Ceconomy Annual Report 2012

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934For the fiscal year ended December 30, 2012OR ¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934For the transition period from to Commission File Number: 001-13687 CEC ENTERTAINMENT, INC.(Exact name of registrant as specified, in its charter) Kansas 48-0905805(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)4441 West Airport FreewayIrving, Texas 75062(Address of principal executive offices) (Zip Code)(972) 258-8507(Registrant’s telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registeredCommon Stock, $0.10 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act:None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No xIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No xIndicate 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 1934during 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 filingrequirements for the past 90 days. Yes x No ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired 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 shorterperiod that the registrant was required to submit and post such files). Yes x No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K. ¨Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act: Large accelerated filer x Accelerated filer ¨Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No xAs of June 29, 2012, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the commonstock beneficially held by non-affiliates of the registrant was $604,869,143. The aggregate market value was determined based on the closing price of thecommon stock on June 29, 2012.As of February 12, 2013, an aggregate of 17,896,960 shares of the registrant’s common stock, par value $0.10 per share, were outstanding.DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s Definitive Proxy Statement, to be filed pursuant to Section 14(a) of the Securities Exchange Act of 1934 in connection with theregistrant’s 2013 annual meeting of stockholders, are incorporated by reference in Part III of this report. Table of ContentsCEC ENTERTAINMENT, INC.TABLE OF CONTENTS Page Cautionary Statement Regarding Forward-Looking Statements 3 PART I ITEM 1. Business 4 ITEM 1A. Risk Factors 9 ITEM 1B. Unresolved Staff Comments 16 ITEM 2. Properties 17 ITEM 3. Legal Proceedings 18 ITEM 4. Mine Safety Disclosures 18 PART II ITEM 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 19 ITEM 6. Selected Financial Data 21 ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 23 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 44 ITEM 8. Financial Statements and Supplementary Data 45 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 71 ITEM 9A. Controls and Procedures 71 ITEM 9B. Other Information 72 PART III ITEM 10. Directors, Executive Officers and Corporate Governance 73 ITEM 11. Executive Compensation 73 ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 73 ITEM 13. Certain Relationships and Related Transactions, and Director Independence 73 ITEM 14. Principal Accountant Fees and Services 73 PART IV ITEM 15. Exhibits and Financial Statement Schedules 74 SIGNATURES 75 EXHIBIT INDEX 2Table of ContentsAs used in this report, the terms “CEC Entertainment,” “we,” “Company,” “us,” and “our” refer to CEC Entertainment, Inc. and itssubsidiaries.Cautionary Statement Regarding Forward-Looking StatementsCertain statements in this report, other than historical information, may be considered “forward-looking statements” within the meaning of the “safeharbor” provisions of the Private Securities Litigation Reform Act of 1995, and are subject to various risks, uncertainties and assumptions. Statements thatare not historical in nature, and which may be identified by the use of words such as “may,” “should,” “could,” “believe,” “predict,” “potential,” “continue,”“plan,” “intend,” “expect,” “anticipate,” “future,” “project,” “estimate,” and similar expressions (or the negative of such expressions) are forward-lookingstatements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future events and, therefore, involve anumber of assumptions, risks and uncertainties, including the risk factors described in Part I, Item 1A. “Risk Factors” of this Annual Report on Form 10-K.Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ from thoseanticipated, estimated or expected. Factors that could cause actual results to differ materially from those contemplated by forward-looking statements include,but are not limited to: • Our ability to successfully implement our strategic plan; • Competition in both the restaurant and entertainment industries; • Changes in consumer discretionary spending; • Impacts on our business and financial results from economic uncertainty in the U.S. and Canada; • Negative publicity concerning food quality, health, general safety and other issues; • Increases in food, labor and other operating costs; • Unanticipated costs and delays in implementing our strategic plan; • Government regulations, including health care reform; • Existence or occurrence of certain public health issues; • Changes in consumers’ health, nutrition and dietary preferences; • Any disruption of our commodity distribution system, which currently utilizes a single distributor for most of our products and supplies; • Product liability claims and product recalls; • Inadequate insurance coverage; • Disruptions of our information technology systems and technologies; • Litigation risks; • Our dependence on a limited number of suppliers for our games, rides, redemption prizes and merchandise; • Adverse effects of local conditions, natural disasters and other events; • Increases in our leverage; • Loss of certain key personnel; • Fluctuations in our quarterly results of operations due to seasonality; • Our ability to adequately protect our trademarks or other proprietary rights; • Risks in connection with owning and leasing real estate; and • Conditions in foreign markets.The forward-looking statements made in this report relate only to events as of the date on which the statements were made. Except as may be required bylaw, we undertake no obligation to update our forward-looking statements to reflect events and circumstances after the date on which the statements were madeor to reflect the occurrence of unanticipated events. 3Table of ContentsPART IITEM 1. Business.Company OverviewChuck E. Cheese’s is a nationally recognized leader in family dining and entertainment. We consider the family dining and entertainment centerbusiness to be our sole reportable segment. The first Chuck E. Cheese’s opened in 1977. The Company was originally incorporated under the name ShowBizPizza Place, Inc. and began trading on the NASDAQ Stock Market in 1989. In 1998, the Company changed its name to CEC Entertainment, Inc. and begantrading on the New York Stock Exchange under its existing ticker symbol (CEC).We develop, operate and franchise family dining and entertainment centers (also referred to as “stores”) under the name “Chuck E. Cheese’s” in 47states and eight foreign countries and territories. As of December 30, 2012, we and our franchisees operated a total of 565 stores, of which 514 wereCompany-owned stores located in 44 states and Canada. Our franchisees operated a total of 51 stores located in 15 states and seven foreign countries andterritories including Chile, Guam, Guatemala, Mexico, Puerto Rico, Saudi Arabia and the United Arab Emirates.Chuck E. Cheese’s stores offer wholesome family dining, distinctive musical and comic entertainment by computer-controlled robotic characters,family-oriented arcade-style and skill-oriented games, video games, rides and other activities, all of which are intended to uniquely appeal to our primarycustomer base of families with children between two and 12 years of age. All of our stores offer dining selections consisting of a variety of pizzas, sandwiches,wings, appetizers, a salad bar, beverages and desserts.We believe that the dining and entertainment components of our business are interdependent, and therefore we primarily manage and promote them as anintegrated product. Our typical guest experience involves a combination of wholesome family dining and entertainment, comprised of token-operated gamesand rides, as well as attractions provided free-of-charge. We also believe our unique integrated experience drives our strategic plan as we continuously endeavorto increase customer traffic in our stores, benefiting both dining and entertainment revenue.Our Strategic PlanOur strategic plan is focused on implementing our marketing plan and value proposition, continuing to reinvest in our existing store base, delivering onour operational plan, continuing our new company store development domestically and developing franchises internationally.Marketing Plan and Value Proposition. The primary components of our marketing plan include a strong television campaign targeting both childrenand parents, an enhanced creative plan for television, a strong presence in digital media and a redesigned website. Our primary advertising medium continuesto be television, due to its broad access to family audiences and our belief in its ability to effectively communicate the Chuck E. Cheese’s experience. Ourmessaging to children is built on a foundation of brand advertising and reasons to visit our locations for both everyday and birthday occasions. Ourcommunication to parents is rooted in emotion and complemented by a value message. In the second half of 2012, we launched a digital campaign through anumber of parents’ websites and on our new website that delivers Chuck E. Cheese’s branded content, reinforces our value proposition and communicates ourbrand promise. Our value proposition includes competitive pizza prices and value deals, coupon offers and token packages. We distribute value offers on ourwebsite, digitally, through print and through strategic promotional partnerships with brands that target a similar customer base.Existing Stores. We believe that in order to maintain consumer demand and the appeal of our concept, we must continue to reinvest in our existingstores. For our existing stores, we utilize the following capital initiatives: (a) game enhancements; (b) major remodels; and (c) store expansions. Gameenhancements include 4®Table of Contentsreplacing a portion of a store’s games and rides with new and, to a lesser extent, refurbished equipment. We undertake periodic major remodels when there is aneed to improve the overall appearance or layout of a store or when we introduce concept changes or enhancements in our stores. Store expansions add squarefootage to a store that allows us to increase the number and variety of games and rides. Store expansions typically include all components of a major remodeland increase the store’s seat count. While initiatives such as expansions may capitalize on incremental revenue growth opportunities, we believe capitalinitiatives involving major remodels and game enhancements help to preserve our existing sales base and cash flows and, to a lesser extent, provide afoundation for long-term revenue growth.See Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition, Liquidity andCapital Resources – Capital Expenditures” for more information regarding our capital initiatives and expenditures.Operational Plan. The primary objective of our operational plan is to improve the service level and experience for all of our guests. Our operationalcornerstones include recognition of first time guests, Chuck E. Cheese performances every hour on the half-hour and enhanced cleanliness standards,including notifying our customers of the location of free hand sanitizer stations throughout the store.New Company Store Development. Our plan for the development of new Company-owned stores focuses on opening high sales volume stores indensely populated areas domestically. The cost of opening a new store varies depending on many factors, including the existing real estate market, the size ofthe store, whether we acquire land and whether the store is located in an in-line or freestanding building.Chuck E. Cheese’s are typically located in shopping centers or in free-standing buildings near shopping centers. Our stores are typically divided intothree areas: (a) a kitchen and other store-related areas (cashier and prize area, salad bar, manager’s office, technician’s office, restrooms, etc.); (b) a showroomarea; and (c) a playroom area. The average size of our existing stores is approximately 12,000 square feet. Total table and chair seating in both the showroomand playroom areas generally average between 400 to 450 guests per store.We periodically reevaluate the site characteristics of our stores and will consider relocating a store if certain site characteristics considered essential forthe success of a store deteriorate, more desirable property becomes available or we are unable to negotiate acceptable lease terms with the existing landlord.International Growth. We believe we have an opportunity to further expand the Chuck E. Cheese’s concept globally. In 2012, our internationalfranchisees opened two new stores in Chile and one new store in Mexico. Under our existing international franchise agreements, we currently expect franchiseesto open approximately four to six international franchise stores in 2013.In 2011, we signed three franchise development agreements, which grant the right to develop a total of 19 franchise stores in Mexico, Panama and SaudiArabia. In 2012, we signed seven new franchise development agreements, which grant the right to develop a total of 42 additional franchise stores located inBahrain, Mexico, Peru, the Philippines, Saudi Arabia, Trinidad and the United Arab Emirates. In addition, in 2013, we plan on continuing to pursueinternational franchise growth by selectively seeking franchise partners in certain countries in Asia, Latin America and the Middle East. As of December 30,2012, we currently have 11 development agreements with the rights to open 64 franchise stores in foreign countries and territories, which could take a numberof years to develop, if at all.Food and BeveragesEach Chuck E. Cheese’s store offers a variety of pizzas, sandwiches, wings, appetizers, a salad bar and desserts, as well as certain gluten-free options.Soft drinks, coffee and tea are also served, along with beer and wine where permitted by local laws. We continuously focus on delivering a quality-drivenproduct and believe the quality of our food compares favorably with that of our competitors. The majority of the food, non-alcoholic 5Table of Contentsbeverages and other supplies used in Company-owned stores are currently distributed under a system-wide agreement with a major food distributor. We believethat this distribution system creates certain cost and operational efficiencies for us. In 2012, we standardized all of our domestic Company stores’ valuemenus and pricing.Food and beverage sales represented 46.7%, 47.7% and 49.0% of our Company store sales during fiscal years 2012, 2011 and 2010, respectively.Entertainment and MerchandiseEach Chuck E. Cheese’s store includes a showroom area featuring musical and comic entertainment presented by computer-controlled robotic charactersand playroom area offering arcade-style and skill-oriented games, video games, rides and other forms of entertainment. Tokens are used to activate the gamesand rides in the playroom area. All of our games and rides are activated with one token. A number of skill-oriented games dispense tickets that can be redeemedby guests for prize merchandise such as toys and plush items. Our guests can also purchase this merchandise directly for cash. Also included in theplayroom area of our stores are tubes and tunnels suspended from, or reaching to, the ceiling known as Sky Tubes, as well as other free attractions foryoung children. We place a limited amount of table and chair seating in the playroom areas of our Company-owned stores so that parents can more closelyobserve and interact with their children as they play the games and ride the rides.Entertainment and merchandise sales represented 53.3%, 52.3% and 51.0% of our Company store sales during fiscal years 2012, 2011 and 2010,respectively.FranchisingAs of December 30, 2012, a total of 51 Chuck E. Cheese’s stores were operated by our franchisees. Of these stores, 35 are located domestically in theUnited States and 16 are located in foreign countries and territories.Our standard franchise agreement grants the franchisee the right to construct and operate a store and use our associated trade names, trademarks andservice marks in accordance with our standards and guidelines. Most of our existing franchise agreements have an initial term of 15 to 20 years and include a10-year renewal option. The standard agreement provides us with a right of first refusal should a franchisee decide to sell a store. We also enter into areadevelopment agreements, which grant franchisees exclusive rights to open a specified number of stores in a designated geographic area within a specified periodof time. In addition to initial franchise and area development fees, the franchisee is charged a continuing monthly royalty fee equal to a certain percentage oftheir gross monthly sales.In 1985, we and our franchisees formed the International Association of CEC Entertainment, Inc. (the “Association”) to discuss and consider matters ofcommon interest relating to the operation of Company-owned and franchised Chuck E. Cheese’s. Routine business matters of the Association are conducted bya board of directors of the Association, composed of five members appointed by us and five members elected by the franchisees. The Association serves as anadvisory council, which among other responsibilities, oversees expenditures from the funds established and managed by the Association. These funds include(a) the Advertising Fund, a fund that pays the costs of development, purchasing and placement of advertising programs, including websites; (b) theEntertainment Fund, a fund established to develop and improve audio-visual and animated entertainment attractions, as well as the development andimplementation of new entertainment concepts; and (c) the Media Fund, a fund primarily designated for the purchase of national network televisionadvertising.The franchise agreements governing existing franchised Chuck E. Cheese’s in the United States currently require each franchisee to pay to theAssociation a monthly contribution equal to a certain percentage of their gross monthly sales. Additionally, under these franchise agreements, we are required,with respect to Company-owned stores, to contribute to the Advertising Fund and the Entertainment Fund at the same rates, or at higher 6®Table of Contentsrates in certain instances, as our franchisees. We and our franchisees are also required to spend minimum amounts on local advertising and could be requiredto make additional contributions to fund any deficits that may be incurred by the Association. Certain franchise agreements governing existing franchisedChuck E. Cheese’s outside of the United States currently require each franchisee to pay a certain percentage of their gross monthly sales to the Association tofund various advertising and media costs.Royalties, franchise and area development fees and other miscellaneous franchise income represented 0.6%, 0.6% and 0.5% of our total consolidatedrevenues during fiscal years 2012, 2011 and 2010, respectively.Foreign OperationsAs of December 30, 2012, we operated a total of 14 Company-owned stores in Canada. During fiscal years 2012, 2011 and 2010, our Canada storesgenerated total revenues of $21.7 million, $22.2 million and $21.8 million, respectively, representing 2.7% of our total consolidated revenues in each fiscalyear. As of December 30, 2012, $17.5 million, or 2.5%, of the total net book value of our long-lived assets were located in Canada.These foreign activities, along with our international franchisees, are subject to various risks of conducting business in a foreign country, includingchanges in foreign currency, laws and regulations and economic and political stability. See Part I, Item 1A. “Risk Factors” for more information regarding therisks associated with operations located in foreign markets.Third-Party SuppliersWe currently use a network of 20 distribution centers owned by a single company to distribute most of the products and supplies used in our domesticstores. We have not entered into any hedging arrangements to reduce our exposure to commodity price volatility associated with commodity prices; however, wetypically enter into short-term purchasing arrangements, which may contain pricing designed to minimize the impact of commodity price fluctuations.We procure games, rides and other entertainment-related equipment from a limited number of suppliers, some of which are located in China. Thenumber of suppliers from which we purchase games, rides and other entertainment-related equipment has declined due to industry consolidation over the pastseveral years, coupled with a lower overall global demand. See Part I, Item 1A. “Risk Factors” for more information regarding the risks associated with ourthird-party suppliers.CompetitionThe family dining and entertainment industries are highly competitive, with a number of major national and regional chains operating in each of thesespaces. In this regard, we compete for customers on the basis of (a) our name recognition; (b) the price, quality, variety and perceived value of our food andentertainment offerings; (c) the quality of our customer service; and (d) the convenience and attractiveness of our facilities. Although there are other conceptsthat presently utilize the combined family dining and entertainment format, these competitors primarily operate on a regional or market-by-market basis. To alesser extent, we also compete directly and/or indirectly with other dining and entertainment formats, including full-service and quick-service restaurantsappealing to families with young children, the quick service pizza segment, movie theaters, themed amusement attractions, and other entertainment facilitiesfor children.We believe that our principal competitive strengths consist of our established recognized brand, the quality and value of the food and service we provide,the quality and variety of our entertainment offerings, the location and attractiveness of our stores and the cleanliness, safety and whole family fun we offerour guests. We also believe that our competitive strengths include our operating model and tenured management team’s knowledge of the family dining andentertainment industries relative to our target market of families with young children. 