24,579
Total current assets	115,880			13,712		13,525			(3,274		)	139,843				136,069			20,335		7,024			(3,681		)	159,747
Property and equipment, net	513,147			63,203		6,578			—			582,928				467,580			68,992		6,324			—			542,896
Goodwill	433,024			51,414		—			—			484,438				433,024			51,414		—			—			484,438
Intangible assets, net	17,337			463,941		—			—			481,278				15,193			462,679		—			—			477,872
Intercompany	84,420			—		—			(84,420		)	—				67,181			77,548		—			(144,729		)	—
Investment in subsidiaries	465,766			—		—			(465,766		)	—				482,913			—		—			(482,913		)	—
Other noncurrent assets	7,747			12,180		243			—			20,170				7,641			13,429		34			—			21,104
Total assets	$	1,637,321		$	604,450	$	20,346		$	(553,460	)	$	1,708,657			$	1,609,601		$	694,397	$	13,382		$	(631,323	)	$	1,686,057
Current liabilities:
Bank indebtedness and other long-term debt, current portion	$	7,600		$	—	$	—		$	—		$	7,600			$	7,600		$	—	$	—		$	—		$	7,600
Capital lease obligations, current portion	562			—		9			—			571				624			—		10			—			634
Accounts payable and accrued expenses	60,104			30,447		5,096			—			95,647				50,629			40,261		3,724			—			94,614
Other current liabilities	4,155			511		—			—			4,666				4,489			511		—			—			5,000
Total current liabilities	72,421			30,958		5,105			—			108,484				63,342			40,772		3,734			—			107,848
Capital lease obligations, less current portion	13,105			—		57			—			13,162				12,482			—		46						12,528
Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion	965,976			—		—			—			965,976				962,402			—		—			—			962,402
Deferred tax liability	159,582			24,022		(2,815		)	—			180,789				97,698			15,265		(2,042		)	—			110,921
Intercompany	—			60,498		27,196			(87,694		)	—				—			121,193		27,217			(148,410		)	—
Other noncurrent liabilities	216,867			13,588		421			—			230,876				217,455			18,188		493			—			236,136
Total liabilities	1,427,951			129,066		29,964			(87,694		)	1,499,287				1,353,379			195,418		29,448			(148,410		)	1,429,835
Stockholder's equity:
Common stock	—			—		—			—			—				—			—		—			—			—
Capital in excess of par value	359,144			466,114		3,241			(469,355		)	359,144				359,411			466,114		3,241			(469,355		)	359,411
Retained earnings (deficit)	(148,065		)	9,270		(11,150		)	1,880			(148,065		)		(101,430		)	32,865		(17,675		)	(15,190		)	(101,430		)
Accumulated other comprehensive income (loss)	(1,709		)	—		(1,709		)	1,709			(1,709		)		(1,759		)	—		(1,632		)	1,632			(1,759		)
Total stockholder's equity	209,370			475,384		(9,618		)	(465,766		)	209,370				256,222			498,979		(16,066		)	(482,913		)	256,222
Total liabilities and stockholder's equity	$	1,637,321		$	604,450	$	20,346		$	(553,460	)	$	1,708,657			$	1,609,601		$	694,397	$	13,382		$	(631,323	)	$	1,686,057

1920

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

																															CEC Entertainment, Inc.	Condensed Consolidating Balance Sheet
As of January 1, 2017
As of December 31, 2017																As of December 31, 2017
(in thousands)

	Issuer			Guarantors			Non-Guarantors			Eliminations			Consolidated				Issuer			Guarantors		Non-Guarantors			Eliminations			Consolidated
Current assets:
Cash and cash equivalents	$	53,088		$	1,158		$	6,777		$	—		$	61,023			$	59,948		$	410	$	6,842		$	—		$	67,200
Restricted cash	—			—			268			—			268				—			—		112			—			112
Accounts receivable	16,922			3,220			2,455			(2,102		)	20,495				27,098			3,283		2,563			(1,923		)	31,021
Inventories	18,255			3,151			271			—			21,677				17,104			4,614		282			—			22,000
Prepaid expenses	14,294			6,077			1,127			—			21,498				13,766			5,549		1,083			—			20,398
Total current assets	102,559			13,606			10,898			(2,102		)	124,961				117,916			13,856		10,882			(1,923		)	140,731
Property and equipment, net	538,195			47,906			6,785			—			592,886				496,725			66,669		6,627			—			570,021
Goodwill	432,462			51,414			—			—			483,876				433,024			51,414		—			—			484,438
Intangible assets, net	19,157			464,926			—			—			484,083				16,764			463,613		—			—			480,377
Intercompany	127,107			317			—			(127,424		)	—				90,937			10,770		—			(101,707		)	—
Investment in subsidiaries	436,483			—			—			(436,483		)	—				462,873			—		—			(462,873		)	—
Other noncurrent assets	6,888			17,025			393			—			24,306				7,913			11,359		205			—			19,477
Total assets	$	1,662,851		$	595,194		$	18,076		$	(566,009	)	$	1,710,112			$	1,626,152		$	617,681	$	17,714		$	(566,503	)	$	1,695,044
Current liabilities:
Bank indebtedness and other long-term debt, current portion	$	7,600		$	13		$	—		$	—		$	7,613			$	7,600		$	—	$	—		$	—		$	7,600
Capital lease obligations, current portion	460			—			7			—			467				586			—		10			—			596
Accounts payable and accrued expenses	84,207			11,445			2,184			—			97,836				58,014			35,134		4,169			—			97,317
Other current liabilities	3,764			511			—			—			4,275				4,265			511		—			—			4,776
Total current liabilities	96,031			11,969			2,191			—			110,191				70,465			35,645		4,179			—			110,289
Capital lease obligations, less current portion	13,542			—			60			—			13,602				12,956			—		54			—			13,010
Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion	968,266			—			—			—			968,266				965,213			—		—			—			965,213
Deferred tax liability	166,064			21,234			(1,008		)	—			186,290				99,083			16,697		(1,594		)	—			114,186
Intercompany	—			106,131			23,395			(129,526		)	—				—			75,052		28,578			(103,630		)	—
Other noncurrent liabilities	212,943			12,484			331			—			225,758				216,287			13,465		446			—			230,198
Total liabilities	1,456,846			151,818			24,969			(129,526		)	1,504,107				1,364,004			140,859		31,663			(103,630		)	1,432,896
Stockholder's equity:
Common stock	—			—			—			—			—				—			—		—			—			—
Capital in excess of par value	357,166			466,114			3,241			(469,355		)	357,166				359,233			466,114		3,241			(469,355		)	359,233
Retained earnings (deficit)	(148,265		)	(22,738		)	(7,238		)	29,976			(148,265		)		(95,199		)	10,708		(15,304		)	4,596			(95,199		)
Accumulated other comprehensive income (loss)	(2,896		)	—			(2,896		)	2,896			(2,896		)		(1,886		)	—		(1,886		)	1,886			(1,886		)
Total stockholder's equity	206,005			443,376			(6,893		)	(436,483		)	206,005				262,148			476,822		(13,949		)	(462,873		)	262,148
Total liabilities and stockholder's equity	$	1,662,851		$	595,194		$	18,076		$	(566,009	)	$	1,710,112			$	1,626,152		$	617,681	$	17,714		$	(566,503	)	$	1,695,044

2021

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CEC ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

																																CEC Entertainment, Inc.	Consolidating Statement of Comprehensive Income (Loss)
For the Three Months Ended October 1, 2017
For the Three Months Ended September 30, 2018																For the Three Months Ended September 30, 2018
(in thousands)


	Issuer			Guarantors			Non-Guarantors			Eliminations			Consolidated				Issuer			Guarantors			Non-Guarantors			Eliminations			Consolidated
Revenues:
Food and beverage sales	$	83,413		$	13,234		$	1,608		$	—		$	98,255			$	79,871		$	12,854		$	1,298		$	—		$	94,023
Entertainment and merchandise sales	88,551			19,174			2,908			—			110,633				108,461			10,380			2,770			—			121,611
Total company venue sales	171,964			32,408			4,516			—			208,888				188,332			23,234			4,068			—			215,634
Franchise fees and royalties	506			3,953			—			—			4,459				441			4,302			568			—			5,311
International Association assessments and other fees	364			7,702			8,294			(16,360		)	—				221			9,588			8,862			(18,671		)	—
Total revenues	172,834			44,063			12,810			(16,360		)	213,347				188,994			37,124			13,498			(18,671		)	220,945
Operating Costs and Expenses:
Company venue operating costs:
Cost of food and beverage	19,916			3,519			539			—			23,974				18,700			3,348			472			—			22,520
Cost of entertainment and merchandise	6,807			432			191			—			7,430				9,306			391			177			—			9,874
Total cost of food, beverage, entertainment and merchandise	26,723			3,951			730			—			31,404				28,006			3,739			649			—			32,394
Labor expenses	55,252			4,729			1,239			—			61,220				58,818			4,976			1,234			—			65,028
Depreciation and amortization	23,789			1,064			436			—			25,289
Rent expense	22,066			1,624			569			—			24,259				21,719			1,630			502			—			23,851
Other venue operating expenses	43,731			3,817			1,079			(8,066		)	40,561				43,711			3,500			830			(9,809		)	38,232
Total company venue operating costs	171,561			15,185			4,053			(8,066		)	182,733				152,254			13,845			3,215			(9,809		)	159,505
Advertising expense	8,670			1,085			10,622			(8,294		)	12,083				8,984			1,150			9,786			(8,862		)	11,058
General and administrative expenses	4,863			10,454			105			—			15,422				5,017			8,499			(323		)	—			13,193
Depreciation and amortization																	21,429			2,807			503			—			24,739
Transaction, severance and related litigation costs	128			—			—			—			128				(262		)	(1		)	—			—			(263		)
Asset impairments	1,824			14			5						1,843				2,505			2,836			3			—			5,344
Total operating costs and expenses	187,046			26,738			14,785			(16,360		)	212,209				189,927			29,136			13,184			(18,671		)	213,576
Operating income (loss)	(14,212		)	17,325			(1,975		)	—			1,138				(933		)	7,988			314			—			7,369
Equity in earnings (loss) in affiliates	(10,551		)	—			—			10,551			—				5,444			—			—			(5,444		)	—
Interest expense	15,902			1,353			196			—			17,451				18,205			692			172			—			19,069
Income (loss) before income taxes	(40,665		)	15,972			(2,171		)	10,551			(16,313		)		(13,694		)	7,296			142			(5,444		)	(11,700		)
Income tax expense (benefit)	(29,573		)	25,067			(715		)	—			(5,221		)		(4,207		)	2,113			(119		)	—			(2,213		)
Net income (loss)	$	(11,092	)	$	(9,095	)	$	(1,456	)	$	10,551		$	(11,092	)		$	(9,487	)	$	5,183		$	261		$	(5,444	)	$	(9,487	)

Components of other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	648			—			648			(648		)	648				(172		)	—			(172		)	172			(172		)
Comprehensive income (loss)	$	(10,444	)	$	(9,095	)	$	(808	)	$	9,903		$	(10,444	)		$	(9,659	)	$	5,183		$	89		$	(5,272	)	$	(9,659	)

2122

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CEC ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

																																CEC Entertainment, Inc.	Consolidating Statement of Comprehensive Income (Loss)
For the Three Months Ended October 2, 2016
For the Three Months Ended October 1, 2017																For the Three Months Ended October 1, 2017
(in thousands)


