UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended ~~September 30, 2018~~March 31, 2019



¨	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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting ~~company”~~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, 2018,~~April 30, 2019, 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 ~~September~~March 31, 2019 and December 30, 2018 ~~and December 31, 2017~~	3

Consolidated Statements of Earnings for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and April 1, 2018 ~~and October 1, 2017~~	45

Consolidated Statements of Comprehensive Income ~~(Loss)~~ for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and April 1, 2018 ~~and October 1, 2017~~	5

Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and April 1, 2018 ~~and October 1, 2017~~	6

Notes to Consolidated Financial Statements	8

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	3028

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	4539

ITEM 4. Controls and Procedures	4640

PART II OTHER INFORMATION

ITEM 1. Legal Proceedings	4741

ITEM 1A. Risk Factors	4741

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	4741

ITEM 6. Exhibits	4842

SIGNATURES

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements.

CEC ENTERTAINMENT, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share information)


	September 30, 2018			December 31, 2017			March 31, 2019			December 30, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	84,429		$	67,200		$	112,030		$	63,170
Restricted cash	23			112			266			151
Accounts receivable	18,898			20,061			20,747			24,020
Income taxes receivable	9,749			10,960			—			10,160
Inventories	22,069			22,000			24,593			23,807
Prepaid expenses	24,579			20,398			18,712			25,424
Total current assets	159,747			140,731			176,348			146,732
Property and equipment, net	542,896			570,021			533,610			539,185
Operating lease right-of-use assets, net							544,592			—
Goodwill	484,438			484,438			484,438			484,438
Intangible assets, net	477,872			480,377			470,242			477,085
Other noncurrent assets	21,104			19,477			18,883			18,725
Total assets	$	1,686,057		$	1,695,044		$	2,228,113		$	1,666,165
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Bank indebtedness and other long-term debt, current portion	$	7,600		$	7,600		$	7,600		$	7,600
Capital lease obligations, current portion	634			596
Operating lease liability, current portion							47,509			—
Accounts payable	36,140			31,374			38,848			31,410
Accrued expenses	37,927			36,616			40,405			36,030
Unearned revenues	17,787			21,050			22,706			18,124
Accrued interest	2,760			8,277			2,417			7,463
Other current liabilities	5,000			4,776			5,332			5,955
Total current liabilities	107,848			110,289			164,817			106,582
Capital lease obligations, less current portion	12,528			13,010
Operating lease obligations, less current portion							529,972			—
Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion	962,402			965,213			960,715			961,514
Deferred tax liability	110,921			114,186			108,450			107,058
Accrued insurance	9,484			8,311			9,861			9,861
Other noncurrent liabilities	226,652			221,887			190,510			238,579
Total liabilities	1,429,835			1,432,896			1,964,325			1,423,594
Stockholder’s equity:
Common stock, $0.01 par value; authorized 1,000 shares; 200 shares issued as of September 30, 2018 and December 31, 2017	—			—
Common stock, $0.01 par value; authorized 1,000 shares; 200 shares issued as of March 31, 2019 and December 30, 2018							—			—
Capital in excess of par value	359,411			359,233			359,696			359,570
Accumulated deficit	(101,430		)	(95,199		)	(94,414		)	(115,660		)
Accumulated other comprehensive loss	(1,759		)	(1,886		)	(1,494		)	(1,339		)
Total stockholder’s equity	256,222			262,148			263,788			242,571
Total liabilities and stockholder’s equity	$	1,686,057		$	1,695,044		$	2,228,113		$	1,666,165

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
	September 30, 2018			October 1, 2017			September 30, 2018			October 1, 2017		March 31, 2019		April 1, 2018
REVENUES:
Food and beverage sales	$	94,023		$	98,255		$	308,658		$	320,085	$	117,815	$	118,377
Entertainment and merchandise sales	121,611			110,633			368,633			356,274		149,677		131,117
Total company venue sales	215,634			208,888			677,291			676,359		267,492		249,494
Franchise fees and royalties	5,311			4,459			15,917			13,731		5,820		5,410
Total revenues	220,945			213,347			693,208			690,090		273,312		254,904
OPERATING COSTS AND EXPENSES:
Company venue operating costs (excluding Depreciation and amortization):
Cost of food and beverage	22,520			23,974			72,774			75,014		26,652		27,360
Cost of entertainment and merchandise	9,874			7,430			27,676			22,771		11,746		9,382
Total cost of food, beverage, entertainment and merchandise	32,394			31,404			100,450			97,785		38,398		36,742
Labor expenses	65,028			61,220			194,994			187,958		72,505		67,349
Rent expense	23,851			24,259			72,615			71,484
Lease costs												27,027		24,049
Other venue operating expenses	38,232			40,561			113,363			113,277		35,297		38,062
Total company venue operating costs	159,505			157,444			481,422			470,504		173,227		166,202
Other costs and expenses:
Other costs and expenses:
Advertising expense	11,058			12,083			38,010			37,702		12,253		13,974
General and administrative expenses	13,193			13,575			39,519			42,665		15,243		12,909
Depreciation and amortization	24,739			27,136			76,804			83,064		24,334		26,572
Transaction, severance and related litigation costs	(263		)	128			463			698		23		534
Asset impairments	5,344			1,843			6,935			1,843
Total operating costs and expenses	213,576			212,209			643,153			636,476		225,080		220,191
Operating income	7,369			1,138			50,055			53,614		48,232		34,713
Interest expense	19,069			17,451			56,740			51,574		19,808		18,557
Income (loss) before income taxes	(11,700		)	(16,313		)	(6,685		)	2,040
Income tax expense (benefit)	(2,213		)	(5,221		)	(454		)	1,840
Net income (loss)	$	(9,487	)	$	(11,092	)	$	(6,231	)	$	200
Income before income taxes												28,424		16,156
Income tax expense												7,178		3,933
Net income												$	21,246	$	12,223

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
September 30,
2018 October 1,
2017 September 30,
2018 October 1,
2017
Net income (loss) $ (9,487 ) $ (11,092 ) $ (6,231 ) $ 200
Components of other comprehensive income (loss), net of tax:

Foreign currency translation adjustments (172 ) 648
127
1,187
Comprehensive income (loss) $ (9,659 ) $ (10,444 ) $ (6,104 ) $ 1,387



	Three Months Ended
	March 31, 2019			April 1, 2018
Net income	$	21,246		$	12,223
Components of other comprehensive income, net of tax:
Foreign currency translation adjustments	(155		)	154
Comprehensive income	$	21,091		$	12,377

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						Three Months Ended
	September 30, 2018			October 1, 2017			March 31, 2019			April 1, 2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(6,231	)	$	200
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net income							$	21,246		$	12,223
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	76,804			83,064			24,334			26,572
Deferred income taxes	(3,314		)	(5,220		)	1,448			(672		)
Stock-based compensation expense	169			520			1,162			64
Amortization of lease related liabilities	(749		)	(411		)	—			(211		)
Amortization of original issue discount and deferred debt financing costs	3,284			3,410			1,059			1,137
Loss on asset disposals, net	2,551			5,457			954			1,237
Asset impairments	6,935			1,843
Non-cash rent expense	4,109			3,562
Non-cash lease expense							732			1,181
Change in operating lease liabilities							(152		)	—
Other adjustments	531			18			112			(26		)
Changes in operating assets and liabilities:
Accounts receivable	2,016			2,678			3,369			3,071
Inventories	(84		)	(4,499		)	(864		)	(1,641		)
Prepaid expenses	(3,479		)	1,195			(2,079		)	442
Accounts payable	886			1,775			7,692			2,195
Accrued expenses	3,847			(2,097		)	1,638			1,916
Unearned revenues	(3,263		)	5,952			4,578			3,908
Accrued interest	(5,291		)	(4,891		)	(4,975		)	(5,010		)
Income taxes receivable	1,994			425			10,224			4,426
Deferred landlord contributions	1,760			1,210			—			1,752
Net cash provided by operating activities	82,475			94,191			70,478			52,564
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(55,202		)	(71,910		)	(18,372		)	(18,060		)
Development of internal use software	(1,992		)	(2,520		)	(282		)	(515		)
Proceeds from sale of property and equipment	464			424			21			158
Net cash used in investing activities	(56,730		)	(74,006		)	(18,633		)	(18,417		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on senior term loan	(5,700		)	(5,700		)	(1,900		)	(1,900		)
Repayments on note payable	—			(13		)
Proceeds from sale leaseback transaction	—			4,073
Payment of debt financing costs	(395		)	—
Payments on capital lease obligations	(442		)	(340		)
Payments on financing lease obligations							(168		)	(145		)
Payments on sale leaseback obligations	(2,119		)	(1,789		)	(803		)	(688		)

Table of Contents

CEC ENTERTAINMENT, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS, CONT'D

(Unaudited)

(in thousands)


Return of capital	—			1,447						—
Net cash used in financing activities	(8,656		)	(2,322		)	(2,871		)	(2,733		)
Effect of foreign exchange rate changes on cash	51			492			1			46
Change in cash, cash equivalents and restricted cash	17,140			18,355			48,975			31,460
Cash, cash equivalents and restricted cash at beginning of period	67,312			61,291			63,321			67,312
Cash, cash equivalents and restricted cash at end of period	$	84,452		$	79,646		$	112,296		$	98,772


	Nine Months Ended						Three Months Ended
	September 30, 2018			October 1, 2017			March 31, 2019			April 1, 2018
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	$	59,229		$	53,076		$	23,799		$	22,546
Income taxes paid, net	$	867		$	6,635
Income taxes (refunded) paid, net							$	(4,493	)	$	180
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accrued construction costs	$	1,659		$	2,772		$	1,062		$	634

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the statement of financial position that sum to the total of the same such amounts shown in the statement of cash flows.



	March 31, 2019		April 1, 2018
	Three Months Ended
Cash and cash equivalents	$	112,030	$	98,686
Restricted cash⁽¹⁾	266		86
Cash, cash equivalents and restricted cash	$	112,296	$	98,772

__________________


⁽¹⁾	Restricted cash represents cash balances held by the Association that are restricted for use in our advertising, entertainment and media programs.

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

CEC ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 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 47 states and 14 foreign countries and territories. As of March 31, 2019 we and our franchisees operated a total of 748 venues, of which 554 were Company-operated venues located in 44 states and Canada. Our franchisees operated a total of 194 venues ~~provide our guests with~~located in 15 states and 13 foreign countries and territories, including Chile, Colombia, Guam, Guatemala, Honduras, Mexico, Panama, Peru, Puerto Rico, Saudi Arabia, Trinidad & Tobago, and the United Arab Emirates. As of March 31, 2019, a ~~variety~~total of ~~family entertainment~~181 Chuck E. Cheese's venues are located in California, Texas, and ~~dining alternatives.~~ Florida (178 are Company-operated and three are franchised locations), and a total of 133 Peter Piper Pizza venues are located in Arizona, Texas, and Mexico (33 are Company-operated and 100 are franchised locations).

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.

The Association Funds are required to be segregated and used for specified 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~~$0.8 million and ~~$1.7~~$0.7 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and April 1, 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,~~March 31, 2019 and April 1, 2018 ~~and October 1, 2017~~ 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 December ~~31, 2017~~30, 2018, filed with the SEC on March ~~28, 2018.~~12, 2019.

Recently ~~Issued~~Adopted Accounting Guidance

~~Accounting Guidance Adopted:~~

Effective ~~January 1,~~December 31, 2018, the beginning of our Fiscal 2019 year, we adopted ~~the following~~ Accounting Standards ~~Updates:~~

~~(i) ASU 2016-04,~~ ~~Liabilities—Extinguishments of Liabilities (Subtopic 405-20).~~ This amendment provides a narrow scope exception to Liabilities—Extinguishment of Liabilities (Subtopic 405-20) that requires breakage for those liabilities to be accounted for in accordance with the 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 a prepaid stored-value product, the entity shall derecognize the amount related to the expected breakage in proportion to the pattern of rights expected to be exercised by the product holder only to the extent that it is probable that a significant reversal of 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 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.

~~(ii) ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing~~ ~~(“ASU 2016-10”~~Update (“ASU”). 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. We elected the modified retrospective method to apply this standard. Under the modified retrospective method, results for reporting periods beginning on or after January 1, 2018 are presented under the revenue guidance in this amendment, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting treatment. The cumulative impact of adopting this amendment was not material, and as such we did not record an adjustment to our opening accumulated deficit in our Consolidated Balance Sheet as of January 1, 2018. For further details, see Note 2. “Revenue.”

~~(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 beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Accordingly, as a result of the adoption of these amendments, we reclassified $0.1 million of restricted cash into cash, cash equivalents and restricted cash as of October 1, 2017 for a 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 net cash used in investing or financing activities for the six months ended October 1, 2017.

~~Table of Contents~~

~~CEC ENTERTAINMENT, INC.~~

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

~~(Unaudited)~~

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 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): 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. 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. We early adopted this amendment on January 1, 2018. The adoption of this amendment did not have a significant impact on our Consolidated Financial Statements.

~~Accounting Guidance Not Yet Adopted:~~

~~In February 2016, the FASB issued~~ ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”) and subsequent amendment ASU 2018-11, Leases (Topic 842): Target Improvements(“ASU 2018-11”). This new standard introduces a new lease model that requires the recognition of lease right-of-use assets and operating 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. ASU 2018-11 ~~allows entities~~

~~to change their date of initial application~~provides for another transition method in addition to the ~~beginning~~modified retrospective approach required by ASU 2016-02. This option allows for entities to initially apply the new leases standard at the adoption date and recognize a cumulative adjustment to the opening balance sheet of retained earnings in the period of adoption. The cumulative impact of adopting the new lease guidance ~~will be effective for~~did not require us ~~beginning~~to record an adjustment to opening accumulated deficit as of December 31, ~~2018. We are currently evaluating the impact of the~~2018 in our Consolidated Balance Sheet.