7Table of ContentsIntellectual PropertyWe own various trademarks, including Chuck E. Cheese’s and the Chuck E. Cheese character image used in connection with our business, whichhave been registered with the appropriate patent and trademark offices. The duration of such trademarks is unlimited, subject to continued use and renewal.We believe that we hold the necessary rights for protection of the trademarks considered essential to conduct our business. We believe our trade name and ourownership of trademarks in the names and character likenesses featured in the operation of our stores provide us with an important competitive advantage,and we actively seek to protect our interests in such property.SeasonalityOur operating results fluctuate seasonally. We typically generate higher sales volumes during the first and third quarters of each fiscal year due to thetiming of school vacations, holidays and changing weather conditions. School operating schedules, holidays and weather conditions may also affect our salesvolumes in some operating regions differently than others. Because of the seasonality of our business, results for any quarter are not necessarily indicative ofthe results that may be achieved for our full fiscal year.Government RegulationWe and our franchisees are subject to various federal, state and local laws and regulations affecting the development and operation of Chuck E. Cheese’sstores. For a discussion of government regulation risks to our business, see Part I, Item 1A. “Risk Factors.”EmployeesAs of December 30, 2012, we employed approximately 17,600 employees, including approximately 17,200 in the operation of our Company-ownedstores and approximately 400 in our corporate office. None of our employees are members of any union or collective bargaining group. We believe that ouremployee relations are satisfactory, and we have not experienced any work stoppages at any of our stores.Each Chuck E. Cheese’s store typically employs a general manager, one or two managers, an electronic specialist who is responsible for repair andmaintenance of the robotic characters, games and rides and approximately 20 to 40 food preparation and service employees, many of whom work part-time.Our staffing requirements are seasonal, and the number of people we employ at our stores will fluctuate throughout the year.Available InformationWe make financial information, news releases and other information available on our corporate website at www.chuckecheese.com. Our annual reportson Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant toSection 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended are available free of charge on our website as soon as reasonably practicable afterwe electronically file these reports and amendments, or furnish them to, the United States Securities and Exchange Commission (“SEC”). Stockholders mayalso contact Investor Relations at 4441 W. Airport Freeway, Irving, Texas 75062 or call (972) 258-4525 to obtain a hard copy of these reports without charge.We do not intend for information contained on our website to be part of this Annual Report on Form 10-K. 8®Table of ContentsITEM 1A. Risk Factors.Our business operations and the implementation of our business strategy are subject to significant risks inherent in our business, including, withoutlimitation, the risks and uncertainties described below. The occurrence of any one or more of the risks or uncertainties described below and elsewhere in thisAnnual Report on Form 10-K could have a material effect on our consolidated financial condition, results of operations and cash flows. Because theseforward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many ofwhich are beyond our control or are subject to change, actual results could be materially different.We may not be successful in the implementation of our strategic plan, which could adversely affect our business and our consolidated financialresults.Our ability to increase revenues and improve financial results depends, to a significant degree, on our ability to successfully implement our long-termgrowth strategy. As part of our long-term growth strategy, we plan to upgrade the games, rides and entertainment in some of our existing stores, remodel andexpand certain of our existing stores and open additional new stores in selected markets. The opening and success of new Chuck E. Cheese’s stores isdependent on various factors, including but not limited to the availability of suitable sites, the negotiation of acceptable lease terms for such locations, ourability to meet construction schedules, our ability to manage such expansion and hire and train personnel to manage the new stores, the potentialcannibalization of sales at our adjacent stores located in the market, as well as general economic and business conditions. Our ability to successfully open newstores or remodel, expand or upgrade the entertainment at existing stores will also depend upon the availability of sufficient capital for such purposes,including operating cash flow, our existing credit facility, future debt financings, future equity offerings or a combination thereof. There can also be noassurance that we will be successful in opening and operating the number of anticipated new stores on a timely or profitable basis. There can be no assurancethat we can continue to successfully remodel or expand our existing facilities or upgrade the games and entertainment or obtain a reasonable return on suchinvestments. Our growth is also dependent on our ability to continually evolve and update our business model to anticipate and respond to changing customerpreferences and competitive conditions. In recent years, we have reduced capital expenditures allocated to our existing stores and increased capital expendituresrelated to new store development. This reduction in capital expenditures allocated to our existing stores may have an adverse effect on our comparable storesales and revenues. There can be no assurance that we will be able to successfully anticipate changes in competitive conditions or customer preferences or thatthe market will accept our business model.We have in recent years made significant changes to our marketing and advertising strategy, including (a) the introduction of an updated Chuck E.Cheese character; (b) a reallocation of our media expenditures to increase online impressions; and (c) promoting our value proposition and national menupricing through free-standing inserts in newspapers, on television and online. There can be no assurance that these changes to our traditional media strategy,which was heavily weighted towards kids television advertising, free-standing inserts in newspapers and significant couponing, will be effective at reachingcustomers or be accepted by customers. If we are not effective in reaching our customers with our new marketing and advertising strategy or if these changesare not accepted by guests, our consolidated financial results could be adversely affected.Part of our growth strategy depends on our ability to attract new international franchisees and the ability of these franchisees to open and operate newstores on a profitable basis. As we do not have a history of significant international growth experience, there can be no assurance that we will be able tosuccessfully execute this strategy in the future. Delays or failures in identifying desirable franchise partners and opening new franchised stores couldadversely affect our planned growth. Our franchisees depend on the availability of financing to construct and open new stores. If these franchisees experiencedifficulty in obtaining adequate financing, our growth strategy and franchise revenues could be adversely affected. Additionally, our growth strategy depends 9Table of Contentson the ability of our international franchisees to learn and implement our business strategy, while adapting it to the local culture. There can be no assurancethat the Chuck E. Cheese’s concept will be accepted in the international markets where we open new franchise stores.The restaurant and entertainment industries are highly competitive and that competition could harm our business and our consolidated financialresults.We believe that our combined restaurant and entertainment center concept puts us in a niche, which combines elements of both the restaurant andentertainment industries. As a result, we compete with entities in both industries. The family dining industry and the entertainment industry are highlycompetitive, with a number of major national and regional chains operating in each of these spaces. Although other restaurant chains presently utilize theconcept of combined family dining-entertainment operations, we believe these competitors operate primarily on a local, regional or market-by-market basis.Within the traditional restaurant sector, we compete with other casual dining restaurants on a nationwide basis with respect to price, quality and speed ofservice, type and quality of food, personnel, the number and location of restaurants, attractiveness of facilities, effectiveness of advertising and marketingprograms and new product development. To a lesser extent, our competition also includes quick service restaurants with respect to pricing, service, experienceand perceived value. Within the entertainment sector, we compete with movie theaters, bowling alleys, theme parks and other family-oriented concepts on anationwide basis with respect to perceived value and overall experience. Additionally, children’s interests and opportunities for entertainment continue toexpand. If we are unable to successfully evolve our concept, including new food and entertainment offerings, we may lose market share to our competition.These competitive market conditions, including the emergence of significant new competition, could adversely affect our consolidated financial results.Changes in consumer discretionary spending could reduce sales at our stores and have an adverse effect on our consolidated financial results.Purchases at our stores are discretionary for consumers and, therefore, our results of operations are susceptible to economic slowdowns and recessions.We are dependent in particular upon discretionary spending by consumers living in the communities in which our stores are located. A significant portion ofour stores are clustered in certain geographic areas. Currently, a total of 171 Chuck E. Cheese’s stores are located in California, Texas and Florida (168 areCompany-owned and 3 are franchised locations). A significant weakening in the local economies of these geographic areas, or any of the areas in which ourstores are located, may cause consumers to curtail discretionary spending, which in turn could reduce our Company store sales and have an adverse effect onour consolidated financial results.The future performance of the U.S. and global economies are uncertain and are directly affected by numerous national and global financial and otherfactors that are beyond our control. Increases in credit card debt, home mortgage and other borrowing costs and declines in housing values could furtherweaken the U.S. economy, leading to a further decrease in discretionary consumer spending. We believe that consumers generally are more willing to makediscretionary purchases, including at our stores, during periods in which favorable economic conditions prevail. Further, fluctuations in the retail price ofgasoline and the potential for future increases in gasoline and other energy costs may affect consumers’ disposable incomes available for entertainment anddining. Changes in consumer spending habits as a result of a recession or a reduction in consumer confidence are likely to reduce our sales performance,which could have an adverse effect on our business and consolidated financial results. In addition, these economic factors could affect our level of spendingon planned capital initiatives at our stores, and thereby impact our future sales. 10Table of ContentsEconomic uncertainty in the U.S. and Canada could adversely impact our business and consolidated financial results, and a renewed recessioncould materially adversely affect our business and consolidated financial results.Our target market of families with young children can be highly sensitive to adverse economic conditions, which may impact their desire to spenddiscretionary dollars resulting in lower customer traffic levels in our stores. Reduced consumer confidence as a result of a renewed recession, job losses, homeforeclosures, investment losses in the financial markets, personal bankruptcies and reduced access to credit may also result in lower levels of traffic to ourstores. Moreover, our customer traffic may be impacted by major changes in U.S. fiscal policy, including the expiration of the “payroll tax holiday” and otherausterity measures. If conditions worsen, we could experience a deterioration in customer traffic and/or a reduction in the average amount spent in our stores,which would negatively impact our sales. This could result in a reduction in staffing at our stores, deferring or curtailing our capital expenditures, significantasset impairments and potential store closures. Future recessionary effects are unknown at this time and could have a material adverse impact on ourconsolidated financial results.Negative publicity concerning food quality, health, general safety or other issues could negatively affect our brand image and adversely affect ourconsolidated financial results.Food service businesses can be adversely affected by litigation and complaints from guests, consumer groups or government authorities resulting fromfood quality, illness, injury or other health concerns or operating issues stemming from one store or a limited number of stores. Publicity concerning food-borne illnesses, injuries caused by food tampering and general safety issues could negatively affect our operations, reputation and brand. Families with youngchildren may be highly sensitive to adverse publicity that may arise from an actual or perceived negative event within one or more of our stores. We have, fromtime to time, received negative publicity related to altercations and other incidents in certain of our stores. There can be no assurance that in the future we willnot experience negative publicity regarding one or more of our stores, and the existence of negative publicity could materially and adversely affect our brandimage with our customers and our consolidated financial results.Increases in food, labor and other operating costs could adversely affect our consolidated financial results.The performance of our stores is affected by changes in the costs for food products we purchase, including but not limited to cheese, dough, produce,chicken and beef. The commodity prices for these food products vary throughout the year and may be affected by changes in supply, demand and otherfactors beyond our control. We have not entered into any hedging arrangements to reduce our exposure to commodity price volatility associated with commodityprices; however, we typically enter into short-term purchasing arrangements, which may contain pricing designed to minimize the impact of commodity pricefluctuations. A material increase in our food costs could negatively affect our profit margins and adversely affect our consolidated financial results.A significant number of our store-level employees are subject to various minimum wage requirements. Several states and cities in which we operatestores have established a minimum wage higher than the federally mandated minimum wage. There may be similar increases implemented in otherjurisdictions in which we operate or seek to operate. Changes in the minimum wage could increase our labor costs and could have an adverse effect on ourprofit margins and our consolidated financial results.The performance of our stores is also adversely affected by increases in the price of utilities on which the stores depend, such as electricity and naturalgas, whether as a result of inflation, shortages or interruptions in supply, or otherwise. Our business also incurs significant costs for and including, amongother things, insurance, marketing, taxes, real estate, borrowing and litigation, all of which could increase due to inflation, rising interest rates, changes inlaws, competition or other events beyond our control, which could have an adverse effect on our consolidated financial results. 11Table of ContentsWe may incur significant costs and experience significant delays in connection with our strategic plan, which could impair our ability to grow ourbusiness and could harm our consolidated financial results.Our long-term growth is dependent on the success of strategic initiatives to effectively advertise and market our concept to our target audience, enhancethe facilities of our existing stores and increase the number of our stores. In recent years, we have made significant changes to our marketing and advertisingstrategy, which increased our total advertising costs. We may incur additional advertising costs in the future, as there can be no assurance that our currentmarketing plan will be effective in reaching our targeted customer base. We incur significant costs each time we open a new store and other expenses when werelocate or remodel existing stores. The expenses of opening, relocating or remodeling any of our stores may be higher than anticipated. If we are unable to openor are delayed in opening new or relocated stores, we may incur significant costs, which could adversely affect our consolidated financial results. If we areunable to remodel or are delayed in remodeling stores, we may incur significant costs, which could adversely affect our consolidated financial results. Inaddition, our inability to effectively implement our marketing and advertising strategy could adversely affect our consolidated financial results.We are subject to various government regulations, including health care reform, which could adversely affect our business and consolidatedfinancial results.The development and operation of our stores are subject to various federal, state and local laws and regulations in many areas of our business,including, but not limited to, those that impose restrictions, levy a fee or tax, or require a permit, license or other regulatory approval, and those that relate tothe operation of video and arcade games and rides, the preparation of food and beverages, the sale and service of alcoholic beverages, and building and zoningrequirements. Difficulties or failure in obtaining required permits, licenses or other regulatory approvals could delay or prevent the opening of a new store, andthe suspension of, or inability to renew, a license or permit could interrupt operations at an existing store.We continue to review the health care reform law enacted by Congress in March of 2010 and regulations issued related to the law to evaluate the potentialimpact of this new law on our business, and to accommodate various parts of the law as they take effect. The costs and other effects of the new legalrequirements cannot be determined with certainty. For example, health care reform law may result in increased costs directly for our compliance or indirectlythrough increased prices charged by our vendors because of their increased compliance costs. We are also subject to laws governing our relationship withemployees, including minimum wage requirements, overtime, other health insurance mandates, working and safety conditions, immigration statusrequirements and child labor laws. Additionally, potential changes in federal labor laws, including card verification regulations, could result in portions of ourworkforce being subjected to greater organized labor influence. This could result in an increase to our labor costs. A significant portion of our store personnelare paid at rates related to the minimum wage established by federal, state and municipal law. Increases in such minimum wage result in higher labor costs,which may be only partially offset by price increases and operational efficiencies. Furthermore, we are also subject to certain laws and regulations that governour handling of customers’ personal information. A failure to protect the integrity and security of our customers’ personal information could expose us tolitigation, as well as materially damage our reputation.While we endeavor to comply with all applicable laws and regulations, governmental and regulatory bodies may change such laws and regulations in thefuture, which may require us to incur substantial cost increases. If we fail to comply with applicable laws and regulations, we may be subject to varioussanctions and/or penalties and fines or may be required to cease operations until we achieve compliance, which could have a material adverse effect on ourbusiness and consolidated financial results.Public health issues could adversely affect our consolidated financial results.Our business may be impacted by certain public health issues including epidemics, pandemics and the rapid spread of certain illness and contagiousdiseases. To the extent that our customers feel uncomfortable visiting 12Table of Contentspublic locations, particularly locations with a large number of children, due to a perceived risk of exposure to a public health issue, we could experience areduction in customer traffic, which could adversely affect our consolidated financial results.Changes in consumers’ health, nutrition and dietary preferences could adversely affect demand for our menu offerings and adversely affect ourconsolidated financial results.Our industry is affected by consumer preferences and perceptions. Changes in prevailing health or dietary preferences and perceptions may causeconsumers to avoid certain products we offer in favor of alternative or healthier foods. If consumer eating habits change significantly and we are unable torespond with appropriate menu offerings, it could adversely affect our consolidated financial results.Any disruption of our commodity distribution system, which currently utilizes a single distributor, could adversely affect our business andconsolidated financial results.We use a single company to distribute most of the products and supplies used in our stores. Any failure by this distributor to adequately distributeproducts or supplies to our stores could increase our costs and have a material adverse effect on our business and consolidated financial results.We face risks with respect to product liability claims and product recalls, which could adversely affect our reputation, business and consolidatedfinancial results.We purchase merchandise from third parties and offer this merchandise to customers in exchange for prize tickets or for sale. This merchandise couldbe subject to recalls and other actions by regulatory authorities. Changes in laws and regulations could also impact the type of merchandise we offer to ourcustomers. We have experienced, and may in the future experience, issues that result in recalls of merchandise. In addition, individuals have asserted claims,and may in the future assert claims, that they have sustained injuries from third-party merchandise offered by us, and we may be subject to future lawsuitsrelating to these claims. There is a risk that these claims or liabilities may exceed, or fall outside of the scope of, our insurance coverage. Any of the issuesmentioned above could result in damage to our reputation, diversion of development and management resources, or reduced sales and increased costs, any ofwhich could adversely affect our business and consolidated financial results.Our current insurance policies may not provide adequate levels of coverage against all claims, and we could incur losses that are not covered byour insurance, which could adversely affect our business and consolidated financial results.We have procured and maintain insurance coverage, which we believe is typical for a business of our type and size. However, we could experience a lossthat either cannot be insured against or is not commercially reasonable to insure. For example, insurance covering liability for violations of wage and hour lawsis generally not available. Under certain circumstances, plaintiffs may file certain types of claims, which may not be covered by insurance. In some cases,plaintiffs may seek punitive damages, which may also not be covered by insurance. Losses such as these, if they occur, could adversely affect our businessand consolidated financial results.If we are unable to maintain and protect our information technology systems and technologies, we could suffer disruptions in our business,damage our reputation with customers and incur substantial costs.The operation of our business is heavily dependent upon the implementation, integrity, security and successful functioning of our computer networksand information systems, including the point-of-sales systems in our stores, data centers that process transactions, enterprise resource planning system andvarious software applications used in our operations. In the ordinary course of our business, we also collect and store sensitive data, including intellectualproperty, our proprietary business information and that of our customers, suppliers 13Table of Contentsand business partners and personally identifiable information of our customers and employees, our computer networks and information systems. A failure ofour systems to operate effectively as a result of a cyber-attack, damage to, interruption or failure of any of these systems could result in a failure to meet ourreporting obligations, material misstatements in our Consolidated Financial Statements or losses due to disruption of our business operations. These adversesituations could also lead to loss of sales or profits or cause us to incur additional development costs. In addition, despite our efforts to secure our computernetworks and information systems, security could be compromised or confidential information could be misappropriated, resulting in a loss of customers’ oremployees’ personal information, negative publicity or harm to our business and reputation which could cause us to incur costs to reimburse third parties fordamages.We face litigation risks from customers, employees, franchisees and other third parties in the ordinary course of business, which could adverselyaffect our business and consolidated financial results.Our business is subject to the risk of litigation by customers, current and former employees, suppliers, stockholders or others through private actions,class actions, administrative proceedings, regulatory actions or other litigation. The outcome of litigation, particularly class action lawsuits and regulatoryactions, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude ofthe potential loss relating to such lawsuits may remain unknown for substantial periods of time. The cost to defend future litigation may be significant. Theremay also be adverse publicity associated with litigation that could decrease customer acceptance of our food or entertainment offerings, regardless of whetherthe allegations are valid or whether we are ultimately found liable.We are continuously subject to risks from litigation and regulatory action regarding advertising to our market of children between the ages of two and 12years old. In addition, since certain of our stores serve alcoholic beverages, we are subject to “dram shop” statutes. These statutes generally allow a personinjured by an intoxicated person to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. Although webelieve we are adequately covered by insurance, a judgment against us under a “dram shop” statute in excess of the liability covered could have an adverseeffect on our business and consolidated financial results.Our procurement of games, rides, redemption prizes and merchandise is dependent upon a few global providers, the loss of any of whom couldadversely affect our business and consolidated financial results.Our ability to continue to procure new games, rides, other entertainment-related equipment, redemption prizes and merchandise is important to ourbusiness strategy. The number of suppliers from which we can purchase these items is limited due to industry consolidation over the past several years. To theextent that the number of suppliers continues to decline, we could be subject to the risk of distribution delays, pricing pressure, lack of innovation and otherassociated risks. Furthermore, some of our suppliers are located in China, and continuing and increasing tension between the U.S. and Chinese governmentscould also result in interruptions in our ability to procure these products, which could adversely affect our business and consolidated financial results.Our stores may be adversely affected by local conditions, natural disasters and other events.Certain regions in which our stores are located may be subject to adverse local conditions, natural disasters and other events. Severe weather, such asheavy snowfall or extreme temperatures, may discourage or restrict customers in a particular region from traveling to our stores, which could adversely affectour sales. If severe weather conditions occur during the first and third quarters of the year, the adverse impact to our sales and profitability could be evengreater than at other times during the year because we generate a significant portion of our sales and profits during these periods. Natural disasters includingtornadoes, hurricanes, floods and earthquakes may damage our stores or other operations, which may adversely affect our consolidated financial results. 