	Issuer			Guarantors			Non-Guarantors			Eliminations			Consolidated				Issuer			Guarantors			Non-Guarantors			Eliminations			Consolidated
Revenues:
Food and beverage sales	$	88,557		$	11,892		$	1,535		$	—		$	101,984			$	83,413		$	13,234		$	1,608		$	—		$	98,255
Entertainment and merchandise sales	112,306			6,703			2,755			—			121,764				88,551			19,174			2,908			—			110,633
Total company venue sales	200,863			18,595			4,290			—			223,748				171,964			32,408			4,516			—			208,888
Franchise fees and royalties	292			4,030			—			—			4,322				506			3,953			—			—			4,459
International Association assessments and other fees	273			615			8,431			(9,319		)	—				364			7,702			8,294			(16,360		)	—
Total revenues	201,428			23,240			12,721			(9,319		)	228,070				172,834			44,063			12,810			(16,360		)	213,347
Operating Costs and Expenses:
Company venue operating costs:
Cost of food and beverage	21,773			3,194			540			—			25,507				19,916			3,519			539			—			23,974
Cost of entertainment and merchandise	7,391			428			195			—			8,014				6,807			432			191			—			7,430
Total cost of food, beverage, entertainment and merchandise	29,164			3,622			735			—			33,521				26,723			3,951			730			—			31,404
Labor expenses	56,386			4,039			1,296			—			61,721				55,252			4,729			1,239			—			61,220
Depreciation and amortization	26,501			650			516			—			27,667
Rent expense	22,235			1,331			554			—			24,120				22,066			1,624			569			—			24,259
Other venue operating expenses	35,659			3,033			953			(888		)	38,757				43,731			3,817			1,079			(8,066		)	40,561
Total company venue operating costs	169,945			12,675			4,054			(888		)	185,786				147,772			14,121			3,617			(8,066		)	157,444
Advertising expense	8,967			828			10,151			(8,431		)	11,515				8,670			1,085			10,622			(8,294		)	12,083
General and administrative expenses	6,741			10,270			273			—			17,284				4,526			9,003			46			—			13,575
Depreciation and amortization																	24,126			2,515			495			—			27,136
Transaction, severance and related litigation costs	166			—			—			—			166				128			—			—			—			128
Asset impairments	709			—			63			—			772				1,824			14			5			—			1,843
Total operating costs and expenses	186,528			23,773			14,541			(9,319		)	215,523				187,046			26,738			14,785			(16,360		)	212,209
Operating income (loss)	14,900			(533		)	(1,820		)	—			12,547				(14,212		)	17,325			(1,975		)	—			1,138
Equity in earnings (loss) in affiliates	(2,299		)	—			—			2,299			—				(10,551		)	—			—			10,551			—
Interest expense	15,685			1,440			112			—			17,237				15,902			1,353			196			—			17,451
Income (loss) before income taxes	(3,084		)	(1,973		)	(1,932		)	2,299			(4,690		)		(40,665		)	15,972			(2,171		)	10,551			(16,313		)
Income tax expense (benefit)	(680		)	(935		)	(671		)	—			(2,286		)		(29,573		)	25,067			(715		)	—			(5,221		)
Net income (loss)	$	(2,404	)	$	(1,038	)	$	(1,261	)	$	2,299		$	(2,404	)		$	(11,092	)	$	(9,095	)	$	(1,456	)	$	10,551		$	(11,092	)

Components of other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	(212		)	—			(212		)	212			(212		)		648			—			648			(648		)	648
Comprehensive income (loss)	$	(2,616	)	$	(1,038	)	$	(1,473	)	$	2,511		$	(2,616	)		$	(10,444	)	$	(9,095	)	$	(808	)	$	9,903		$	(10,444	)

2223

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CEC ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

																													CEC Entertainment, Inc.	Consolidating Statement of Comprehensive Income (Loss)
For the Nine Months Ended October 1, 2017
For the Nine Months Ended September 30, 2018														For the Nine Months Ended September 30, 2018
(in thousands)

	Issuer			Guarantors		Non-Guarantors			Eliminations			Consolidated			Issuer			Guarantors		Non-Guarantors			Eliminations			Consolidated
Revenues:
Food and beverage sales	$	274,411		$	40,959	$	4,715		$	—		$	320,085		$	264,130		$	40,250	$	4,278		$	—		$	308,658
Entertainment and merchandise sales	296,197			52,097		7,980			—			356,274			324,231			36,255		8,147			—			368,633
Total company venue sales	570,608			93,056		12,695			—			676,359			588,361			76,505		12,425			—			677,291
Franchise fees and royalties	1,411			12,320		—			—			13,731			1,441			12,661		1,815			—			15,917
International Association assessments and other fees	1,054			28,791		26,900			(56,745		)	—			794			28,339		27,951			(57,084		)	—
Total revenues	573,073			134,167		39,595			(56,745		)	690,090			590,596			117,505		42,191			(57,084		)	693,208
Operating Costs and Expenses:
Company venue operating costs:
Cost of food and beverage	62,847			10,671		1,496			—			75,014			60,432			10,845		1,497			—			72,774
Cost of entertainment and merchandise	21,037			1,236		498			—			22,771			25,972			1,238		466			—			27,676
Total cost of food, beverage, entertainment and merchandise	83,884			11,907		1,994			—			97,785			86,404			12,083		1,963			—			100,450
Labor expenses	170,089			14,108		3,761			—			187,958			176,106			15,065		3,823			—			194,994
Depreciation and amortization	73,162			2,946		1,384			—			77,492
Rent expense	65,168			4,678		1,638			—			71,484			65,417			5,638		1,560			—			72,615
Other venue operating expenses	129,415			10,360		3,373			(29,871		)	113,277			129,006			10,882		2,634			(29,159		)	113,363
Total company venue operating costs	521,718			43,999		12,150			(29,871		)	547,996			456,933			43,668		9,980			(29,159		)	481,422
Advertising expense	27,921			4,345		32,310			(26,874		)	37,702			28,742			4,511		32,682			(27,925		)	38,010
General and administrative expenses	15,672			32,194		371			—			48,237			13,539			25,336		644			—			39,519
Depreciation and amortization															67,073			8,253		1,478			—			76,804
Transaction, severance and related litigation costs	698			—		—			—			698			197			266		—			—			463
Asset Impairments	1,824			14		5			—			1,843			2,591			4,341		3			—			6,935
Total operating costs and expenses	567,833			80,552		44,836			(56,745		)	636,476			569,075			86,375		44,787			(57,084		)	643,153
Operating income (loss)	5,240			53,615		(5,241		)	—			53,614			21,521			31,130		(2,596		)	—			50,055
Equity in earnings (loss) in affiliates	28,096			—		—			(28,096		)	—			19,869			—		—			(19,869		)	—
Interest expense	47,730			3,345		499			—			51,574			53,833			2,446		461			—			56,740
Income (loss) before income taxes	(14,394		)	50,270		(5,740		)	(28,096		)	2,040			(12,443		)	28,684		(3,057		)	(19,869		)	(6,685		)
Income tax expense (benefit)	(14,594		)	18,263		(1,829		)	—			1,840			(6,212		)	6,526		(768		)	—			(454		)
Net income (loss)	$	200		$	32,007	$	(3,911	)	$	(28,096	)	$	200		$	(6,231	)	$	22,158	$	(2,289	)	$	(19,869	)	$	(6,231	)

Components of other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	1,187			—		1,187			(1,187		)	1,187			127			—		127			(127		)	127
Comprehensive income (loss)	$	1,387		$	32,007	$	(2,724	)	$	(29,283	)	$	1,387		$	(6,104	)	$	22,158	$	(2,162	)	$	(19,996	)	$	(6,104	)

2324

Table of Contents

CEC ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

																													CEC Entertainment, Inc.	Consolidating Statement of Comprehensive Income (Loss)
For the Nine Months Ended October 2, 2016
For the Nine Months Ended October 1, 2017															For the Nine Months Ended October 1, 2017
(in thousands)

	Issuer			Guarantors			Non-Guarantors			Eliminations			Consolidated			Issuer			Guarantors		Non-Guarantors			Eliminations			Consolidated
Revenues:
Food and beverage sales	$	280,391		$	36,779		$	4,421		$	—		$	321,591		$	274,411		$	40,959	$	4,715		$	—		$	320,085
Entertainment and merchandise sales	358,192			18,151			7,635			—			383,978			296,197			52,097		7,980			—			356,274
Total company venue sales	638,583			54,930			12,056			—			705,569			570,608			93,056		12,695			—			676,359
Franchise fees and royalties	1,561			11,879			—			—			13,440			1,411			12,320		—			—			13,731
International Association assessments and other fees	735			1,845			28,746			(31,326		)	—			1,054			28,791		26,900			(56,745		)	—
Total revenues	640,879			68,654			40,802			(31,326		)	719,009			573,073			134,167		39,595			(56,745		)	690,090
Operating Costs and Expenses:
Company venue operating costs:
Cost of food and beverage	69,431			9,632			1,639			—			80,702			62,847			10,671		1,496			—			75,014
Cost of entertainment and merchandise	23,149			1,329			526			—			25,004			21,037			1,236		498			—			22,771
Total cost of food, beverage, entertainment and merchandise	92,580			10,961			2,165			—			105,706			83,884			11,907		1,994			—			97,785
Labor expenses	175,495			11,842			3,833			—			191,170			170,089			14,108		3,761			—			187,958
Depreciation and amortization	81,661			1,884			1,484			—			85,029
Rent expense	66,601			4,043			1,674			—			72,318			65,168			4,678		1,638			—			71,484
Other venue operating expenses	104,297			7,568			2,884			(2,606		)	112,143			129,415			10,360		3,373			(29,871		)	113,277
Total company venue operating costs	520,634			36,298			12,040			(2,606		)	566,366			448,556			41,053		10,766			(29,871		)	470,504
Advertising expense	30,188			3,548			31,761			(28,720		)	36,777			27,921			4,345		32,310			(26,874		)	37,702
General and administrative expenses	19,669			30,996			557			—			51,222			14,663			27,806		196			—			42,665
Depreciation and amortization																74,171			7,334		1,559			—			83,064
Transaction, severance and related litigation costs	1,294			55			—			—			1,349			698			—		—			—			698
Asset impairment	709			—			63			—			772			1,824			14		5			—			1,843
Total operating costs and expenses	572,494			70,897			44,421			(31,326		)	656,486			567,833			80,552		44,836			(56,745		)	636,476
Operating income (loss)	68,385			(2,243		)	(3,619		)	—			62,523			5,240			53,615		(5,241		)	—			53,614
Equity in earnings (loss) in affiliates	(8,096		)	—			—			8,096			—			28,096			—		—			(28,096		)	—
Interest expense	47,765			3,328			326			—			51,419			47,730			3,345		499			—			51,574
Income (loss) before income taxes	12,524			(5,571		)	(3,945		)	8,096			11,104			(14,394		)	50,270		(5,740		)	(28,096		)	2,040
Income tax expense (benefit)	6,065			(185		)	(1,235		)	—			4,645			(14,594		)	18,263		(1,829		)	—			1,840
Net income (loss)	$	6,459		$	(5,386	)	$	(2,710	)	$	8,096		$	6,459		$	200		$	32,007	$	(3,911	)	$	(28,096	)	$	200

Components of other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	703			—			703			(703		)	703			1,187			—		1,187			(1,187		)	1,187
Comprehensive income (loss)	$	7,162		$	(5,386	)	$	(2,007	)	$	7,393		$	7,162		$	1,387		$	32,007	$	(2,724	)	$	(29,283	)	$	1,387

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(Unaudited)

																														CEC Entertainment, Inc.	Consolidating Statement of Cash Flows
For the Nine Months Ended October 1, 2017
For the Nine Months Ended September 30, 2018															For the Nine Months Ended September 30, 2018
(in thousands)

	Issuer			Guarantors			Non-Guarantors			Eliminations		Consolidated				Issuer			Guarantors			Non-Guarantors			Eliminations		Consolidated
Cash flows provided by operating activities:	$	68,568		$	24,632		$	1,040		$	—	$	94,240			$	68,801		$	17,888		$	(4,214	)	$	—	$	82,475

Cash flows from investing activities:
Purchases of property and equipment	(49,735		)	(21,407		)	(768		)	—		(71,910		)		(38,536		)	(15,512		)	(1,154		)	—		(55,202		)
Development of internal use software	—			(2,520		)	—			—		(2,520		)		(1,484		)	(508		)	—			—		(1,992		)
Proceeds from sale of property and equipment	424			—			—			—		424				464			—			—			—		464
Cash flows provided by (used in) investing activities	(49,311		)	(23,927		)	(768		)	—		(74,006		)		(39,556		)	(16,020		)	(1,154		)	—		(56,730		)

Cash flows from financing activities:
Net proceeds from senior term loan, net of original issue discount																											—
Repayments on senior term loan	(5,700		)	—			—			—		(5,700		)		(5,700		)	—			—			—		(5,700		)
Repayments on note payable	—			(13		)	—			—		(13		)
Proceeds from sale-leaseback transaction	4,073			—			—			—		4,073
Payment of debt financing costs																(395		)	—			—			—		(395		)
Payments on capital lease obligations	(335		)	—			(5		)	—		(340		)		(436		)	—			(6		)	—		(442		)
Payments on sale leaseback transactions	(1,789		)	—			—			—		(1,789		)		(2,119		)	—			—			—		(2,119		)
Return of capital	1,447			—			—			—		1,447
Cash flows provided by (used in) financing activities	(2,304		)	(13		)	(5		)	—		(2,322		)		(8,650		)	—			(6		)	—		(8,656		)
Effect of foreign exchange rate changes on cash	—			—			492			—		492				—			—			51			—		51
Change in cash and cash equivalents	16,953			692			759			—		18,404
Cash and cash equivalents at beginning of period	53,088			1,158			6,777			—		61,023
Cash and cash equivalents at end of period	$	70,041		$	1,850		$	7,536		$	—	$	79,427
Change in cash, cash equivalents and restricted cash																20,595			1,868			(5,323		)	—		17,140
Cash, cash equivalents and restricted cash at beginning of period																59,948			410			6,954			—		67,312
Cash, cash equivalents and restricted cash at end of period																$	80,543		$	2,278		$	1,631		$	—	$	84,452

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(Unaudited)

																																						CEC Entertainment, Inc.	Consolidating Statement of Cash Flows
For the Nine Months Ended October 2, 2016
For the Nine Months Ended October 1, 2017																			For the Nine Months Ended October 1, 2017
(in thousands)