Upon adoption of ~~this guidance on our Consolidated Financial Statements, but~~ASU 2016-02, we ~~expect this will have~~applied the package of practical expedients included therein, which eliminated the requirements to reassess prior conclusions about lease identification, lease classification, and initial direct costs. We did not elect the hindsight practical expedient, which permits the use of hindsight when determining lease term. Further, we elected a ~~material effect on our balance sheet since~~short-term lease exception policy, permitting us to not apply the ~~Company has a significant amount of operating and capital lease arrangements.~~

~~In February 2018, the 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 Tax Cuts and Jobs Act ("TCJA") from accumulated other comprehensive income to retained earnings. This ASU will be effective for us for annual and interim periods beginning on December 31, 2019. Early adoptionrecognition requirements of this standard ~~is permitted~~to short-term leases (i.e. leases with terms of 1 year or less) and ~~may be applied either~~an accounting policy to account for lease and non-lease components as a single component for real estate operating leases. We also utilized the transition method included in ASU 2018-11. By applying ASU 2016-02 at the adoption date, as opposed to at the beginning of the earliest period presented, the presentation of financial information for periods prior to December 31, 2018 remained unchanged and in accordance with Leases (Topic 840). The adoption of the guidance in ASU 2016-02 resulted in the ~~period~~recognition as of ~~adoption or retrospectively~~December 31, 2018 of Right-of-Use assets related to ~~each period in which the effect~~our operating leases of ~~the change in the tax rate~~$557.1 million and lease liabilities related to our operating leases of $590.8 million. In addition, as a result of ~~TCJA is recognized. We do not expect~~electing to account for lease and non-lease components as a single component for certain classes of assets, lease costs for the three months ended March 31, 2019 includes $3.5 million of common area maintenance charges, which was previously included in “Other venue operating expenses” in our Consolidated Statement of Earnings. Other venue operating expenses in our Consolidated Statement of Earnings for the three months ended April 1, 2018 includes common area maintenance charges of $3.6 million. The adoption of ~~this ASU to~~the guidance did not have a material impact on our ~~results~~Consolidated Statement 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, 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.

~~Table of Contents~~

~~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. Cash Flows.

Note 2. Unearned Revenue:

Food, beverage and 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.

We sell gift cards to our customers in our venues and 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 $0.8 million and $2.6 million in the three and nine months ended September 30, 2018, respectively, and is recorded in “Franchise fees and royalties” in our Consolidated Statement of Earnings.

Liabilities relating to 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 Company’s Unearned revenue balances during the ~~nine~~three months ended ~~September 30, 2018:~~March 31, 2019:


	Balance at							Balance at		Balance at							Balance at
	January 1, 2018		Revenue Deferred		Revenue Recognized			September 30, 2018		December 31, 2018		Revenue Deferred		Revenue Recognized			March 31, 2019
	(in thousands)									(in thousands)
PlayPass related deferred revenue	$	12,035	$	48,368	$	(52,119	)	$	8,284	$	5,561	$	14,346	$	(12,455	)	$	7,452
Gift card related deferred revenue	3,868		4,215		(4,912		)	3,171		5,253		1,926		(2,882		)	4,297
Unearned franchise and development fees	4,274		534		(62		)	4,746		6,321		2,572		(29		)	8,864
Other unearned revenues	873		19,726		(19,013		)	1,586		989		9,101		(7,997		)	2,093
Total unearned revenue	$	21,050	$	72,843	$	(76,106	)	$	17,787	$	18,124	$	27,945	$	(23,363	)	$	22,706

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~~CEC ENTERTAINMENT, INC.~~

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

~~(Unaudited)~~

Note 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 ~~September 30, 2018:~~March 31, 2019:


	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		(8,274		)	6,606
Franchise agreements	25	53,300		(8,734		)	44,566		25	53,300		(9,758		)	43,542
		$	494,880	$	(17,008	)	$	477,872		$	480,000	$	(9,758	)	$	470,242

~~__________________~~In connection with the adoption of ASU 2016-02 effective December 31, 2018, we reclassified $6.3 million related to the net carrying amount of our favorable lease definite-lived intangible asset from “Intangible Assets, Net” to “Operating lease right-of-use assets, net” on our Consolidated Balance Sheets. See Note 1. “Description of Business and Summary of Significant Accounting Policies - Recently Adopted Accounting Guidance” and Note 4. “Leases” for further discussion on the adoption of ASU 2016-02.

~~(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 ~~$0.3 million and~~ $0.4 million for the three months ended ~~September 30,~~April 1, 2018, ~~and October 1, 2017, respectively, and $1.0 million and $1.3 million for the nine months ended September 30, 2018 and October 1, 2017, respectively,~~ and is included in ~~“Rent expense”~~“Lease costs” in our Consolidated Statements of Earnings. As described above, in connection with the adoption of ASU 2016-02 at the beginning of Fiscal 2019, our favorable lease definite-lived intangible asset from “Intangible Assets, Net” to “Operating lease right-of-use assets, net” and therefore we no longer have any amortization expense related to favorable lease agreements. Amortization expense related to franchise agreements was $0.5 million for both the three months ended ~~September 30,~~March 31, 2019 and April 1, 2018, ~~and October 1, 2017, respectively, and $1.5 million for both the nine months ended September 30, 2018 and October 1, 2017,~~ respectively, and is included in “Depreciation and amortization” in our Consolidated Statements of Earnings.

Note 4. Leases:

We lease certain venues, warehouses, office space and equipment. The leases generally require us to pay minimum rent, property taxes, insurance, and other maintenance costs. Certain lease agreements include rental payments based on a percentage of retail sales over contractual levels and others include rental payments adjusted periodically for inflation. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants

Most leases generally have initial terms of 10 to 20 years and include one or more options to renew. The exercise of lease renewal options is at our sole discretion and based on our history of exercising renewal lease options, our operating lease liabilities typically assume the exercise of two lease renewal options. The depreciable life of assets and leasehold improvements are limited by the expected lease term.



		March 31, 2019
	Balance Sheet Classification	(in thousands)
Assets
Operating	Operating lease right-of-use assets, net	$	544,592
Finance	Property and equipment, net ⁽¹⁾	9,839
Total leased assets		$	554,431

Liabilities
Current
Operating	Operating lease liability, current portion	$	47,509
Finance	Other current liabilities	735
Noncurrent
Operating	Operating lease obligations, less current portion	529,972
Finance	Other noncurrent liabilities	12,104
Total leased liabilities		$	590,320

__________________

⁽¹⁾ Finance lease assets are recorded net of accumulated amortization of $5.2 million as of March 31, 2019.

As most of our leases do not provide an implicit rate, we use our estimated incremental borrowing rate based on the current cost of debt on our secured credit facilities at commencement date in determining the present value of lease payments.



		Three Months Ended
		March 31, 2019
	Statement of Earnings Classification	(in thousands)
Operating lease cost	Lease costs	$	27,027
Operating lease cost ⁽²⁾	General and administrative	323
Finance lease cost
Amortization of leased assets	Depreciation and amortization	248
Interest on lease liabilities	Net interest expense	381
Net lease cost		$	27,979

__________________

⁽¹⁾Includes common area maintenance charges of $3.5 million.

⁽²⁾ Represents the lease cost associated with operating leases relating to our corporate offices and warehouse facilities.



Maturity of Lease Liabilities	Operating Leases ⁽¹⁾		Finance Leases ⁽²⁾		Total
	(in thousands)
Remainder of 2019	$	69,565	$	2,192	$	71,757
2020	91,300		2,204		93,504
2021	89,249		2,181		91,430
2022	87,383		2,147		89,530
2023	84,958		1,920		86,878
After 2023	451,203		13,216		464,419
Total lease payments	873,658		23,860		897,518
Less: interest	296,177		11,021		307,198
Present value of lease liabilities	$	577,481	$	12,839	$	590,320

__________________

⁽¹⁾ Operating lease payments include payments related to options to extend lease terms that are reasonably certain of being exercised and exclude legally binding minimum lease payments for leases signed but not yet commenced.

⁽²⁾ Finance lease payments include payments related to options to extend lease terms that are reasonably certain of being exercised and exclude legally binding minimum lease payments for leases signed but not yet commenced.



Lease Term and Discount Rate	March 31, 2019
Weighted average remaining lease term (years):
Operating leases	10.3
Finance leases	11.4
Weighted average discount rate:
Operating leases	8.0	%
Finance leases	13.6	%

The following table includes supplemental cash flow information related to leases:



	March 31, 2019
	(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	23,398
Operating cash flows for finance leases	381
Financing cash flows for finance leases	168
Right-of-use assets obtained in exchange for lease obligations:
Operating lease liabilities	234
Finance lease liabilities	—

The following table illustrates the Company’s future minimum rental payments for non-cancelable leases as of December 30, 2018:



	Financing			Operating
Fiscal Years	(in thousands)
2019	2,182			92,435
2020	2,214			90,983
2021	2,201			88,914
2022	2,184			87,183
2023	1,956			84,806
Thereafter	13,266			457,277
Future minimum lease payments	24,003			901,598
Less amounts representing interest	(10,996		)
Present value of future minimum lease payments	13,007
Less current portion	(677		)
Finance lease liability, net of current portion	$	12,330

Note 5. Accounts Payable:

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


	September 30, 2018		December 31, 2017		March 31, 2019		December 30, 2018
	(in thousands)				(in thousands)
Trade and other amounts payable	$	25,476	$	20,492	$	26,962	$	20,685
Book overdraft	10,664		10,882		11,886		10,725
Accounts payable	$	36,140	$	31,374	$	38,848	$	31,410

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

~~Table of Contents~~

~~CEC ENTERTAINMENT, INC.~~

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

~~(Unaudited)~~

Note 6. Indebtedness and Interest Expense:

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


	September 30, 2018			December 31, 2017			March 31, 2019			December 30, 2018
	(in thousands)						(in thousands)
Term loan facility	$	725,800		$	731,500		$	722,000		$	723,900
Senior notes	255,000			255,000			255,000			255,000
Total debt outstanding	980,800			986,500			977,000			978,900
Less:
Deferred financing costs, net							(7,667		)	(8,633		)
Unamortized original issue discount	(1,288		)	(1,694		)	(1,018		)	(1,153		)
Deferred financing costs, net	(9,510		)	(11,993		)
Current portion of term loan facility	(7,600		)	(7,600		)	(7,600		)	(7,600		)
Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion	$	962,402		$	965,213		$	960,715		$	961,514

We were in compliance with the debt covenants in effect as of March 31, 2019 for both the secured credit facilities and the senior notes.

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~~$95.0 million senior secured revolving credit facility with ~~an original~~a maturity date of November 16, 2020 (as discussed in more detail below, $95.0 million of our original $150.0 million revolving credit facility maturing on February 14, 2019, ~~which~~was extended to November 16, 2020). The revolving credit facility 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 term loan facility requires scheduled quarterly payments equal to 0.25% of the original principal amount from July 2014 to December 2020, with the remaining balance paid at maturity, February 14, 2021. We

As of March 31, 2019, we had no borrowings outstanding and ~~$9.0~~an $8.5 million ~~and $9.9 million, respectively~~letter of credit issued but undrawn ~~letters~~under the revolving credit facility, and a $9.0 million letter of credit issued but undrawn under the revolving credit facility, as of ~~September~~December 30, ~~2018 and December 31, 2017, respectively.~~

2018. 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~~the extent that 75% ~~(subject~~times our excess cash flow (as defined in the secured credit facilities agreement and 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~~with any such required mandatory payment reduced by 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~~remaining $55.0 million of the ~~amount of the~~original revolving credit facility ~~that was not extended remains~~matured on February 14, ~~2019.~~2019 with no borrowing thereunder outstanding thereunder. 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.

The term loan was issued net of $3.8 million of original issue discount. We also paid $17.8 million and $3.8 million in debt financing costs related to the term loan facility and revolving credit facility (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 life of the 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.

rate determined by reference to the highest of (i) the federal funds effective rate plus 0.50%; (ii) the prime rate of Deutsche Bank AG New York Branch; and (iii) the one-month adjusted LIBOR plus 1.00%, in each case plus an applicable margin. The base applicable margin is 3.25% with respect to LIBOR borrowings and 2.25% with respect to base rate borrowings under the

term loan facility and base rate borrowings and swingline borrowings under the revolving credit facility. The applicable margin

for LIBOR borrowings under the term loan facility 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 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. During the ~~nine~~

~~Table of Contents~~

~~CEC ENTERTAINMENT, INC.~~

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

~~(Unaudited)~~

three months ended ~~September 30, 2018,~~March 31, 2019, the applicable margin for LIBOR borrowings under both the term loan facility and the revolving credit 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 is 0.50% per annum and is subject to one step-down from 0.50% to 0.375% based on our net first lien senior secured leverage ratio. During the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and April 1, 2018 the commitment fee rate 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.

During the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, the federal funds rate ranged from ~~1.34%~~2.40% to ~~2.18%~~2.43%, the prime rate ~~ranged from 4.50% to 5.25%~~was 5.50% and the one-month LIBOR ranged from ~~1.55%~~2.48% to ~~2.26%~~2.52%.