14Table of ContentsIncreases in our leverage could restrict our operations and future activities, expose us to interest rate risk to the extent of our variable rate debtand limit our ability to react to changes in the economy or our industry.As of December 30, 2012, our total funded indebtedness was $412.2 million. We had cash and cash equivalents of $19.6 million and an additional$100.1 million available for borrowing under our revolving credit facility at that date. As of December 30, 2012, our leverage ratio was 2.4 to 1.0, compared toour maximum leverage ratio, as defined in our credit agreement, of 3.0 to 1.0, or 2.75 to 1.0 for the unrestricted ability to repurchase shares of our commonstock and pay cash dividends.An increase in our leverage could have adverse effects on our operations, including (a) require a portion of cash flows from operating activities to bededicated to paying down our indebtedness, therefore reducing our ability to use our cash flows to fund our operations, capital expenditures or future businessopportunities; (b) limit our ability to repurchase shares and pay cash dividends; (c) expose us to interest rate risk on borrowings under our revolving creditfacility; and (d) limit our ability to adjust to changing economic and market conditions.In addition, under our revolving credit facility, we are required to satisfy and maintain specified financial ratios and other financial condition tests. Ourability to meet those financial ratios and tests can be affected by events beyond our control, and we may be unable to meet those ratios and tests. A breach ofany of these covenants could result in a default under our revolving credit facility. Upon the occurrence of an event of default under our revolving creditfacility, the lenders could elect to declare all amounts outstanding under our revolving credit facility to be immediately due and payable and terminate allcommitments to extend further credit.We may be able to incur substantial additional indebtedness in the future, subject to the restrictions contained in our revolving credit facility. If newindebtedness is added to our current debt levels, the related risks could intensify.We are dependent on the service of certain key personnel, and the loss of any of these personnel could harm our business.Our success significantly depends on the continued employment and performance of our senior management team. We have employment agreementswith certain members of our senior management team. However, we cannot prevent the members of our senior management team from terminating theiremployment with us. Losing the services of senior management could harm our business until a suitable replacement is hired, and such replacement may nothave equal experience or capabilities.Our business is highly seasonal, and quarterly results may fluctuate significantly as a result of this seasonality.We have experienced, and in the future could experience, quarterly variations in our revenues and profitability as a result of a variety of factors, many ofwhich are outside our control, including the timing of school vacations, holidays and changing weather conditions. We typically generate higher sales volumesand profitability in the first and third quarters of each fiscal year compared to the second and fourth quarters. If there is a material decrease in the customertraffic in our stores during the first and third quarters of the year, our operating results could be adversely affected for that quarter and further, may have anadverse effect on our consolidated financial results for the fiscal year.We may not be able to adequately protect our trademarks or other proprietary rights, which could have a material adverse affect on ourbusiness and consolidated financial results.We own certain common law trademark rights and a number of federal and international trademark and service mark registrations and proprietaryrights relating to our operations. We believe that our trademarks and other proprietary rights are important to our success and our competitive position. We,therefore, devote 15Table of Contentsappropriate resources to the protection of our trademarks and proprietary rights. However, the protective actions that we take may not be enough to preventunauthorized usage or imitation by others, which could harm our image, brand or competitive position and, if we commence litigation to enforce our rights, wemay incur significant legal fees.There can be no assurance that third parties will not claim that our trademarks or menu offerings infringe upon their proprietary rights. Any suchclaim, whether or not it has merit, may result in costly litigation, cause delays in introducing new menu items in the future, interfere with our internationaldevelopment agreements or require us to enter into royalty or licensing agreements. As a result, any such claim could have a material adverse effect on ourbusiness and consolidated financial results.We are subject to risks in connection with owning and leasing real estate, which could adversely affect our consolidated financial results.As an owner or lessee of the land and/or building for our Company-owned stores, we are subject to all of the risks generally associated with owning andleasing real estate, including changes in the supply and demand for real estate in general and the supply and demand for the use of the stores. We may becompelled to continue to operate a non-profitable store due to our obligations under lease agreements, or we may close a non-profitable store and continuemaking rental payments with respect to the lease, which could adversely affect our consolidated financial results. Furthermore, economic instability mayinhibit our landlords from securing financing and maintaining good standing in their existing financing arrangements, which could result in their inability tokeep, or attract new, tenants thereby reducing customer traffic to our stores.Unanticipated conditions in foreign markets could adversely affect our ability to operate effectively in those markets.In addition to our stores in the United States, we currently own and operate stores in Canada. In addition, franchisees operate stores domestically and inChile, Guam, Guatemala, Mexico, Puerto Rico, Saudi Arabia and the United Arab Emirates. We and our franchisees are subject to the regulatory, economicand political conditions of any foreign market in which we and our franchisees operate stores. Any change in the laws, regulations and economic and politicalstability of these foreign markets could adversely affect our consolidated financial results. Changes in foreign markets that could affect our consolidatedfinancial results include, but are not limited to, taxation, inflation, currency fluctuations, political instability, economic instability, war, increased regulationsand quotas, tariffs and other protectionist measures. Additionally, our long-term growth strategy includes adding franchisees in additional foreign markets inthe future. To the extent unfavorable conditions exist in the foreign markets we plan to expand into, we and our international franchise partners may not besuccessful in opening the number of anticipated new stores on a timely and profitable basis. Delays or failures in opening new foreign market store locationscould adversely affect our planned growth.ITEM 1B. Unresolved Staff Comments.None. 16Table of ContentsITEM 2. Properties.The following table summarizes information regarding the number and location of stores we and our franchisees operated as of December 30, 2012: Domestic Company-Owned Stores FranchisedStores Total Alabama 6 1 7 Alaska 1 — 1 Arizona 2 7 9 Arkansas 6 — 6 California 79 3 82 Colorado 10 — 10 Connecticut 6 1 7 Delaware 2 — 2 Florida 26 — 26 Georgia 16 — 16 Hawaii — 2 2 Idaho 1 — 1 Illinois 22 — 22 Indiana 13 — 13 Iowa 5 — 5 Kansas 4 — 4 Kentucky 5 — 5 Louisiana 10 2 12 Maryland 14 — 14 Massachusetts 11 — 11 Michigan 18 — 18 Minnesota 7 — 7 Mississippi 3 2 5 Missouri 8 — 8 Montana — 1 1 Nebraska 2 — 2 Nevada 6 — 6 New Hampshire 2 — 2 New Jersey 15 — 15 New Mexico 3 — 3 New York 22 — 22 North Carolina 13 2 15 North Dakota — 1 1 Ohio 19 1 20 Oklahoma 3 — 3 Oregon 1 3 4 Pennsylvania 23 — 23 Rhode Island 1 — 1 South Carolina 7 — 7 South Dakota 2 — 2 Tennessee 12 — 12 Texas 63 — 63 Utah 1 2 3 Virginia 11 4 15 Washington 9 3 12 West Virginia 1 — 1 Wisconsin 9 — 9 Total domestic 500 35 535 17Table of ContentsInternational Company-Owned Stores FranchisedStores Total Canada 14 — 14 Chile — 5 5 Guam — 1 1 Guatemala — 2 2 Mexico — 1 1 Puerto Rico — 3 3 Saudi Arabia — 3 3 United Arab Emirates — 1 1 Total international 14 16 30 Total stores in operation 514 51 565 Company Store LeasesOf the 514 Company-owned Chuck E. Cheese’s stores as of December 30, 2012, 59 are owned premises and 455 are leased.The terms of our store leases vary in length from lease to lease, although generally a lease provides for an initial primary term of 10 years, with twoadditional five-year options to renew. As of December 30, 2012, six of our leases were month-to-month and 24 of our leases were set to expire in 2013, withavailable renewal options expiring between 2018 and 2033. Our remaining leases are set to expire at various dates through 2028, with available renewal optionsthat expire at various dates through 2045.These leases generally require us to pay the cost of repairs, other maintenance costs, insurance and real estate taxes and, in some instances, may providefor additional rent equal to the amount by which a percentage of revenues exceed the minimum rent. It is common for us to take possession of leased premisesprior to the commencement of rent payments for the purpose of constructing leasehold improvements.Corporate Office and Warehouse FacilitiesWe lease a 76,556 square foot office building in Irving, Texas, which serves as our corporate office and support services center. This lease expires inMay 2015, with options to renew through May 2025.We also lease two warehouse buildings for a total of 169,030 square feet of warehouse space in Topeka, Kansas, which primarily serve as storage andrefurbishing facilities for our store fixtures and game equipment. The two leases expire in August and September 2013, respectively. We are currentlynegotiating to consolidate into a single warehouse lease of approximately 160,000 square feet with the landlord.ITEM 3. 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 ofour 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 andlegal proceedings pending against us.In the opinion of our management, after consultation with legal counsel, the amount of liability with respect to claims or proceedings currently pendingagainst us is not expected to have a material effect on our consolidated financial condition, results of operations or cash flows.ITEM 4. Mine Safety Disclosures.None. 18Table of ContentsPART IIITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.Market Information and DividendsOur common stock is listed on the New York Stock Exchange under the symbol “CEC”. The following table sets forth the highest and lowest sale pricefor our common stock as reported on the New York Stock Exchange and dividends declared during each quarterly period within the two most recent fiscalyears: 2012 2011 Price Price High Low Dividends High Low Dividends 1st Quarter $ 40.01 $ 33.77 $ 0.22 $ 39.66 $ 35.42 $ 0.20 2nd Quarter $39.36 $31.88 $0.22 $42.71 $35.75 $0.20 3rd Quarter $36.92 $28.23 $0.22 $42.75 $25.83 $0.20 4th Quarter $33.88 $29.07 $0.24 $35.71 $26.63 $0.22 As of February 12, 2013, there were 1,804 stockholders of record. The number of stockholders of record does not include a substantially greaternumber of beneficial holders of our common stock, whose shares are held in “street name” with brokers, banks and other financial institutions.On February 19, 2013, our Board of Directors (“Board”) declared a cash dividend of $0.24 per share, or $4.3 million, which will be paid on April 18,2013 to stockholders of record on March 21, 2013. We expect to continue to pay quarterly dividends. However, there can be no assurance that futuredividends will be declared or paid. The actual declaration and payment of future dividends, the amount of any such dividends and the establishment of recordand payment dates, if any, is subject to final determination by the Board each quarter after its review of our then-current strategy, applicable debt covenantsand financial performance and position, among other things.See Part I, Item 1A. “Risk Factors” for a discussion of factors that might affect our financial performance and compliance with debt covenants,including covenants that affect our ability to pay dividends. Pursuant to our current revolving credit facility agreement, there are restrictions on the amount ofcash dividends that we may pay on our common stock. See the discussion of our current revolving credit facility agreement included in Part II, Item 7.“Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition, Liquidity and Capital Resources – DebtFinancing.” 19Table of ContentsIssuer Purchases of Equity SecuritiesThe following table presents information related to repurchases of our common stock during the fourth quarter of 2012 and the maximum dollar value ofshares that may yet be purchased pursuant to our stock repurchase program: Issuer Purchases of Equity Securities Period TotalNumberof SharesPurchased AveragePrice PaidPerShare TotalNumber ofShares Purchased AsPart of PubliclyAnnounced Plans orPrograms Maximum DollarValue of Sharesthat May Yet BePurchasedUnder the Plansor Programs October 1 – October 28, 2012 46 $ 30.84 — $ 46,992,284 October 29 – November 25, 2012 816 $31.24 — $46,992,284 November 26, 2012 – December 30, 2012 — $— — $46,992,284 Total 862 $31.22 — $46,992,284 For the periods ended October 28, 2012 and November 25, 2012, the total number of shares purchased were tendered by employees to satisfy tax withholding requirements on the vesting of restricted stockawards, which are not deducted from shares available to be purchased under our share repurchase program. Shares tendered by employees to satisfy tax withholding requirements were considered purchased atthe closing price of our common stock on the date of vesting. We may repurchase shares of our common stock under a plan authorized by our Board. On July 25, 2005, the Board approved a stock repurchase program, which authorized us to repurchase up to $400million of our common stock, and on October 22, 2007 and October 27, 2009 our Board authorized $200 million increases each. The stock repurchase program, which does not have a stated expiration date,authorizes us to make repurchases in the open market, through accelerated share repurchases or in privately negotiated transactions.Pursuant to our current revolving credit facility agreement, there are restrictions on the amount of our common stock we may repurchase. See thediscussion of our current revolving credit facility included in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results ofOperations – Financial Condition, Liquidity and Capital Resources – Debt Financing.” 20(1)(1)(2)(1)(2)Table of ContentsITEM 6. Selected Financial Data.The following selected financial data presented below should be read in conjunction with Part II, Item 7. “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and our Consolidated Financial Statements included in Part II, Item 8. “Financial Statements andSupplementary Data.” Fiscal Year 2012 2011 2010 2009 2008 (in thousands, except percentages, per share and store number amounts) Statements of Earnings Data: Company store sales $ 798,937 $ 815,894 $ 813,133 $ 814,563 $ 810,693 Sales percent increase (decrease): Total company store sales (2.1)% 0.3% (0.2)% 0.5% 3.7% Comparable store sales (2.9)% (2.0)% 0.7% (2.8)% 2.3% Total revenues $803,480 $821,178 $817,248 $818,346 $814,509 Revenues percent increase (decrease) (2.2)% 0.5% (0.1)% 0.5% 3.7% Operating income $79,071 $97,979 $104,902 $110,965 $108,020 As a percent of total revenues 9.8% 11.9% 12.8% 13.6% 13.3% Net income $43,590 $54,962 $54,034 $61,194 $56,494 Per Share Data: Earnings per share: Basic $2.48 $2.88 $2.55 $2.68 $2.37 Diluted $2.47 $2.88 $2.55 $2.67 $2.33 Weighted average common shares outstanding: Basic 17,545 19,072 21,163 22,835 23,825 Diluted 17,618 19,121 21,204 22,933 24,199 Balance Sheet Data (end of year): Total assets $801,806 $772,471 $778,029 $744,266 $747,440 Total debt $412,216 $400,509 $388,262 $365,810 $414,058 Stockholders’ equity $143,274 $124,177 $158,062 $167,913 $128,586 Dividends declared $16,182 $15,806 $— $— $— Dividends declared per share $0.90 $0.82 $— $— $— Non-GAAP Financial Measures: EBITDA $158,581 $179,539 $185,581 $189,036 $183,465 EBITDA as a percentage of total revenues 19.7% 21.9% 22.7% 23.1% 22.5% Number of Stores (end of year): Company-owned 514 507 507 497 495 Franchised 51 49 47 48 46 565 556 554 545 541 We operate on a 52 or 53 week fiscal year ending on the Sunday nearest December 31. Fiscal year 2009 was 53 weeks in length and all other fiscal years presented were 52 weeks. We estimate that the additional 53 operating week in our 2009 fiscal year benefited 2009 total revenues by $19.5 million, comparable store sales by 0.5% and diluted earnings per share by $0.17. We define comparable store sales as the percentage change in sales for our domestic Company-owned stores that have been open for at least 18 months as of the beginning of each respective fiscal year or operated byus for 12 months for acquired stores. We believe comparable store sales to be a key performance indicator used within our industry and is a critical factor when evaluating our performance, as it is indicative ofacceptance of our strategic initiatives and local economic and consumer trends. See Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results ofOperations” for discussion of the decrease in comparable store sales for 2012 and 2011. 21(1)(2)(3)(4)(5)(5) (6)(1)(2)rd(3)Table of Contents Total debt includes our outstanding revolving credit facility borrowings and capital lease obligations. No cash dividends on common stock were declared prior to 2011. See the definition of Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) and the reconciliation of net income to EBITDA in “Non-GAAP Financial Measures” below.Non-GAAP Financial MeasuresWe report and discuss our operating results using financial measures consistent with generally accepted accounting principles (“GAAP”). From time totime in our SEC filings (including this Annual Report on Form 10-K), press releases, financial presentations, earnings conference calls or otherwise, we maydisclose certain non-GAAP financial measures such as EBITDA presented below. This non-GAAP financial measure should not be viewed as an alternative orsubstitute for our reported GAAP results.The following table sets forth a reconciliation of net income to EBITDA and EBITDA expressed as a percentage of total revenues for the periods shown: Fiscal Year 2012 2011 2010 2009 2008 (in thousands, except percentages) Total revenues $ 803,480 $ 821,178 $ 817,248 $ 818,346 $ 814,509 Net income $43,590 $54,962 $54,034 $61,194 $56,494 Add: Income taxes 26,080 34,142 38,726 37,754 34,137 Interest expense 9,401 8,875 12,142 12,017 17,389 Depreciation and amortization 79,510 81,560 80,679 78,071 75,445 EBITDA $158,581 $179,539 $185,581 $189,036 $183,465 EBITDA as a percent of total revenues 19.7% 21.9% 22.7% 23.1% 22.5% We define EBITDA, a non-GAAP financial measure, as net income before interest expense, income taxes and depreciation and amortization. EBITDA asdefined herein may differ from similarly titled measures presented by other companies. We believe that EBITDA provides useful information to us, ourinvestors and other interested parties about our operating performance, our capacity to incur and service debt, fund capital expenditures and other corporateuses. EBITDA, as presented above, differs from the definition of consolidated EBITDA utilized in connection with the financial covenant ratios contained inour revolving credit facility agreement.See the discussion of our revolving credit facility included in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition andResults of Operations – Financial Condition, Liquidity and Capital Resources – Debt Financing.” 