	Issuer				Guarantors				Non-Guarantors				Eliminations			Consolidated				Issuer				Guarantors				Non-Guarantors				Eliminations			Consolidated
Cash flows provided by (used in) operating activities:	$	93,340			$	17,674			$	240			$	—		$	111,254			$	68,568			$	24,632			$	991			$	—		$	94,191

Cash flows from investing activities:
Purchases of property and equipment	(50,823		)		(15,506		)		(206		)		—			(66,535		)		(49,735		)		(21,407		)		(768		)		—			(71,910		)
Development of internal use software	(6,004		)		(2,784		)		—				—			(8,788		)		—				(2,520		)		—				—			(2,520		)
Proceeds from the sale of property and equipment	426				—				—				—			426				424				—				—				—			424
Cash flows provided by (used in) investing activities	(56,401		)	—	(18,290		)	—	(206		)	—	—		—	(74,897		)		(49,311		)	—	(23,927		)	—	(768		)	—	—		—	(74,006		)

Cash flows from financing activities:
Repayments on senior term loan	(5,700		)		—				—				—			(5,700		)		(5,700		)		—				—				—			(5,700		)
Repayments on note payable	—				(37		)		—				—			(37		)		—				(13		)		—				—			(13		)
Proceeds from sale leaseback transaction																				4,073				—				—				—			4,073
Payments on capital lease obligations	(308		)		—				(3		)		—			(311		)		(335		)		—				(5		)		—			(340		)
Payments on sale leaseback transactions	(1,466		)		—				—				—			(1,466		)		(1,789		)		—				—				—			(1,789		)
Excess tax benefit realized from stock-based compensation	4				—				—				—			4
Return of capital																				1,447				—				—				—			1,447
Cash flows provided by (used in) financing activities	(7,470		)	—	(37		)	—	(3		)	—	—		—	(7,510		)		(2,304		)	—	(13		)	—	(5		)	—	—		—	(2,322		)
Effect of foreign exchange rate changes on cash	—				—				356				—			356				—				—				492				—			492
Change in cash and cash equivalents	29,469			—	(653		)	—	387			—	—		—	29,203
Cash and cash equivalents at beginning of period	42,235				1,797				6,622				—			50,654
Cash and cash equivalents at end of period	$	71,704			$	1,144			$	7,009			$	—		$	79,857
Change in cash, cash equivalents and restricted cash																				16,953			—	692			—	710			—	—		—	18,355
Cash, cash equivalents and restricted cash at beginning of period																				53,088				1,158				7,045				—			61,291
Cash, cash equivalents and restricted cash at end of period																				$	70,041			$	1,850			$	7,755			$	—		$	79,646

13. Related Party Transactions:

~~CEC Entertainment reimburses~~We reimburse Apollo Management, L.P. for certain out-of-pocket expenses incurred in connection with travel and Board of Directors related expenses. ~~Expense reimbursements by CEC Entertainment to Apollo Management, L.P.~~These expenses totaled $0.1 million and less than $0.1 ~~million and $0.3~~ million for the three months ended September 30, 2018 and October 1, 2017, respectively, and ~~October 2, 2016,~~$0.2 million and $0.4 ~~million and $0.3~~ million for the nine months ended September 30, 2018 and October 1, 2017, ~~and October 2, 2016, respectively, and~~respectively. These expenses are included in “General and administrative expenses” in our Consolidated Statements of Earnings.

We utilize an Apollo portfolio company to provide security services to certain of our venues. These expenses totaled approximately $0.2 million for both the three months ended September 30, 2018 and October 1, 2017, and $0.7 million for both the nine months ended September 30, 2018 and October 1, 2017, in connection with services provided by this Apollo portfolio company. These expenses are included in “Other venue operating expenses” in our Consolidated Statements of Earnings.

14. 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.

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(Unaudited)

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. All necessary loss accruals based on the probability and estimate of loss have been recorded.

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~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(Unaudited)~~

Employment-Related Litigation: On October 10, 2014, former ~~venue~~ General Manager Richard Sinohui filed a purported class action lawsuit against CEC Entertainment in the Superior Court of California, Riverside County (the “Sinohui Litigation”), claiming to represent other similarly-situated current and former General Managers of CEC Entertainment in California during the period October 10, 2010 to the present. The lawsuit sought an unspecified amount in damages and to certify a class based on allegations that CEC Entertainment wrongfully classified current and former California General Managers as exempt from overtime protections; that such General Managers worked more than 40 hours a week without overtime premium pay, paid rest periods, and paid meal periods; and that CEC Entertainment failed to provide accurate itemized wage statements or to pay timely wages upon separation from employment, 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 also alleged that CEC Entertainment failed to reimburse General Managers for certain business expenses, including for personal cell phone usage and mileage, in violation of the California Labor Code; he also asserted a claim for civil penalties under the California Private Attorneys General Act (“PAGA”). On December 5, 2014, CEC Entertainment removed the Sinohui Litigation to the U.S. District Court for the Central District of California, Southern Division. On March 16, 2016, the Court issued an order denying in part and granting in part Plaintiff’s Motion for Class Certification. Specifically, the Court denied Plaintiff’s motion to the extent that he sought to certify a class on Plaintiff’s misclassification and wage statement claims, but certified a class with respect to Plaintiff’s claims that CEC Entertainment had wrongfully failed to reimburse him for cell phone expenses and/or mileage. On June 14, 2016, the Court dismissed Sinohui’s PAGA claim. After participating in mediation on April 19, 2017, the parties agreed to settle all of Sinohui’s individual and class claims. Pursuant to the basic terms of their settlement, Sinohui will grant a complete release to CEC Entertainment on behalf of himself and the class of all claims that he asserted or could have asserted against the Company, based on the facts that gave rise to the certified reimbursement claim in the Sinohui Litigation, in exchange for the Company’s settlement payment. ~~The parties presented their proposed class settlement to~~On December 13, 2017, the Court ~~for review and~~entered its order granting preliminary approval ~~during the third quarter of 2017, and expect that the settlement will be concluded and the case dismissed by the end~~ of the ~~first quarter~~parties’ settlement, and on October 2, 2018, the Court entered an order granting final approval of ~~2018.~~the settlement. CEC Entertainment has fully complied with its payment and other obligations under the settlement. The settlement of this ~~action will~~lawsuit has not ~~have~~had a material adverse effect on our results of operations, financial position, liquidity or capital resources.

After the Court in the Sinohui Litigation issued its order denying certification of a class of California-based general managers on misclassification and wage statement claims, six lawsuits were filed against the Company in California state court (the “California General Manager Litigation”). The plaintiffs in these actions include nine current and 12 former California General Managers asserting individual misclassification, wage statement, and expense reimbursement claims. Between December 20, 2016 and April 21, 2017 the Company filed initial responses to each of the lawsuits and removed them all to Federal District Court.

As part of the settlement reached by the parties in the Sinohui Litigation, described above, the parties also agreed to settle the California General Manager Litigation. Pursuant to the basic terms of their comprehensive settlement, each of the Plaintiffs will grant a complete release to CEC Entertainment of all claims that he or she asserted or could have asserted against the Company based on the facts that gave rise to the California General Manager Litigation in exchange for the Company’s settlement payments to each of them. The parties expect that the comprehensive settlement of these lawsuits will be concluded and each of these cases dismissed by the end of the first quarter of 2018. The settlement of these actions will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.

On January 30, 2017, former Technical Manager Kevin French filed a purported class action lawsuit against the Company in the ~~United States~~U. S. District Court for the Northern District of California (“the French Federal Court Lawsuit”), alleging that CEC Entertainment failed to pay overtime wages, failed to issue accurate itemized wage statements, failed to pay wages due upon separation of employment, and failed to reimburse for certain business expenses, including for mileage and personal cell phone usage, in violation of the California Labor Code and federal ~~law. We believe the Company has meritorious defenses~~law, and seeking to ~~this lawsuit~~certify separate classes on his federal and ~~we intend to vigorously defend it.~~state claims. On October 30, 2017, the parties conducted a mediation. At the conclusion of the mediation,the parties agreed to settle all of French’s class and individual claims. ~~The proposed class settlement must be presented~~Pursuant to the parties’ agreement, on November 14, 2017, the Federal Court Lawsuit was dismissed, and on November 15, 2017, Plaintiff filed a new lawsuit in Superior Court of San Bernadino County, California (the “French State Court Lawsuit”). The French State Court Lawsuit carried forward only the California state law claims alleging a failure to reimburse for ~~review~~business expenses, and ~~preliminary approval,~~sought to certify a class of CEC California Senior Assistant Managers, Assistant Managers, Technical Managers and ~~we expect that~~Assistant Technical Managers who were authorized to drive on behalf of CEC from January 30, 2013 through April 27, 2018. On December 20, 2017, further pursuant to the parties’

settlement, ~~will be concluded and the case dismissed by the end~~Plaintiff filed a Notice of Settlement. The Court entered an order preliminarily approving of the ~~second quarter~~parties’ settlement on May 17, 2018, and on October 18, 2018, the Court entered an order granting final approval of ~~2018.~~the settlement. CEC Entertainment has fully complied with its payment and other obligations under the settlement. The settlement of this ~~action will~~lawsuit has not ~~have~~had 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 CEC Entertainment had entered into an agreement (“Merger Agreement”), pursuant to which an entity controlled by Apollo Global Management, LLC and its subsidiaries merged with and into CEC Entertainment, with CEC Entertainment surviving the merger (“the Merger”), four putative shareholder class actions were filed in the District Court of Shawnee County, Kansas, on behalf of purported stockholders of CEC Entertainment, against A.P. VIII Queso Holdings, L.P., CEC Entertainment, CEC Entertainment's directors, Apollo and Merger Sub (as defined in the Merger Agreement), in connection with the Merger Agreement and the transactions contemplated thereby. These actions were consolidated into one action (the “Consolidated Shareholder Litigation”)

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~~CEC ENTERTAINMENT, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(Unaudited)~~

in March 2014, and on July 21, 2015, a consolidated class action petition was filed as the operative consolidated complaint, asserting claims against CEC’s former directors, adding The Goldman Sachs Group (“Goldman Sachs”) as a defendant, and removing all Apollo entities as defendants (the “Consolidated Class Action Petition”). The Consolidated Class Action Petition alleges that CEC Entertainment’s directors breached their fiduciary duties to CEC Entertainment’s stockholders in connection

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

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 CEC Entertainment’s board who also served as the senior managers of CEC Entertainment 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 assumed the defense of the Consolidated Shareholder Litigation on behalf of CEC’s named former directors and Goldman Sachs pursuant to existing indemnity agreements. On March 23, 2016, the Court conducted a hearing on the defendants’ Motion to Dismiss the Consolidated Class Action Petition and on March 1, 2017, the Special Master appointed by the Court issued a report recommending to the Court that the Consolidated Class Action Petition be dismissed. On September 9, 2018, the Court accepted the Special Master’s recommendations and dismissed the lawsuit in its entirety. On ~~March 17, 2017, Plaintiffs filed objections to~~October 8, 2018, the ~~Special Master’s report and recommendation with~~Plaintiff in the ~~Kansas court and separately~~Consolidated Shareholder Litigation filed a ~~motion with~~notice of appeal of the ~~Special Master to amend the complaint as to Goldman Sachs. We currently await the Special Master’s decision on the Plaintiffs’ motion for leave to amend. The~~ District ~~Court has not yet set this case for trial. The Company continues to believe the Consolidated Class Action Petition is without merit and intends to defend it vigorously.~~Court’s decision. 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.