The weighted average effective interest rate incurred on our borrowings under our secured credit facilities was ~~5.7%~~6.2% and ~~4.7%~~5.5% for the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and April 1, 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 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 8.0% Senior Notes due 2022 (the “senior notes”). The senior notes bear interest at a rate of 8.0% per year payable February 15th and August 15th each year and mature on February 15, 2022. We may ~~redeem~~call some or all of the senior notes at ~~certain redemption prices~~102% on or after February 15, 2019 and at 100% on or after February 15, 2020 as 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” in 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); (iv) pay dividends on or make distributions in respect of our capital stock or make other restricted payments; (v) consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; (vi) sell assets; (vii) enter into certain transactions with our affiliates; and (viii) restrict dividends from our subsidiaries.

~~Table of Contents~~

~~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~~three months ended ~~September 30,~~March 31, 2019 and April 1, 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
September 30, 2018 October 1, 2017
(in thousands)
Term loan facility ⁽¹⁾
$ 9,946
$ 8,014
Senior notes 5,083
5,083
Capital lease obligations 394
434
Sale leaseback obligations 2,628
2,647
Amortization of deferred financing costs 923
1,001
Other 95
272
Total interest expense $ 19,069
$ 17,451


	Nine Months Ended				Three Months Ended
	September 30, 2018		October 1, 2017		March 31, 2019		April 1, 2018
	(in thousands)				(in thousands)
Term loan facility ⁽¹⁾	$	28,747	$	23,240	$	10,666	$	9,119
Senior notes	15,248		15,248		5,082		5,082
Capital lease obligations	1,253		1,264
Finance lease obligations					381		428
Sale leaseback obligations	7,880		7,949		2,695		2,630
Amortization of deferred financing costs	2,878		3,004		924		1,001
Other	734		869		60		297
Total interest expense	$	56,740	$	51,574	$	19,808	$	18,557

__________________

(1) Includes amortization of original issue discount.

The weighted average effective interest rate incurred on our 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%~~6.7% for the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 and ~~5.6%~~6.2% for the ~~nine~~three months ended ~~October~~April 1, ~~2017,~~2018, respectively.

We were in compliance with the debt covenants in effect as of ~~September 30, 2018~~March 31, 2019 for both the secured credit facilities and the senior notes.

Note 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.

~~Table of Contents~~

~~CEC ENTERTAINMENT, INC.~~

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

~~(Unaudited)~~

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


	September 30, 2018				December 31, 2017				March 31, 2019				December 30, 2018
	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	$	7,366	$	7,600	$	7,220	$	7,600	$	7,391	$	7,600	$	7,051
Long-term portion ⁽²⁾	971,912		930,715		977,206		937,662		968,382		929,021		970,147		885,212
Bank indebtedness and other long-term debt:	$	979,512	$	938,081	$	984,806	$	944,882	$	975,982	$	936,412	$	977,747	$	892,263

_________________

⁽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, operating lease right-of-use assets, 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~~three months ended ~~September 30,~~March 31, 2019 and April 1, 2018, ~~and October 1, 2017,~~ there were no significant transfers among Level 1, 2 or 3 fair value determinations.

Note 8. Other Noncurrent Liabilities:

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


	September 30, 2018		December 31, 2017		March 31, 2019		December 30, 2018
	(in thousands)				(in thousands)
Sale leaseback obligations, less current portion(1)	$	175,589	$	177,933	$	172,543	$	174,520
Deferred rent liability	30,946		27,951
Deferred landlord contributions	8,276		6,282
Long-term portion of unfavorable leases	4,176		5,453
Lease related liabilities ⁽²⁾					—		45,195
Financing lease obligations, less current portion					12,104		12,330
Other	7,665		4,268		5,863		6,534
Total other noncurrent liabilities	$	226,652	$	221,887	$	190,510	$	238,579

_________________

⁽¹⁾

The sale leaseback obligations are accounted for under the financing method, rather than as completed sales. Under the financing method the sales proceeds received are included in other long-term liabilities until our continuing involvement with the properties is terminated. The rental payments related to the sale leaseback properties are recorded as interest expense and a reduction of the sale leaseback obligation.


⁽²⁾	Lease liabilities totaling $45.2 million were reclassified in connection with the adoption of ASU 2016-02 on December 31, 2018.See Note 1. “Description of Business and Summary of Significant Accounting Policies - Recently Adopted Accounting Guidance” and Note 4. “Leases” for further discussion on the adoption of ASU 2016-02.

~~Table of Contents~~

~~CEC ENTERTAINMENT, INC.~~

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

~~(Unaudited)~~

Note 9. Income Taxes:

Our income tax expense consists of the following for the periods presented:


	Three Months Ended						Three Months Ended
	September 30, 2018			October 1, 2017			March 31, 2019		April 1, 2018
	(in thousands)						(in thousands)
Federal and state income taxes	$	(2,451	)	$	(5,533	)	$	6,898	$	3,535
Foreign income taxes ⁽¹⁾	238			312			280		398
Income tax benefit	$	(2,213	)	$	(5,221	)
Income tax expense							$	7,178	$	3,933

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 ~~rates~~rate for the three ~~and nine~~ months ended ~~September 30, 2018 were 18.9% and 6.8%, respectively,~~March 31, 2019 was 25.3% as compared to ~~32.0% and 90.2%, respectively,~~24.3% for the three ~~and nine~~ months ended ~~October~~April 1, ~~2017.~~2018. Our effective income tax rate for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and April 1, 2018 ~~was~~were 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, and the impact of employment-related federal income tax credits, offset by state taxes and 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 1, 2017 differed from the statutory rate primarily due to state income taxes (taxes withheld on royalties and ~~the favorable impact of employment-related federal income tax 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~~franchise fees earned from international franchisees 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 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 changes madeoffset by the 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 the limitation under Section 162(m) relating to the deductibility of executive compensation in excess of $1.0 million, and (iii) the one-time transition tax, net of foreign tax credits ~~and operating losses, on earnings of foreign subsidiaries that were previously deferred from U.S. tax. SAB118 further states that any adjustments made~~due to the provisional amounts under SAB 118 should be recorded as discrete adjustments in the 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 discreteforeign tax benefit relating to the provisional estimates required to account for TCJA that normally would not have impacted our effective tax rate (deductions in 2017’s tax return at 35% with the offset to deferred taxes at 21%)credit limitation). ~~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 ~~$4.6~~$4.2 million as of ~~September 30, 2018~~March 31, 2019 and ~~$3.9~~$4.3 million as of December ~~31, 2017~~30, 2018 and if recognized would decrease our provision for income taxes by $3.3 million. Within the next twelve months, we could settle or otherwise conclude certain ongoing income tax 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 ~~$3.9~~$3.7 million within the next twelve months.

Total accrued interest and penalties related to unrecognized tax benefits ~~as of September 30, 2018 and December 31, 2017~~ was $1.1 million as of March 31, 2019 and ~~$1.0 million, respectively.~~December 30, 2018. 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.”

Note 10. Stock-Based Compensation Arrangements:

2014 Equity Incentive Plan

The 2014 Equity Incentive Plan provides 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 ~~September 30, 2018~~March 31, 2019 and the activity for the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 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, 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 $ —



	Stock Options		Weighted Average Exercise Price ⁽¹⁾	Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
			($ per share)		($ in thousands)
Outstanding stock options, December 30, 2018	1,987,331		$8.87
Options Granted	424,985		$8.86
Options Forfeited	(5,366	)	$8.58
Outstanding stock options, March 31, 2019	2,406,950		$8.87	6.1	$	2,197
Stock options expected to vest, March 31, 2019	1,624,580		$9.05	6.5	$	1,182
Exercisable stock options, March 31, 2019	601,862		$8.31	5.0	$	883

__________________

(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 ~~September 30, 2018,~~March 31, 2019, we had ~~$0.7~~$1.7 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 ~~2.9~~4.4 years.

Stock Awards

~~Table~~During the first quarter of ~~Contents~~

~~CEC ENTERTAINMENT, INC.~~

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

~~(Unaudited)~~

2019, certain officers of the Company were granted stock bonus awards under the 2014 Equity Incentive Plan. The number of common shares of Parent awarded was based on the fair market value of Parent’s common stock as of December 31, 2018. The shares granted to the officers were fully vested immediately on the date that they were granted. In addition, during 2019, the Company agreed to issue fully vested common shares of Parent to certain officers of the Company in the first quarter 2020 based on the Company’s financial performance for Fiscal 2019.

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


	Nine Months Ended						Three Months Ended
	September 30, 2018			October 1, 2017			March 31, 2019			April 1, 2018
	(in thousands)						(in thousands)
Stock-based compensation costs	$	178		$	531
Stock-based compensation costs related to stock awards							$	1,031		$	—
Stock-based compensation costs related to incentive stock options							126			67
Portion capitalized as property and equipment ⁽¹⁾	(9		)	(11		)	(10		)	(3		)
Stock-based compensation expense recognized	$	169		$	520		$	1,147		$	64
Payroll taxes related to stock awards							$	15		$	—

__________________

(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.

Note 11. Stockholder’s Equity:

The following table summarizes the changes in stockholder’s equity during the ~~nine~~three months ended ~~September 30, 2018:~~March 31, 2019:


	Common Stock			Capital In Excess of Par Value			Accumulated Deficit			Accumulated Other Comprehensive Loss								Common Stock						Capital In Excess of Par Value			Accumulated Deficit				Accumulated Other Comprehensive Loss
	Shares	Amount				Total				Accumulated Other Comprehensive Loss			Shares			Amount							Total				Accumulated Deficit				Accumulated Other Comprehensive Loss
	(in thousands, except share information)																	(in thousands, except share information)
Balance at December 31, 2017	200	$	—	Capital In Excess of Par Value		$	Accumulated Deficit		359,233		$	(95,199	)		$	(1,886	)		$	262,148
Balance at December 30, 2018																		200			$	—		Capital In Excess of Par Value	$	359,570		$	(115,660	)		$	(1,339	)		$	242,571
Net loss	—	—		—			(6,231		)	—				(6,231		)		—			—			—			21,246				—				21,246
Other comprehensive income	—	—		—			—			127				127				—			—			—			—				(155		)		(155		)
Stock-based compensation costs	—	—		178			—			—				178				—			—			126			—				—				126
Balance September 30, 2018	200	$	—	$	359,411		$	(101,430	)	$	(1,759	)		$	256,222
Balance March 31, 2019																		200			$	—		$	359,696		$	(94,414	)		$	(1,494	)		$	263,788

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.” The senior notes issued by 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:

~~Table of Contents~~

~~CEC ENTERTAINMENT, INC.~~

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

~~(Unaudited)~~



CEC Entertainment, Inc.
Condensed Consolidating Balance Sheet
As of March 31, 2019
(in thousands)

	Issuer			Guarantors		Non-Guarantors			Eliminations			Consolidated
Current assets:
Cash and cash equivalents	$	104,407		$	5,065	$	2,558		$	—		$	112,030
Restricted cash	—			—		266			—			266
Accounts receivable	13,946			5,950		5,834			(4,983		)	20,747
Inventories	18,658			5,641		294						24,593
Prepaid expenses	8,030			9,740		942						18,712
Total current assets	145,041			26,396		9,894			(4,983		)	176,348
Property and equipment, net	459,345			68,873		5,392			—			533,610
Operating lease right-of-use assets, net	485,766			48,717		10,109			—			544,592
Goodwill	433,024			51,414		—			—			484,438
Intangible assets, net	8,584			461,658		—			—			470,242
Intercompany	57,340			80,658		—			(137,998		)	—
Investment in subsidiaries	491,735			—		—			(491,735		)	—
Other noncurrent assets	7,104			11,759		20			—			18,883
Total assets	$	2,087,939		$	749,475	$	25,415		$	(634,716	)	$	2,228,113
Current liabilities:
Bank indebtedness and other long-term debt, current portion	$	7,600		$	—	$	—		$	—		$	7,600
Operating lease liability, current portion	42,988			3,399		1,122			—			47,509
Accounts payable and accrued expenses	57,215			41,414		5,747			—			104,376
Other current liabilities	5,317			—		15			—			5,332
Total current liabilities	113,120			44,813		6,884			—			164,817
Operating lease obligations, less current portion	463,959			56,689		9,324			—			529,972
Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion	960,715			—		—			—			960,715
Deferred tax liability	91,990			18,037		(1,577		)	—			108,450
Intercompany	—			116,598		26,383			(142,981		)	—
Other noncurrent liabilities	194,367			5,970		34			—			200,371
Total liabilities	1,824,151			242,107		41,048			(142,981		)	1,964,325
Stockholder's equity:
Common stock	—			—		—			—			—
Capital in excess of par value	359,696			466,114		3,241			(469,355		)	359,696
Retained earnings (deficit)	(94,414		)	41,254		(17,224		)	(24,030		)	(94,414		)
Accumulated other comprehensive income (loss)	(1,494		)	—		(1,650		)	1,650			(1,494		)
Total stockholder's equity	263,788			507,368		(15,633		)	(491,735		)	263,788
Total liabilities and stockholder's equity	$	2,087,939		$	749,475	$	25,415		$	(634,716	)	$	2,228,113