22(4)(5)(6)Table of ContentsITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide the readers of ourConsolidated 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 our Consolidated Financial Statementsand related notes included in Part II, Item 8. “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.Our MD&A includes the following sections: • Executive Summary; • Overview of Operations; • Results of Operations; • Financial Condition, Liquidity and Capital Resources; • Off-Balance Sheet Arrangements and Contractual Obligations; • Inflation; • Critical Accounting Policies and Estimates; and • Recently Issued Accounting Guidance.Fiscal YearWe 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 weekyear when the fourth quarter has 14 weeks. References to 2012, 2011 and 2010 are for the fiscal years ended December 30, 2012, January 1, 2012, andJanuary 2, 2011, respectively, which each consisted of 52 weeks.Executive SummaryOur Strategic PlanAs previously disclosed, we began implementing an updated strategic plan with the primary objective of increasing customer traffic and ultimatelyimproving our sales and operating results. In late 2011, we engaged the services of a new marketing and advertising partner to assist our organization inrefreshing and reestablishing our brand’s approach to connecting with our targeted customer base. As part of this plan, we implemented a number of strategicchanges during the second half of 2012. We introduced a new and updated Chuck E. Cheese character, launched a multi-faceted advertising campaign,launched our redesigned website, began implementing and communicating our value proposition to our customers and began providing a significantlyimproved and targeted operational plan focused on enhancing the service level and experience for all guests. In executing this plan we reduced the number oftelevision commercials seen by children as compared to 2011, and for the majority of 2012, we focused on brand and trademark messaging.Our value proposition includes changes in our pricing strategy to ensure that we continue to provide our guests with what we believe is a great value.Based on market research and testing, we changed our pricing structure during 2012, including reducing price points for our package deals, reducing pizzaprices, decreasing the number of tokens included in various token packages, reducing discounts included in certain coupons and reducing the number of“token only” coupons. In addition, a standardized menu and pricing for domestic Company-owned stores was included on our redesigned website and in all ofour stores by November 2012. We believe that these changes to our pricing strategy will increase the attractiveness of our everyday menu offerings, whilecontinuing to provide our guests with a great value proposition. 23Table of ContentsWe believe that certain changes in our strategies, including changes in the frequency of children’s advertising and a change in the mix of advertisingmessaging, contributed to a decline in our comparable store sales in 2012. These strategic changes have been evaluated and refined for 2013. We believe ourstrategies, when fully deployed, will increase customer traffic and grow comparable store sales in the long-term. See Part I, Item 1. “Business – Our StrategicPlan – Marketing Plan and Value Proposition” for more information regarding our revised marketing strategy.Overview of 2012 • Net income decreased to $43.6 million, or $2.47 per share, for 2012 compared to net income of $55.0 million, or $2.88 per share, for 2011.Results included the following: • Total revenues decreased $17.7 million, or 2.2%, primarily due to a 2.9% decrease in comparable store sales, which was partially offsetby additional revenues from new stores, net of closed stores. • Company store operating costs increased 100 basis points as a percentage of Company store sales, primarily due to a 70 basis pointincrease in labor costs. Labor costs increased primarily as a result of an increase in labor hours and the average hourly wage rate. • Other costs and expenses increased $6.0 million, primarily due to an increase in asset impairments and general and administrativeexpenses. • Our effective income tax rate for 2012 decreased to 37.4% from 38.3% in 2011. • Cash provided by operations was $137.1 million, a decrease of 22.6% compared to the prior year, driven primarily by a decrease in net income,receipt of a tax refund in 2011 and a reduction in working capital. • We repurchased $14.4 million of our common stock in 2012. • During 2012, we completed 125 existing store capital initiatives, including 94 game enhancements, 6 major remodels, 25 expansions and opened13 new Company store locations, including three relocated stores and one we acquired from a domestic franchisee. The new stores we opened in2010 and 2011, including franchisee stores we purchased, have an average square footage of approximately 14,000 to 15,000 square feet andgenerated average annual sales of approximately $2.0 million per store in 2012. • During 2012, we declared dividends of $16.2 million, or $0.90 per share.Overview of OperationsWe develop, operate and franchise family dining and entertainment centers under the name “Chuck E. Cheese’s” in 47 states and eight foreign countriesand territories. Our stores offer wholesome family dining, distinctive musical and comic entertainment by computer-controlled robotic characters, family-oriented arcade-style and skill-oriented games, video games, rides and other activities, all of which are intended to uniquely appeal to our primary customerbase of families with children between two and 12 years of age. All of our stores offer dining selections consisting of a variety of pizzas, sandwiches, wings,appetizers, a salad bar, beverages and desserts. 24Table of ContentsThe following table summarizes information regarding the number of Company-owned and franchised stores for the periods presented: Fiscal Year 2012 2011 2010 Number of Company-owned stores: Beginning of period 507 507 497 New 12 4 7 Acquired from franchisees 1 — 5 Closed (6) (4) (2) End of period 514 507 507 Number of franchised stores: Beginning of period 49 47 48 New 3 3 4 Acquired by the Company (1) — (5) Closed — (1) — End of period 51 49 47 The number of new and closed Company-owned stores during 2012 included three stores that were relocated. The number of new and closed Company-owned stores during both 2011 and 2010 included therelocation of two stores.We are focusing on growing our concept both domestically and internationally. We currently plan to open 12 to 15 new or relocated domestic Company-owned stores in both 2013 and 2014. We are also targeting franchising our concept internationally in certain countries located in Latin America, Asia and theMiddle East. During 2012, we opened two franchise stores in Chile and one in Mexico. We currently expect franchisees to open a total of four to six additionalinternational franchise stores in 2013.Comparable store sales. We define comparable store sales as the percentage change in sales for our domestic Company-owned stores that have beenopen for at least 18 months as of the beginning of each respective fiscal year or operated by us for at least 12 months for acquired stores (our “comparablestore base”). Comparable store sales is a key performance indicator used within our industry and is a critical factor when evaluating our performance, as it isindicative of acceptance of our strategic initiatives and local economic and consumer trends.The following table summarizes information regarding our average annual comparable store sales and comparable store base: Fiscal Year 2012 2011 2010 (in thousands, except storenumber amounts) Average annual sales per comparable store $ 1,553 $ 1,596 $ 1,614 Number of stores included in our comparable store base 480 475 473 Average annual sales per comparable store is calculated based on the average weekly sales of our comparable store base. The amount of average annual sales per comparable store cannot be used to compute year-over-year comparable store sales increases or decreases due to the change in comparable store base.Revenues. Our primary source of revenues is sales at our Company-owned stores (“Company store sales”), which consists of the sale of food,beverages, game-play tokens and merchandise. A portion of our Company store sales are from sales of value-priced combination packages generally comprisedof food, beverage and game tokens (“Package Deals”), which we promote through in-store menu pricing or coupon offerings. We allocate the revenuesrecognized from the sale of our Package Deals and coupons between “Food and beverage sales” and 25(1)(1)(1)(1)(1)Table of Contents“Entertainment and merchandise sales” based upon the price charged for each component when it is sold separately, or in limited circumstances, our bestestimate of selling price if a component is not sold on a stand-alone basis, which we believe approximates each component’s fair value.Food and beverage sales include all revenues recognized with respect to stand-alone food and beverage sales, as well as the portion of revenues allocatedfrom Package Deals and coupons that relate to food and beverage sales.Entertainment and merchandise sales include all revenues recognized with respect to stand-alone game token and merchandise sales, as well as a portionof revenues allocated from Package Deals and coupons that relate to entertainment and merchandise.Another source of revenues is from franchise fees and royalties. We earn monthly royalties from our franchisees based on a percentage of eachfranchised store’s monthly sales. We also receive development and initial franchise fees to establish new franchised stores, as well as earn revenues from thesale of equipment and other items or services to franchisees. We recognize development and initial franchise fees as revenue when the franchise store hasopened and we have substantially completed our obligations to the franchisee relating to the opening of a store.Company store operating costs. Certain costs and expenses relate only to the operation of our Company-owned stores and are as follows: • Cost of food and beverage includes all direct costs of food, beverages and costs of related paper and birthday supplies, less rebates fromsuppliers; • Cost of entertainment and merchandise includes all direct costs of prizes provided and merchandise sold to our customers, as well as the cost oftickets dispensed to customers and redeemed for prizes; • Labor expenses consist of salaries and wages, bonuses, related payroll taxes and benefits for store personnel; • Depreciation and amortization includes expenses that are directly related to our Company-owned stores’ property and equipment, includingleasehold improvements, game and ride equipment, furniture, fixtures and other equipment; • Rent expense includes lease costs for Company-owned stores, excluding common occupancy costs (e.g., common area maintenance (“CAM”)charges and property taxes); and • Other store operating expenses primarily include utilities, repair and maintenance costs, liability and property insurance, CAM charges, propertytaxes, credit card processing fees, licenses, preopening expenses, store asset disposal gains and losses and all other costs directly related to theoperation of a store.The “Cost of food and beverage” and the “Cost of entertainment and merchandise” mentioned above excludes any allocation of (a) store employeepayroll, related payroll taxes and benefit costs; (b) rent expense; (c) depreciation and amortization expense; or (d) other direct store operating expensesassociated with the operation of our Company-owned stores. We believe that presenting store-level labor costs, rent expense, depreciation and amortizationexpense and other store operating expenses in the aggregate provides the most informative financial reporting presentation. Our rationale for excluding suchcosts is as follows: • our store employees are trained to sell and attend to both our dining and entertainment operations. We believe it would be difficult and potentiallymisleading to allocate labor costs between “Food and beverage sales” and “Entertainment and merchandise sales”; and • while certain assets are individually dedicated to either our food service operations or game activities, we also have significant capital investmentsin shared depreciating assets, such as leasehold improvements, point-of-sale systems, computer-controlled robotic characters and showroomfixtures. 26Table of Contents Therefore, we believe it would be difficult and potentially misleading to allocate depreciation and amortization expense or rent expense between foodand beverage sales and entertainment and merchandise sales.“Cost of food and beverage” and “Cost of entertainment and merchandise”, as a percentage of Company store sales, are influenced by both the cost ofproducts, as well as the overall mix of our Package Deals and coupon offerings. “Entertainment and merchandise sales” have higher margins than “Food andbeverage sales.”Advertising expense. Advertising expense includes production costs for television commercials, newspaper inserts, Internet advertising, coupons,media expenses for national and local advertising and consulting fees, partially offset by contributions from our franchisees.General and administrative expenses. General and administrative expenses represent all costs associated with operating our corporate office,including regional and district management and corporate personnel payroll and benefits, depreciation and amortization of corporate assets and otheradministrative costs not directly related to the operation of our Company-owned stores.Asset impairments. Asset impairments represent non-cash charges for the estimated write down or write-off of the carrying amount of certain long-livedassets within our stores to their estimated fair value, which are incurred when a store’s operation is not expected to generate sufficient projected future cashflows to recover the current net book value of the long-lived assets within the store. We believe our assumptions in calculating the fair value of our long-livedassets is similar to those used by other marketplace participants.Results of OperationsHistorical ResultsThe following table summarizes our principal sources of Company store sales expressed in dollars and as a percentage of total Company store sales forthe periods presented: Fiscal Year 2012 2011 2010 (in thousands, except percentages) Food and beverage sales $ 372,948 46.7% $ 388,908 47.7% $ 398,241 49.0% Entertainment and merchandise sales 425,989 53.3% 426,986 52.3% 414,892 51.0% Company store sales $798,937 100.0% $815,894 100.0% $813,133 100.0% 27Table of ContentsThe following table summarizes our revenues and expenses expressed in dollars and as a percentage of total revenues (except as otherwise noted) for theperiods presented: Fiscal Year 2012 2011 2010 (in thousands, except percentages) Company store sales $ 798,937 99.4% $ 815,894 99.4% $ 813,133 99.5% Franchising fees and royalties 4,543 0.6% 5,284 0.6% 4,115 0.5% Total revenues 803,480 100.0% 821,178 100.0% 817,248 100.0% Company store operating costs: Cost of food and beverage 93,417 25.0% 95,989 24.7% 90,649 22.8% Cost of entertainment and merchandise 30,855 7.2% 32,362 7.6% 34,233 8.3% Total cost of food, beverage, entertainment and merchandise 124,272 15.6% 128,351 15.7% 124,882 15.4% Labor expenses 223,605 28.0% 222,596 27.3% 222,337 27.3% Depreciation and amortization 78,769 9.9% 80,826 9.9% 79,716 9.8% Rent expense 75,312 9.4% 74,992 9.2% 70,425 8.7% Other store operating expenses 126,855 15.9% 126,847 15.5% 128,075 15.8% Total Company store operating costs 628,813 78.7% 633,612 77.7% 625,435 76.9% Other costs and expenses: Advertising expense 35,407 4.4% 34,989 4.3% 35,282 4.3% General and administrative expenses 53,437 6.7% 51,859 6.3% 50,693 6.2% Asset impairments 6,752 0.8% 2,739 0.3% 936 0.1% Total operating costs and expenses 724,409 90.2% 723,199 88.1% 712,346 87.2% Operating income 79,071 9.8% 97,979 11.9% 104,902 12.8% Interest expense 9,401 1.2% 8,875 1.1% 12,142 1.5% Income before income taxes $69,670 8.7% $89,104 10.9% $92,760 11.4% Percent amount expressed as a percentage of Food and beverage sales. Percent amount expressed as a percentage of Entertainment and merchandise sales. Percent amount expressed as a percentage of Company store sales.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 andthe 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 areexpressed as a percentage of related Food and beverage sales and Entertainment and merchandise sales, as opposed to total Company store sales.Fiscal Year 2012 Compared to Fiscal Year 2011RevenuesCompany store sales decreased $17.0 million, or 2.1%, to $798.9 million in 2012 compared to $815.9 million in 2011. The decrease in Companystore sales is primarily due to a 2.9% decrease in comparable store sales. This decrease was partially offset by additional revenues from 13 new stores openedor acquired, net of six closed stores, since the end of 2011. We believe the decrease in comparable store sales is primarily attributable to the following: (a) asignificant decrease in national television advertising to children as compared to the prior year; and (b) our messaging in new commercials being focusedprimarily on our new brand, without complementary messaging related to our value propositions and reasons to visit Chuck E. Cheese’s. 28(1)(2)(3)(3)(3)(3)(3)(3)(1)(2)(3)Table of ContentsWe continue to believe that families’ concerns about unemployment levels and costs of non-discretionary items cause our customers to be more cautiousabout how they spend their discretionary income. Competition for families’ food and entertainment dollars continues to increase. Additionally, our sales mayhave been impacted by certain changes in our pricing strategy, including a reduction in the circulation of certain coupons, a reduction in the discounts offeredon certain coupons and changes in the types of coupons issued. Lastly, we believe the decrease in comparable store sales may be attributed, in part, to theimpact of record warm weather in the Midwest and Northeast, in March 2012, which falls in our most significant quarter.We have refined our strategic plan with the objective of increasing customer traffic in the future, as discussed earlier in Part I, Item 1. “Business – OurStrategic Plan.”Our Company store sales mix consisted of food and beverage sales totaling 46.7% and entertainment and merchandise sales totaling 53.3% in 2012compared to 47.7% and 52.3%, respectively, in 2011. We believe that this shift in our sales mix is primarily due to the following: (a) repricing of certaincomponents of our offerings; (b) changing the mix of items included in Packaged Deals and coupons; and (c) modification of our various token offers. Thesechanges were part of our continued effort to rebalance our menu pricing between food and games. We believe that the rebalancing of our menu pricing and ourongoing investment in our games has resulted in more of our guests’ average check being allocated to games.Company Store Operating CostsOverall, the cost of food, beverage, entertainment and merchandise, as a percentage of Company store sales, decreased 10 basis points to 15.6% in2012 from 15.7% in 2011. The decrease primarily related to a decrease in certain commodity costs and price changes, as well as a shift in sales mix fromfood and beverage sales to entertainment and merchandise sales.Cost of food and beverage, as a percentage of food and beverage sales, increased 30 basis points to 25.0% in 2012 from 24.7% in 2011. The increaseprimarily related to a 40 basis point increase in the cost of paper and birthday supplies, partially offset by a reduction of $0.10 per pound, or 5.6%, in theaverage cost per pound of cheese and a reduction of $0.02, or 4.4%, in the average cost per pound of dough. The total cost of food and beverage, as apercentage of food and beverage sales, was also influenced by a shift in sales mix from food and beverage sales to entertainment and merchandise sales relatedto component and price changes in our Package Deals and tokens.Cost of entertainment and merchandise, as a percentage of entertainment and merchandise sales, decreased 40 basis points to 7.2% in 2012 from 7.6%in 2011. The percentage of cost of entertainment and merchandise was favorably impacted by the shift in the sales mix to entertainment and merchandiserelated to component and price changes in our Package Deals and tokens.Labor expenses, as a percentage of Company store sales, increased 70 basis points to 28.0% in 2012 from 27.3% in 2011. The increase primarilyrelated to a 1.2% increase in labor hours and a 0.6% increase in average hourly wage rate, partially offset by a reduction in store incentive compensationattributable to our sales decline.Depreciation and amortization expense for Company-owned stores decreased $2.0 million to $78.8 million in 2012 from $80.8 million in 2011. Thedecrease primarily related to a reduction in depreciation and amortization expense of approximately $3.0 million associated with our change in the estimateduseful lives of certain games, leasehold improvements and various pieces of equipment utilized in our stores implemented at the beginning of the third quarterof 2011. The change in accounting estimate is discussed further in Note 1 “Description of Business and Summary of Significant Accounting Policies” to ourConsolidated Financial Statements included in Part II, Item 8. “Financial Statements and Supplementary Data.” 29Table of ContentsAdvertising ExpensesAdvertising expenses, as a percentage of total revenues, increased 10 basis points to 4.4% in 2012 from 4.3% in 2011. The increase is due to increases inproduction costs for new commercials, costs associated with our new advertising agency and new digital advertising costs, partially offset by a reduction inthe frequency of national television advertising to children and frequency of free standing inserts.General and Administrative ExpensesGeneral and administrative expenses increased $1.5 million to $53.4 million in 2012 from $51.9 million in 2011. The increase primarily related toinvestments to modernize our various information technology platforms and infrastructure.Asset ImpairmentsIn 2012, we recognized an asset impairment charge of $6.8 million for 18 stores, of which seven stores were previously impaired. In 2011, werecognized an asset impairment charge of $2.7 million for six stores, none of which were previously impaired. We continue to operate all but two of theseimpaired stores. The impairment charge was based on the determination that these stores were adversely impacted by various economic factors in the marketsin which they are located. Management determined that the estimated fair value of certain long-lived assets at these stores (determined from discounted futureprojected operating cash flows of the stores over their remaining lease term) had declined below their carrying amount. As a result, we recorded an impairmentcharge to write down the carrying amount of certain property and equipment at these stores to the estimated fair value. For additional information about theseimpairment charges, refer to Note 4 “Property and Equipment – Asset Impairments” in our Consolidated Financial Statements included in Part II, Item 8.