Peter Piper, Inc. Litigation: On September 8, 2016, Diane Jacobson filed a purported class action lawsuit against Peter Piper, Inc. (“Peter Piper”) in the U.S. District Court for the District of Arizona, Tucson Division (the “Jacobson Litigation”). The plaintiff claims to represent other similarly-situated consumers who, within the two years prior to the filing of the Jacobson Litigation, received a printed receipt on which Peter Piper allegedly printed more than the last five digits of the consumer’s credit/debit card number, in violation of the Fair and Accurate Credit Transactions Act. On November 11, 2016, Peter Piper filed a motion to dismiss the Jacobson Litigation. After the plaintiff filed her opposition to the Motion to Dismiss and Peter Piper filed its reply in support thereof, the motion was submitted to the Court for ruling on December 22, 2016. On February 2, 2017, the Court stayed the Jacobson Litigation pending the decision of the U.S. Ninth Circuit Court of Appeals in Noble v. Nevada Check Cab Corp., a case that ~~presents~~presented an issue for decision that is relevant to ~~the~~ Peter Piper’s motion to dismiss. ~~We believe~~On March 9, 2018, the Ninth Circuit issued its decision in the Noble case, setting precedent that favors Peter Piper’s position in the Jacobson Litigation. Based on the appellate court’s decision in that case, on March 15, 2018 Peter Piper ~~has meritorious defenses~~filed a motion to ~~this lawsuit~~lift the stay and ~~should~~requesting that the trial court grant its motion to dismiss. On June 28, 2018, the magistrate judge issued a report recommending that the District Court ~~overrule the~~grant Peter Piper’s motion to dismiss ~~we intend~~and dismiss the plaintiff’s claims without prejudice to ~~vigorously defend it. Since~~their refiling. On August 3, 2018, the ~~litigation~~District Court accepted the magistrate judge’s recommendation and entered an order dismissing the lawsuit without prejudice to its refiling. The plaintiff did not appeal the District Court’s order, so it is ~~in its earliest stages,~~now final and the ~~Company does not yet have sufficient information to reach a good faith determination on Peter Piper’s potential liability or exposure in the event that its defense~~case is ~~unsuccessful.~~concluded.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

As used in this report, the terms “CEC Entertainment,” the “Company,” “we,” “us” and “our” refer to CEC Entertainment, Inc. and its subsidiaries.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide the readers of our Consolidated Financial Statements with a narrative from the perspective of our management on our consolidated financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A should be read in conjunction with (i) our Consolidated Financial Statements and related notes included in Part I, Item 1. “Financial Statements” of this report and (ii) Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 8. “Financial Statements and Supplementary Data” in our Annual Report on Form 10-K for the fiscal year ended ~~January 1,~~December 31, 2017, filed with the ~~SEC~~Securities and Exchange Commission (“SEC”) on March ~~16, 2017.~~28, 2018. Our MD&A includes the following sub-sections:

Presentation of Operating Results;

Executive Summary;

Key Measure of Our Financial Performance and Key Non-GAAP ~~Measure;~~Measures;

Key Income Statement Line Item Descriptions;

Results of Operations;

Financial Condition, Liquidity and Capital Resources;

Off-Balance Sheet Arrangements and Contractual Obligations;

Critical Accounting Policies and Estimates;

Recently Issued Accounting Guidance;

Non-GAAP Financial Measures; and

Cautionary Statement Regarding Forward-Looking Statements.

Presentation of Operating Results

We operate on a 52 or 53 week fiscal year that ends on the Sunday nearest to December 31. Each quarterly period has 13 weeks, except for a 53 week year when the fourth quarter has 14 weeks. Our current fiscal year, which ends on December ~~31, 2017,~~30, 2018, and our fiscal year ended ~~January 1,~~December 31, 2017, each consist of 52 weeks.

Seasonality and Variation in Quarterly Results

Our operating results fluctuate seasonally due to the timing of school vacations, holidays and changing weather conditions. As a result, we typically generate higher sales volumes during the first quarter of each fiscal year. School operating schedules, holidays and weather conditions may affect sales volumes in some operating regions differently than others. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.

Executive Summary

General

We develop, operate and franchise family dining and entertainment ~~venues~~centers (also referred to as “venues”) under the names “Chuck E. Cheese’s” (“Where A Kid Can Be A Kid”) and “Peter Piper Pizza” (“The Solution to the Family Night Out”). Our venues deliver a lively, kid-friendly atmosphere that feature a broad array of entertainment offerings including arcade-style and skill-oriented games, rides, live entertainment shows, and other attractions, with the opportunity for kids to win tickets that they can redeem for prizes. We combine this memorable entertainment experience with a broad and creative menu that combines kid-friendly classics as well as a ~~new~~ selection of more sophisticated options for adults.We operate ~~562~~557 venues and have an additional ~~191~~197 venues operating under franchise arrangements across 47 states and 1314 foreign countries and territories as of ~~October 1, 2017.~~September 30, 2018.

The following table summarizes information regarding the number of Company-operated and franchised venues for the periods presented:


	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
	October 1, 2017		October 2, 2016		October 1, 2017		October 2, 2016		September 30, 2018		October 1, 2017		September 30, 2018		October 1, 2017
Number of Company-owned venues:
Number of Company-operated venues:
Beginning of period	564		556		559		556		559		564		562		559
New	—		3		3		4
New ⁽¹⁾									1		—		1		3
Acquired from franchisee	—		—		2		—		—		—		—		2
Closed	(2	)	(2	)	(2	)	(3	)
Closed ⁽¹⁾									(3	)	(2	)	(6	)	(2	)
End of period	562		557		562		557		557		562		557		562
Number of franchised venues:
Beginning of period	193		183		188		176		196		193		192		188
New	—		2		7		11		1		—		7		7
Acquired from franchisee	—		—		(2	)	—		—		—		—		(2	)
Closed	(2	)	—		(2	)	(2	)	—		(2	)	(2	)	(2	)
End of period	191		185		191		185		197		191		197		191
Total number of venues:
Beginning of period	757		739		747		732		755		757		754		747
New	—		5		10		15
New ⁽¹⁾									2		—		8		10
Acquired from franchisee	—		—		—		—		—		—		—		—
Closed	(4	)	(2	)	(4	)	(5	)
Closed ⁽¹⁾									(3	)	(4	)	(8	)	(4	)
End of period	753		742		753		742		754		753		754		753

__________________


(1)	The number of new and closed Company-operated venues during the three and nine months ended September 30, 2018 included one store that was relocated.

Key Measure of Our Financial Performance and Key Non-GAAP ~~Measure~~Measures

Comparable venue sales. We define “comparable venue sales” as the sales for our domestic ~~Company-owned~~Company-operated venues that have been open for more than 18 months as of the beginning of each respective fiscal year or acquired venues we have operated for at least 12 months as of the beginning of each respective fiscal year. Comparable venue sales excludes sales for our domestic Company-owned venues that are expected to be temporarily closed for more than three months primarily as a result of natural disasters, fires, floods and property damage. We define “comparable venue sales change” as the percentage change in comparable venue sales for each respective fiscal period. We believe comparable venue sales change to be a key performance indicator used within our industry; it is a critical factor when evaluating our performance, as it is indicative of acceptance of our strategic initiatives and local economic and consumer trends.

Adjusted EBITDA and Margin. We define Adjusted EBITDA, a measure used by management to assess operating performance, as net income (loss) plus interest expense, income tax expense (benefit), depreciation and amortization expense, impairments, gains and losses on asset disposals, and stock based compensation. In addition, Adjusted EBITDA excludes other items we consider unusual or non-recurring and certain other adjustments required or permitted in calculating covenant compliance under the indenture governing our senior notes and/or our secured credit facilities. Adjusted EBITDA Margin represents Adjusted EBITDA as a percentage of total revenues.

Key Income Statement Line Item Descriptions

Revenues. Our primary source of revenues is sales at our Company-owned venues (“Company venue sales”), which consist of the sale of food, beverages, game-play credits and merchandise. A portion of our Company venue sales are from sales of value-priced combination packages ~~generally~~have historically been comprised of food, beverage and game plays (“Package Deals”), which we promote through in-venue menu pricing, our website and coupon offerings. We allocate the revenues recognized from the sale of our Package Deals and coupons between “Food and beverage sales” and “Entertainment and merchandise sales” based upon the relative price charged for each component when it is sold separately, or in limited circumstances, our best estimate of selling price if a component is not sold on a stand-alone basis, which we believe approximates each component’s fair value.

Food and beverage sales include all revenues recognized with respect to stand-alone food and beverage sales, as well as the portion of revenues allocated from Package Deals and coupons that relate to food and beverage sales. Entertainment and merchandise sales include all revenues recognized with respect to stand-alone game token and game play credit sales, as well as a portion of revenues allocated from Package Deals and coupons that relate to entertainment and merchandise.

Franchise fees and royalties are another source of revenues. We earn monthly royalties from our franchisees based on a percentage of each franchise venue’s sales. We also receive development and initial franchise fees to establish new franchised

venues, as well as earn fees from the sale of equipment and other items or services to franchisees. ~~We recognize~~Historically, we recognized development and franchise fees as revenues when the franchise venue ~~has~~had opened and we ~~have~~had substantially completed our obligations to the franchisee relating to the opening of a venue. Effective January 1, 2018, with the adoption of Accounting Standards Update 2016-10 Revenues from Contracts with Customers (Topic 606), we recognize initial and renewal development and franchise fees as revenues on a straight-line basis over the life of the franchise agreement starting when the franchise venue has opened. In addition, our national advertising fund receipts from members of the International Association of CEC Entertainment, Inc. (the “Association”) are now accounted for on a gross basis as revenue from franchisees, when historically they have been netted against advertising expense.

Company venue operating costs. Certain of our costs and expenses relate only to the operation of our Company-operated venues. These costs and expenses are listed and described below:

Cost of food and beverage includes all direct costs of food, beverages and costs of related paper and birthday supplies, less rebates from suppliers;

Cost of entertainment and merchandise includes all direct costs of prizes provided and merchandise sold to our customers, as well as the cost of tickets dispensed to ~~guests;~~customers;

Labor expenses consist of salaries and wages, bonuses, related payroll taxes and benefits for venue personnel;

Depreciation and amortization includes expenses that are directly related to our Company-operated venues’ property and equipment, including leasehold improvements, game and ride equipment, furniture, fixtures and other equipment;

Rent expense includes lease costs for Company-operated venues, excluding common occupancy costs (e.g., common area maintenance (“CAM”) charges and property taxes); and

Other venue operating expenses primarily include utilities, repair and maintenance costs, liability and property insurance, CAM charges, property taxes, credit card processing fees, licenses, preopening expenses, venue asset disposal gains and losses and all other costs directly related to the operation of a venue.

“Cost of food and beverage” and “Cost of entertainment and merchandise,” as a percentage of Company venue sales, are influenced both by the cost of products and by the overall mix of our Package Deals and coupon offerings. “Entertainment and merchandise sales” have higher margins than “Food and beverage sales.”

Advertising expense. Advertising expense includes production costs for television commercials, newspaper inserts, Internet advertising, coupons, and media expenses for national and local advertising and consulting ~~fees, partially offset by contributions from our franchisees.~~fees.

General and administrative expenses. General and administrative expenses represent all costs associated with operating our corporate office, including regional and district management and corporate personnel payroll and benefits, ~~depreciation and amortization of corporate assets,~~ back-office support systems and other administrative costs not directly related to the operation of our Company-operated venues.

Depreciation and amortization. Depreciation and amortization includes expenses that are directly related to our

Company-operated venues’ property and equipment, including leasehold improvements, game and ride equipment, furniture,

fixtures and other equipment, and depreciation and amortization of corporate assets and intangibles.

Results of Operations

The following table summarizes our principal sources of company venue sales expressed in dollars and as a percentage of total company venue sales for the periods presented:


	Three Months Ended								Three Months Ended
	October 1, 2017				October 2, 2016				September 30, 2018				October 1, 2017
	(in thousands, except percentages)								(in thousands, except percentages)
Food and beverage sales	$	98,255	47.0	%	$	101,984	45.6	%	$	94,023	43.6	%	$	98,255	47.0	%
Entertainment and merchandise sales	110,633		53.0	%	121,764		54.4	%	121,611		56.4	%	110,633		53.0	%
Total company venue sales	$	208,888	100.0	%	$	223,748	100.0	%	$	215,634	100.0	%	$	208,888	100.0	%


	Nine Months Ended								Nine Months Ended
	October 1, 2017				October 2, 2016				September 30, 2018				October 1, 2017
	(in thousands, except percentages)								(in thousands, except percentages)
Food and beverage sales	$	320,085	47.3	%	$	321,591	45.6	%	$	308,658	45.6	%	$	320,085	47.3	%
Entertainment and merchandise sales	356,274		52.7	%	383,978		54.4	%	368,633		54.4	%	356,274		52.7	%
Total company venue sales	$	676,359	100.0	%	$	705,569	100.0	%	$	677,291	100.0	%	$	676,359	100.0	%

The following ~~tables summarize~~table summarizes our revenues and expenses expressed in dollars and as a percentage of Total revenues (except as otherwise noted) for the periods presented:


	Three Months Ended										Three Months Ended
	October 1, 2017					October 2, 2016					September 30, 2018					October 1, 2017
	(in thousands, except percentages)										(in thousands, except percentages)
Total company venue sales	$	208,888		97.9	%	$	223,748		98.1	%	$	215,634		97.6	%	$	208,888		97.9	%
Franchise fees and royalties	4,459			2.1	%	4,322			1.9	%	5,311			2.4	%	4,459			2.1	%
Total revenues	213,347			100.0	%	228,070			100.0	%	220,945			100.0	%	213,347			100.0	%
Company venue operating costs:
Cost of food and beverage ⁽¹⁾	23,974			24.4	%	25,507			25.0	%	22,520			24.0	%	23,974			24.4	%
Cost of entertainment and merchandise ⁽²⁾	7,430			6.7	%	8,014			6.6	%	9,874			8.1	%	7,430			6.7	%
Total cost of food, beverage, entertainment and merchandise ⁽³⁾	31,404			15.0	%	33,521			15.0	%	32,394			15.0	%	31,404			15.0	%
Labor expenses ⁽³⁾	61,220			29.3	%	61,721			27.6	%	65,028			30.2	%	61,220			29.3	%
Depreciation and amortization ⁽³⁾	25,289			12.1	%	27,667			12.4	%
Rent expense ⁽³⁾	24,259			11.6	%	24,120			10.8	%	23,851			11.1	%	24,259			11.6	%
Other venue operating expenses ⁽³⁾	40,561			19.4	%	38,757			17.3	%	38,232			17.7	%	40,561			19.4	%
Total company venue operating costs ⁽³⁾	182,733			87.5	%	185,786			83.0	%	159,505			74.0	%	157,444			75.4	%
Other costs and expenses:
Advertising expense	12,083			5.7	%	11,515			5.0	%	11,058			5.0	%	12,083			5.7	%
General and administrative expenses	15,422			7.2	%	17,284			7.6	%	13,193			6.0	%	13,575			6.4	%
Depreciation and amortization											24,739			11.2	%	27,136			12.7	%
Transaction, severance and related litigation costs	128			0.1	%	166			0.1	%	(263		)	(0.1	)%	128			0.1	%
Asset impairments	1,843			0.9	%	772			0.3	%	5,344			2.4	%	1,843			0.9	%
Total operating costs and expenses	212,209			99.5	%	215,523			94.5	%	213,576			96.7	%	212,209			99.5	%
Operating income	1,138			0.5	%	12,547			5.5	%	7,369			3.3	%	1,138			0.5	%
Interest expense	17,451			8.2	%	17,237			7.6	%	19,069			8.6	%	17,451			8.2	%
Loss before income taxes	$	(16,313	)	(7.6	)%	$	(4,690	)	(2.1	)%	$	(11,700	)	(5.3	)%	$	(16,313	)	(7.6	)%

__________________


(1)	Percent amount expressed as a percentage of Food and beverage sales.