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

	Issuer			Guarantors		Non-Guarantors			Eliminations			Consolidated				Issuer			Guarantors		Non-Guarantors			Eliminations			Consolidated
Current assets:
Cash and cash equivalents	$	80,543		$	2,278	$	1,608		$	—		$	84,429			$	54,775		$	6,725	$	1,670		$	—		$	63,170
Restricted cash	—			—		23			—			23				—			—		151			—			151
Accounts receivable	24,805			3,058		4,465			(3,681		)	28,647				28,421			4,956		4,117			(3,314		)	34,180
Inventories	16,854			4,937		278			—			22,069				16,896			6,617		294			—			23,807
Prepaid expenses	13,867			10,062		650			—			24,579				14,264			10,562		598			—			25,424
Total current assets	136,069			20,335		7,024			(3,681		)	159,747				114,356			28,860		6,830			(3,314		)	146,732
Property and equipment, net	467,580			68,992		6,324			—			542,896				468,827			64,721		5,637			—			539,185
Goodwill	433,024			51,414		—			—			484,438				433,024			51,414		—			—			484,438
Intangible assets, net	15,193			462,679		—			—			477,872				14,716			462,369		—			—			477,085
Intercompany	67,181			77,548		—			(144,729		)	—				78,402			66,373		—			(144,775		)	—
Investment in subsidiaries	482,913			—		—			(482,913		)	—				477,556			—		—			(477,556		)	—
Other noncurrent assets	7,641			13,429		34			—			21,104				7,292			11,409		24			—			18,725
Total assets	$	1,609,601		$	694,397	$	13,382		$	(631,323	)	$	1,686,057			$	1,594,173		$	685,146	$	12,491		$	(625,645	)	$	1,666,165
Current liabilities:
Bank indebtedness and other long-term debt, current portion	$	7,600		$	—	$	—		$	—		$	7,600			$	7,600		$	—	$	—		$	—		$	7,600
Capital lease obligations, current portion	624			—		10			—			634
Accounts payable and accrued expenses	50,629			40,261		3,724			—			94,614				56,277			34,429		2,321			—			93,027
Other current liabilities	4,489			511		—			—			5,000				5,429			510		16			—			5,955
Total current liabilities	63,342			40,772		3,734			—			107,848				69,306			34,939		2,337			—			106,582
Capital lease obligations, less current portion	12,482			—		46						12,528
Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion	962,402			—		—			—			962,402				961,514			—		—			—			961,514
Deferred tax liability	97,698			15,265		(2,042		)	—			110,921				91,049			17,866		(1,857		)	—			107,058
Intercompany	—			121,193		27,217			(148,410		)	—				—			119,498		28,591			(148,089		)	—
Other noncurrent liabilities	217,455			18,188		493			—			236,136				229,733			18,191		516			—			248,440
Total liabilities	1,353,379			195,418		29,448			(148,410		)	1,429,835				1,351,602			190,494		29,587			(148,089		)	1,423,594
Stockholder's equity:
Common stock	—			—		—			—			—				—			—		—			—			—
Capital in excess of par value	359,411			466,114		3,241			(469,355		)	359,411				359,570			466,114		3,241			(469,355		)	359,570
Retained earnings (deficit)	(101,430		)	32,865		(17,675		)	(15,190		)	(101,430		)		(115,660		)	28,538		(18,691		)	(9,847		)	(115,660		)
Accumulated other comprehensive income (loss)	(1,759		)	—		(1,632		)	1,632			(1,759		)		(1,339		)	—		(1,646		)	1,646			(1,339		)
Total stockholder's equity	256,222			498,979		(16,066		)	(482,913		)	256,222				242,571			494,652		(17,096		)	(477,556		)	242,571
Total liabilities and stockholder's equity	$	1,609,601		$	694,397	$	13,382		$	(631,323	)	$	1,686,057			$	1,594,173		$	685,146	$	12,491		$	(625,645	)	$	1,666,165

~~Table of Contents~~

~~CEC ENTERTAINMENT, INC.~~

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

~~(Unaudited)~~

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

Issuer Guarantors Non-Guarantors Eliminations Consolidated
Current assets:
Cash and cash equivalents $ 59,948
$ 410
$ 6,842
$ —
$ 67,200
Restricted cash —
—
112
—
112
Accounts receivable 27,098
3,283
2,563
(1,923 ) 31,021
Inventories 17,104
4,614
282
—
22,000
Prepaid expenses 13,766
5,549
1,083
—
20,398
Total current assets 117,916
13,856
10,882
(1,923 ) 140,731
Property and equipment, net 496,725
66,669
6,627
—
570,021
Goodwill 433,024
51,414
—
—
484,438
Intangible assets, net 16,764
463,613
—
—
480,377
Intercompany 90,937
10,770
—
(101,707 ) —
Investment in subsidiaries 462,873
—
—
(462,873 ) —
Other noncurrent assets 7,913
11,359
205
—
19,477
Total assets $ 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
$ —
$ —
$ —
$ 7,600
Capital lease obligations, current portion 586
—
10
—
596
Accounts payable and accrued expenses 58,014
35,134
4,169
—
97,317
Other current liabilities 4,265
511
—
—
4,776
Total current liabilities 70,465
35,645
4,179
—
110,289
Capital lease obligations, less current portion 12,956
—
54
—
13,010
Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion 965,213
—
—
—
965,213
Deferred tax liability 99,083
16,697
(1,594 ) —
114,186
Intercompany —
75,052
28,578
(103,630 ) —
Other noncurrent liabilities 216,287
13,465
446
—
230,198
Total liabilities 1,364,004
140,859
31,663
(103,630 ) 1,432,896
Stockholder's equity:
Common stock —
—
—
—
—
Capital in excess of par value 359,233
466,114
3,241
(469,355 ) 359,233
Retained earnings (deficit) (95,199 ) 10,708
(15,304 ) 4,596
(95,199 )
Accumulated other comprehensive income (loss) (1,886 ) —
(1,886 ) 1,886
(1,886 )
Total stockholder's equity 262,148
476,822
(13,949 ) (462,873 ) 262,148
Total liabilities and stockholder's equity $ 1,626,152
$ 617,681
$ 17,714
$ (566,503 ) $ 1,695,044

~~Table of Contents~~

~~CEC ENTERTAINMENT, INC.~~

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

~~(Unaudited)~~



CEC Entertainment, Inc.
Consolidating Statement of Comprehensive Income (Loss)
For the Three Months Ended March 31, 2019
(in thousands)

	Issuer			Guarantors		Non-Guarantors			Eliminations			Consolidated
Revenues:
Food and beverage sales	$	102,113		$	14,223	$	1,479		$	—		$	117,815
Entertainment and merchandise sales	133,650			13,207		2,820			—			149,677
Total company venue sales	235,763			27,430		4,299			—			267,492
Franchise fees and royalties	685			4,294		841			—			5,820
International Association assessments and other fees	315			11,785		11,319			(23,419		)	—
Total revenues	236,763			43,509		16,459			(23,419		)	273,312
Operating Costs and Expenses:
Company venue operating costs (excluding Depreciation and amortization):
Cost of food and beverage	22,428			3,734		490			—			26,652
Cost of entertainment and merchandise	11,044			443		259			—			11,746
Total cost of food, beverage, entertainment and merchandise	33,472			4,177		749			—			38,398
Labor expenses	66,240			4,941		1,324			—			72,505
Lease costs	24,594			1,861		572			—			27,027
Other venue operating expenses	42,811			3,737		849			(12,100		)	35,297
Total company venue operating costs	167,117			14,716		3,494			(12,100		)	173,227
Advertising expense	11,324			1,600		10,648			(11,319		)	12,253
General and administrative expenses	5,106			10,398		(261		)	—			15,243
Depreciation and amortization	21,426			2,467		441			—			24,334
Transaction, severance and related litigation costs	23			—		—			—			23
Total operating costs and expenses	204,996			29,181		14,322			(23,419		)	225,080
Operating income	31,767			14,328		2,137			—			48,232
Equity in earnings (loss) in affiliates	14,386			—		—			(14,386		)	—
Interest expense	18,915			711		182			—			19,808
Income (loss) before income taxes	27,238			13,617		1,955			(14,386		)	28,424
Income tax expense	5,992			903		283			—			7,178
Net income (loss)	$	21,246		$	12,714	$	1,672		$	(14,386	)	$	21,246

Components of other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	(155		)	—		(155		)	155			(155		)
Comprehensive income (loss)	$	21,091		$	12,714	$	1,517		$	(14,231	)	$	21,091

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

Issuer Guarantors Non-Guarantors Eliminations Consolidated
Revenues:
Food and beverage sales $ 79,871
$ 12,854
$ 1,298
$ —
$ 94,023
Entertainment and merchandise sales 108,461
10,380
2,770
—
121,611
Total company venue sales 188,332
23,234
4,068
—
215,634
Franchise fees and royalties 441
4,302
568
—
5,311
International Association assessments and other fees 221
9,588
8,862
(18,671 ) —
Total revenues 188,994
37,124
13,498
(18,671 ) 220,945
Operating Costs and Expenses:
Company venue operating costs:
Cost of food and beverage 18,700
3,348
472
—
22,520
Cost of entertainment and merchandise 9,306
391
177
—
9,874
Total cost of food, beverage, entertainment and merchandise 28,006
3,739
649
—
32,394
Labor expenses 58,818
4,976
1,234
—
65,028
Rent expense 21,719
1,630
502
—
23,851
Other venue operating expenses 43,711
3,500
830
(9,809 ) 38,232
Total company venue operating costs 152,254
13,845
3,215
(9,809 ) 159,505
Advertising expense 8,984
1,150
9,786
(8,862 ) 11,058
General and administrative expenses 5,017
8,499
(323 ) —
13,193
Depreciation and amortization 21,429
2,807
503
—
24,739
Transaction, severance and related litigation costs (262 ) (1 ) —
—
(263 )
Asset impairments 2,505
2,836
3
—
5,344
Total operating costs and expenses 189,927
29,136
13,184
(18,671 ) 213,576
Operating income (loss) (933 ) 7,988
314
—
7,369
Equity in earnings (loss) in affiliates 5,444
—
—
(5,444 ) —
Interest expense 18,205
692
172
—
19,069
Income (loss) before income taxes (13,694 ) 7,296
142
(5,444 ) (11,700 )
Income tax expense (benefit) (4,207 ) 2,113
(119 ) —
(2,213 )
Net income (loss) $ (9,487 ) $ 5,183
$ 261
$ (5,444 ) $ (9,487 )

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

~~Table of Contents~~

~~CEC ENTERTAINMENT, INC.~~

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

~~(Unaudited)~~

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

Issuer Guarantors Non-Guarantors Eliminations Consolidated
Revenues:
Food and beverage sales $ 83,413
$ 13,234
$ 1,608
$ —
$ 98,255
Entertainment and merchandise sales 88,551
19,174
2,908
—
110,633
Total company venue sales 171,964
32,408
4,516
—
208,888
Franchise fees and royalties 506
3,953
—
—
4,459
International Association assessments and other fees 364
7,702
8,294
(16,360 ) —
Total revenues 172,834
44,063
12,810
(16,360 ) 213,347
Operating Costs and Expenses:
Company venue operating costs:
Cost of food and beverage 19,916
3,519
539
—
23,974
Cost of entertainment and merchandise 6,807
432
191
—
7,430
Total cost of food, beverage, entertainment and merchandise 26,723
3,951
730
—
31,404
Labor expenses 55,252
4,729
1,239
—
61,220
Rent expense 22,066
1,624
569
—
24,259
Other venue operating expenses 43,731
3,817
1,079
(8,066 ) 40,561
Total company venue operating costs 147,772
14,121
3,617
(8,066 ) 157,444
Advertising expense 8,670
1,085
10,622
(8,294 ) 12,083
General and administrative expenses 4,526
9,003
46
—
13,575
Depreciation and amortization 24,126
2,515
495
—
27,136
Transaction, severance and related litigation costs 128
—
—
—
128
Asset impairments 1,824
14
5
—
1,843
Total operating costs and expenses 187,046
26,738
14,785
(16,360 ) 212,209
Operating income (loss) (14,212 ) 17,325
(1,975 ) —
1,138
Equity in earnings (loss) in affiliates (10,551 ) —
—
10,551
—
Interest expense 15,902
1,353
196
—
17,451
Income (loss) before income taxes (40,665 ) 15,972
(2,171 ) 10,551
(16,313 )
Income tax expense (benefit) (29,573 ) 25,067
(715 ) —
(5,221 )
Net income (loss) $ (11,092 ) $ (9,095 ) $ (1,456 ) $ 10,551
$ (11,092 )

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

~~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 September 30, 2018
(in thousands)

Issuer Guarantors Non-Guarantors Eliminations Consolidated
Revenues:
Food and beverage sales $ 264,130
$ 40,250
$ 4,278
$ —
$ 308,658
Entertainment and merchandise sales 324,231
36,255
8,147
—
368,633
Total company venue sales 588,361
76,505
12,425
—
677,291
Franchise fees and royalties 1,441
12,661
1,815
—
15,917
International Association assessments and other fees 794
28,339
27,951
(57,084 ) —
Total revenues 590,596
117,505
42,191
(57,084 ) 693,208
Operating Costs and Expenses:
Company venue operating costs:
Cost of food and beverage 60,432
10,845
1,497
—
72,774
Cost of entertainment and merchandise 25,972
1,238
466
—
27,676
Total cost of food, beverage, entertainment and merchandise 86,404
12,083
1,963
—
100,450
Labor expenses 176,106
15,065
3,823
—
194,994
Rent expense 65,417
5,638
1,560
—
72,615
Other venue operating expenses 129,006
10,882
2,634
(29,159 ) 113,363
Total company venue operating costs 456,933
43,668
9,980
(29,159 ) 481,422
Advertising expense 28,742
4,511
32,682
(27,925 ) 38,010
General and administrative expenses 13,539
25,336
644
—
39,519
Depreciation and amortization 67,073
8,253
1,478
—
76,804
Transaction, severance and related litigation costs 197
266
—
—
463
Asset Impairments 2,591
4,341
3
—
6,935
Total operating costs and expenses 569,075
86,375
44,787
(57,084 ) 643,153
Operating income (loss) 21,521
31,130
(2,596 ) —
50,055
Equity in earnings (loss) in affiliates 19,869
—
—
(19,869 ) —
Interest expense 53,833
2,446
461
—
56,740
Income (loss) before income taxes (12,443 ) 28,684
(3,057 ) (19,869 ) (6,685 )
Income tax expense (benefit) (6,212 ) 6,526
(768 ) —
(454 )
Net income (loss) $ (6,231 ) $ 22,158
$ (2,289 ) $ (19,869 ) $ (6,231 )