“Financial Statements and Supplementary Data.”Interest ExpenseInterest expense increased $0.5 million to $9.4 million in 2012 from $8.9 million in 2011. The increase is primarily due to interest related to new capitalleases and an increase in the average outstanding debt balance on our revolving credit facility to $373.9 million in 2012 from $358.9 million in 2011,partially offset by the reduction in our weighted average effective interest rate. Our weighted average interest rate was 1.7% in 2012 compared to 2.0% in 2011,which decreased as a result of the expiration of our interest rate swap contract in May 2011.Income TaxesOur 2012 effective income tax rate decreased to 37.4% in 2012 as compared to 38.3% in 2011. The decrease primarily related to the recognition ofuncertain tax positions resulting from favorable settlements and the expirations of statutes of limitations, refund claims filed in connection with prior yearfederal and state income tax returns, as well as the true-up of prior year’s estimated tax provision. The favorable impact of these adjustments was partiallyoffset by an increase in other uncertain tax positions and a decrease in employment related federal income tax credits, as a result of the expiration of certaincredits in 2012.Diluted Earnings Per ShareDiluted earnings per share decreased to $2.47 per share in 2012 compared to $2.88 per share in 2011. The decrease was primarily due to an $11.4million, or 20.7%, decrease in net income, significantly offset by the decrease in the number of weighted average diluted shares outstanding in 2012 ascompared to 2011. The decrease in the weighted average diluted shares outstanding was impacted by our repurchase of 2.7 million shares of our commonstock since the beginning of the 2011 fiscal year. We estimate stock repurchases benefited our earnings per share in 2012 by approximately $0.17. Ourestimate is based on the weighted average number of shares repurchased since the beginning of the 2011 fiscal year and includes consideration of the estimated 30Table of Contentsadditional interest expense attributable to increased borrowings under our revolving credit facility to finance any repurchases. Our computation does notinclude the effect of share repurchases prior to the 2011 fiscal year, or the effect of the issuance of restricted stock subsequent to the beginning of the 2011fiscal year.Fiscal Year 2011 Compared to Fiscal Year 2010RevenuesCompany store sales increased $2.8 million, or 0.3%, to $815.9 million in 2011 compared to $813.1 million in 2010. The increase in Company storesales primarily related to a weighted average net increase of approximately six Company-owned stores and an increase in menu prices of 0.7%, which wereprimarily initiated during the second quarter of 2010. These increases were partially offset by a decrease in comparable store sales of 2.0%. We believe thepercentage decrease in comparable store sales resulted primarily from the negative effects of the sustained economic slowdown in the U.S. on our targeteconomic demographic, including the adverse effects of persistently high unemployment and higher prices for food, fuel, utilities and healthcare ondiscretionary consumer spending.Our Company store sales mix consisted of food and beverage sales totaling 47.7% and entertainment and merchandise sales totaling 52.3% in 2011compared to 49.0% and 51.0%, respectively, in 2010. We believe the sales mix shift from food and beverage to entertainment and merchandise is primarily theresult of our ongoing investment in our games, which we believe is resulting in our guests allocating more of their average check to games, coupled withongoing changes made to our token-only coupons and the shift in component mix of Package Deals and coupons.During the third quarter of 2011, we recognized franchise fees of $1.2 million associated with the termination of an international development agreementwith a franchisee.Company Store Operating CostsOverall, the cost of food, beverage, entertainment and merchandise, as a percentage of Company store sales, increased 30 basis points to 15.7% in 2011from 15.4% in 2010. The increase primarily related to an increase in cheese usage and an increase in the costs of certain commodities, including mostsignificantly cheese costs.Cost of food and beverage, as a percentage of food and beverage sales, increased 190 basis points to 24.7% in 2011 from 22.8% in 2010. The increaseprimarily related to an increase associated with higher cheese usage and higher cheese prices. During 2011, the weighted average block of cheese increasedapproximately $0.30 per pound, or 20.1%, compared to prices paid in 2010. Additionally, the increase was impacted by the deleveraging effect of the shift insales mix in connection with component changes in our coupons and Package Deals.Cost of entertainment and merchandise, as a percentage of entertainment and merchandise sales, decreased 70 basis points to 7.6% in 2011 from 8.3%in 2010. The decrease primarily related to the leveraging effect of the shift in the sales mix to component changes in our Package Deals, coupons and changesto our token-only coupons.Labor expenses, as a percentage of Company store sales, remained unchanged at 27.3% during 2011 and 2010, which was primarily related to a declinein our revenues that resulted in a reduction in sales-based compensation expense, offset by a 1.2% increase in our average hourly wage rate.Depreciation and amortization expense for Company-owned stores increased $1.1 million to $80.8 million in 2011 from $79.7 million in 2010. Theincrease was primarily the result of ongoing capital investment initiatives at our existing stores and new store development. The increase was partially offset bya reduction in depreciation and amortization expense of approximately $3.0 million related to our change in the estimated useful lives of certain games,leasehold improvements and various pieces of equipment utilized in our stores. 31Table of ContentsRent expense for our Company-owned stores increased $4.6 million to $75.0 million in 2011 from $70.4 million in 2010. The increase primarily relatedto recording additional deferred rent expense of $1.1 million and an increase associated with leased properties resulting from new store development andexpansions of existing stores.Other store operating expenses, as a percentage of Company store sales, decreased 30 basis points to 15.5% in 2011 from 15.8% in 2010. The decreasewas primarily related to recording, in the prior year, an increase in self-insurance reserves of $1.7 million associated with the unfavorable development ofcertain general liability claims and a charge of $1.0 million to transition to a new soft drink supplier. The charges from the prior year were partially offset by anet increase in various store-related operating costs in 2011.General and Administrative ExpensesGeneral and administrative expenses increased $1.2 million to $51.9 million in 2011 from $50.7 million in 2010. The increase primarily related to anincrease in corporate-office compensation costs and various corporate overhead expenses.Asset ImpairmentsIn 2011, we recognized an asset impairment charge of $2.7 million for six stores, of which none were previously impaired. In 2010, we recognized anasset impairment charge of $0.9 million for three stores, of which one store was previously impaired. The impairment charges were based on the determinationthat these stores were adversely impacted by various economic factors in the markets in which they are located. We still operate all but one of these stores;however, due to a decline in their financial performance, management determined that the estimated fair value of certain long-lived assets at these stores(determined from discounted future projected operating cash flows of the stores over their remaining lease term) had declined below their carrying amount. As aresult, we recorded an impairment charge to the carrying amount of certain property and equipment at these stores to their estimated fair value.Interest ExpenseInterest expense decreased to $8.9 million in 2011 from $12.1 million in 2010. The decrease primarily related to a reduction in our weighted averageeffective interest rate related to the expiration of our interest rate swap contract in May 2011, which fixed our interest rate at 4.62% on $150.0 million of ouroutstanding borrowings. This decrease was partially offset by an increase in the average debt balance outstanding in 2011 as compared to 2010. During 2011,the average debt balance outstanding under our revolving credit facility was $358.9 million compared to $335.3 million during 2010, and our weightedaverage effective interest rate, including the effect of our interest rate swap, was 2.0% in 2011 compared to 2.9% in 2010. Additionally, the decrease in interestexpense related to recording, in the prior year, a non-recurring charge of $0.6 million related to interest associated with the examination of our 2006 and 2007tax returns by the Internal Revenue Service (“IRS”).Income TaxesOur 2011 effective income tax rate decreased to 38.3% compared to 41.7% for 2010. The decrease in our effective tax rate was primarily related to our2010 effective tax rate being adversely impacted by a $3.0 million net unfavorable adjustment made during 2010 largely resulting from adjustments made toour tax accounts identified as a result of an IRS examination of our 2006 and 2007 tax year, which was concluded and settled in 2010, as well as the true-up ofprior year’s estimated tax provision. The impact of these adjustments was partially offset by favorable adjustments resulting from employment related stateincome tax credits. Our 2011 effective income tax rate was also favorably impacted by an increase in employment related federal and state income tax credits,including the federal Work Opportunity Tax Credit and New Hire Retention Credit. However, a 32Table of Contentssubstantial number of the targeted groups qualifying under the Work Opportunity Tax Credit expired at the end of 2011, and the New Hire Retention Creditonly applied to qualified employees hired during 2010 who remained employed for at least 52 consecutive weeks.Diluted Earnings Per ShareDiluted earnings per share were $2.88 per share for 2011 compared to $2.55 per share in 2010. The increase, among other things, related to recordingunfavorable discrete adjustments in 2010 of $3.0 million in connection with the IRS examination discussed above and a decrease of 9.8% associated with thenumber of weighted average diluted shares outstanding in 2011 as compared to 2010. The number of weighted average diluted shares outstanding decreasedprimarily due to our repurchase of 4.5 million shares of our common stock since the beginning of the 2010 fiscal year.We estimate that the decrease in the number of weighted average diluted shares outstanding during 2011 attributable solely to our repurchases benefitedour diluted earnings per share in 2011 by approximately $0.26 per share. Our estimate of the impact of stock repurchases is based on the weighted averagenumber of shares repurchased since the beginning of the 2010 fiscal year and includes consideration of any estimated additional interest expense attributable toborrowings under our revolving credit facility to finance any stock repurchases. The diluted earnings per share computation excludes the effect of stockrepurchases prior to the beginning of our 2010 fiscal year, the effect of the issuance of restricted stock and the exercise of stock options subsequent to thebeginning of our 2010 fiscal year.Financial Condition, Liquidity and Capital ResourcesOverview of LiquidityWe finance our business activities through cash flows provided by our operations and, as necessary, from borrowings under a revolving credit facility.The primary components of working capital are as follows: • Our store customers pay for their purchases in cash or credit cards at the time of the sale, and the cash from these sales is typically receivedbefore our related accounts payable to suppliers and employee payroll becomes due; • Frequent inventory turnover results in a limited investment required in inventories; and • Our accounts payable are generally due within five to 30 days.As a result of these factors, our requirement for working capital is not significant and we are able to operate with a net working capital deficit (currentliabilities in excess of current assets). The following tables present summarized consolidated financial information that we believe is helpful in evaluating ourliquidity and capital resources: Fiscal Year 2012 2011 2010 (in thousands) Net cash provided by operating activities $ 137,092 $ 177,233 $156,870 Net cash used for investing activities (98,903) (94,652) (102,869) Net cash used for financing activities (37,285) (82,973) (52,163) Effect of foreign exchange rate changes on cash 59 (204) 70 Change in cash and cash equivalents $963 $(596) $1,908 Interest paid $9,419 $9,081 $11,596 Income taxes paid, net $27,598 $6,592 $41,725 33Table of Contents At Year End 2012 2011 (in thousands) Cash and cash equivalents $19,636 $18,673 Revolving credit facility borrowings $ 389,500 $ 389,600 Available unused commitments under revolving credit facility $100,100 $99,741 Funds generated by our operating activities, available cash and cash equivalents and, as necessary, borrowings from our revolving credit facilitycontinue to be our primary sources of liquidity. We believe funds generated from our expected results of operations and available cash and cash equivalentswill be sufficient to finance our strategic plan and capital initiatives for the next year. Our revolving credit facility is also available for additional workingcapital needs and investment opportunities. However, in the event of a material decline in our sales trends or operating margins, there can be no assurance thatwe will generate sufficient cash flows at or above our current levels.Our primary uses for cash provided by operating activities relate to funding our ongoing business activities, planned capital expenditures and servicingour debt. We may also use cash from operations to pay dividends to our stockholders and to repurchase shares of our common stock.Our cash and cash equivalents totaled $19.6 million and $18.7 million as of December 30, 2012 and January 1, 2012, respectively. Cash and cashequivalents as of December 30, 2012 and January 1, 2012 includes $7.8 million and $7.0 million, respectively, of undistributed income from our Canadiansubsidiary that we consider to be permanently invested.Our strategic plan does not require that we enter into any material development or contractual purchase obligations. Therefore, we have the flexibilitynecessary to manage our liquidity by promptly deferring or curtailing any planned capital spending. In 2013, our planned capital spending includes new storedevelopment, existing store improvements, improvements to our various information technologies platforms and other capital initiatives.Sources and Uses of Cash – Fiscal Year 2012 Compared to Fiscal Year 2011Net cash provided by operating activities decreased $40.1 million to $137.1 million in 2012 from $177.2 million in 2011. The decrease was primarilyattributable to a $9.0 million refund of federal income tax reported on our 2010 income tax return received in the first quarter of 2011 and an increase in theamount of estimated tax payments required for 2012 income taxes. The remaining decrease in cash provided by operating activities related to a decrease in netincome and changes in our working capital.Our cash interest payments increased $0.3 million to $9.4 million in 2012 from $9.1 million in 2011. The increase primarily related to higher averageoutstanding debt balances on our revolving credit facility of $373.9 million in fiscal 2012 as compared to $358.9 in fiscal 2011, partially offset by a decreasein the weighted average interest rate incurred from 2.0% to 1.7% on our borrowings under our revolving credit facility. The decrease in the weighted averageinterest rate was associated with the expiration of the interest rate swap agreement in May 2011.Our cash payments for income taxes, net of refunds received, increased $21.0 million to $27.6 million in 2012 from $6.6 million in 2011. Theincrease primarily related to the receipt in 2011 of refunds of $9.0 million in federal income taxes related to our 2010 tax year and a $15.0 million increase ofestimated tax payments required for 2012 federal income taxes, partially offset by a $3.0 million reduction in the amount of other income tax payments. Thereduced amount of tax payments and the increase in refunds related to our 2010 and 2011 tax years largely resulted from more favorable bonus tax depreciationrules in effect from September 2010 through December 2011. Bonus depreciation for qualifying capital additions placed in service in 2012 was less favorable 34Table of Contentsand was scheduled to expire at the end of 2012. However in January 2013, bonus depreciation for qualifying capital additions placed in service in 2013 wasextended, and thus, we will continue to benefit from bonus depreciation through 2013.Net cash used in investing activities increased $4.2 million to $98.9 million in 2012 from $94.7 million in 2011. The increase primarily related to anincrease in the number of new or relocated stores opened or acquired in 2012 compared to 2011, partially offset by a reduction of $24.7 million in spending onexisting stores in 2012. Capital spending for our existing stores affected 125 stores during 2012 compared to 181 stores during 2011. Additionally, during2012 we opened 13 new stores, including three relocated stores and one acquired from a franchisee, while in 2011 we opened four new stores, including tworelocations.Net cash used in financing activities decreased $45.7 million to $37.3 million in 2012 from $83.0 million in 2011. The decrease primarily related to a$65.4 million decrease in repurchases of our common stock, partially offset by an $8.4 million increase in dividend payments and net repayments of $0.1million on our revolving credit facility in 2012 compared to net proceeds of $12.6 million on our revolving credit facility in 2011.Sources and Uses of Cash – Fiscal Year 2011 Compared to Fiscal Year 2010Net cash provided by operating activities increased $20.3 million to $177.2 million in 2011 from $156.9 million in 2010. Operating cash flows in2011 benefited from a decrease in the amounts of estimated tax payments required for 2011 and receipt of $9.2 million in refunds related to federal and statetax overpayments reported on our 2010 income tax returns received in 2011. The reduction in estimated tax payments and the refunds both largely resultedfrom more favorable bonus tax depreciation rules in effect from September 2010 through December 2011. This increase was partially offset by a decrease inworking capital including the timing of when we made payments related to accounts payable and accrued expenses in 2011.Our cash interest payments decreased $2.5 million to $9.1 million in 2011 from $11.6 million in 2010. The decrease primarily related to the decreasein the weighted average interest rate incurred from 2.9% to 2.0% on our borrowings under our revolving credit facility. This decrease primarily related to theexpiration of our interest rate swap agreement in May 2011, partially offset by an increase in the average debt balance outstanding under our revolving creditfacility from $335.3 million to $358.9 million.Our cash payments for income taxes, net of refunds received, decreased $35.1 million to $6.6 million in 2011 from $41.7 million in 2010. Aspreviously noted, the decrease in payments for income taxes was primarily the result of favorable tax depreciation rules in effect from September 2010 throughDecember 2011. The decrease in income tax payments was also the result of refunds received of $9.2 million, which includes the refund of an overpayment of$9.0 million of federal income taxes relating to our 2010 tax return that was received during the first quarter of 2011.Net cash used in investing activities decreased $8.2 million to $94.7 million in 2011 from $102.9 million in 2010. The decrease primarily related to adecrease in the number of capital spending initiatives at our existing stores and the number of new Company store development efforts during 2011 ascompared to 2010. Capital spending initiatives for our existing stores affected 181 stores during 2011 compared to 223 stores in 2010. Additionally, during2010 we opened seven new or relocated stores and acquired five stores from franchisees while in 2011 we opened four new stores, including two relocations.Net cash used in financing activities increased $30.8 million to $83.0 million in 2011 from $52.2 million in 2010. The increase primarily related to thepayment of quarterly cash dividends in 2011 of $11.5 million, a $10.1 million decrease in borrowings under our revolving credit facility, the payment of$2.1 million in 2011 for financing costs related to amending and restating our revolving credit facility, a $2.1 million increase in our share repurchases of ourcommon stock and a $5.2 million reduction in the amount of cash proceeds received through the exercise of employee stock options during 2011 as comparedto 2010 due to the decline in the number of stock option awards available to be exercised. 35Table of ContentsDebt FinancingWe maintain a $500.0 million revolving credit facility under a credit agreement dated October 28, 2011, with a syndicate of lenders. The revolvingcredit facility is a senior unsecured credit commitment, which matures in October 2016. The revolving credit facility includes an accordion feature allowingus, subject to meeting certain conditions and lender approval, to request an increase to the revolving commitment of up to $200.0 million in borrowings at anytime. Based on the type of borrowing, the revolving credit facility bears interest at the one month London Interbank Offered Rate (“LIBOR”) plus an applicablemargin of 0.875% to 1.625%, determined based on our financial performance and debt levels, or alternatively, the highest of (a) the Prime Rate, (b) the FederalFunds rate plus 0.50%, or (c) one-month LIBOR plus 1.0%; plus an applicable margin of up to 0.625%, determined based on our financial performance anddebt levels. During 2012, the Prime Rate was 3.25% and the one-month LIBOR rate ranged from 0.20% to 0.30%. The revolving credit facility also requires usto pay a commitment fee on a quarterly basis ranging from 0.15% to 0.30%, depending on our financial performance and debt levels on any unused portion ofour revolving credit facility. All borrowings under our revolving credit facility are unsecured, but we agreed not to pledge any of our existing assets to secureany other future indebtedness. We have the unrestricted ability to pay dividends and repurchase shares of our common stock under our revolving creditfacility, provided that our consolidated leverage ratio, as defined in the revolving credit facility, does not exceed 2.75 to 1.0 on a proforma basis, for the fourfiscal quarters then most recently ended, immediately after giving effect to such payments or repurchases.As of December 30, 2012, we had $389.5 million of borrowings outstanding and $10.4 million of letters of credit, issued but undrawn under ourrevolving credit facility. The weighted average effective interest rate incurred on our borrowings under our credit facilities was 1.7% for the year endingDecember 30, 2012.Our revolving credit facility contains a number of covenants that, among other things, require us to comply with the following financial ratios as of theend of any fiscal quarter: • a consolidated fixed charge coverage ratio of not less than 1.5 to 1.0, based upon the ratio of (a) consolidated earnings before interest, income taxesand rents (“EBITR”) for the last four fiscal quarters to (b) the sum of consolidated interest charges plus consolidated rent expense during suchperiod. Consolidated EBITR, as defined in the revolving credit facility, equals net income plus consolidated interest charges, income taxes, stock-based compensation expense, rent expense and other non-cash charges, reduced by non-cash income. • a consolidated leverage ratio of not greater than 3.0 to 1.0, based upon the ratio of (a) the quarter-end consolidated funded indebtedness (as definedin the revolving credit facility) to (b) consolidated EBITDA for the last four fiscal quarters. Consolidated EBITDA, as defined in the revolvingcredit facility, equals our consolidated EBITR adjusted to exclude the non-cash portion of rent expense plus depreciation and amortization.Our revolving credit facility is the primary source of committed funding from which we finance our planned capital expenditures, repurchase ourcommon stock and provide for our working capital needs. Non-compliance with the financial covenant ratios could prevent us from being able to accessfurther borrowings under our revolving credit facility, require us to immediately repay all amounts outstanding under the revolving credit facility and increaseour cost of borrowing. As of December 30, 2012, we were in compliance with these covenant ratios, with a consolidated fixed charge coverage ratio of 2.02 to1.0 and a consolidated leverage ratio of 2.4 to 1.0, and we expect to remain in compliance for the next twelve months. 