(2)	Percent amount expressed as a percentage of Entertainment and merchandise sales.


(3)	Percent amount expressed as a percentage of Total company venue sales.

(4)

Due to rounding, percentages presented in the table above may not sum to total. The percentage amounts for the components of Cost of food and beverage and the Cost of entertainment and merchandise may not sum to total due to the fact that Cost of food and beverage and Cost of entertainment and merchandise are expressed as a percentage of related Food and beverage sales and Entertainment and merchandise sales, as opposed to Total company venue sales.


	Nine Months Ended								Nine Months Ended
	October 1, 2017				October 2, 2016				September 30, 2018					October 1, 2017
	(in thousands, except percentages)								(in thousands, except percentages)
Total company venue sales	$	676,359	98.0	%	$	705,569	98.1	%	$	677,291		97.7	%	$	676,359	98.0	%
Franchise fees and royalties	13,731		2.0	%	13,440		1.9	%	15,917			2.3	%	13,731		2.0	%
Total revenues	690,090		100.0	%	719,009		100.0	%	693,208			100.0	%	690,090		100.0	%
Company venue operating costs:
Cost of food and beverage ⁽¹⁾	75,014		23.4	%	80,702		25.1	%	72,774			23.6	%	75,014		23.4	%
Cost of entertainment and merchandise ⁽²⁾	22,771		6.4	%	25,004		6.5	%	27,676			7.5	%	22,771		6.4	%
Total cost of food, beverage, entertainment and merchandise ⁽³⁾	97,785		14.5	%	105,706		15.0	%	100,450			14.8	%	97,785		14.5	%
Labor expenses ⁽³⁾	187,958		27.8	%	191,170		27.1	%	194,994			28.8	%	187,958		27.8	%
Depreciation and amortization ⁽³⁾	77,492		11.5	%	85,029		12.1	%
Rent expense ⁽³⁾	71,484		10.6	%	72,318		10.2	%	72,615			10.7	%	71,484		10.6	%
Other venue operating expenses ⁽³⁾	113,277		16.7	%	112,143		15.9	%	113,363			16.7	%	113,277		16.7	%
Total company venue operating costs ⁽³⁾	547,996		81.0	%	566,366		80.3	%	481,422			71.1	%	470,504		69.6	%
Other costs and expenses:
Advertising expense	37,702		5.5	%	36,777		5.1	%	38,010			5.5	%	37,702		5.5	%
General and administrative expenses	48,237		7.0	%	51,222		7.1	%	39,519			5.7	%	42,665		6.2	%
Depreciation and amortization									76,804			—	%	83,064		—	%
Transaction, severance and related litigation costs	698		0.1	%	1,349		0.2	%	463			0.1	%	698		0.1	%
Asset impairments	1,843		0.3	%	772		0.1	%	6,935			1.0	%	1,843		0.3	%
Total operating costs and expenses	636,476		92.2	%	656,486		91.3	%	643,153			92.8	%	636,476		92.2	%
Operating income	53,614		7.8	%	62,523		8.7	%	50,055			7.2	%	53,614		7.8	%
Interest expense	51,574		7.5	%	51,419		7.2	%	56,740			8.2	%	51,574		7.5	%
Income before income taxes	$	2,040	0.3	%	$	11,104	1.5	%	$	(6,685	)	(1.0	)%	$	2,040	0.3	%

__________________


(1)	Percent amount expressed as a percentage of Food and beverage sales.


(2)	Percent amount expressed as a percentage of Entertainment and merchandise sales.


(3)	Percent amount expressed as a percentage of Total company venue sales.

(4)

Three months ended ~~October 1, 2017~~September 30, 2018 Compared to the Three months ended October ~~2, 2016~~1, 2017

Revenues

Company venue sales were $215.6 million for the third quarter of 2018 compared to $208.9 million for the third quarter of 2017, ~~compared to $223.7 million for the third quarter of 2016,~~ primarily attributable to a ~~6.9% decrease~~2.2% increase in comparable venue sales ~~including the impact of lost revenues from venues that were impacted by Hurricanes Harvey~~ and ~~Irma, partially offset by revenue from new venue openings.~~

~~Company venue sales for the third quarter of 2017 were impacted by approximately $1.9~~a $5.3 million ~~of incremental~~increase in net breakage related to PlayPass ~~related deferred revenue~~ compared to the third quarter of ~~2016.~~2017, offset by a $1.5 million decrease in revenue due to temporary store closures and a net reduction of four Company-operated venues.

Franchise fees and royalties increased from $4.5 million to $5.3 million primarily due to the impact of new revenue recognition guidance which was effective for us on January 1, 2018. Franchise fees and royalties for the third quarter of 2018 increased $0.8 million related to the recognition of our national advertising fund contributions as revenue, rather than netted against advertising expense (see “Advertising Expense” below).

Company Venue Operating Costs

The cost of food, beverage, entertainment and merchandise, as a percentage of Total company venue sales, was 15.0% for both thethird quarter of 2018 and the third quarter of 2017 as a sales shift towards higher margin Entertainment and merchandise sales from food and beverage sales was offset by cost pressures.

The cost of food and beverage, as a percentage of food and beverage sales, was 24.0% for the third quarter of 2018 compared to 24.4% for the third quarter of ~~2017 compared to 25.0% for the third quarter of 2016.~~2017. The decrease in the cost of food and beverage on a percentage basis in the

third quarter of ~~2017~~2018 was primarily driven by ~~benefits realized from~~lower commodity prices and a mix shift to higher margin items during the ~~implementation~~third quarter of ~~our inventory management system, as well as price increases in our food and beverage menu, partially offset by increased commodity prices.~~2018.

The cost of entertainment and merchandise, as a percentage of entertainment and merchandise sales, was 8.1% for the third quarter of 2018 compared to 6.7% for the third quarter of ~~2017 compared to 6.6% for the third quarter of 2016.~~2017. The increase in the cost of entertainment and merchandise on a percentage basis in the third quarter of ~~2017~~2018 was ~~primarily due to an increase~~impacted by a combination of the national launch of time based play and “More Tickets” in ~~PlayPass related supplies as a result~~all of

~~PlayPass being deployed to more~~ our Chuck E. Cheese Company-operated venues ~~compared to~~during the third quarter of ~~2016, and an increase in the deferred revenue associated with the implementation of our PlayPass card system. The cost of entertainment and merchandise~~2018.

Labor expenses, as a percentage of ~~entertainment~~sales, were 30.2% in the third quarter of 2018 compared to 29.3% in the third quarter of 2017. The increase in Labor expenses as a percentage of sales in the third quarter of 2018 reflects an increase in our average hourly wage rate, driven by mandated minimum wage rate increases, partially offset by a reduction in hours.

Other venue operating expenses, as a percentage of sales, improved 170 basis points in the third quarter of 2018 as we focused on improving productivity. The decrease in Other venue operating costs as a percentage of sales was primarily driven by property and ~~merchandise sales excluding~~inventory losses incurred in the ~~impact~~third quarter of ~~supplies~~2017 in connection with Hurricanes Harvey and ~~deferred revenue~~Irma, as well as a decrease in insurance costs associated with general liability claims and business interruption insurance proceeds received in the third quarter of 2018 related to ~~PlayPass~~one of our venues that was ~~5.7%~~temporarily closed due to a fire.

Advertising Expense

Advertising expense was $11.1 million in the third quarter of 2018 compared to $12.1 million in the third quarter of 2017. Advertising expense for the third quarter of ~~2017 and 6.3%~~2018 was impacted by the adoption of a new revenue recognition standard effective January 1, 2018 that requires us to account for our national advertising fund contributions as revenues, rather than netted against Advertising expense. Including the impact of netting national advertising fund revenues against Advertising expense, Advertising expense in the third quarter of ~~2016.~~

~~Labor expenses were $61.2~~2018 would have been $10.3 million, compared to $12.1 million in the third quarter of 2017 ~~compared to $61.7~~(see “Revenues” above). Advertising expense for the third quarter of 2018 reflects a decrease in purchases of national television and print media.

General and Administrative Expenses

General and administrative expenses were $13.2 million in the third quarter of ~~2016. We were able~~2018 compared to ~~partially offset increased minimum wage rates in several states with improved labor management aided by our labor management system, which we implemented in early 2016.~~

~~Depreciation and amortization was $25.3~~$13.6 million in the third quarter of ~~2017 compared~~2017. The decrease in general and administrative expenses in the third quarter of 2018 is primarily due to ~~$27.7~~savings initiatives implemented in the first quarter of 2018, partially offset by an increase in incentive compensation as a result of improved sales.

Depreciation and Amortization

Depreciation and amortization was $24.7 million in the third quarter of ~~2016.~~2018 compared to $27.1 million in the third quarter of 2017. The decrease in depreciation and amortization is primarily due to the impact of certain property plant and equipment having reached the end of their depreciable lives throughout the past year.

~~Other venue operating expenses~~Transaction, Severance and Related Litigation Costs

Transaction, severance and related litigation costs were ~~$40.6~~$(0.3) million in the third quarter of ~~2017~~2018 compared to ~~$38.8~~$0.1 million in the third quarter of ~~2016.~~2017. The ~~increase was primarily due to an increase in self-insurance expense associated with general liability claims, as well as property~~Transaction, severance and ~~inventory losses incurred~~related litigation costs in the third quarter of ~~2017~~2018 reflect an insurance settlement received relating to legal fees incurred in ~~connection with Hurricanes Harvey and Irma.~~prior years.

~~Advertising Expense~~Asset Impairments

~~Advertising expense~~In thethird quarter of 2018, we recognized an asset impairment charge of $5.3 million primarily related to eight venues, of which one was ~~$12.1 million in~~previously impaired. In the third quarter of 2017 ~~compared~~we recognized an asset impairment charge of $1.8 million primarily related to ~~$11.5 million~~five venues, of which two were previously impaired. We continue to operate all but one of these venues. The impairment charge was based on the determination that the financial performance of these venues was adversely impacted by various competitive and economic factors in the ~~third quarter of 2016. The third quarter of 2017 reflects an increase~~markets in ~~national media costs.~~

~~General and Administrative Expenses~~

~~General and administrative expenses were $15.4 million in~~which the third quarter of 2017 compared to $17.3 million in the third quarter of 2016. The decrease in general and administrative expenses in the third quarter of 2017 is primarily due to a decrease in incentive compensation as a result of lower sales and operating performance, and a decrease in labor related litigation costs.venues are located.

Income Taxes

Our effective income tax rate was 18.9% for the third quarter of 2018 as compared to 32.0% for the third quarter of 2017. Our effective income tax rate for 2018 was favorably impacted by the reduction in the U.S. federal statutory corporate income tax rate from 35% to 21% resulting from the Tax Cuts and Jobs Act (TCJA) signed into law on December 22, 2017, ~~as compared~~return-to-provision adjustments including those related to ~~48.7%~~the true up of provisional estimates provided in 2017 to account for the ~~third quarter~~impact of ~~2016, differs from~~ the ~~statutory rate primarily due~~TCJA pursuant to SAB118, and the ~~favorable~~ impact of employment-related federal income tax credits offset by the ~~negative~~unfavorable impact of ~~non-deductible~~nondeductible litigation costs related to the Merger, ~~(see Note 12 “Consolidating Guarantor Financial Information”~~nondeductible penalties, a net increase in our liability for ~~a definition~~uncertain tax positions, and state and foreign taxes. Our effective income tax rates for the third quarter of 2017

differed from the Merger) and non-deductible Canadian interest expense. In addition, unfavorable adjustments negatively impacting 2017 include a true-up of the prior year’s estimate of employment-related tax credits versus actuals and the impact to our deferred tax liability resulting from changesstatutory rate primarily due to state income taxes and the favorable impact of employment related federal income tax ~~apportionment factors and rates. Whereas, an increase in the liability from uncertain tax positions negatively impacted 2016.~~credits.