Components of other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 127
—
127
(127 ) 127
Comprehensive income (loss) $ (6,104 ) $ 22,158
$ (2,162 ) $ (19,996 ) $ (6,104 )

~~Table of Contents~~

~~CEC ENTERTAINMENT, INC.~~

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

~~(Unaudited)~~

																											CEC Entertainment, Inc.	Consolidating Statement of Comprehensive Income (Loss)
For the Nine Months Ended October 1, 2017
For the Three Months Ended April 1, 2018														For the Three Months Ended April 1, 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		$	102,648	$	13,958	$	1,771		$	—		$	118,377
Entertainment and merchandise sales	296,197			52,097		7,980			—			356,274			115,275		12,727		3,115			—			131,117
Total company venue sales	570,608			93,056		12,695			—			676,359			217,923		26,685		4,886			—			249,494
Franchise fees and royalties	1,411			12,320		—			—			13,731			572		4,143		695			—			5,410
International Association assessments and other fees	1,054			28,791		26,900			(56,745		)	—			341		9,038		10,562			(19,941		)	—
Total revenues	573,073			134,167		39,595			(56,745		)	690,090			218,836		39,866		16,143			(19,941		)	254,904
Operating Costs and Expenses:
Company venue operating costs:
Company venue operating costs (excluding Depreciation and amortization):
Cost of food and beverage	62,847			10,671		1,496			—			75,014			22,884		3,891		585			—			27,360
Cost of entertainment and merchandise	21,037			1,236		498			—			22,771			8,766		446		170			—			9,382
Total cost of food, beverage, entertainment and merchandise	83,884			11,907		1,994			—			97,785			31,650		4,337		755			—			36,742
Labor expenses	170,089			14,108		3,761			—			187,958			60,829		5,095		1,425			—			67,349
Rent expense	65,168			4,678		1,638			—			71,484
Lease costs															21,797		1,689		563			—			24,049
Other venue operating expenses	129,415			10,360		3,373			(29,871		)	113,277			42,908		3,590		969			(9,405		)	38,062
Total company venue operating costs	448,556			41,053		10,766			(29,871		)	470,504			157,184		14,711		3,712			(9,405		)	166,202
Advertising expense	27,921			4,345		32,310			(26,874		)	37,702			10,985		1,941		11,584			(10,536		)	13,974
General and administrative expenses	14,663			27,806		196			—			42,665			4,195		8,168		546			—			12,909
Depreciation and amortization	74,171			7,334		1,559			—			83,064			23,377		2,732		463			—			26,572
Transaction, severance and related litigation costs	698			—		—			—			698			313		221		—			—			534
Asset impairment	1,824			14		5			—			1,843
Total operating costs and expenses	567,833			80,552		44,836			(56,745		)	636,476			196,054		27,773		16,305			(19,941		)	220,191
Operating income (loss)	5,240			53,615		(5,241		)	—			53,614			22,782		12,093		(162		)	—			34,713
Equity in earnings (loss) in affiliates	28,096			—		—			(28,096		)	—			8,645		—		—			(8,645		)	—
Interest expense	47,730			3,345		499			—			51,574			17,528		844		185			—			18,557
Income (loss) before income taxes	(14,394		)	50,270		(5,740		)	(28,096		)	2,040			13,899		11,249		(347		)	(8,645		)	16,156
Income tax expense (benefit)	(14,594		)	18,263		(1,829		)	—			1,840
Income tax expense															1,676		2,186		71			—			3,933
Net income (loss)	$	200		$	32,007	$	(3,911	)	$	(28,096	)	$	200		$	12,223	$	9,063	$	(418	)	$	(8,645	)	$	12,223

Components of other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	1,187			—		1,187			(1,187		)	1,187			154		—		154			(154		)	154
Comprehensive income (loss)	$	1,387		$	32,007	$	(2,724	)	$	(29,283	)	$	1,387		$	12,377	$	9,063	$	(264	)	$	(8,799	)	$	12,377



CEC Entertainment, Inc.
Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2019
(in thousands)

	Issuer			Guarantors			Non-Guarantors			Consolidated
Cash flows provided by operating activities:	$	64,577		$	4,743		$	1,158		$	70,478

Cash flows from investing activities:
Purchases of property and equipment	(12,602		)	(5,699		)	(71		)	(18,372		)
Development of internal use software	421			(703		)	—			(282		)
Proceeds from sale of property and equipment	21			—			—			21
Cash flows used in investing activities	(12,160		)	(6,402		)	(71		)	(18,633		)

Cash flows from financing activities:
Repayments on senior term loan	(1,900		)	—			—			(1,900		)
Payments on capital lease obligations	(165		)	—			(3		)	(168		)
Payments on sale leaseback transactions	(803		)	—			—			(803		)
Cash flows used in financing activities	(2,868		)	—			(3		)	(2,871		)
Effect of foreign exchange rate changes on cash	—			—			1			1
Change in cash, cash equivalents and restricted cash	49,549			(1,659		)	1,085			48,975
Cash, cash equivalents and restricted cash at beginning of period	54,775			6,725			1,821			63,321
Cash, cash equivalents and restricted cash at end of period	$	104,324		$	5,066		$	2,906		$	112,296

~~Table of Contents~~

~~CEC ENTERTAINMENT, INC.~~

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

~~(Unaudited)~~

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

Issuer Guarantors Non-Guarantors Eliminations Consolidated
Cash flows provided by operating activities: $ 68,801
$ 17,888
$ (4,214 ) $ —
$ 82,475

Cash flows from investing activities:
  Purchases of property and equipment (38,536 ) (15,512 ) (1,154 ) —
(55,202 )
  Development of internal use software (1,484 ) (508 ) —
—
(1,992 )
  Proceeds from sale of property and equipment 464
—
—
—
464
Cash flows provided by (used in) investing activities (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 )
  Payment of debt financing costs (395 ) —
—
—
(395 )
  Payments on capital lease obligations (436 ) —
(6 ) —
(442 )
  Payments on sale leaseback transactions (2,119 ) —
—
—
(2,119 )
Cash flows provided by (used in) financing activities (8,650 ) —
(6 ) —
(8,656 )
Effect of foreign exchange rate changes on cash —
—
51
—
51
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

~~Table of Contents~~

~~CEC ENTERTAINMENT, INC.~~

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

~~(Unaudited)~~

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

	Issuer				Guarantors				Non-Guarantors				Eliminations			Consolidated				Issuer				Guarantors				Non-Guarantors				Consolidated
Cash flows provided by (used in) operating activities:	$	68,568			$	24,632			$	991			$	—		$	94,191			$	38,848			$	18,807			$	(5,091	)		$	52,564

Cash flows from investing activities:
Purchases of property and equipment	(49,735		)		(21,407		)		(768		)		—			(71,910		)		(9,502		)		(7,868		)		(690		)		(18,060		)
Development of internal use software	—				(2,520		)		—				—			(2,520		)		(622		)		107				—				(515		)
Proceeds from the sale of property and equipment	424				—				—				—			424				316				(158		)		—				158
Cash flows provided by (used in) investing activities	(49,311		)	—	(23,927		)	—	(768		)	—	—		—	(74,006		)
Cash flows used in investing activities																				(9,808		)	—	(7,919		)	—	(690		)	—	(18,417		)

Cash flows from financing activities:
Repayments on senior term loan	(5,700		)		—				—				—			(5,700		)		(1,900		)		—				—				(1,900		)
Repayments on note payable	—				(13		)		—				—			(13		)
Proceeds from sale leaseback transaction	4,073				—				—				—			4,073
Payments on capital lease obligations	(335		)		—				(5		)		—			(340		)		(143		)		—				(2		)		(145		)
Payments on sale leaseback transactions	(1,789		)		—				—				—			(1,789		)		(688		)		—				—				(688		)
Return of capital	1,447				—				—				—			1,447
Cash flows provided by (used in) financing activities	(2,304		)	—	(13		)	—	(5		)	—	—		—	(2,322		)
Cash flows used in financing activities																				(2,731		)	—	—			—	(2		)	—	(2,733		)
Effect of foreign exchange rate changes on cash	—				—				492				—			492				—				—				46				46
Change in cash, cash equivalents and restricted cash	16,953			—	692			—	710			—	—		—	18,355				26,309			—	10,888			—	(5,737		)	—	31,460
Cash, cash equivalents and restricted cash at beginning of period	53,088				1,158				7,045				—			61,291				59,948				410				6,954				67,312
Cash, cash equivalents and restricted cash at end of period	$	70,041			$	1,850			$	7,755			$	—		$	79,646			$	86,257			$	11,298			$	1,217			$	98,772

13. Related Party Transactions:

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

~~We utilize an~~In addition, CEC Entertainment engages Apollo portfolio ~~company~~companies to provide various services, including security services to ~~certain of~~its venues, licensed music video content for use in its venues, and employment screening services to its recruiting functions. Included in our ~~venues. These~~Total operating costs and expenses ~~totaled approximately $0.2~~are related expenses totaling $0.4 million for both the three months ended ~~September~~March 31, 2019 and April 1, 2018.

Included in our Accounts Receivable balance are amounts due from Parent totaling $2.6 million at both March 31, 2019 and December 30, 2018, primarily related to various general and ~~October 1, 2017,~~administrative 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~~transaction related expenses ~~are included in “Other venue operating expenses” in our Consolidated Statements~~paid on behalf of ~~Earnings.~~Parent.

Note 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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~~CEC ENTERTAINMENT, INC.~~

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

~~(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.

~~Employment-Related Litigation:~~ On October 10, 2014, former 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. On December 13, 2017, the Court entered its order granting preliminary approval of the parties’ settlement, and on October 2, 2018, the Court entered an order granting final approval of the settlement. CEC Entertainment has fully complied with its payment and other obligations under the settlement. The settlement of this lawsuit has not had 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 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, and seeking to certify separate classes on his federal and 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. 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 business expenses, and sought to certify a class of CEC California Senior Assistant Managers, Assistant Managers, Technical Managers and 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, Plaintiff filed a Notice of Settlement. The Court entered an order preliminarily approving of the parties’ settlement on May 17, 2018, and on October 18, 2018, the Court entered an order granting final approval of the settlement. CEC Entertainment has fully complied with its payment and other obligations under the settlement. The settlement of this lawsuit has not 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”) 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

~~Table of Contents~~

~~CEC ENTERTAINMENT, INC.~~

~~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 October 8, 2018, the Plaintiff in the Consolidated Shareholder Litigation filed a notice of appeal of the District Court’s decision. The parties have filed their briefs and are awaiting a setting for oral argument. 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”)~~

Note 15. Subsequent Events:

The Company has evaluated subsequent events through May 14, 2019, and determined that there have been no events that have occurred that would require adjustments to our disclosures in the ~~U.S. District Court~~consolidated financial statements except for the ~~District~~transaction described below:

Business Combination: On April 7, 2019, Parent and Leo Holdings Corp. (“Leo”), a publicly traded special purpose acquisition company, together with Parent’s controlling stockholder, an entity owned by funds managed by affiliates of ~~Arizona, Tucson Division~~Apollo, entered into a Business Combination Agreement (the ~~“Jacobson Litigation”~~“Leo Merger Agreement”). ~~The plaintiff claims~~Also concurrent with the closing of the transaction, Leo will domesticate as a Delaware corporation, following which Parent will merge with and into Leo with the result that the Company will become a wholly-owned subsidiary of Leo, which will be renamed Chuck E. Cheese Brands Inc. (the “Business Combination”). Concurrent with the consummation of the Business Combination, additional investors will purchase $100 million of common stock of Leo in a private placement. After giving effect to ~~represent other similarly-situated consumers who, within~~any redemptions by the ~~two years prior~~public shareholders of Leo, the balance of the approximately $200 million in cash held in Leo Holdings’ trust account, together with the $100 million in private placement proceeds, will be used to pay transaction expenses and de-leverage the Company’s existing capital structure by repaying all, or substantially all, of the $255 million senior notes (see Note 6. “Indebtedness and Interest Expense -Senior Unsecured Debt”). It is expected that existing shareholders including funds managed by affiliates of Apollo, will hold an approximately 51% stake in the Company upon completion of the Business Combination.

In connection with the proposed Business Combination, including the domestication of Leo as a Delaware corporation, on April 29, 2019 Leo filed with the SEC a registration statement on Form S-4 containing a preliminary proxy statement and a preliminary prospectus of Leo. After the registration statement is declared effective, Leo will mail a definitive proxy statement/prospectus relating to the ~~filing~~proposed Business Combination and other relevant materials for the proposed Business Combination to its shareholders as 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 motionrecord date 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~~be established 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 presented an issue for decision that is relevant to Peter Piper’s motion to dismiss. 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. Basedvoting on the appellate court’s decision in that case, on March 15, 2018 Peter Piper filed a motion to lift the stay and 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 grant Peter Piper’s motion to dismiss and dismiss the plaintiff’s claims without prejudice to their refiling. On August 3, 2018, the 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 now final and the case is concluded.proposed Business Combination.