36Table of ContentsCash DividendsThe table below presents dividends declared during 2012 and 2011: Declaration Date Record Date Dividend PayableDate DividendPayable PerShare Total Amount ofDividends Declared (in millions) February 21, 2012 March 22, 2012 April 19, 2012 $ 0.22 $4.0 May 1, 2012 June 7, 2012 July 5, 2012 0.22 3.9 July 31, 2012 September 6, 2012 October 4, 2012 0.22 4.0 October 30, 2012 December 6, 2012 December 27, 2012 0.24 4.3 $0.90 $16.2 Declaration Date Record Date Dividend PayableDate DividendPayable PerShare Total Amount ofDividends Declared (in millions) February 22, 2011 March 24, 2011 April 21, 2011 $0.20 $4.0 May 3, 2011 June 2, 2011 July 7, 2011 0.20 3.9 August 2, 2011 September 8, 2011 October 6, 2011 0.20 3.8 November 1, 2011 December 1, 2011 January 5, 2012 0.22 4.1 $0.82 $15.8 On February 19, 2013, our Board declared a cash dividend of $0.24 per share, or $4.3 million, which will be paid on April 18, 2013 to stockholders ofrecord on March 21, 2013. We expect to continue to pay quarterly cash dividends. However, we can give no assurance that future cash dividends will bedeclared or paid. The actual declaration and payment of future cash dividends, the amount of any such dividends and the establishment of record andpayment dates, if any, is subject to final determination by our Board each quarter, after its review of our business strategy, applicable debt covenants andfinancial performance and position, among other things.Pursuant to our current revolving credit facility agreement, there are restrictions on the amount of cash dividends that we may pay on our commonstock. See the discussion of our current revolving credit facility agreement included above in “Debt Financing.” See Part I, Item 1A. “Risk Factors” for adiscussion of factors that might affect our financial performance and compliance with debt covenants, including covenants that affect our ability to paydividends. 37Table of ContentsCapital ExpendituresCapital expenditures for 2012 totaled $102.5 million, including $43.1 million related to capital initiatives for our existing stores, $37.4 million related tonew store development and the remainder of $22.0 million related to other store initiatives, general store requirements and corporate capital expenditures. Thefollowing table summarizes information regarding the number of capital spending initiatives and the approximate total capital spend for the periods presented: Fiscal Year 2012 2011 2010 Investment in existing Company-owned stores: Game enhancements 94 137 180 Major remodels 6 11 15 Store expansions 25 33 28 Total completed 125 181 223 Total capital spend on existing Company-owned stores (in millions) $40 $65 $65 Company-owned stores added 13 4 12 Total capital spend on new Company-owned stores (in millions) $35 $10 $20 2010 included incremental game enhancements completed for stores located in the Los Angeles, San Diego, Chicago and Philadelphia market areas in conjunction with local television advertising. In 2012 and2011, we did not incur any incremental game enhancements in conjunction with local television advertising. Company-owned stores added during 2012 included one store acquired from a franchisee and three stores we relocated. Company-owned stores added during 2011 included two stores we relocated. Company-owned stores added during 2010 included five stores acquired from franchisees and two stores we relocated.New Company store development. Our plan for new store development is primarily focused on opening high sales volume stores in densely populatedareas. We expect the cost of opening a new store will vary depending upon many factors, including the existing real estate market, the size of the store, whetherwe acquire land and whether the store is located in an in-line or freestanding building.Existing stores. We believe that in order to maintain consumer demand and the appeal of our concept, we must continue to reinvest in our existingstores. For our existing stores, we utilize the following capital initiatives: (a) game enhancements; (b) major remodels; and (c) store expansions.Game enhancements. Game enhancements include replacing a portion of a store’s games and rides with new and, to a lesser extent, refurbishedequipment. Generally, we perform a game enhancement every three to four years at a store. We believe game enhancements are necessary to maintain therelevance and appeal of our games and rides. In addition, game enhancements counteract general wear and tear on the equipment and incorporate improvementsin game ride technology.Major remodels. We undertake periodic major remodels when there is a need to improve the overall appearance or layout of a store or when we introduceconcept changes or enhancements in our stores. A major remodel initiative typically includes interior design modifications that allow us to more effectivelyutilize space allocated to the playroom area of the store, increase the number of games and rides and modify or develop a new exterior and interior identity.Store expansions. We believe store expansions improve the quality of our guests’ experience because the additional square footage allows us to increasethe number and variety of games, rides and other entertainment offerings in the expanded stores. In addition to expanding the square footage of a store, storeexpansions typically include all components of a major remodel and result in an increase in the store’s seat count. We 38(1)(2)(1)(2)Table of Contentsconsider our investments in store expansions generally to be discretionary in nature. In undertaking store expansions, our objective is to improve the appeal ofour stores and to capture sales growth opportunities as they arise.Since the lifecycles of our store format and our games are largely driven by changes in consumer behaviors and preferences, we believe that our capitalinitiatives involving major remodels and game enhancements are strategic investments required in order to keep pace with consumer entertainment expectations.As a result, we view our major remodel and game enhancement initiatives as a means to maintaining and protecting our existing sales and cash flows over thelong-term. While we are hopeful that our major remodels and game enhancements will contribute to incremental sales growth, we believe that our capitalspending with respect to expansions of existing stores will more directly lead to growth in our comparable store sales and cash flow. We typically invest inexpansions when we believe there is a potential for sales growth and, in some instances, in order to maintain sales in stores that have competitors in theirmarket. We believe that expanding the square footage and entertainment space of a store increases our customer traffic and enhances the overall customerexperience, which we believe will contribute to the growth of our long-term comparable store sales. The objective of an expansion or remodel that increasesspace available for entertainment is not intended to exclusively improve our entertainment sales, but rather is focused on impacting overall Company storesales through increased customer traffic and satisfaction.Fiscal 2013 Capital PlanWe have funded and expect to continue to fund our capital expenditures through existing cash flows from operations and, if necessary, borrowings underour revolving credit facility. We currently estimate that total capital expenditures for 2013 will be approximately $82 million to $84 million, including(a) approximately $41 million related to new store development; (b) approximately $28 million related to capital initiatives for our existing stores; and (c) theremainder for other store initiatives, general store requirements and other corporate capital expenditures. As discussed above, we currently plan to continue ourstore growth plan over the next four years and expect to open approximately 50 to 60 new stores, 12 to 15 of which we plan to open in 2013 at an average costof approximately $2.7 million per store. New store growth will include a combination of opening new stores, acquiring franchise stores and relocating existingstores.We continually reassess the need for capital investment in our existing stores in light of each store’s current condition. We currently anticipate that ourexisting store capital plan will average $28 million per year over the next three years (2013-2015) and will impact, on average, 120 to 150 stores per year. Thisis a reduction in our planned existing store capital investment of approximately $15 million per year compared to 2012 and $40 million per year compared to2011. In part, this reduction in planned capital expenditures for 2013 relates to a significant decline in the number of store expansions.The following tables summarize information regarding the expected number of, and estimated average cost for, our projected capital expendituresactivities in fiscal 2013: ProjectedCompletionsInFiscal 2013 EstimatedAverageCostPer Project ProjectedTotal CostsIn Fiscal 2013 (in millions, exceptprojected completions) Investment in existing Company-owned stores: Store expansions 12 $ 1.0 $ 12 Game enhancements 100 $0.1 $10 Major remodels 8 $0.7 $6 Total 120 $28 New Company store development 15 $2.7 $41 New Company store development projected for fiscal year 2013 includes one store relocation. 39(1)(1)Table of ContentsShare RepurchasesOn July 25, 2005, our Board approved a stock repurchase program, which authorized us to repurchase from time to time up to $400 million of ourcommon stock, and on October 22, 2007 and October 27, 2009, our Board authorized $200 million increases each. During 2012, we repurchased 406,507shares of our common stock at an aggregate purchase price of $14.4 million. As of December 30, 2012, $47.0 million remained available for us to repurchaseshares of our common stock in the future, under our approved stock repurchase program.Our stock repurchase program does not have an expiration date and the pace of our repurchase activity will depend on factors such as our workingcapital needs, our debt repayment obligations, the market price of our common stock and economic and market conditions. Our share repurchases may beeffected from time to time through open market purchases, accelerated share repurchases or in privately negotiated transactions. Although there are no currentplans to modify the implementation of our stock repurchase program, our Board may elect to accelerate, expand, suspend, delay or discontinue the program atany time. Pursuant to our current revolving credit facility agreement, there are restrictions on the amount of our common stock we may repurchase. See thediscussion of our current revolving credit facility included above in “Debt Financing.”Off-Balance Sheet Arrangements and Contractual ObligationsAs of December 30, 2012, we had no off-balance sheet financing arrangements as described in Regulation S-K Item 303(a)(4)(ii).The following table summarizes our contractual cash obligations as of December 30, 2012: Payments Due by Period Total Less than1 Year 1 – 3Years 3 – 5Years More than5 Years (in thousands) Operating leases $ 1,094,424 $78,733 $157,625 $158,426 $699,640 Capital leases 40,456 2,795 5,406 5,138 27,117 Purchase obligations 24,454 19,239 1,812 1,912 1,491 Revolving credit facility 389,500 — — 389,500 — Interest obligations 25,343 6,599 13,161 5,583 — Uncertain tax positions 934 934 — — — $1,575,111 $ 108,300 $ 178,004 $ 560,559 $ 728,248 Includes the initial non-cancelable term plus renewal option periods provided for in the lease that can be reasonably assured but excludes contingent rent obligations and obligations to pay property taxes, insuranceand maintenance on the leased assets. A “purchase obligation” is defined as an agreement to purchase goods or services that is enforceable and legally binding on us and that specifies all significant terms, including (a) fixed or minimum quantities to bepurchased; (b) fixed, minimum or variable price provisions; and (c) the approximate timing of the transaction. Our purchase obligations primarily consist of obligations for the purchase of merchandise andentertainment inventory and obligations associated with the modernization of various information technology platforms. The above purchase obligations exclude agreements that are cancelable without significantpenalty. Interest obligations represent an estimate of future interest payments under our revolving credit facility. We calculated the estimate based on (a) terms of the revolving credit facility agreement and (b) using a 1.7%weighted average interest rate incurred on outstanding borrowings as of December 30, 2012. Our estimate assumes that we will maintain the same levels of indebtedness and financial performance through thecredit facility’s maturity in October 2016. Due to the uncertainty related to the settlement of uncertain tax positions, only the current portion of the liability for unrecognized tax benefits has been provided in the table above. The noncurrent portion of $2.0million is excluded from the table above.As of December 30, 2012, capital expenditures totaling $3.0 million were outstanding and included in accounts payable. These amounts are expected tobe paid in less than one year. 40(1)(2)(3)(4)(1)(2)(3)(4)Table of ContentsThe total estimate of accrued liabilities for our self-insurance programs was $20.0 million as of December 30, 2012. We estimate that $8.0 million ofthese liabilities will be paid in fiscal 2013 and the remainder paid in fiscal 2014 and beyond. Due to the nature of the underlying liabilities and the extendedperiod of time often experienced in resolving insurance claims, we cannot make reliable estimates of the timing of cash payments to be made in the future forour obligations related to our insurance liabilities. Therefore, no amounts for such liabilities have been included in the table above.As of December 30, 2012, there were $10.4 million of letters of credit issued but undrawn under our revolving credit facility. We utilize standby lettersof credit primarily for our self-insurance programs. These letters of credit do not represent additional obligations of the Company since the underlyingliabilities are already recorded in accrued liabilities. However, if we were unable to pay insurance claims when due, our insurance carrier could make demandfor payment pursuant to these letters of credit.As of December 30, 2012, we had dividends payable of $0.7 million, which will be paid when the restricted stock associated with the declared cashdividends vest, which is generally over four years. On February 19, 2013, our Board declared additional cash dividends of $4.3 million, which will largelybe paid in the second quarter of 2013.We enter into various purchase agreements in the ordinary course of business and have fixed price agreements and contracts with “spot” market pricesprimarily relating to food and beverage products. Other than the purchase obligation included in the above table, we do not have any material contracts (eitherindividually or in the aggregate) in place committing us to a minimum or fixed level of purchases or that are cancelable subject to significant penalty.InflationOur cost of operations, including but not limited to labor, food products, supplies, utilities, financing and rental costs, are significantly affected byinflationary factors.Critical Accounting Policies and EstimatesOur Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”),which requires us to make estimates and assumptions that affect the reported amount of our assets and liabilities at the date of our Consolidated FinancialStatements, the reported amount of revenues and expenses during the reporting period and the related disclosures of contingent assets and liabilities. The use ofestimates is pervasive throughout our Consolidated Financial Statements and is affected by management judgment and uncertainties. Our estimates,assumptions and judgments are based on historical experience, current market trends and other factors that we believe to be relevant and reasonable at the timeour Consolidated Financial Statements were prepared. We continually evaluate the information used to make these estimates as our business and the economicenvironment change. Actual results could differ materially from these estimates under different assumptions or conditions.The significant accounting policies used in the preparation of our Consolidated Financial Statements are described in Note 1 “Description of Businessand Summary of Significant Accounting Policies” included in Part II, Item 8. “Financial Statements and Supplementary Data.” We consider an accountingpolicy or estimate to be critical if it requires difficult, subjective or complex judgments and is material to the portrayal of our consolidated financial condition,changes in financial condition or results of operations. The selection, application and disclosure of the critical accounting policies and estimates have beenreviewed by the Audit Committee of our Board of Directors. Our accounting policies and estimates that our management considers most critical are as follows: 41Table of ContentsEstimation of ReservesThe amount of liability we record for claims related to insurance and tax reserves requires us to make judgments about the amount of expenses that willultimately be incurred. We use history and experience, as well as other specific circumstances surrounding these contingencies, in evaluating the amount ofliability that should be recorded. As additional information becomes available, we assess the potential liability related to various claims and revise ourestimates as appropriate. These revisions could materially impact our consolidated results of operations, financial position or liquidity.Self-Insurance reserves. We are self-insured for certain losses related to workers’ compensation claims, property losses, general liability matters and ourCompany sponsored employee health insurance programs. The self-insured health program is administered by a third party covering the majority of theemployees that participate in our health insurance programs. We estimate the amount of accrued liabilities for all the insurance programs. This estimate isprimarily based on historical claims experience and loss reserves, current claims data, demographic factors, severity factors and other factors that we deemrelevant to limit our losses, as well as information provided by independent third-party actuaries. However, to limit our losses, we purchase stop-lossinsurance coverage through third-party insurers for certain losses related to workers’ compensation, general liability, property and employee health insuranceprograms, where our deductibles range from $0.2 million to $0.5 million per occurrence. As of December 30, 2012, our total estimate of accrued liabilities forour self-insurance programs was $20.0 million. We estimate $8.0 million of these liabilities will be paid in fiscal 2013 and the remainder paid in fiscal 2014and beyond. If actual claims trends or other factors differ from our estimates, our financial results could be significantly impacted.Tax reserves. We are subject to audits from multiple domestic and foreign tax authorities. We maintain reserves for federal, state and foreign income taxeswhen we believe a position may not be fully sustained upon review by taxing authorities. Although we believe that our tax positions are fully supported by theapplicable tax laws and regulations, there are matters for which the ultimate outcome is uncertain. We recognize the benefit from an uncertain tax position inour Consolidated Financial Statements when the position is more-likely-than-not (a greater than 50 percent chance of being sustained). The amount recognizedis measured using a probability weighted approach and is the largest amount of benefit that is greater than 50 percent likelihood of being realized uponsettlement or ultimate resolution with the taxing authority. We routinely assess the adequacy of the estimated liability for unrecognized tax benefits, which maybe affected by changing interpretations of laws, rulings by tax authorities and administrative policies, certain changes and/or developments with respect toaudits and expirations of the statute of limitations. Depending on the nature of the tax issue, the ultimate resolution of an uncertain tax position may not beknown for a number of years; therefore, the estimated reserve balances could be included on our Consolidated Balance Sheets for multiple years. To the extentthat new information becomes available that causes us to change our judgment regarding the adequacy of a reserve balance, such a change will affect ourincome tax expense in the period in which the determination is made and the reserve is adjusted. Significant judgment is required to estimate our provision forincome taxes and liability for unrecognized tax benefits. At December 30, 2012, we had recorded $2.9 million of unrecognized tax benefits. Although we believeour approach is appropriate, there can be no assurance that the final outcome resulting from a tax authority’s review will not be materially different than theamounts reflected in our estimated tax provision and tax reserves. If the results of any audit materially differ from the liabilities we have established for taxes,there would be a corresponding impact to our consolidated results of operations, including the liability for unrecognized tax benefits, current tax provision,effective tax rate, net after tax earnings and cash flows, in the period of resolution.Impairment of Long-Lived AssetsWe review our property and equipment for indicators of impairment on an ongoing basis at the lowest reporting unit level, which is on a store-by-storebasis, to assess if the carrying amount may not be recoverable. Such events or changes may include a significant change in the business climate in aparticular market area (for example, due to economic downturn or natural disaster), historical negative cash flows or plans to dispose of or 42Table of Contentssell the property and equipment before the end of its previously estimated useful life. If an event or change in circumstances occurs, we estimate the future cashflows expected to result from the use of the property and equipment and its eventual disposition. If the sum of the expected future cash flows, undiscountedand without interest, is less than the asset carrying amount (an indication that the carrying amount may not be recoverable), we may be required to recognizean impairment loss. We estimate the fair value of a store’s property and equipment by discounting the expected future cash flows of the store over its remaininglease term using a weighted average cost of capital commensurate with the risk.The following estimates and assumptions used in the discounted cash flow analysis impact the fair value of a store’s long-lived assets: • Discount rate based on our weighted average cost of capital and the risk-free rate of return; • Sales growth rates and cash flow margins over the expected remaining lease terms; • Strategic plans, including projected capital spending and intent to exercise renewal options, for the store; • Salvage values; and • Other risks and qualitative factors specific to the asset or conditions in the market in which the asset is located at the time the assessment wasmade.During 2012, the average discount rate, average sales growth rate and average cash flow margin rate used were 8.0%, 0.5% and 8.0%, respectively. Webelieve our assumptions in calculating the fair value of our long-lived assets are similar to those used by other marketplace participants. If actual results arenot consistent with our estimates and assumptions, we may be exposed to additional impairment charges, which could be material to our ConsolidatedStatements of Earnings.Accounting for LeasesThe majority of our stores are leased. The terms of our store leases vary in length from lease to lease, although a typical lease provides for an initialprimary term of 10 years with two additional five year options to renew. We estimate the expected term of a lease by assuming the exercise of renewal options,in addition to the initial non-cancelable lease term, if the renewal is reasonably assured. Generally, reasonably assured relates to our contractual right to renewand the existence of an economic penalty that would preclude the abandonment of the lease at the end of the initial non-cancelable lease term. The expected termis used in the determination of whether a lease is a capital or operating lease and in the calculation of straight-line rent expense. Additionally, the useful life ofleasehold improvements is limited by the expected lease term or the economic life of the asset, whichever is shorter. If significant expenditures are made forleasehold improvements late in the expected term of a lease and renewal is reasonably assured, the useful life of the leasehold improvement is limited to the endof the reasonably assured renewal period or economic life of the asset.The determination of the expected term of a lease requires us to apply judgment and estimates concerning the number of renewal periods that arereasonably assured. If a lease is terminated prior to reaching the end of the expected term, this may result in the acceleration of depreciation or impairment of astore’s long-lived assets, and it may result in the accelerated recognition of landlord contributions and the reversal of deferred rent balances that assumedhigher rent payments in renewal periods that were never ultimately exercised by us.Recently Issued Accounting GuidanceSee Note 1 “Description of Business and Summary of Significant Accounting Policies” to our Consolidated Financial Statements included in Part II,Item 8, “Financial Statements and Supplementary Data” for a description of new accounting standards and their anticipated effects on our ConsolidatedFinancial Statements. 