Nine months ended ~~October 1, 2017~~September 30, 2018 Compared to Nine months ended October ~~2, 2016~~1, 2017

Revenues

Company venue sales were $677.3 million for the first nine months of 2018 compared to $676.4 million for the first nine months of ~~2017 compared to $705.6 million~~2017. The increase in Company venue sales for the first nine months of ~~2016,~~2018 was primarily attributable to the recognition of $3.7 million in net breakage revenue related to PlayPass for the first nine months of 2018 compared to a ~~4.4% decrease in comparable store sales, offset partially by revenue from new venue openings.~~

~~Company venue sales in~~net deferral of $7.9 million the first nine months of 2017, ~~were also negatively impacted~~offset partially by ~~approximately $5.7~~a 1.0% decrease in comparable venue sales, a $3.3 million decrease in revenue due to temporary store closures and a net reduction of three Company-operated venues.

Franchise fees and royalties increased from $13.7 million to $15.9 million primarily due to the impact of new revenue recognition guidance which resulted in $2.6 million of ~~incremental deferred~~national advertising fund contributions from franchisees being recorded as revenue, rather than netted against advertising expense in 2018 (see “Advertising Expense” below).

Company Venue Operating Costs

The cost of food, beverage, entertainment and merchandise, as a percentage of Total company venue sales, was 14.8% for first nine months of 2018 compared to 14.5% for the first nine months of ~~2016.~~

~~Company Venue Operating Costs~~2017 as a sales shift towards higher margin Entertainment and merchandise sales from food and beverage sales was offset by cost pressures, primarily related to the impact of new initiatives launched by the Company.

The cost of food and beverage, as a percentage of food and beverage sales, was 23.6% for the first nine months of 2018 compared to 23.4% for the first nine months of ~~2017 compared to 25.1% for the first nine months of 2016.~~2017. The ~~decrease~~increase in the cost of food and beverage on a percentage basis in the first nine months of ~~2017~~2018 was driven primarily by ~~benefits realized from the implementation of our inventory management system, as well as price increases~~a change in ~~our food~~sales mix and ~~beverage menu, partially offset by~~ an increase in ~~commodity prices, primarily cheese.~~beverage costs.

The cost of entertainment and merchandise, as a percentage of entertainment and merchandise sales, was 7.5% for the first nine months of 2018 compared to 6.4% for the first nine months of ~~2017 compared to 6.5% for the first nine months of 2016.~~2017. The ~~decrease in the~~ cost of entertainment and merchandise on a percentage basis in the first nine months of 2018 compared to the first nine months of 2017 was ~~primarily due to~~impacted by a ~~decrease in~~combination of the ~~effective price~~impact of ~~our merchandise, offset~~time based play and “More Tickets” which were launched nationally during the third quarter of 2018, and by an increase in PlayPass related supplies as a result of PlayPass now being deployed to ~~more~~all of our Company-owned venues, compared to 268 venues at the beginning of 2017.

Labor expenses, as a percentage of sales, were 28.8% for the first nine months of ~~2016, and an increase~~2018 compared to 27.8% for the first nine months of 2017. Increased minimum wage rates in ~~the deferred revenue associated with the implementation of our PlayPass card system. The cost of entertainment and merchandise as~~several states fully offset a ~~percentage of entertainment and merchandise sales, excluding the impact of supplies and deferred revenue related to PlayPass, was 5.6%~~decrease in labor hours in the first nine months of ~~2017 compared to 6.3% in the first nine months of 2016.~~

Labor expenses were $188.0 million for the first nine months of 2017 compared to $191.2 million for the first nine months of 2016. A decrease in labor hours as a result of lower sales volumes in the first nine months of 20172018 compared to the first nine months of ~~2016 offset increased minimum wage rates in several states.~~2017.

Other venue operating costs, as a percentage of sales, were ~~$113.3 million~~16.7% in both the first nine months of 2018 and 2017. An increase in common area and utility costs, and increased expenses related to the production of new menu boards and panels in the first nine months of ~~2017 compared~~2018, offset decreases related to ~~$112.1 million in~~ the ~~first nine months~~impact of ~~2016. The increase is primarily driven by~~ property and inventory losses ~~incurred~~ in the ~~first nine months~~third quarter of 2017 in connection with Hurricanes Harvey and Irma, ~~and an increase~~as well as business interruption insurance proceeds received in ~~travel~~the third quarter of 2018 related ~~charges incurred in connection with training venue level employees on~~to one of our ~~new PlayPass card system.~~venues that was temporarily closed due to a fire.

Advertising Expense

Advertising expense was $38.0 million in the first nine months of 2018 compared to $37.7 million in the first nine months of ~~2017 compared to $36.8 million in~~2017. Advertising expense for the first nine months of ~~2016. The~~2018 was impacted by the adoption of a new revenue recognition standard effective January 1, 2018 that requires us to account for our national advertising fund contributions as revenues, rather than netted against Advertising expense. Including the impact of netting national advertising fund revenues against Advertising expense, Advertising expense for the first nine months of ~~2017 reflect an increase~~2018 would have been $35.5 million (see “Revenues” above). Advertising expense for the first nine months of 2018 reflects a decrease in national media costs and a decrease in advertising for our Peter Piper Pizza ~~venues relative to the first nine months of 2016, primarily related to our new~~ venues.

General and Administrative Expenses

General and administrative expenses were ~~$48.2~~$39.5 million for the first nine months of ~~2017~~2018 compared to ~~$51.2~~$42.7 million for the first nine months of ~~2016.~~2017. The decrease in general and administrative expenses in the first nine months of ~~2017~~2018 is primarily due to a decrease in ~~incentive compensation as a result~~labor related litigation costs, and savings initiatives implemented in the first quarter of ~~lower sales~~2018.

Depreciation and ~~operating performance.~~Amortization

Depreciation and amortization was $76.8 million in the first nine months of 2018 compared to $83.1 million in the first nine months of 2017. The decrease in depreciation and amortization is primarily due to the impact of certain property plant and equipment having reached the end of their depreciable lives.

Transaction, Severance and Related Litigation Costs

Transaction, severance and related litigation costs were $0.5 million in the first nine months of 2018 compared to $0.7 million in the first nine months of ~~2017 compared to $1.3 million in the first nine months of 2016.~~2017. The Transaction, severance and related litigation costs in ~~both~~the first nine months of 2018 relate primarily to $0.2 million in legal fees incurred in connection with Merger related litigation and severance payments of $0.3 million. The Transaction, severance and related litigation costs in the first nine months of 2017 ~~and the first nine months of 2016~~ relate ~~primarily~~ to legal fees ~~and settlements~~ incurred in connection with Merger related litigation.

Asset Impairments

In thefirst nine months of 2018, we recognized an asset impairment charge of $6.9 million primarily related to nine venues, of which one was previously impaired. In the first nine months of 2017 we recognized an asset impairment charge of $1.8 million primarily related to five venues, of which two were previously impaired. We continue to operate all but two of these venues. The impairment charge was based on the determination that the financial performance of these venues was adversely impacted by various competitive and economic factors in the markets in which the venues are located.

Income Taxes

Our effective income tax rate offor the nine months ended September 30, 2018 was 6.8% as compared to 90.2% for the nine months ended October 1, 2017. Our effective income tax rate for 2018 was favorably impacted by the reduction in the U.S. federal statutory corporate income tax rate from 35% to 21% resulting from the Tax Cuts and Jobs Act (TCJA) signed into law on December 22, 2017, return-to-provision adjustments including those related to the true up of provisional estimates provided in 2017 to account for the impact of the TCJA pursuant to SAB118, the impact of employment-related federal income tax credits, a one-time adjustment to deferred taxes (the tax effect of the cumulative foreign currency translation adjustment existing as ~~compared~~of January 1, 2018) resulting from the change in our intent to ~~41.8%~~no longer indefinitely reinvest monies previously loaned to our Canadian subsidiary offset by the negative impact of nondeductible litigation costs related to the Merger, nondeductible penalties, a net increase in our liability for uncertain tax positions, state income taxes including the negative impact of state tax legislation enacted during the second quarter that increased the amount of income subject to state taxation and foreign taxes. Our effective income tax rates for the nine months ended October ~~2, 2016, differs~~1, 2017 differed from the statutory rate primarily due to state income taxes and the favorable impact of ~~employment-related~~employment related federal income tax credits offset by the negative impact of non-deductible litigation costs related to the Merger (see Note 12 “Consolidating Guarantor Financial Information” for a definition of the Merger) and non-deductible Canadian interest expense. In addition, unfavorable adjustments negatively impacting 2017 include a true-up of the prior year’s estimate of employment-related tax credits versus actuals and the impact to our deferred tax liability resulting from changes to state income tax apportionment factors and rates. Whereas, an increase in the liability from uncertain tax positions negatively impacted 2016.credits.

Financial Condition, Liquidity and Capital Resources

Overview of Liquidity

We finance our business activities through cash flows provided by our operations.

The primary components of working capital are as follows:

our ~~venue~~ guests pay for their purchases in cash or credit cards at the time of the sale and the cash from these sales is typically received before our related accounts payable to suppliers and employee payroll become due;

frequent inventory turnover results in a limited investment required in inventories; and

our accounts payable are generally due within five to 30 days.

As a result of these factors, our requirement for working capital is not significant and we are able to operate with a net working capital deficit (current liabilities in excess of current assets), similar to other companies in the restaurant industry. As part of our capital allocation strategy, we may elect from time to time to retire certain of our debt obligations through voluntary prepayments or open market purchases.

Sources and Uses of Cash

The following tables present summarized consolidated financial information that we believe is helpful in evaluating our liquidity and capital resources as of and for the periods presented:


	Nine Months Ended						Nine Months Ended
	October 1, 2017			October 2, 2016			September 30, 2018			October 1, 2017
	(in thousands)						(in thousands)
Net cash provided by operating activities	$	94,240		$	111,254		$	82,475		$	94,191
Net cash used in investing activities	(74,006		)	(74,897		)	(56,730		)	(74,006		)
Net cash used in financing activities	(2,322		)	(7,510		)
Net cash provided by (used in) financing activities							(8,656		)	(2,322		)
Effect of foreign exchange rate changes on cash	492			356			51			492
Change in cash and cash equivalents	$	18,404		$	29,203
Change in cash, cash equivalents and restricted cash							$	17,140		$	18,355
Interest paid	$	53,076		$	53,971		$	59,229		$	53,076
Income taxes paid, net	$	6,635		$	9,569
Income taxes paid (refunded), net							$	867		$	6,635

October 1,
2017 January 1,
2017
(in thousands)
Cash and cash equivalents $ 79,427
$ 61,023
Restricted cash $ 219
$ 268
Term loan facility $ 733,400
$ 739,100
Senior notes $ 255,000
$ 255,000
Note payable $ —
$ 13
Available unused commitments under revolving credit facility $ 140,100
$ 140,100

~~Cash and cash equivalents as of October 1, 2017 includes $7.5 million of undistributed income from our Canadian subsidiary that we consider to be permanently invested.~~



	September 30, 2018		December 31, 2017
	($ in thousands)
Cash and cash equivalents	$	84,429	$	67,200
Restricted cash	23		112
Term loan facility	725,800		731,500
Senior notes	255,000		255,000
Available unused commitments under revolving credit facility	141,000		140,100

Sources and Uses of Cash - Nine months ended ~~October 1, 2017~~September 30, 2018 Compared to the Nine months ended October ~~2, 2016~~1, 2017

Net cash provided by operating activities was $82.5 million in the nine months ended September 30, 2018 compared to $94.2 million in the nine months ended October 1, ~~2017 compared to $111.3 million in the nine months ended October 2, 2016.~~2017. The decrease in net cash provided by operating activities is primarily due to a decrease in net income and fluctuations in our working capital.

Net cash used in investing activities was $56.7 million in the nine months ended September 30, 2018 compared to $74.0 million in the nine months ended October 1, ~~2017 compared to $74.9 million in the nine months ended October 2, 2016.~~2017. Net cash used in investing activities in the nine months ended September 30, 2018 and October 1, 2017 ~~and October 2, 2016~~ relates primarily to capital expenditures.