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 December ~~31, 2017~~30, 2018, filed with the Securities and Exchange Commission (“SEC”) on March ~~28, 2018.~~12, 2019. Our MD&A includes the following sub-sections:

Presentation of Operating Results;

Executive Summary;

Key Measure of Our Financial Performance and Key Non-GAAP 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 ~~30, 2018,~~29, 2019, and our fiscal year ended December ~~31, 2017,~~30, 2018, 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 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”~~Pizza Made Fresh, Families Made Happy”). 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 selection of more sophisticated options for adults.We operate ~~557~~554 venues and have an additional ~~197~~194 venues operating under franchise arrangements across 47 states and 14 foreign countries and territories as of ~~September 30, 2018.~~March 31, 2019.

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
	September 30, 2018		October 1, 2017		September 30, 2018		October 1, 2017		March 31, 2019		April 1, 2018
Number of Company-operated venues:
Beginning of period	559		564		562		559		554		562
New ⁽¹⁾	1		—		1		3
Acquired from franchisee	—		—		—		2
Closed ⁽¹⁾	(3	)	(2	)	(6	)	(2	)
New									—		—
Acquired from franchisee ⁽¹⁾									1		—
Closed									(1	)	(1	)
End of period	557		562		557		562		554		561
Number of franchised venues:
Beginning of period									196		192
New									—		4
Acquired from franchisee ⁽¹⁾									(1	)	—
Closed									(1	)	(1	)
End of period									194		195
Total number of venues:
Beginning of period	196		193		192		188		750		754
New	1		—		7		7		—		4
Acquired from franchisee	—		—		—		(2	)	—		—
Closed	—		(2	)	(2	)	(2	)	(2	)	(2	)
End of period	197		191		197		191		748		756
Total number of venues:
Beginning of period	755		757		754		747
New ⁽¹⁾	2		—		8		10
Acquired from franchisee	—		—		—		—
Closed ⁽¹⁾	(3	)	(4	)	(8	)	(4	)
End of period	754		753		754		753

__________________


(1)	The number of new Company-operated venues and closed ~~Company-operated~~franchised venues during the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 included one store that was ~~relocated.~~acquired from a franchisee.

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

Comparable venue sales. We define “comparable venue sales” as the sales for our domestic 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~~Company-operated venues (“~~Company~~company venue sales”), which consist of the sale of food, beverages, unlimited game-play time blocks, game-play credits, and merchandise. A portion of our ~~Company~~company venue sales are from sales of value-priced combination packages ~~have historically been~~generally comprised of food, beverage, and through the end of the second quarter of 2018, game plays ~~(“Package Deals”),~~and/or time blocks, which we promote through in-venue menu pricing, our website and coupon offerings. ~~We allocate~~Beginning in the third quarter of 2018, we offer combination packages comprised of food and beverage only (“Package Deals”), with game plays and/or time blocks available for purchase separately. Prior to the bifurcation of the “Food and beverage sales” and “Entertainment and merchandise sales” components of combination packages, we allocated the revenues recognized from the sale of ~~our Package Deals~~combination packages 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,~~circumstanc

es, 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~~and through the end of the second quarter of 2018, the portion of revenues allocated from ~~Package Deals~~combination packages and coupons that relate to food and beverage sales. Entertainment and merchandise sales include all revenues recognized with respect to stand-alone ~~game token~~sales of game-play credits and ~~game play credit sales, as well as~~unlimited game-play time blocks, and through the end of the second quarter of 2018, a portion of revenues allocated from ~~Package Deals~~combination packages 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. Historically, we recognized development and franchise fees as revenues when the franchise venue had opened and we 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~~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~~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.~~franchisees.

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 customers;~~customers.

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

~~Rent expense~~Lease costs includes lease costs for Company-operated venues, ~~excluding common occupancy costs (e.g.,~~including common area maintenance (“CAM”) ~~charges and property taxes);~~charges; 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, consulting fees and ~~consulting fees.~~other forms of advertising such as social media.

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, back-office support systems, costs of outsourced functions, 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
	September 30, 2018				October 1, 2017				March 31, 2019				April 1, 2018
	(in thousands, except percentages)								(in thousands, except percentages)
Food and beverage sales	$	94,023	43.6	%	$	98,255	47.0	%	$	117,815	44.0	%	$	118,377	47.4	%
Entertainment and merchandise sales	121,611		56.4	%	110,633		53.0	%	149,677		56.0	%	131,117		52.6	%
Total company venue sales	$	215,634	100.0	%	$	208,888	100.0	%	$	267,492	100.0	%	$	249,494	100.0	%

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

The following 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
	September 30, 2018					October 1, 2017					March 31, 2019				April 1, 2018
	(in thousands, except percentages)										(in thousands, except percentages ⁽⁴⁾)
Total company venue sales	$	215,634		97.6	%	$	208,888		97.9	%	$	267,492	97.9	%	$	249,494	97.9	%
Franchise fees and royalties	5,311			2.4	%	4,459			2.1	%	5,820		2.1	%	5,410		2.1	%
Total revenues	220,945			100.0	%	213,347			100.0	%	273,312		100.0	%	254,904		100.0	%
Company venue operating costs:
Operating Costs and Expenses:
Cost of food and beverage ⁽¹⁾	22,520			24.0	%	23,974			24.4	%	26,652		22.6	%	27,360		23.1	%
Cost of entertainment and merchandise ⁽²⁾	9,874			8.1	%	7,430			6.7	%	11,746		7.8	%	9,382		7.2	%
Total cost of food, beverage, entertainment and merchandise ⁽³⁾	32,394			15.0	%	31,404			15.0	%	38,398		14.4	%	36,742		14.7	%
Labor expenses ⁽³⁾	65,028			30.2	%	61,220			29.3	%	72,505		27.1	%	67,349		27.0	%
Rent expense ⁽³⁾	23,851			11.1	%	24,259			11.6	%
Lease costs ⁽³⁾											27,027		10.1	%	24,049		9.6	%
Other venue operating expenses ⁽³⁾	38,232			17.7	%	40,561			19.4	%	35,297		13.2	%	38,062		15.3	%
Total company venue operating costs ⁽³⁾	159,505			74.0	%	157,444			75.4	%	134,829		50.4	%	129,460		51.9	%
Other costs and expenses:
Other costs and expenses:
Advertising expense	11,058			5.0	%	12,083			5.7	%	12,253		4.5	%	13,974		5.5	%
General and administrative expenses	13,193			6.0	%	13,575			6.4	%	15,243		5.6	%	12,909		5.1	%
Depreciation and amortization	24,739			11.2	%	27,136			12.7	%	24,334		8.9	%	26,572		10.4	%
Transaction, severance and related litigation costs	(263		)	(0.1	)%	128			0.1	%	23		—	%	534		0.2	%
Asset impairments	5,344			2.4	%	1,843			0.9	%
Total operating costs and expenses	213,576			96.7	%	212,209			99.5	%	225,080		82.4	%	220,191		86.4	%
Operating income	7,369			3.3	%	1,138			0.5	%	48,232		17.6	%	34,713		13.6	%
Interest expense	19,069			8.6	%	17,451			8.2	%	19,808		7.2	%	18,557		7.3	%
Loss before income taxes	$	(11,700	)	(5.3	)%	$	(16,313	)	(7.6	)%
Income before income taxes											$	28,424	10.4	%	$	16,156	6.3	%

__________________


(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)

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
September 30, 2018 October 1, 2017
(in thousands, except percentages)
Total company venue sales $ 677,291
97.7 % $ 676,359
98.0 %
Franchise fees and royalties 15,917
2.3 % 13,731
2.0 %
Total revenues 693,208
100.0 % 690,090
100.0 %
Company venue operating costs:
Cost of food and beverage ⁽¹⁾
72,774
23.6 % 75,014
23.4 %
Cost of entertainment and merchandise ⁽²⁾
27,676
7.5 % 22,771
6.4 %
Total cost of food, beverage, entertainment and merchandise ⁽³⁾
100,450
14.8 % 97,785
14.5 %
Labor expenses ⁽³⁾
194,994
28.8 % 187,958
27.8 %
Rent expense ⁽³⁾
72,615
10.7 % 71,484
10.6 %
Other venue operating expenses ⁽³⁾
113,363
16.7 % 113,277
16.7 %
Total company venue operating costs ⁽³⁾
481,422
71.1 % 470,504
69.6 %
Other costs and expenses:

Advertising expense 38,010
5.5 % 37,702
5.5 %
General and administrative expenses 39,519
5.7 % 42,665
6.2 %
Depreciation and amortization 76,804
— % 83,064
— %
Transaction, severance and related litigation costs 463
0.1 % 698
0.1 %
Asset impairments 6,935
1.0 % 1,843
0.3 %
Total operating costs and expenses 643,153
92.8 % 636,476
92.2 %
Operating income 50,055
7.2 % 53,614
7.8 %
Interest expense 56,740
8.2 % 51,574
7.5 %
Income before income taxes $ (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 ~~September 30, 2018~~March 31, 2019 Compared to the Three months ended ~~October~~April 1, ~~2017~~2018

Revenues

Company venue sales were ~~$215.6~~$267.5 million and $249.5 million for the first quarter of 2019 and the first quarter of 2018, respectively. The increase in Company venue sales is primarily attributable to a 7.7% increase in comparable venue sales. In addition, revenue deferrals were $1.9 million and $3.2 million for the first quarter of 2019 and the first quarter of 2018, respectively, declining as a result of the introduction of AYCP, our time-based play offering, in the third quarter of 2018 compared to $208.9 million for the third quarter of 2017, primarily attributable to a 2.2% increase in comparable venue sales and a $5.3 million increase in net breakage related to PlayPass compared to the third quarter of 2017,2018. These favorable impacts were partially offset by a $1.5 million decrease in revenue ~~due~~related to ~~temporary store~~venue closures ~~and a net reduction of four Company-operated venues.~~in 2018.

Franchise fees and royalties increased from ~~$4.5~~$5.4 million to ~~$5.3~~$5.8 million or 7.6% in the first quarter of 2019 compared to the first quarter of 2018, 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).a net increase in franchise locations.

Company Venue Operating Costs

The cost of food, beverage, entertainment and merchandise, as a percentage of ~~Total~~total company venue sales, was ~~15.0%~~14.4% and 14.7% for ~~both~~ the ~~third~~first quarter of 2019 and 2018 ~~and the third quarter of 2017~~, respectively, as a sales ~~shift~~shifted towards higher margin ~~Entertainment~~entertainment and merchandise sales from food and beverage ~~sales was offset by cost pressures.~~sales.

The cost of food and beverage, as a percentage of food and beverage sales, was ~~24.0%~~22.6% and 23.1% for the ~~third~~first quarter of 2019 and 2018, ~~compared to 24.4% for the third quarter of 2017.~~respectively. The decrease in the cost of food and beverage on a percentage basis in the

~~third~~ first quarter of ~~2018~~2019 was primarily driven by ~~lower~~favorability in commodity prices and ~~a mix shift to higher margin items during the third quarter of 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. The increase in the cost of entertainment and merchandise on a percentage basis in the third quarter of 2018 was impacted by a combination of the national launch of time based play and “More Tickets” in all of our Chuck E. Cheese Company-operated venues during the third quarter of 2018.

Labor expenses, as a percentage of 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,volume, 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 inventory losses incurred in the third quarter of 2017 in connection with Hurricanes Harvey and 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 one of our venues that was 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 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 2018 would have been $10.3 million, compared to $12.1 million in the third quarter of 2017 (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 2018 compared to $13.6 million in the third quarter of 2017. The decrease in general and administrative expenses in the third quarter of 2018 is primarily due to 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 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.

~~Transaction, Severance and Related Litigation Costs~~

Transaction, severance and related litigation costs were $(0.3) million in the third quarter of 2018 compared to $0.1 million in the third quarter of 2017. The Transaction, severance and related litigation costs in the third quarter of 2018 reflect an insurance settlement received relating to legal fees incurred in prior years.

~~Asset Impairments~~

~~In the~~third quarter of 2018, we recognized an asset impairment charge of $5.3 million primarily related to eight venues, of which one was previously impaired. In the third quarter 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 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 markets in which the 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, 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 unfavorable 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 rates for the third quarter of 2017

~~differed from the statutory rate primarily due to state income taxes and the favorable impact of employment related federal income tax credits.~~

~~Nine months ended September 30, 2018 Compared to Nine months ended October 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. The increase in Company venue sales for the first nine months of 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 net deferral of $7.9 million the first nine months of 2017, offset partially by 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 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 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. The increase in the cost of food and beverage on a percentage basis in the first nine months of 2018 was driven primarily by a change in sales mix and an increase in beverage costs.

The cost of entertainment and merchandise, as a percentage of entertainment and merchandise sales, was ~~7.5%~~7.8% and 7.2% for the first ~~nine months~~quarter of 2019 and 2018, ~~compared to 6.4% for~~respectively. The increase in the ~~first nine months of 2017. The~~ cost of entertainment and merchandise on a percentage of sales basis in the first ~~nine months~~quarter of ~~2018 compared to the first nine months of 2017 was impacted by a combination of~~2019 reflects the impact of ~~time based play~~the All You Can Play and ~~“More Tickets” which were~~More Tickets initiatives we launched nationally in all of our Chuck E. Cheese Company-operated venues during the third quarter of 2018.

Gross profit, which represents Revenues less total cost of food, beverage, entertainment and merchandise, as a percentage of Total revenues was 86.0% and 85.6% for the first quarter of 2019 and 2018, ~~and by an~~respectively. The increase in ~~PlayPass related supplies~~gross profit as a ~~result~~percentage of ~~PlayPass now being deployed to all of our Company-owned venues, compared to 268 venues at~~Total revenues was driven by the ~~beginning of 2017.~~shift in Company venue sales towards entertainment and merchandise sales.