43Table of ContentsITEM 7A. 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 andforeign currency fluctuations.Interest Rate RiskWe are exposed to market risk from changes in the variable interest rates (primarily LIBOR) related to borrowings from our revolving credit facility. Ourborrowings outstanding as of December 30, 2012 of $389.5 million are variable rate debt that is exposed to market risk. A hypothetical increase of 100 basispoints in variable interest rates, assuming no change in our outstanding debt balance, would have increased annual interest expense by approximately $3.8million for the year ended December 30, 2012.Commodity Price RiskWe are exposed to commodity price changes related to certain food products that we purchase, primarily related to the prices of cheese and dough, whichcan 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 tocommodity price volatility associated with such commodity prices; however, we typically enter into short-term cancellable purchasing contracts, which maycontain pricing arrangements designed to minimize the impact of commodity price fluctuations. For 2012, the weighted average cost of a block of cheese was$1.70. The estimated increase in our food costs from a hypothetical 10% increase in the average cost of a block of cheese would have been approximately$1.2 million for the year ended December 30, 2012. For 2012, the weighted average cost of dough per pound was $0.43. The estimated increase in our foodcosts from a hypothetical 10% increase in the average price of dough per pound would have been approximately $0.5 million for the year ended December 30,2012.Foreign Currency RiskWe are exposed to foreign currency fluctuation risk associated with changes in the value of the Canadian dollar relative to the United States dollar, as weoperate a total of 14 Company-owned stores in Canada. For the year ended December 30, 2012, our Canadian stores represented less than 0.1% of ourconsolidated operating income. Changes in the currency exchange rate result in cumulative translation adjustments and are included in “Accumulated othercomprehensive income” and potentially result in transaction gains or losses, which are included in our earnings. The low and high currency exchange rates fora Canadian dollar into a United States dollar for the year ended December 30, 2012 were $0.9601 and $1.0334, respectively. A hypothetical 10% devaluationin the average quoted United States dollar-equivalent of the Canadian dollar exchange rate during the year ended December 30, 2012 would have reduced ourreported consolidated operating income by less than $0.1 million. 44Table of ContentsITEM 8. Financial Statements and Supplementary Data.CEC ENTERTAINMENT, INC.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm 46 Consolidated Financial Statements: Consolidated Balance Sheets at December 30, 2012 and January 1, 2012 47 Consolidated Statements of Earnings for the years ended December 30, 2012, January 1, 2012, and January 2, 2011 48 Consolidated Statements of Comprehensive Income for the years ended December 30, 2012, January 1, 2012, and January 2, 2011 49 Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 30, 2012, January 1, 2012, and January 2, 2011 50 Consolidated Statements of Cash Flows for the years ended December 30, 2012, January 1, 2012, and January 2, 2011 51 Notes to Consolidated Financial Statements 52 45Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Stockholders ofCEC Entertainment, Inc.Irving, TexasWe have audited the accompanying consolidated balance sheets of CEC Entertainment, Inc. and subsidiaries (the “Company”) as of December 30, 2012 andJanuary 1, 2012, and the related consolidated statements of earnings, comprehensive income, changes in stockholders’ equity, and cash flows for each of thethree years in the period ended December 30, 2012. We also have audited the Company’s internal control over financial reporting as of December 30, 2012,based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the TreadwayCommission. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, andfor its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on InternalControl over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal controlover financial reporting based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effectiveinternal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining anunderstanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessaryin the circumstances. We believe that our audits provide a reasonable basis for our opinions.A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principalfinancial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to providereasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (a) pertain to themaintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) providereasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of thecompany; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’sassets that could have a material effect on the financial statements.Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override ofcontrols, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of theeffectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changesin conditions, or that the degree of compliance with the policies or procedures may deteriorate.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CEC Entertainment, Inc.and subsidiaries as of December 30, 2012 and January 1, 2012, and the results of their operations and their cash flows for each of the three years in the periodended December 30, 2012, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Companymaintained, in all material respects, effective internal control over financial reporting as of December 30, 2012, based on the criteria established in InternalControl – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission./s/ Deloitte & Touche LLPDallas, TexasFebruary 21, 2013 46Table of ContentsCEC ENTERTAINMENT, INC.CONSOLIDATED BALANCE SHEETS(in thousands, except per share and share information) December 30,2012 January 1,2012 ASSETS Current assets: Cash and cash equivalents $19,636 $18,673 Accounts receivable 26,411 24,253 Inventories 18,957 18,659 Prepaid expenses 18,171 15,436 Deferred tax asset 2,884 3,660 Total current assets 86,059 80,681 Property and equipment, net 703,956 683,390 Other noncurrent assets 11,791 8,400 Total assets $801,806 $772,471 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Capital lease obligations, current portion $1,060 $834 Accounts payable 32,678 32,857 Accrued expenses 35,517 34,631 Unearned revenues 11,779 9,854 Dividends payable 312 4,111 Accrued interest 1,794 1,401 Total current liabilities 83,140 83,688 Capital lease obligations, less current portion 21,656 10,075 Revolving credit facility borrowings 389,500 389,600 Deferred rent liability 57,196 54,165 Deferred landlord contributions 27,092 28,278 Deferred tax liability 62,931 64,360 Accrued insurance 11,980 12,420 Other noncurrent liabilities 5,037 5,708 Total liabilities 658,532 648,294 Commitments and contingencies (Note 7) Stockholders’ equity: Common stock, $0.10 par value; authorized 100,000,000shares; 61,696,806 and 61,553,698 shares issued,respectively 6,170 6,155 Capital in excess of par value 447,449 441,960 Retained earnings 823,012 795,604 Accumulated other comprehensive income 5,880 5,342 Less treasury stock, at cost; 43,814,979 and 43,408,472shares, respectively (1,139,237) (1,124,884) Total stockholders’ equity 143,274 124,177 Total liabilities and stockholders’ equity $801,806 $772,471 The accompanying notes are an integral part of these Consolidated Financial Statements. 47Table of ContentsCEC ENTERTAINMENT, INC.CONSOLIDATED STATEMENTS OF EARNINGS(in thousands, except per share information) Fiscal Year 2012 2011 2010 REVENUES: Food and beverage sales $ 372,948 $ 388,908 $ 398,241 Entertainment and merchandise sales 425,989 426,986 414,892 Total Company store sales 798,937 815,894 813,133 Franchise fees and royalties 4,543 5,284 4,115 Total revenues 803,480 821,178 817,248 OPERATING COSTS AND EXPENSES: Company store operating costs: Cost of food and beverage (exclusive of items shown separatelybelow) 93,417 95,989 90,649 Cost of entertainment and merchandise (exclusive of items shownseparately below) 30,855 32,362 34,233 Total cost of food, beverage, entertainment and merchandise 124,272 128,351 124,882 Labor expenses 223,605 222,596 222,337 Depreciation and amortization 78,769 80,826 79,716 Rent expense 75,312 74,992 70,425 Other store operating expenses 126,855 126,847 128,075 Total Company store operating costs 628,813 633,612 625,435 Other costs and expenses: Advertising expense 35,407 34,989 35,282 General and administrative expenses 53,437 51,859 50,693 Asset impairments 6,752 2,739 936 Total operating costs and expenses 724,409 723,199 712,346 Operating income 79,071 97,979 104,902 Interest expense 9,401 8,875 12,142 Income before income taxes 69,670 89,104 92,760 Income taxes 26,080 34,142 38,726 Net income $43,590 $54,962 $54,034 Earnings per share: Basic $2.48 $2.88 $2.55 Diluted $2.47 $2.88 $2.55 Weighted average common shares outstanding: Basic 17,545 19,072 21,163 Diluted 17,618 19,121 21,204 The accompanying notes are an integral part of these Consolidated Financial Statements. 48Table of ContentsCEC ENTERTAINMENT, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(in thousands) Fiscal Year 2012 2011 2010 Net income $ 43,590 $ 54,962 $ 54,034 Components of other comprehensive income, net of tax: Change in fair value of cash flow hedge, net of income taxes of $0,($5) and ($510), respectively — (10) (835) Hedging loss realized in earnings, net of income taxes of $0, $760and $1,888, respectively — 1,231 3,094 Foreign currency translation adjustments, net of income taxes of$31, ($64) and $144, respectively 538 (401) 1,123 Total components of other comprehensive income, net of tax 538 820 3,382 Comprehensive income $44,128 $55,782 $57,416 The accompanying notes are an integral part of these Consolidated Financial Statements. 49Table of ContentsCEC ENTERTAINMENT, INC.CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY(in thousands, except share amounts) Common Stock Capital InExcess ofPar Value RetainedEarnings AccumulatedOtherComprehensiveIncome Treasury Stock Shares Amount Shares Amount Total Balance at January 3, 2010 61,120,018 $ 6,112 $ 425,717 $ 702,414 $ 1,140 38,944,354 $(967,470) $ 167,913 Net income — — — 54,034 — — — 54,034 Other comprehensive income — — — — 3,382 — — 3,382 Stock-based compensation costs — — 7,529 — — — — 7,529 Stock options exercised 181,043 18 5,773 — — — — 5,791 Restricted stock issued, net of forfeitures 194,700 20 (20) — — — — — Tax shortfall from stock options and restricted stock, net — — (790) — — — — (790) Restricted stock returned for taxes (78,424) (8) (2,759) — — — — (2,767) Common stock issued under 401(k) plan 18,892 2 601 — — — — 603 Purchases of treasury stock — — — — — 2,184,515 (77,633) (77,633) Balance at January 2, 2011 61,436,229 6,144 436,051 756,448 4,522 41,128,869 (1,045,103) 158,062 Net income — — — 54,962 — — — 54,962 Other comprehensive income — — — — 820 — — 820 Stock-based compensation costs — — 7,376 — — — — 7,376 Stock options exercised 17,588 1 631 — — — — 632 Restricted stock issued, net of forfeitures 173,713 17 (17) — — — — — Tax benefit from stock options and restricted stock, net — — 674 — — — — 674 Restricted stock returned for taxes (73,832) (7) (2,755) — — — — (2,762) Dividends declared — — — (15,806) — — — (15,806) Purchases of treasury stock — — — — — 2,279,603 (79,781) (79,781) Balance at January 1, 2012 61,553,698 6,155 441,960 795,604 5,342 43,408,472 (1,124,884) 124,177 Net income — — — 43,590 — — — 43,590 Other comprehensive income — — — — 538 — — 538 Stock-based compensation costs — — 7,595 — — — — 7,595 Restricted stock issued, net of forfeitures 214,059 22 (22) — — — — — Tax benefit from restricted stock, net — — 565 — — — — 565 Restricted stock returned for taxes (70,951) (7) (2,649) — — — — (2,656) Dividends declared — — — (16,182) — — — (16,182) Purchases of treasury stock — — — — — 406,507 (14,353) (14,353) Balance at December 30, 2012 61,696,806 $6,170 $447,449 $823,012 $5,880 43,814,979 $(1,139,237) $143,274 The accompanying notes are an integral part of these Consolidated Financial Statements. 50Table of ContentsCEC ENTERTAINMENT, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Fiscal Year 2012 2011 2010 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $43,590 $54,962 $54,034 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 79,510 81,560 80,679 Deferred income taxes (836) 20,292 7,210 Stock-based compensation expense 7,468 7,185 7,338 Amortization of landlord contributions (2,293) (2,024) (2,049) Amortization of deferred debt financing costs 492 361 281 Loss on asset disposals, net 3,562 3,035 3,320 Asset impairments 6,752 2,739 936 Other adjustments 474 423 15 Changes in operating assets and liabilities: Accounts receivable (1,587) 3,113 1,132 Inventories (594) (714) (423) Prepaid expenses (4,150) (1,721) 1 Accounts payable 374 (2,416) 6,723 Accrued expenses 1,132 (349) 336 Unearned revenues 1,925 460 1,748 Accrued interest (376) (37) 118 Income taxes payable (1,361) 6,170 (9,811) Deferred rent liability 2,744 3,016 2,658 Deferred landlord contributions 266 1,178 2,624 Net cash provided by operating activities 137,092 177,233 156,870 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (99,489) (94,669) (99,844) Other investing activities 586 17 (3,025) Net cash used in investing activities (98,903) (94,652) (102,869) CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from (repayments on) revolving credit facility (100) 12,600 22,700 Payments on capital lease obligations (949) (938) (885) Payment of debt financing costs — (2,052) — Dividends paid (19,846) (11,487) — Proceeds from exercise of stock options — 632 5,791 Excess tax benefit realized from stock-based compensation 619 815 631 Restricted stock returned for payment of taxes (2,656) (2,762) (2,767) Purchases of treasury stock (14,353) (79,781) (77,633) Net cash used in financing activities (37,285) (82,973) (52,163) Effect of foreign exchange rate changes on cash 59 (204) 70 Change in cash and cash equivalents 963 (596) 1,908 Cash and cash equivalents at beginning of period 18,673 19,269 17,361 Cash and cash equivalents at end of period $19,636 $18,673 $19,269 SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $9,419 $9,081 $11,596 Income taxes paid, net $27,598 $6,592 $41,725 NON-CASH INVESTING AND FINANCING ACTIVITIES: Accrued construction costs $3,025 $3,580 $11,149 Dividends payable $656 $4,319 $— Capital lease obligations $12,732 $932 $593 The accompanying notes are an integral part of these Consolidated Financial Statements. 51Table of ContentsCEC ENTERTAINMENT, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Description of Business and Summary of Significant Accounting Policies:Description of Business: CEC Entertainment, Inc. and its subsidiaries (the “Company “) operate and franchise Chuck E. Cheese’s family diningand entertainment centers (also referred to as “stores”) in a total of 47 states and eight foreign countries and territories. As of December 30, 2012 we and ourfranchisees operated a total of 565 stores, of which 514 were Company-owned stores located in 44 states and Canada. Our franchisees operated a total of 51stores located in 15 states and seven foreign countries and territories, including Chile, Guam, Guatemala, Mexico, Puerto Rico, Saudi Arabia and the UnitedArab Emirates. The use of the terms “CEC Entertainment,” “we,” “us” and “our” throughout these Notes to Consolidated Financial Statements refer to theCompany.All of our stores utilize a consistent restaurant-entertainment format that features both family dining and entertainment areas with the same general mix offood, beverages, entertainment and merchandise. The economic characteristics, products and services, preparation processes, distribution methods and typesof customers are substantially similar for each of our stores. Therefore, we aggregate each store’s operating performance into one reportable segment forfinancial reporting purposes.Basis of Presentation: Our Consolidated Financial Statements include the accounts of the Company and the International Association of CECEntertainment, Inc. (the “Association”), a variable interest entity in which we have a controlling financial interest. The Association primarily administers thecollection and disbursement of funds (the “Association Funds”) used for advertising, entertainment and media programs that benefit both us and ourfranchisees. We and our franchisees are required to contribute a percentage of gross sales to these funds and could be required to make additional contributionsto fund any deficits that may be incurred by the Association. We include the Association in our Consolidated Financial Statements, as we concluded that weare the primary beneficiary of its variable interests because we (a) have the power to direct the majority of its significant operating activities; (b) provide itunsecured lines of credit; and (c) own the majority of the store locations that benefit from the Association’s advertising, entertainment and media expenditures.The assets, liabilities and operating results of the Association are not material to our Consolidated Financial Statements.All intercompany accounts and transactions have been eliminated in consolidation.Fiscal Year: 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 fora 53 week year when the fourth quarter has 14 weeks. Our 2012, 2011 and 2010 fiscal years each consisted of 52 weeks.Use of Estimates and Assumptions: The preparation of these Consolidated Financial Statements in conformity with accounting principles generallyaccepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date of our Consolidated Financial Statements and the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from those estimates.Change in Accounting Estimate and Capitalization Thresholds: During 2011, we performed an assessment of the useful lives of all of ourproperty and equipment. In evaluating the useful lives, we considered the historical life of the assets, operational strategy and related functionality. Weconcluded that certain games and leasehold improvements in our stores remained in service longer than the depreciable life assigned and certain pieces ofequipment utilized in our stores remained in service for less than the depreciable life assigned. As a result, effective July 4, 2011, we revised our estimate of theuseful lives of certain property and equipment as follows: (a) certain games from six years to either eight or 10 years; (b) leasehold improvements related toexpansions of our stores from 15 to 20 years or the remaining lease term if shorter; (c) leasehold improvements related to major remodels of our stores from 10to 15 years or the remaining lease term if shorter; and (d) other 52®Table of ContentsCEC ENTERTAINMENT, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 1. Description of Business and Summary of Significant Accounting Policies (continued): equipment utilized in our stores had various useful lives reduced. Accounting guidance requires a change in estimate to be accounted for on a prospective basisby amortizing an asset’s current carrying value over its revised remaining useful life. This change provided an incremental benefit to pre-tax depreciation andamortization expense in our Consolidated Statements of Earnings in the second half of 2011 and the first half of 2012. Pre-tax depreciation and amortizationexpense incrementally benefited by approximately $3.0 million for both 2012 and 2011.In conjunction with the revision of the estimated useful lives of certain property and equipment in 2011, we also changed our capitalization thresholdswith respect to costs associated with certain refurbished games, as well as costs related to the replacement of certain asset parts. This change incrementallyincreased other store operating costs in our Consolidated Statements of Earnings in the second half of 2011 and first half of 2012. Pre-tax other store operatingcosts incrementally increased by approximately $1.0 million for 2012 and 2011.We estimate that the after-tax effect of both the change in estimated useful lives and the change in capitalization thresholds benefited our fully dilutedearnings per share by approximately $0.08 and $0.06 per share for the years ended December 30, 2012 and January 1, 2012, respectively.Subsequent Events: We recognize the effects of events or transactions that occur after the balance sheet date but before financial statements are issued(“subsequent events”) if there is evidence that conditions related to the subsequent event existed at the date of the balance sheet, including the impact of suchevents on management’s estimates and assumptions used in preparing our Consolidated Financial Statements. Other significant subsequent events that are notrecognized in our Consolidated Financial Statements, if any, are disclosed in the Notes to Consolidated Financial Statements.Cash and Cash Equivalents: Cash and cash equivalents are comprised of demand deposits with banks and short-term cash investments withremaining maturities of three months or less from the purchase date.Concentrations of Credit Risk: We have exposure to credit risk to the extent that our cash and cash equivalents exceed amounts covered by the UnitedStates and Canada deposit insurance limits, as we currently maintain a significant amount of our cash and cash equivalents balances with two majorfinancial institutions. The individual balances, at times, may exceed the insured limits. We have not experienced any losses in such accounts. Inmanagement’s opinion, the capitalization and operating history of the financial institutions are such that the likelihood of a material loss is considered remote.Inventories: Inventories of food, beverages, merchandise, paper products and other supplies needed for our food service and entertainment operationsare stated at the lower of cost on a first-in, first-out basis or market.Property and Equipment: Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortizationare charged to operations using the straight-line method over the assets’ estimated useful lives, which are as follows: Buildings 40 yearsGame and ride equipment 4 to 12 yearsNon-technical play equipment 15 to 20 yearsFurniture, fixtures and other equipment 4 to 20 yearsLeasehold improvements are amortized using the straight-line method over the lesser of the lease term or the estimated useful lives of the related assets.We use a consistent lease period (generally, the initial non-cancelable lease term plus renewal option periods provided for in the lease that can be reasonablyassured of being 53Table of ContentsCEC ENTERTAINMENT, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 1. Description of Business and Summary of Significant Accounting Policies (continued): exercised) when estimating the depreciable lives of leasehold improvements, in determining classification of our leases as either operating or capital and inrecognizing straight-line rent expense. Interest costs incurred during the construction period are capitalized and depreciated based on the estimated useful life ofthe underlying asset.We review our property and equipment for indicators of impairment on an ongoing basis at the lowest reporting unit level, which is on a store-by-storebasis, to assess if the carrying amount may not be recoverable. Such events or changes may include a significant change in the business climate in aparticular market area (for example, due to economic downturn or natural disaster), historical negative cash flows or plans to dispose of or sell the propertyand equipment before the end of