Net cash used in financing activities was ~~$2.3~~$8.7 million in the nine months ended ~~October 1, 2017,~~September 30, 2018, relating primarily to principal payments on our term loan and other lease related ~~obligations, partially offset~~obligations. Net cash provided by financing activities of $2.3 million in the nine months ended October 1, 2017 related primarily to sale leaseback proceeds of $4.1 million and a $1.4 million return of ~~capital. Net cash used in financing of $7.5 million in the nine months ended October 2, 2016 related primarily to~~capital, partially offset by principal payments on our term loan and other lease related obligations.

Debt Financing

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 aan original 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 balance paid at maturity, February 14, 2021. As of ~~October 1, 2017,~~September 30, 2018, we had no borrowings outstanding under the revolving credit facility and $9.0 million and $9.9 million of letters of credit issued but undrawn under the ~~revolving credit facility.~~facility as of September 30, 2018 and December 31, 2017, respectively.

~~All borrowings under~~On May 8, 2018 we entered into an incremental assumption agreement with certain of our revolving credit facility ~~are subject~~lenders to extend the maturity on $95.0 million of the revolving credit facility through November 16, 2020. In connection with the extension of the maturity date, we agreed to the ~~satisfaction~~following covenants for the benefit of ~~customary conditions, including~~ the ~~absence~~revolving facility lenders: (a)

with respect to each fiscal year (commencing with the fiscal year ending December 30, 2018), to the extent we have excess cash flow (as defined in the secured credit facilities agreement), we are required to make a mandatory prepayment of term loan principal equal to at least 75% (subject to step-downs based on our net first lien senior secured leverage ratio) of the amount of excess cash flow that exceeds $10 million less any optional prepayments of principal that may have occurred during the fiscal year and (b) we shall not incur additional first lien senior secured debt in connection with certain acquisitions, mergers or consolidations unless our net first lien senior secured leverage ratio is not greater than 3.65 to 1.00 on a ~~default and~~pro forma basis. The maturity date of the ~~accuracy~~amount of ~~representations and warranties.~~the revolving credit facility that was not extended remains February 14, 2019.

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%~~0.5%; (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 is subject to one step down from 3.25% to 3.00%, based on our net first lien senior secured leverage ratio. The applicable margin for LIBOR borrowings under the revolving credit facility is 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 facility stepped-down to 3.00%.~~ During the ~~fourth quarter of 2017~~nine months ended September 30, 2018, the applicable margin for LIBOR borrowings under both the term loan facility and the revolving facility ~~will return to their previous level of~~was 3.25%~~. During~~ and during the nine months ended October 1, 2017 was 3.00% and 2.75%, respectively.

During the nine months ended September 30, 2018, the federal funds rate ranged from ~~0.55%~~1.34% to ~~1.16%~~2.18%, the prime rate ranged from ~~3.75%~~4.50% to ~~4.25%~~5.25% and the one-month LIBOR ranged from ~~0.76%~~1.55% to ~~1.24%~~2.26%.

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%~~0.5% per annum and ~~was~~is subject to one step-down from ~~0.50%~~0.5% to 0.375% based on our net first lien senior secured leverage ratio. ~~Effective March 4, 2016,~~During the nine months ended September 30, 2018, the commitment fee rate ~~stepped down to~~was 0.5% and for the nine months ended October 1, 2017 it was 0.375%~~. During the fourth quarter of 2017, the commitment fee rate will return to it previous level of 0.50%~~. We are also required to pay customary agency fees, as well as letter of credit participation fees computed at a rate per annum equal to the applicable margin for LIBOR rate borrowings on the dollar equivalent of the daily stated amount of outstanding letters of credit, plus such letter of credit issuer’s customary documentary and processing fees and charges and a fronting fee computed at a rate equal to 0.125% per annum on the daily stated amount of such letter of credit.

All borrowings under our revolving credit facility are subject to the satisfaction of customary conditions, including the absence of a default and the accuracy of representations and warranties.

Senior Unsecured Notes

Our senior unsecured notes consist of $255.0 million aggregate principal amount borrowings of 8.000% Senior Notes due 2022 (the “senior notes”) and mature on February 15, 2022. The senior notes ~~are registered under the Securities Act, do not~~ bear ~~legends restricting their transfer~~interest at a rate of 8.000% per year payable February 15th and ~~are not entitled to registration rights under our registration rights agreement. As~~August 15th of each year and mature on February 15, ~~2017, we~~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”).

Capital Expenditures

We intend to continue to focus our future capital expenditures on reinvestment into our existing Company-operated Chuck E. Cheese’s and Peter Piper Pizza venues through various planned capital initiatives and the development or acquisition of additional Company-operated venues. During the first nine months of ~~2017,~~2018, we completed ~~225~~194 game enhancements and 1213 major ~~remodels, and we opened three new domestic Company-operated Peter Piper Pizza venues.~~remodels. We have funded and expect to continue to fund our capital expenditures through existing cash flows from operations. Capital expenditures in the first nine months of ~~2017~~2018 totaled approximately ~~$74.4~~$57.2 million.

The following table reconciles the approximate total capital spend by initiative to our Consolidated Statements of Cash Flows for the periods presented:


	Nine Months Ended				Nine Months Ended
	October 1, 2017		October 2, 2016		September 30, 2018		October 1, 2017
	(in thousands)				(in thousands)
Growth capital spend ⁽¹⁾	$	42,960	$	37,734	$	21,157	$	42,960
Maintenance capital spend ⁽²⁾	26,104		29,018		33,048		26,104
IT capital spend	5,363		8,571		2,989		5,363
Total Capital Spend	$	74,427	$	75,323	$	57,194	$	74,427

__________________


(1)	Growth capital spend includes major remodels, venue expansions, our PlayPass initiative and new venue development, including relocations and franchise acquisitions.

(2) Maintenance capital spend includes game enhancements, general venue capital expenditures and corporate capital expenditures.

We currently estimate our capital expenditures in ~~2017~~2018 will total approximately ~~$95~~$75 million to ~~$100~~$80 million, inclusive of maintenance capital, growth capital ~~(including the completion of our PlayPass initiative~~ and ~~new venue growth) and IT-related~~IT related capital.

Off-Balance Sheet Arrangements and Contractual Obligations

As of ~~October 1, 2017,~~September 30, 2018, we had no off-balance sheet financing arrangements as described in Regulation S-K Item 303(a)(4)(ii).

For information regarding our contractual obligations, refer to “Off Balance Sheet Arrangements and Contractual Obligations” in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended ~~January 1,~~December 31, 2017, filed with the SEC on March ~~16, 2017.~~28, 2018.

See further discussion of our indebtedness and future debt obligations in “Financial Condition, Liquidity and Capital Resources - Debt Financing” of this report. There have been no other material changes to our contractual obligations since ~~January 1,~~December 31, 2017.

Critical Accounting Policies and Estimates

Information with respect to our critical accounting policies and estimates, which we believe could have the most significant effect on our reported consolidated results and require difficult, subjective or complex judgment by management are described under “Critical Accounting Policies and Estimates” in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended ~~January 1,~~December 31, 2017,, filed with the SEC on March ~~16, 2017. As~~28, 2018. See Note 1. “Description of Business and Summary of Significant Accounting Policies”~~October 1, 2017, there~~to our Consolidated Financial Statements included in Part I, Item 1. “Financial Statements” of this report. There has been no other material change to the information concerning our critical accounting policies and ~~estimates.~~estimates since December 31, 2017.

Recently Issued Accounting Guidance

Refer to Note 1 “Description of Business and Summary of Significant Accounting Policies” to our Consolidated Financial Statements included in Part I, Item 1. “Financial Statements” of this report for a description of recently issued accounting guidance.

Non-GAAP Financial Measures

Adjusted EBITDA, a measure used by management to assess operating performance, is defined as Net income (loss) plus interest expense, income tax expense (benefit), depreciation and amortization expense, impairments, gains and losses on asset disposals, and stock based compensation. In addition, Adjusted EBITDA excludes other items we consider unusual or non-recurring and certain other adjustments required or permitted in calculating covenant compliance under our secured credit facilities and the indenture governing our senior notes (see discussion of our senior notes in Note 56 “Indebtedness and Interest Expense” to our Consolidated Financial Statements included in Part I, Item 1. “Financial Statements” and above under the heading “Financial Condition, Liquidity and Capital Resources - Debt Financing”).

Adjusted EBITDA is presented because we believe that it provides useful information to investors regarding our operating performance and our capacity to incur and service debt and fund capital expenditures. We believe that Adjusted EBITDA is used by many investors, analysts and rating agencies as a measure of performance. We also present Adjusted EBITDA because it is substantially similar to Credit Agreement EBITDA, a measure used in calculating financial ratios and other calculations under our debt agreements, except for ~~(i) adding back the change in deferred amusement revenue, and (ii)~~ excluding the annualized full year effect of Company-operated and franchised venues that were opened and closed during the ~~year, which is an addback allowed in our credit agreement.~~year. By reporting Adjusted EBITDA, we provide a basis for comparison of our business operations between current, past and future periods by excluding items that we do not believe are indicative of our core operating performance.

Our definition of Adjusted EBITDA allows for the exclusion of certain non-cash and other income and expense items that are used in calculating net income from continuing operations. However, these are items that may recur, vary greatly and can be difficult to predict. They can represent the effect of long-term strategies as opposed to short-term results. In addition, certain of these items can represent the reduction of cash that could be used for other corporate purposes. These measures should not be considered as alternatives to operating income, cash flows from operating activities or any other performance measures derived in accordance with GAAP as measures of operating performance, or cash flows as measures of liquidity. These measures have important limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. Because of these limitations, we rely primarily on our U.S. GAAP results and use Adjusted EBITDA and Adjusted EBITDA Margin, only supplementally.

The following table sets forth a reconciliation of Net income to Adjusted EBITDA and Adjusted EBITDA Margin for the periods presented:

Three Months Ended Nine Months Ended
October 1, 2017 October 2, 2016 October 1, 2017 October 2, 2016
(in thousands, except percentages)
Total revenues $ 213,347
$ 228,070
$ 690,090
$ 719,009
Net income (loss) as reported $ (11,092 )
$ (2,404 )
$ 200

$ 6,459
   Interest expense 17,451

17,237

51,574

51,419
   Income tax expense (benefit) (5,221 )
(2,286 )
1,840

4,645
   Depreciation and amortization 27,136

29,886

83,064

90,167
Asset Impairments 1,843

772

1,843

772
Loss on asset disposals, net ⁽¹⁾
1,741

2,225

5,457

6,298
Non-cash stock-based compensation ⁽²⁾
184

185

520

522
Rent expense book to cash ⁽³⁾
1,192

1,635

4,028

6,478
Franchise revenue, net cash received ⁽⁴⁾
—

(35 )
(344 )
127
Impact of purchase accounting ⁽⁵⁾
—

171

785

725
Venue pre-opening costs ⁽⁶⁾
155

572

643

888
One-time and unusual items ⁽⁷⁾
1,167

1,583

4,379

4,459
Cost savings initiatives ⁽⁸⁾
—

—

—

62
Change in deferred amusement revenue ⁽⁹⁾
3,568

1,674

7,937

2,265
Adjusted EBITDA $ 38,124
$ 51,215
$ 161,926
$ 175,286
Adjusted EBITDA Margin 17.9 % 22.5 % 23.5 % 24.4 %



	Three Months Ended						Nine Months Ended
	September 30, 2018			October 1, 2017			September 30, 2018			October 1, 2017
	(in thousands, except percentages)
Total revenues	$	220,945		$	213,347		$	693,208		$	690,090
Net income (loss) as reported	$	(9,487	)	$	(11,092	)	$	(6,231	)	$	200
Interest expense	19,069			17,451			56,740			51,574
Income tax expense	(2,213		)	(5,221		)	(454		)	1,840
Depreciation and amortization	24,739			27,136			76,804			83,064
Asset Impairments	5,344			1,843			6,935			1,843
Loss on asset disposals, net ⁽¹⁾	513			1,741			2,551			5,457
Unrealized loss on foreign exchange ⁽²⁾	(412		)	—			283			—
Non-cash stock-based compensation ⁽³⁾	(58		)	184			169			520
Rent expense book to cash ⁽⁴⁾	945			1,192			5,133			4,028
Franchise revenue, net cash received ⁽⁵⁾	(30		)	—			712			(344		)
Impact of purchase accounting ⁽⁶⁾	—			—			—			785
Venue pre-opening costs ⁽⁷⁾	81			155			105			643
One-time and unusual items ⁽⁸⁾	44			1,167			1,511			4,379
Adjusted EBITDA ⁽⁹⁾	$	38,535		$	34,556		$	144,258		$	153,989
Adjusted EBITDA Margin	17.4		%	16.2		%	20.8		%	22.3		%

____________


(1)	Relates primarily to gains or losses upon disposal of property or equipment.


(2)	Relates to unrealized gains or losses on the revaluation of our indebtedness with our Canadian subsidiary. Effective January 1, 2018, we no longer consider undistributed income from our Canadian subsidiary to be permanently invested.


(3)	Represents non-cash equity-based compensation expense.