Labor expenses, as a percentage of sales, were ~~28.8%~~27.1% and 27.0% for the first ~~nine months~~quarter of 2019 and 2018, ~~compared to 27.8% for the first nine months of 2017. Increased minimum~~respectively, as wage ~~rates in several states fully offset a decrease in labor hours in the first nine months of 2018 compared to the first nine months of 2017.~~pressures exceeded productivity gains.

~~Other venue operating~~Lease costs, as a percentage of sales, were ~~16.7% in both the first nine months of 2018~~10.1% 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 2018, offset decreases related to the impact of property and inventory losses in the third quarter of 2017 in connection with Hurricanes Harvey and Irma, as well as business interruption insurance proceeds received in the third quarter of 2018 related to one of our 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. Advertising expense~~9.6%, for the first ~~nine months~~quarter of 2019 and 2018, ~~was~~respectively. Lease costs for the first quarter of 2019 were impacted by the adoption of a new ~~revenue recognition~~lease standard effective ~~January 1,~~December 31, 2018, the first day of Fiscal 2019, that requires us to ~~account for our national advertising fund contributions~~recognize lease and non-lease components, such as ~~revenues,~~CAM charges, as lease costs, rather than ~~netted against Advertising expense. Including~~reflecting CAM charges as Other venue operating expenses. Excluding CAM charges, Lease costs, as a percentage of sales, would have been 8.8% for the first quarter of 2019.

Other venue operating expenses, as a percentage of sales, were 13.2% and 15.3% for the first quarter of 2019 and 2018, respectively. Other venue operating expenses for the first quarter of 2019 were impacted by the adoption of a new lease standard, as discussed in the previous paragraph under Lease costs. Other venue operating expenses as a percentage of sales, including the impact of ~~netting national advertising fund revenues against Advertising expense, Advertising expense~~CAM charges, would have been 14.5% for the first ~~nine months~~quarter of ~~2018 would have been $35.5~~2019, reflecting savings initiatives in general costs.

Advertising Expense

Advertising expense was $12.3 million ~~(see “Revenues” above). Advertising expense~~and $14.0 million for the first ~~nine months~~quarter of 2019 and 2018, ~~reflects~~respectively, due to a ~~decrease~~shift in ~~national media costs and a decrease in advertising for~~ our ~~Peter Piper Pizza venues.~~marketing strategy.

General and Administrative Expenses

General and administrative expenses were ~~$39.5~~$15.2 million and $12.9 million for the first ~~nine months~~quarter of 2019 and 2018, ~~compared to $42.7 million for the first nine months of 2017.~~respectively. The ~~decrease~~increase in general and administrative expenses infor the first ~~nine months~~quarter of ~~2018~~2019 is primarily due to an increase in performance-based compensation as a ~~decrease in labor related litigation costs, and savings initiatives implemented in the first quarter~~result of ~~2018.~~

improved operating results.

Depreciation and Amortization

Depreciation and amortization was ~~$76.8~~$24.3 million inand $26.6 million for the first ~~nine months~~quarter of 2019 and 2018, ~~compared to $83.1 million in the first nine months of 2017.~~respectively. The decrease in depreciation and amortization is primarily due to the impact of eight venue closures and non-cash venue impairments recorded in 2018, as well as 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. The Transaction, severance and related litigation costs in 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 relate to legal fees incurred in connection with Merger related litigation.

~~Asset Impairments~~

~~In the~~first 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 was 25.3% and 24.3% for the ~~nine months ended September 30,~~first quarter of 2019 and 2018, ~~was 6.8% as compared to 90.2% for the nine months ended October 1, 2017.~~respectively. Our effective income tax rate for the first quarter of 2019 and 2018 ~~was~~were both 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 of January 1, 2018) resulting from the change in our intent to no longer indefinitely reinvest monies previously loaned to our Canadian subsidiary offset by state income taxes, the negative impact of nondeductible litigation costs related to the Merger, nondeductible penalties, ~~a net increase in our liability for uncertain tax positions, state~~and foreign income taxes ~~including the negative impact of state~~(taxes withheld on royalties and franchise fees earned from international franchisees not offset by foreign 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 1, 2017 differed from the statutory rate primarilycredits due to ~~state income taxes and~~ the ~~favorable impact of employment related federal income~~foreign tax ~~credits.~~

credit limitation).

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 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.~~cash management strategies.

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						Three Months Ended
	September 30, 2018			October 1, 2017			March 31, 2019			April 1, 2018
	(in thousands)						(in thousands)
Net cash provided by operating activities	$	82,475		$	94,191		$	70,478		$	52,564
Net cash used in investing activities	(56,730		)	(74,006		)	(18,633		)	(18,417		)
Net cash provided by (used in) financing activities	(8,656		)	(2,322		)
Net cash used in financing activities							(2,871		)	(2,733		)
Effect of foreign exchange rate changes on cash	51			492			1			46
Change in cash, cash equivalents and restricted cash	$	17,140		$	18,355		$	48,975		$	31,460
Interest paid	$	59,229		$	53,076		$	23,799		$	22,546
Income taxes paid (refunded), net	$	867		$	6,635		$	(4,493	)	$	180


	September 30, 2018		December 31, 2017		March 31, 2019		December 30, 2018
	($ in thousands)				($ in thousands)
Cash and cash equivalents	$	84,429	$	67,200	$	112,030	$	63,170
Restricted cash	23		112		266		151
Term loan facility	725,800		731,500		722,000		723,900
Senior notes	255,000		255,000		255,000		255,000
Available unused commitments under revolving credit facility	141,000		140,100		86,538		141,000

Sources and Uses of Cash - ~~Nine~~Three months ended ~~September 30, 2018~~March 31, 2019 Compared to the ~~Nine~~Three months ended ~~October~~April 1, ~~2017~~2018

Net cash provided by operating activities was ~~$82.5~~$70.5 million and $52.6 million in the ~~nine~~three months ended ~~September 30, 2018 compared to $94.2 million in~~March 31, 2019 and the ~~nine~~three months ended ~~October~~April 1, ~~2017.~~2018, respectively. The ~~decrease~~increase in net cash provided by operating activities is primarily due to ~~a decrease~~an increase in net income, income tax refunds received, and fluctuations in our working capital.

Net cash used in investing activities was ~~$56.7~~$18.6 million and $18.4 million in the ~~nine~~three months ended ~~September 30, 2018 compared to $74.0 million in~~March 31, 2019 and the ~~nine~~three months ended ~~October~~April 1, ~~2017.~~2018, respectively. Net cash used in investing activities in the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and April 1, 2018 ~~and October 1, 2017~~ relates primarily to capital expenditures.

Net cash used in financing activities was ~~$8.7~~$2.9 million and $2.7 million in the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and the three months ended April 1, 2018, relating primarily to principal payments on our term loan and other lease related 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, 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~~$95.0 million senior secured revolving credit facility with ~~an original~~a maturity date of November 16, 2020 (as discussed in more detail below, $95.0 million of our original $150.0 million revolving credit facility maturing on February 14, 2019, ~~which~~was extended to November 16, 2020). The revolving credit facility 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 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 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 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~~the extent that 75% ~~(subject~~times our excess cash flow (as defined in the secured credit facilities agreement and 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~~with any such required mandatory payment reduced by 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 pro forma basis. The ~~maturity date~~remaining $55.0 million of the original revolving credit facility matured on February 14, 2019 with no borrowing thereunder outstanding thereunder.

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 March 31, 2019, we had no borrowings outstanding and $8.5 million of letters of credit issued but undrawn under the revolving credit facility ~~that was not extended remains February 14,~~leaving $86.5 million in borrowing capacity under the revolving credit facility as of March 31, 2019. As of December 30, 2018, we had no borrowings outstanding and $9.0 million of letters of credit issued but undrawn under the revolving credit facility.

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 0.5%; (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. During both the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and April 1, 2018, the applicable margin for LIBOR borrowings under both the term loan facility and the revolving facility was 3.25% ~~and during the nine months ended October 1, 2017 was 3.00% and 2.75%, respectively.~~.

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 0.5% per annum and is subject to one step-down from 0.5% to 0.375% based on our net first lien senior secured leverage ratio. During both the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and April 1, 2018, the commitment fee rate was 0.5% ~~and for the nine months ended October 1, 2017 it was 0.375%~~. We are also required to pay customary agency fees, as well as letter of credit participation fees computed at a rate per annum equal to the applicable margin for LIBOR rate borrowings on the dollar equivalent of the daily stated amount of outstanding letters of credit, plus such letter of credit issuer’s customary documentary and processing fees ~~and charges~~ and a fronting fee computed at a rate equal to 0.125% per annum on the daily stated amount of such letter of credit.

All 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%~~8.0% Senior Notes due 2022 (the “senior notes”) and mature on February 15, 2022. The senior notes bear interest at a rate of ~~8.000%~~8.0% per year payable February 15th and August 15th of each ~~year and mature on February 15, 2022.~~ year.

We may ~~redeem~~call some or all of the senior notes at ~~certain redemption prices~~102% on or after February 15, 2019 and at 100% on or after February 15, 2020 as 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 2018, we completed 194 game enhancements and 13 major 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~~three months of ~~2018~~2019 totaled approximately ~~$57.2~~$18.7 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				Three Months Ended
	September 30, 2018		October 1, 2017		March 31, 2019		April 1, 2018
	(in thousands)				(in thousands)
Growth capital spend ⁽¹⁾	$	21,157	$	42,960	$	4,904	$	5,307
Maintenance capital spend ⁽²⁾	33,048		26,104		13,332		12,138
IT capital spend	2,989		5,363		418		1,139
Total Capital Spend	$	57,194	$	74,427	$	18,654	$	18,584

__________________


(1)	Growth capital spend includes major remodels, including the re-imaging effort to update Chuck E. Cheese venues to a new look and feel, 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 ~~2018~~2019 will total approximately ~~$75~~$95 million to ~~$80~~$105 million, inclusive of maintenance capital, growth capital and IT related capital.

Off-Balance Sheet Arrangements and Contractual Obligations

As of ~~September 30, 2018,~~March 31, 2019, 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 December ~~31, 2017,~~30, 2018, filed with the SEC on March ~~28, 2018.~~12, 2019.

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 December ~~31, 2017.~~30, 2018.

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 December ~~31, 2017,~~30, 2018, filed with the SEC on March ~~28, 2018. See~~12, 2019. Except for the adoption of Accounting Standards Update ASU 2016-12, Leases (Topic 842) and subsequent amendment ASU 2018-11, Leases (Topic 842): Target Improvements, there has been no other material change to the information concerning our critical accounting policies and estimates since December 30, 2018 (see 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. There has been no other material change to the information concerning our critical accounting policies and estimates since December 31, 2017.~~report).

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 6 “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 excluding the annualized full year effect of Company-operated and franchised venues that were opened and closed during the 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						Three Months Ended
	September 30, 2018			October 1, 2017			September 30, 2018			October 1, 2017			March 31, 2019			April 1, 2018
	(in thousands, except percentages)												(in thousands, except percentages)
Total revenues	$	220,945		$	213,347		$	693,208		$	690,090		$	273,312		$	254,904
Net income (loss) as reported	$	(9,487	)	$	(11,092	)	$	(6,231	)	$	200
Net income as reported													$	21,246		$	12,223
Interest expense	19,069			17,451			56,740			51,574			19,808			18,557
Income tax expense	(2,213		)	(5,221		)	(454		)	1,840			7,178			3,933
Depreciation and amortization	24,739			27,136			76,804			83,064			24,334			26,572
Asset Impairments	5,344			1,843			6,935			1,843
EBITDA													72,566			61,285
Loss on asset disposals, net ⁽¹⁾	513			1,741			2,551			5,457			954			1,237
Unrealized loss on foreign exchange ⁽²⁾	(412		)	—			283			—
Unrealized (gain) loss on foreign exchange ⁽²⁾													(342		)	356
Non-cash stock-based compensation ⁽³⁾	(58		)	184			169			520			1,162			64
Rent expense book to cash ⁽⁴⁾	945			1,192			5,133			4,028			732			2,174
Franchise revenue, net cash received ⁽⁵⁾	(30		)	—			712			(344		)	698			421
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
Venue pre-opening costs ⁽⁶⁾													65			23
One-time and unusual items ⁽⁷⁾													300			762
Adjusted EBITDA													$	76,135		$	66,322
Adjusted EBITDA Margin	17.4		%	16.2		%	20.8		%	22.3		%	27.9		%	26.0		%

____________


(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.


(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.


(5)	Represents the actual cash received for franchise fees received in the period for post-acquisition franchise development agreements, which we do not start recognizing into revenue until the franchise venue is opened.


(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.~~


~~(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.

~~(8)~~(7)

Represents non-recurring income and expenses primarily related to (i) legal fees, claims and settlements related to litigation in respect of the 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) sales and use tax refunds relating to prior periods; (v) professional fees incurred in connection with one-time strategic corporate and tax initiatives, such as accounting and consulting fees related to incurred to enhance transfer ~~pricing and to implement PlayPass;~~pricing; (vi) legal fees incurred in connection with certain potential transactions the Company did not pursue; (vii) 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; (viii) one-time costs related to the early termination of a supplier contract in connection with the transition to a new supplier; (ix) one-time marketing expenses related to the grand openings of our re-imaged Chuck E. Cheese venues; and ~~(vii)~~(x) 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.~~

~~(9)~~

~~With~~and 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 resultsre-imaging effort of the ~~fluctuation of the deferred revenue liability related to unused credits on Play Pass cards begins to lessen~~venues 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 the deferred revenue liability relating to unused Play Pass cards has been removed from Adjusted EBITDA for all periods presented.Chuck E. Cheese portfolio.

Cautionary Statement Regarding Forward-Looking Statements

This report contains forward-looking statements, which involve risks and uncertainties. These forward-looking statements are generally identified by the use of forward-looking terminology, including the terms “anticipate,” “believe,” “could,” “estimate,” “expect,” “intent,” “may,” “plan,” “predict,” “potential,” “project,” “should,” “target,” “will,” “would” and, in each case, their negative or other various or comparable terminology. All statements other than statements of 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 December ~~31, 2017~~30, 2018, filed with the SEC on March ~~28, 2018.~~12, 2019. 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. There are a number of important factors that could cause actual results or events to differ materially from those indicated by such forward-looking statements, 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 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;

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

increases in food, labor and other operating costs;

the impact of labor scheduling legislation;

our ability to successfully open international franchises and to operate under the 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 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;

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;

risks associated with our proposed business combination and

the related business combination agreement, and following the consummation of the proposed business combination, the increased costs, and the risks, associated with being a reporting company with publicly traded equity; 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 December ~~31, 2017,~~30, 2018, filed with the SEC on March ~~28, 2018.~~12, 2019.

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~~$722.0 million as of ~~September 30, 2018~~March 31, 2019, 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~~$7.2 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,~~March 31, 2019 and April 1, 2018, ~~and October 1, 2017,~~ the average cost of a block of cheese was ~~$1.77~~$1.68 and ~~$1.85,~~$1.70, 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~~March 31, 2019 and ~~October~~April 1, ~~2017.~~ 2018.

For the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and April 1, 2018, and October 1, 2017, the average cost of a block of cheese was $1.72 and $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 $0.8 million for the nine months ended September 30, 2018 and $0.9 million for the nine months ended October 1, 2017, respectively.

~~For both the three and nine months ended September 30, 2018 and October 1, 2017,~~ the average cost of dough per pound was $0.47 and ~~$0.45,~~$0.48, 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,~~March 31, 2019 and April 1, 2018, ~~and October 1, 2017, and $0.4 million for both the nine months ended September 30, 2018 and October 1, 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 11 ~~Company-owned~~Company-operated venues in Canada. For the three ~~and nine~~ months ended ~~September 30, 2018,~~March 31, 2019, our Canadian venues generated operating income of ~~$0.7~~$0.6 million, ~~and $0.5 million, respectively,~~ compared to our consolidated operating income of ~~$7.2~~$48.2 million ~~and $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~~three months ended ~~September 30, 2018~~March 31, 2019 were ~~$0.751~~$0.733 and ~~$0.814,~~$0.764, respectively. A hypothetical 10% devaluation in the average quoted U.S. dollar-equivalent of the Canadian dollar exchange rate during the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 would have decreased our reported consolidated operating results by $0.1 million for ~~both~~ the three ~~and nine~~ months ended ~~September 30, 2018.~~March 31, 2019.

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 ~~September 30, 2018~~March 31, 2019 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.~~reporting, other than as set forth below.

In the first quarter, we completed the implementation of a lease administrative and reporting system to increase the efficiency of our existing lease administration and financial reporting process. Internal controls and processes have been designed to address changes in the business applications and financial processes as a result of this implementation.

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.

WeOther than as set forth below, 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 December ~~31, 2017,~~30, 2018, filed with the SEC on March ~~28, 2018.~~12, 2019.

We are subject to risks arising from the proposed business combination

On April 7, 2019, Parent and Leo Holdings Corp. (“Leo”), a publicly traded special purpose acquisition company, together with Parent’s controlling stockholder, an entity owned by funds managed by affiliates of Apollo, entered into a Business Combination Agreement (the “Leo Merger Agreement”). Pursuant to the Leo Merger Agreement, following Leo’s domestication as a Delaware corporation, Parent will merge with and into Leo with the result that the Company will become a wholly-owned subsidiary of Leo, which will be renamed Chuck E. Cheese Brands Inc. (the “Business Combination”). Existing shareholders, including the funds managed by affiliates of Apollo, will hold an approximate 51% stake in Chuck E. Cheese Brands Inc. upon completion of the Business Combination.

Consummation of the Business Combination is subject to various conditions, including certain approvals by the shareholders of Leo and the consummation of a concurrent $100 million private placement by Leo of its common stock. There can be no assurance that the Business Combination will be consummated as contemplated or at all. The failure of the Business Combination to be consummated for any reason could negatively impact the reputation of the Company.

In addition, management and employees of the Company are devoting significant time and resources to the completion of the Business Combination.

Upon consummation of the Business Combination, the Company intends to repay all, or substantially all, of the $255 million senior notes.

Following consummation of the Business Combination, the Company will be a wholly-owned subsidiary of a publicly traded company. As a result, the Company, and its Parent, will be subject to increased costs and other risks associated with being a company with publicly traded equity.

Refer to Note 15. “Subsequent Events” to our Consolidated Financial Statements included in Part I, Item 1. “Financial Statements” of this report for a discussion of our legal proceedings.

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

NONE.

ITEM 6. Exhibits.

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.

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 9, 2018~~May 14, 2019	By:	/s/ James A. Howell
		James A. Howell
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)

~~November 9, 2018~~May 14, 2019	By:	/s/ David Rappaport
		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.



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

	Issuer			Guarantors		Non-Guarantors			Eliminations			Consolidated
Current assets:
Cash and cash equivalents	$	59,948		$	410	$	6,842		$	—		$	67,200
Restricted cash	—			—		112			—			112
Accounts receivable	27,098			3,283		2,563			(1,923		)	31,021
Inventories	17,104			4,614		282			—			22,000
Prepaid expenses	13,766			5,549		1,083			—			20,398
Total current assets	117,916			13,856		10,882			(1,923		)	140,731
Property and equipment, net	496,725			66,669		6,627			—			570,021
Goodwill	433,024			51,414		—			—			484,438
Intangible assets, net	16,764			463,613		—			—			480,377
Intercompany	90,937			10,770		—			(101,707		)	—
Investment in subsidiaries	462,873			—		—			(462,873		)	—
Other noncurrent assets	7,913			11,359		205			—			19,477
Total assets	$	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		$	—	$	—		$	—		$	7,600
Capital lease obligations, current portion	586			—		10			—			596
Accounts payable and accrued expenses	58,014			35,134		4,169			—			97,317
Other current liabilities	4,265			511		—			—			4,776
Total current liabilities	70,465			35,645		4,179			—			110,289
Capital lease obligations, less current portion	12,956			—		54			—			13,010
Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion	965,213			—		—			—			965,213
Deferred tax liability	99,083			16,697		(1,594		)	—			114,186
Intercompany	—			75,052		28,578			(103,630		)	—
Other noncurrent liabilities	216,287			13,465		446			—			230,198
Total liabilities	1,364,004			140,859		31,663			(103,630		)	1,432,896
Stockholder's equity:
Common stock	—			—		—			—			—
Capital in excess of par value	359,233			466,114		3,241			(469,355		)	359,233
Retained earnings (deficit)	(95,199		)	10,708		(15,304		)	4,596			(95,199		)
Accumulated other comprehensive income (loss)	(1,886		)	—		(1,886		)	1,886			(1,886		)
Total stockholder's equity	262,148			476,822		(13,949		)	(462,873		)	262,148
Total liabilities and stockholder's equity	$	1,626,152		$	617,681	$	17,714		$	(566,503	)	$	1,695,044



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


	Issuer			Guarantors			Non-Guarantors			Eliminations			Consolidated
Revenues:
Food and beverage sales	$	79,871		$	12,854		$	1,298		$	—		$	94,023
Entertainment and merchandise sales	108,461			10,380			2,770			—			121,611
Total company venue sales	188,332			23,234			4,068			—			215,634
Franchise fees and royalties	441			4,302			568			—			5,311
International Association assessments and other fees	221			9,588			8,862			(18,671		)	—
Total revenues	188,994			37,124			13,498			(18,671		)	220,945
Operating Costs and Expenses:
Company venue operating costs:
Cost of food and beverage	18,700			3,348			472			—			22,520
Cost of entertainment and merchandise	9,306			391			177			—			9,874
Total cost of food, beverage, entertainment and merchandise	28,006			3,739			649			—			32,394
Labor expenses	58,818			4,976			1,234			—			65,028
Rent expense	21,719			1,630			502			—			23,851
Other venue operating expenses	43,711			3,500			830			(9,809		)	38,232
Total company venue operating costs	152,254			13,845			3,215			(9,809		)	159,505
Advertising expense	8,984			1,150			9,786			(8,862		)	11,058
General and administrative expenses	5,017			8,499			(323		)	—			13,193
Depreciation and amortization	21,429			2,807			503			—			24,739
Transaction, severance and related litigation costs	(262		)	(1		)	—			—			(263		)
Asset impairments	2,505			2,836			3			—			5,344
Total operating costs and expenses	189,927			29,136			13,184			(18,671		)	213,576
Operating income (loss)	(933		)	7,988			314			—			7,369
Equity in earnings (loss) in affiliates	5,444			—			—			(5,444		)	—
Interest expense	18,205			692			172			—			19,069
Income (loss) before income taxes	(13,694		)	7,296			142			(5,444		)	(11,700		)
Income tax expense (benefit)	(4,207		)	2,113			(119		)	—			(2,213		)
Net income (loss)	$	(9,487	)	$	5,183		$	261		$	(5,444	)	$	(9,487	)

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



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


	Issuer			Guarantors			Non-Guarantors			Eliminations			Consolidated
Revenues:
Food and beverage sales	$	83,413		$	13,234		$	1,608		$	—		$	98,255
Entertainment and merchandise sales	88,551			19,174			2,908			—			110,633
Total company venue sales	171,964			32,408			4,516			—			208,888
Franchise fees and royalties	506			3,953			—			—			4,459
International Association assessments and other fees	364			7,702			8,294			(16,360		)	—
Total revenues	172,834			44,063			12,810			(16,360		)	213,347
Operating Costs and Expenses:
Company venue operating costs:
Cost of food and beverage	19,916			3,519			539			—			23,974
Cost of entertainment and merchandise	6,807			432			191			—			7,430
Total cost of food, beverage, entertainment and merchandise	26,723			3,951			730			—			31,404
Labor expenses	55,252			4,729			1,239			—			61,220
Rent expense	22,066			1,624			569			—			24,259
Other venue operating expenses	43,731			3,817			1,079			(8,066		)	40,561
Total company venue operating costs	147,772			14,121			3,617			(8,066		)	157,444
Advertising expense	8,670			1,085			10,622			(8,294		)	12,083
General and administrative expenses	4,526			9,003			46			—			13,575
Depreciation and amortization	24,126			2,515			495			—			27,136
Transaction, severance and related litigation costs	128			—			—			—			128
Asset impairments	1,824			14			5			—			1,843
Total operating costs and expenses	187,046			26,738			14,785			(16,360		)	212,209
Operating income (loss)	(14,212		)	17,325			(1,975		)	—			1,138
Equity in earnings (loss) in affiliates	(10,551		)	—			—			10,551			—
Interest expense	15,902			1,353			196			—			17,451
Income (loss) before income taxes	(40,665		)	15,972			(2,171		)	10,551			(16,313		)
Income tax expense (benefit)	(29,573		)	25,067			(715		)	—			(5,221		)
Net income (loss)	$	(11,092	)	$	(9,095	)	$	(1,456	)	$	10,551		$	(11,092	)

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



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

	Issuer			Guarantors		Non-Guarantors			Eliminations			Consolidated
Revenues:
Food and beverage sales	$	264,130		$	40,250	$	4,278		$	—		$	308,658
Entertainment and merchandise sales	324,231			36,255		8,147			—			368,633
Total company venue sales	588,361			76,505		12,425			—			677,291
Franchise fees and royalties	1,441			12,661		1,815			—			15,917
International Association assessments and other fees	794			28,339		27,951			(57,084		)	—
Total revenues	590,596			117,505		42,191			(57,084		)	693,208
Operating Costs and Expenses:
Company venue operating costs:
Cost of food and beverage	60,432			10,845		1,497			—			72,774
Cost of entertainment and merchandise	25,972			1,238		466			—			27,676
Total cost of food, beverage, entertainment and merchandise	86,404			12,083		1,963			—			100,450
Labor expenses	176,106			15,065		3,823			—			194,994
Rent expense	65,417			5,638		1,560			—			72,615
Other venue operating expenses	129,006			10,882		2,634			(29,159		)	113,363
Total company venue operating costs	456,933			43,668		9,980			(29,159		)	481,422
Advertising expense	28,742			4,511		32,682			(27,925		)	38,010
General and administrative expenses	13,539			25,336		644			—			39,519
Depreciation and amortization	67,073			8,253		1,478			—			76,804
Transaction, severance and related litigation costs	197			266		—			—			463
Asset Impairments	2,591			4,341		3			—			6,935
Total operating costs and expenses	569,075			86,375		44,787			(57,084		)	643,153
Operating income (loss)	21,521			31,130		(2,596		)	—			50,055
Equity in earnings (loss) in affiliates	19,869			—		—			(19,869		)	—
Interest expense	53,833			2,446		461			—			56,740
Income (loss) before income taxes	(12,443		)	28,684		(3,057		)	(19,869		)	(6,685		)
Income tax expense (benefit)	(6,212		)	6,526		(768		)	—			(454		)
Net income (loss)	$	(6,231	)	$	22,158	$	(2,289	)	$	(19,869	)	$	(6,231	)

Components of other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	127			—		127			(127		)	127
Comprehensive income (loss)	$	(6,104	)	$	22,158	$	(2,162	)	$	(19,996	)	$	(6,104	)