~~(3)~~(4)	Represents (i) the removal of the non-cash portion of rent expense relating to the impact of straight-line rent and the amortization of cash incentives and allowances received from landlords, plus (ii) the actual cash received from landlords incentives and allowances in the period in which it was received.


~~(4)~~(5)	Represents the actual cash received for franchise fees received in the period for post-acquisition franchise development agreements, which ~~are~~we do not ~~recorded as~~start recognizing into revenue until ~~the franchise venue is opened, less the actual revenue recognized with respect to these franchise development agreements at the time~~ the franchise venue is opened.


~~(5)~~(6)	Represents revenue related to unearned gift cards and unearned franchise fees that were removed in purchase accounting, and, therefore, were not recorded as revenue.


~~(6)~~(7)	Relates to start-up and marketing costs incurred prior to the opening of new Company-owned venues and generally consists of payroll, recruiting, training, supplies and rent incurred prior to venue opening.

~~(7)~~(8)

Represents non-recurring income and expenses primarily related to (i) legal fees, claims and settlements related to litigation in respect of the ~~Merger;~~merger in 2014 of CEC Entertainment, Inc. with and into an entity controlled by Apollo Global Management, LLC and its subsidiaries (referred to as the “Merger”); (ii) severance expense and executive termination benefits; (iii) legal claims and settlements related to employee class action lawsuits and settlements; (iv) ~~one-time costs incurred in connection with the relocation of our corporate offices; (v)~~ sales and use tax refunds relating to prior periods; ~~(vi)~~(v) professional fees incurred in connection with one-time strategic corporate and tax initiatives, such as accounting and consulting fees incurred to enhance transfer pricing and to implement ~~PlayPass, and initial fees incurred in connection with the overseas outsourcing of our accounts payable and payroll functions; (vii)~~PlayPass; (vi) removing current period property losses and insurance recoveries relating to prior period business interruption losses at certain venues, primarily relating to disaster recoveries, such as natural disasters, fires, floods and property damage; and ~~(viii)~~(vii) one-time training and travel-related costs incurred in connection with training venue employees in connection with the implementation of our PlayPass initiative that we began in 2016.


~~(8)~~	Relates to estimated net cost savings primarily from estimated cost savings associated with the full-year effect of costs savings associated with upgrades to our IT and telephone communication systems.

(9)

~~Represents~~With the continued evolution of our games business from tokens to game play credits and now towards time-based play packages following the implementation of All You Can Play (“AYCP”) in the third quarter of 2018, the impact on our financial results of the fluctuation of the deferred revenue liability related to unused credits on Play Pass cards begins to lessen in importance in understanding our Adjusted EBITDA. Customers continue to see the value of time based play and game play credits continue to decline as a percentage of overall game play. As a result, the change in ~~deferred revenue estimates related to unused game play credits on PlayPass cards. The~~the deferred revenue liability ~~is building due~~relating to the PlayPass implementation as the shift in our business model is impacting revenue recognition. Once PlayPass is fully deployed, the liability will fluctuate in proportion to entertainment and merchandise revenue thereafter.unused Play Pass cards has been removed from Adjusted EBITDA for all periods presented.

Cautionary Statement Regarding Forward-Looking Statements

~~Certain~~This report contains forward-looking statements, in this report, other than historical information, may be considered “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995,which involve risks and uncertainties. These forward-looking statements are ~~subject to various risks, uncertainties and assumptions. Statements that are not historical in nature, and which may be~~generally identified by the use of ~~words such as “may,~~forward-looking terminology, including the terms “anticipate,” ~~“should,~~“believe,” “could,” ~~“believe,~~“estimate,” “expect,” “intent,” “may,” “plan,” “predict,” “potential,” ~~“continue,” “plan,” “intend,” “expect,” “anticipate,” “future,”~~ “project,” ~~“estimate”~~“should,” “target,” “will,” “would” and, ~~similar expressions (or the~~in each case, their negative or other various or comparable terminology. All statements other than statements of ~~such expressions)~~historical facts contained in this report, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objections of management and expected market growth are forward-looking statements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future events and, therefore, involve a number of assumptions, risks and uncertainties, including the risk factors described in Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended ~~January 1,~~December 31, 2017, filed with the SEC on March ~~16, 2017.~~28, 2018. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ from those anticipated, estimated or expected. ~~Factors~~There are a number of important factors that could cause actual results or events to differ materially from those ~~contemplated~~indicated by such forward-looking statements, ~~include,~~including, but are not limited to:

our strategy, outlook and growth prospects;

our operational and financial targets and dividend policy;

our planned expansion of the venue base and the implementation of the new design in our existing venues;

general economic trends and trends in the industry and markets; and

the competitive environment in which we operate.

These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Important factors that could cause our results to vary from expectations include, but are not limited to:

negative publicity ~~concerning food quality, health, general safety and other issues,~~ and changes in consumer preferences;

our ability to successfully expand and update our current venue base;

our ability to successfully implement our marketing strategy;

our ability to compete effectively in an environment of intense ~~competition in both the restaurant and entertainment industries;~~competition;

our ability to weather economic uncertainty and changes in discretionary spending;

increases in food, labor and other operating costs;

our ability to successfully open international franchises and to operate under the ~~U.S.~~United States and foreign anti-corruption laws that govern those international ventures;

risks related to our substantial indebtedness;

failure of our information technology systems to support our current and growing business;

disruptions to our commodity distribution system;

our dependence on third-party vendors to provide us with sufficient quantities of new entertainment-related equipment, prizes and merchandise at acceptable prices;

risks from product liability claims and product recalls;

the impact of governmental laws and regulations and the outcomes of legal proceedings;

potential liability under certain state property laws;

fluctuations in our ~~financials~~financial results due to new venue openings;

local conditions, natural disasters, terrorist attacks and other events and public health issues;

the seasonality of our business;

inadequate insurance coverage;

labor shortages and immigration reform;

loss of certain personnel;

our ability to protect our trademarks or other proprietary rights;

~~risks associated with owning and leasing real estate, as well as the risks from any forced venue relocaton or closure;~~our ability to pay our fixed rental payments;

our ability to successfully integrate the operations of companies we acquire;

impairment charges for goodwill, indefinite-lived intangible assets or other long-lived assets;

our failure to maintain adequate internal controls over our financial and management systems; and

other risks, uncertainties and factors set forth in Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended ~~January 1,~~December 31, 2017, filed with the SEC on March ~~16, 2017.~~28, 2018.

The forward-looking statements made in this report reflect our views with respect to future events as of the date of this report and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, undue reliance should not be placed on these forward-looking statements. These forward-looking statements represent our estimates and assumptions only as of the date of this report and, except as required by law, we undertake no obligation to update or review publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this report. We anticipate that subsequent events and developments will cause our views to change. This report should be read completely and with the understanding that our actual future results may be materially different from what we expect. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may undertake. We qualify all of our forward-looking statements by these cautionary statements.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to various types of market risk in the normal course of business, including the impact of interest rates, commodity price changes and foreign currency fluctuation.

Interest Rate Risk

We are exposed to market risk from changes in the variable interest rates related to borrowings from our secured credit facilities. All of our borrowings outstanding under the secured credit facilities, $725.8 million as of ~~October 1, 2017~~September 30, 2018 ~~of $733.4 million~~, accrue interest at variable rates. Assuming the revolving credit facility remains undrawn, each 1% change in assumed interest rates, excluding the impact of our 1% interest rate floor, would result in a $7.3 million change in annual interest expense on indebtedness under the secured credit facilities.

Commodity Price Risk

We are exposed to commodity price changes related to certain food products that we purchase, primarily related to the prices of cheese and dough, which can vary throughout the year due to changes in supply, demand, and other factors. We have not entered into any hedging arrangements to reduce our exposure to commodity price volatility associated with such commodity prices; however, we typically enter into short-term purchasing contracts, which may contain pricing arrangements designed to minimize the impact of commodity price fluctuations, and derivative instruments such as futures contracts to mitigate our exposure to commodity price fluctuations.

For the three months ended September 30, 2018 and October 1, 2017, ~~and October 2, 2016,~~ the average cost of a block of cheese was ~~$1.85~~$1.77 and ~~$1.68,~~$1.85, respectively. The estimated increase in our food costs from a hypothetical 10% increase in the average cost of a block of cheese would have been $0.3 million for both the three months ended September 30, 2018 and October 1, ~~2017 and October 2, 2016, respectively.~~2017. For the nine months ended September 30, 2018 and October 1, 2017, ~~and October 2, 2016,~~ the average cost of a block of cheese was ~~$1.77~~$1.72 and ~~$1.73,~~$1.77, respectively. The estimated increase in our food costs from a hypothetical 10% increase in the average cost of a block of cheese would have been ~~$0.9~~$0.8 million for the nine months ended September 30, 2018 and ~~$1.0~~$0.9 million for the nine months ended October 1, 2017, ~~and October 2, 2016,~~ respectively.

For both the three and nine months ended September 30, 2018 and October 1, 2017, ~~and October 2, 2016,~~ the average cost of dough per pound was $0.47 and $0.45, respectively. The estimated increase in our food costs from a hypothetical 10% increase in the average cost of dough per pound would have been $0.1 million for both the three months ended September 30, 2018 and October 1, 2017, and October 2, 2016, respectively. For both the nine months ended October 1, 2017 and October 2, 2016, the average cost of dough per pound was $0.45, respectively. The estimated increase in our food costs from a hypothetical 10% increase in the average cost of dough per pound would have been $0.4 million for both the nine months ended September 30, 2018 and October 1, ~~2017 and October 2, 2016, respectively.~~2017.

Foreign Currency Risk

We are exposed to foreign currency fluctuation risk associated with changes in the value of the Canadian dollar relative to the U.S. dollar as we operate a total of 1211 Company-owned venues in Canada. For the ~~the~~ three and nine months ended ~~October 1, 2017,~~September 30, 2018, our Canadian venues generated operating income of ~~$0.4~~$0.7 million and ~~$0.3~~$0.5 million, respectively, compared to our consolidated operating income of ~~$1.1~~$7.2 million and ~~$53.6~~$49.9 million, respectively.

Changes in the currency exchange rate result in cumulative translation adjustments and are included in “Accumulated other comprehensive income (loss)” on our Consolidated Balance Sheets and potentially result in transaction gains or losses, which are included in our earnings. The low and high currency exchange rates for a Canadian dollar into a United States dollar for the nine months ended ~~October 1, 2017~~September 30, 2018 were ~~$0.727~~$0.751 and ~~$0.825,~~$0.814, respectively. A hypothetical 10% devaluation in the average quoted U.S. dollar-equivalent of the Canadian dollar exchange rate during ~~both~~ the three and nine months ended ~~October 1, 2017~~September 30, 2018 would have decreased our reported consolidated operating results by ~~less than~~ $0.1 ~~million.~~million for both the three and nine months ended September 30, 2018.

ITEM 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, as of the end of the period covered by this report. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that our disclosure controls and procedures were effective as of ~~October 1, 2017~~September 30, 2018 to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, was (a) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms; and (b) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

During the quarterly period covered by this report there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. Legal Proceedings.

Refer to Note 14 “Commitments and Contingencies” to our Consolidated Financial Statements included in Part I, Item 1. “Financial Statements” of this report for a discussion of our legal proceedings.

ITEM 1A. Risk Factors.

We believe there have been no material changes in our risk factors from those disclosed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended ~~January 1,~~December 31, 2017, filed with the SEC on March ~~16, 2017.~~28, 2018.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.

NONE.

ITEM 6. Exhibits.

EXHIBIT INDEX



Exhibit Number		Description

31.1* 10.1		Amendment to Employment Agreement, dated as of October 12, 2018, between CEC Entertainment, Inc. and Thomas Leverton

10.2		Amendment to Employment Agreement, dated as of October 12, 2018, between CEC Entertainment, Inc. and J. Roger Cardinale

10.3		Amendment to Employment Agreement, dated as of October 12, 2018, between CEC Entertainment, Inc. and Randy Forsythe

31.1*		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1**		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2**		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

__________________

* Filed herewith.

** Furnished herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



		CEC ENTERTAINMENT, INC.

November ~~13, 2017~~9, 2018	By:	/s/ ~~Dale R. Black~~James A. Howell
		~~Dale R. Black~~James A. Howell
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)

November ~~13, 2017~~9, 2018	By:	/s/ ~~Laurie E. Priest~~David Rappaport
		~~Laurie E. Priest~~David Rappaport
		Vice President, Controller and Chief Accounting Officer
		(Principal Accounting Officer)

EXHIBIT INDEX



Exhibit Number		Description

10.1		Amendment to Employment Agreement, dated as of October 12, 2018, between CEC Entertainment, Inc. and Thomas Leverton

10.2		Amendment to Employment Agreement, dated as of October 12, 2018, between CEC Entertainment, Inc. and J. Roger Cardinale

10.3		Amendment to Employment Agreement, dated as of October 12, 2018, between CEC Entertainment, Inc. and Randy Forsythe

31.1*		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1**		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2**		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

__________________

* Filed herewith.

** Furnished herewith.