its previously estimated useful life. If an event or change in circumstances occurs, we estimate the future cash flows expectedto result from the use of the property and equipment and its eventual disposition. If the sum of the expected future cash flows, undiscounted and withoutinterest, is less than the asset carrying amount (an indication that the carrying amount may not be recoverable), we may be required to recognize an impairmentloss. We estimate the fair value of a store’s property and equipment by discounting the expected future cash flows of the store over its remaining lease termusing a weighted average cost of capital commensurate with the risk. Any impairment loss recognized equals the amount by which the asset carrying amountexceeds its estimated fair value. In the event an asset is impaired, its carrying value is adjusted to the estimated fair value, and any subsequent increases in fairvalue are not recorded. Additionally, if it is determined that the estimated remaining useful life of the asset should be decreased, any periodic depreciation andamortization expense is adjusted based on the new carrying value of the asset unless the asset is written down to salvage value, at which time depreciation oramortization ceases.Capitalized Store Development Costs: We capitalize our internal department costs that are directly attributable to store development projects, such asthe design and construction of a new store and the remodeling and expansion of our existing stores. Capitalized internal department costs include thecompensation, benefits and various office costs related to our design, construction, facilities and legal departments. We also capitalize interest costs inconjunction with the construction of new stores. Store development costs are initially accumulated in our construction in progress account until a project iscompleted. At the time of completion, the costs accumulated to date are then reclassified to property and equipment and depreciated according to ourdepreciation policies. In 2012, 2011 and 2010, we capitalized internal costs of $3.3 million, $3.6 million and $3.6 million, respectively, related to our storedevelopment activities.Goodwill: In 2010, we recorded goodwill of $3.5 million associated with four stores we acquired from our franchisees, representing the excess of thepurchase price over the fair value of the specific assets acquired. As of December 30, 2012 and January 1, 2012, goodwill of $3.5 million was included in“Other noncurrent assets” on our Consolidated Balance Sheets. Goodwill is not amortized, but is tested for impairment at least once per year, or when eventsor changes in circumstances indicate that the carrying amount may be less than fair value, using a two-step fair value test. We perform this test at the lowestreporting unit, which is at the store level. The first step of the test compares the carrying amount of the goodwill to its estimated fair value, which is based onthe undiscounted expected future cash flows of the store. If the estimated fair value of the store is less than its carrying amount, a second step is performed toquantify the amount of goodwill impairment that should be recorded. When testing goodwill for impairment, we make certain assumptions regarding theamount and the timing of estimated future cash flows similar to those when testing a store’s property and equipment for impairment, as described above. Webelieve our assumptions in calculating the fair value are similar to those used by other marketplace participants. We perform our annual impairment analysisof goodwill at the beginning of the fourth quarter of each fiscal year. We did not record any losses in connection with our impairment tests in 2012, 2011 or2010. 54Table of ContentsCEC ENTERTAINMENT, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 1. Description of Business and Summary of Significant Accounting Policies (continued): Self-Insurance Accruals: We are self-insured for certain losses related to workers’ compensation claims, property losses, general liability matters andour Company sponsored employee health insurance programs. We estimate the accrued liabilities for all of our self-insurance programs at the end of eachreporting period. This estimate is primarily based on historical claims experience and loss reserves, with the assistance of an independent third-party actuary.To limit our exposure to losses, we maintain stop-loss coverage through third-party insurers. Our deductibles range from $0.2 million to $0.5 million peroccurrence. For claims that exceed the deductible amount, we record a gross liability and a corresponding receivable representing expected recoveries pursuantto the stop-loss coverage, since we are not legally relieved of our obligation to the claimant.Contingent Loss Accruals: When a contingency involving uncertainty as to a possible loss occurs, an estimate of the loss may be accrued as a chargeto income and a reserve established on the Consolidated Balance Sheets. We perform regular assessments of our contingent losses and develop estimates of thedegree of probability for and range of possible settlement. We accrue liabilities for losses we deem probable and for which we can reasonably estimate anamount of settlement. We do not record liabilities for losses we believe are only reasonably possible to result in an adverse outcome, but provide disclosure ofthe reasonably possible range of loss to the extent it is estimable. Reserve balances may be increased or decreased in the future to reflect further developments.However, there can be no assurance that there will not be a loss different from the amounts accrued. Any such loss, if realized, could have a material effect onour consolidated results of operations in the period during which the underlying matters are resolved.Revolving Credit Facility Borrowings: We classify the borrowings obtained under our revolving credit facility as a noncurrent liability on ourConsolidated Balance Sheets because the credit agreement allows us, except in the event of our violation of a provision that makes the obligation callable, tocontinuously refinance borrowings on a long-term basis through the maturity date and, by its terms, borrowings are not due on demand. On October 28,2011, we amended and restated our then existing revolving credit facility. Refer to Note 6 “Revolving Credit Facility” for further discussion of our revolvingcredit facility.Comprehensive Income: We present the components of other comprehensive income (“OCI”) in a separate financial statement, referred to as ourConsolidated Statements of Comprehensive Income. Comprehensive income consists of net income and certain other changes in stockholders’ equity, whichare excluded from net income and referred to as OCI on our Consolidated Statements of Changes in Stockholders’ Equity. Our OCI consists of foreigncurrency translation adjustments, net of tax. In 2011 and 2010, our OCI also consisted of changes in the fair value of our interest rate swap, net of tax, andhedging losses realized in earnings, net of tax. OCI is recorded directly to “Accumulated other comprehensive income,” which is a separate component ofstockholders’ equity.Foreign Currency Translation: Our Consolidated Financial Statements are presented in U.S. dollars. The assets and liabilities of our Canadiansubsidiary are translated to U.S. dollars at year-end exchange rates, while revenues and expenses are translated at average exchange rates during the year.Adjustments that result from translating amounts are reported as a component of “Accumulated other comprehensive income” on our Consolidated Statementsof Changes in Stockholders’ Equity and in our Consolidated Statements of Comprehensive Income. The effect of foreign currency exchange rate changes oncash is reported in our Consolidated Statements of Cash Flows as a separate component of the change in cash and cash equivalents during the period. 55Table of ContentsCEC ENTERTAINMENT, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 1. Description of Business and Summary of Significant Accounting Policies (continued): Fair Value Disclosures: Fair value is defined as the price that we would receive to sell an asset or pay to transfer a liability (an exit price) in an orderlytransaction between market participants on the measurement date. In determining fair value, U.S. GAAP establishes a three-level hierarchy used in measuringfair value, as follows: Level 1 –inputs are quoted prices available for identical assets or liabilities in active markets. Level 2 –inputs are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets and liabilities inactive markets; or other inputs that are observable or can be corroborated by observable market data. Level 3 –inputs are unobservable and reflect our own assumptions.Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, revolving credit facility and capital leaseobligations. The carrying amount of cash and cash equivalents, accounts receivable and accounts payable approximates fair value because of their shortmaturities. We believe that the carrying amount of our revolving credit facility approximates fair value because the interest rates are adjusted regularly based oncurrent market conditions. We may also adjust the carrying amount of certain nonfinancial assets to fair value on a non-recurring basis when they areimpaired. The fair values of our long-lived assets held and used are determined using Level 3 inputs based on the estimated discounted future cash flows of thestore over its expected remaining lease term. Due to uncertainties in the estimates and assumptions used, actual results could differ from the estimated fairvalues. See Note 4 “Property and Equipment” for the fair value disclosures of stores we have impaired.During 2012 and 2011, there were no significant transfers among level 1, 2 or 3 fair value determinations.Stock-Based Compensation: We expense the fair value of stock-based compensation awards granted to our employees and directors in ourConsolidated Financial Statements on a straight-line basis over the period that services are required to be provided in exchange for the award (“requisite serviceperiod”), which typically is the period over which the award vests. Stock-based compensation is recognized only for awards that vest, and our periodicaccrual of compensation cost is based on the estimated number of awards expected to vest. We measure the fair value of compensation cost related to restrictedstock awards based on the closing market price of our common stock on the grant date.Stock-based compensation expense is recorded in “General and administrative expenses” in the Consolidated Statements of Earnings, which is the samefinancial statement caption where the associated salary expense of employees with stock-based compensation awards is recorded. The gross benefits of taxdeductions in excess of the compensation cost recognized from the vesting of restricted stock awards are tax affected and classified as cash inflows fromfinancing activities in our Consolidated Statements of Cash Flows.Revenue Recognition – Company Store Activities: Food, beverage and merchandise revenues are recognized when sold. Game revenues are recognizedas game-play tokens are purchased by guests, and we accrue unearned revenue as a liability for the estimated amount of unused tickets and tokens that maybe redeemed or used in the future. We allocate the revenue recognized from the sale of value-priced combination packages, which generally are comprised offood, beverage and game tokens (and in some instances, merchandise), between “Food and beverage sales” and “Entertainment and merchandise sales” basedupon the price charged for each component when it is sold separately, or in limited circumstances our best estimate of selling price if a component is not soldon a stand-alone basis, which we believe approximates each component’s fair value. 56Table of ContentsCEC ENTERTAINMENT, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 1. Description of Business and Summary of Significant Accounting Policies (continued): We sell gift cards to our customers in our stores and through certain third-party distributors, which do not expire and do not incur a service fee onunused balances. Gift card sales are recorded as unearned gift card revenue liability when sold and are recognized as revenue when: (a) the gift card isredeemed 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 alegal obligation to remit the value of the unredeemed gift card under applicable state unclaimed property escheat statutes. Gift card breakage is determinedbased upon historical redemption patterns of our gift cards. Breakage income from gift cards is included in “Food and beverage sales” in our ConsolidatedStatements of Earnings and was not material for the periods presented.Revenue Recognition – Franchise Fees and Royalties: Revenues from franchise activities include area development and initial franchise feesreceived from franchisees to establish new stores, and once a store is opened, a franchisee is charged monthly royalties based on a percentage of franchisedstores’ sales. These fees are collectively referred to as “Franchise fees and royalties” in our Consolidated Statements of Earnings. Area development and initialfranchise fees are accrued as unearned franchise revenue liability when received and recognized as revenue when the franchised stores associated with the feesopen, which is generally when we have fulfilled all significant obligations to the franchisee. Continuing royalties and other miscellaneous sales and fees arerecognized in the period earned. Continuing royalties and other miscellaneous sales and fees of $3.8 million, $3.7 million and $3.7 million in 2012, 2011 and2010, respectively, are included in “Franchise fees and royalties” in our Consolidated Statements of Earnings.Cost of Food, Beverage, Entertainment and Merchandise: Cost of food and beverage includes all direct costs of food and beverage sold to ourguests and related paper and birthday supplies used in our food service operations, less “vendor rebates” described below. Cost of entertainment andmerchandise includes the direct cost of prizes provided and merchandise sold to our customers, as well as the cost of tickets dispensed to customers andredeemed for prize items. These amounts exclude any allocation of other operating costs including labor and related costs for store personnel and depreciationand amortization expense.Vendor Rebates: We receive rebate payments primarily from a single third-party vendor. Pursuant to the terms of a volume purchasing and promotionalagreement entered into with the vendor, rebates are primarily provided based on the quantity of the vendor’s products we purchase over the term of theagreement. We record these allowances in the period they are earned as a reduction in the cost of the vendor’s products, and when the related inventory is sold,the allowances are recognized in “Cost of food and beverage” in our Consolidated Statements of Earnings.Rent Expense: We recognize rent expense on a straight-line basis over the lease term, including the construction period and lease renewal option periodsprovided for in the lease that can be reasonably assured at the inception of the lease. The lease term commences on the date when we take possession and havethe right to control use of the leased premises. The difference between actual rent payments and rent expense in any period is recorded as “Deferred rentliability” on our Consolidated Balance Sheets. Construction allowances received from the landlord as a lease incentive intended to reimburse us for the cost ofleasehold improvements (“Landlord contributions”) are accrued as deferred landlord contributions. Landlord contributions are amortized on a straight-linebasis over the lease term as a reduction to rent expense.Advertising Costs: Production costs for commercials and coupons are expensed in the period in which the commercials are initially aired and thecoupons are distributed. All other advertising costs are expensed as incurred. 57Table of ContentsCEC ENTERTAINMENT, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 1. Description of Business and Summary of Significant Accounting Policies (continued): We and our franchisees are required to contribute a percentage of gross sales to advertising, media and entertainment funds maintained by theAssociation, which are utilized to administer all the national advertising programs that benefit both us and our franchisees. Because the Association Funds arerequired to be segregated and used for specified purposes, we do not reflect franchisee contributions to the Association Funds as revenue, but rather recordfranchisee contributions as an offset to advertising expenses in our Consolidated Financial Statements. Our contributions to the Association Funds areeliminated in consolidation. Contributions from our franchisees to the Association Funds for advertising, entertainment and media programs were $2.0million, $2.1 million and $2.2 million for fiscal years ended December 30, 2012, January 1, 2012, and January 2, 2011, respectively.Income Taxes: We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities forthe expected future tax consequences attributable to temporary differences between the financial statement carrying amounts of assets and liabilities and theirrespective tax basis. A valuation allowance is applied against net deferred tax assets if, based on the weight of available evidence, it is more likely than not thatsome or all of the deferred tax assets will not be realized. Deferred income taxes are not provided on undistributed income from our Canadian subsidiary, asthese earnings are considered to be permanently invested.We maintain tax reserves for federal, state and foreign income taxes when we believe a position may not be fully sustained upon review by taxingauthorities. Although we believe that our tax positions are fully supported by the applicable tax laws and regulations, there are matters for which the ultimateoutcome is uncertain. We recognize the benefit from an uncertain tax position in our Consolidated Financial Statements when the position is more-likely-than-not (a greater than 50 percent chance of being sustained). The amount recognized is measured using a probability weighted approach and is the largest amountof benefit that is greater than 50 percent likelihood of being realized upon settlement or ultimate resolution with the taxing authority. We routinely assess theadequacy of the estimated liability for unrecognized tax benefits, which may be affected by changing interpretations of laws, rulings by tax authorities andadministrative policies, certain changes and/or developments with respect to audits and expirations of the statute of limitations. In our Consolidated Statementsof Earnings, we include interest expense related to unrecognized tax benefits in “Interest expense” and include penalties in “General and administrativeexpenses.” On our 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.”Recently Issued Accounting GuidanceAccounting Guidance Adopted: In May 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-04, Amendments to AchieveCommon Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”), whichamended ASC 820, Fair Value Measurements and Disclosures. This amendment clarified the FASB’s intent about the application of existing fair valuemeasurement and disclosure guidance, including additional disclosure (a) for Level 3 fair value measurements including quantitative information aboutunobservable inputs used, a description of the valuation processes used by the entity and a qualitative discussion about the sensitivity of the measurements tochanges in the unobservable inputs; (b) for an entity’s use of a nonfinancial asset that is different from the asset’s highest and best use and the reason for thedifference; (c) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which thefair value measurements were determined; and (d) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. The adoption of thisamendment requires additional disclosure but did not have an impact on our Consolidated Financial Statements. 58Table of ContentsCEC ENTERTAINMENT, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Note 1. Description of Business and Summary of Significant Accounting Policies: In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment, which permits an entity to first make a qualitative assessmentof whether it is more likely than not that a reporting unit’s fair value of goodwill is less than its carrying value before requiring an entity to quantitativelycalculate the two-step goodwill impairment model that is currently in place. If an entity determines through its qualitative assessment that the fair value ofgoodwill is more likely than not greater than its carrying value, then the remaining impairment steps would be deemed unnecessary. The qualitative assessmentis optional, allowing companies to go directly to the quantitative assessment. The adoption of this amendment during the first quarter of 2012 did not have animpact on our Consolidated Financial Statements.Accounting Guidance Not Yet Adopted: In July 2012, the FASB issued ASU 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment.This amendment allows an entity to first assess relevant qualitative factors in order to determine whether it is necessary to perform the two-step quantitativeimpairment test for indefinite-lived intangible assets. In effect, the amendment eliminates the need to calculate the fair value of an indefinite-lived intangibleasset in connection with the impairment test unless the entity determines, based on the qualitative assessment, that it is more likely than not that the asset isimpaired. This amendment is effective for fiscal years beginning after September 15, 2012. Early application is permitted. We believe the adoption of thisguidance will not have a significant impact on our Consolidated Financial Statements.Note 2. Accounts Receivable:Accounts receivable consisted of the following: At Year End 2012 2011 (in thousands) Trade receivables $7,320 $6,635 Vendor rebates 7,186 7,043 Income taxes receivable 9,189 9,137 Other accounts receivable 2,716 1,438 $ 26,411 $ 24,253 Trade receivables consist primarily of debit and credit card receivables due from third-party financial institutions. The other accounts receivable balanceconsists primarily of lease incentives, amounts due from our franchisees and amounts expected to be recovered from third-party insurers through the stop-losscoverage we purchase for our self-insurance programs.Note 3. Inventories:Inventories consisted of the following: At Year End 2012 2011 (in thousands) Food and beverage $4,549 $4,156 Entertainment and merchandise 14,408 14,503 $ 18,957 $ 18,659 59Table of ContentsCEC ENTERTAINMENT, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Note 3. Inventories (continued): Food and beverage inventories include food, beverage, paper products and other supplies needed for our food service operations. Entertainment andmerchandise inventories consist primarily of novelty toy items used as redemption prizes for certain games, sold directly to our guests or used as part of ourbirthday party packages. In addition, entertainment and merchandise inventories also consist of other supplies used in our entertainment operations.Note 4. Property and Equipment:Property and equipment consisted of the following: At Year End 2012 2011 (in thousands) Land $43,423 $43,735 Buildings 112,205 110,387 Leasehold improvements 602,940 579,541 Game and ride equipment 284,666 279,543 Furniture, fixtures and other equipment 229,943 219,373 Property leased under capital leases (Note 7) 28,650 16,800 1,301,827 1,249,379 Less accumulated depreciation and amortization (608,125) (573,289) Net property and equipment in service 693,702 676,090 Construction in progress 10,254 7,300 $703,956 $683,390 Property leased under capital leases consists primarily of buildings for our store locations. Accumulated amortization related to these assets was $9.1million and $8.3 million as of December 30, 2012 and January 1, 2012, respectively. Amortization of assets under capital leases is included in “Depreciationand amortization expense” in our Consolidated Statements of Earnings.Total depreciation and amortization expense was $79.5 million, $81.6 million and $80.7 million in 2012, 2011 and 2010, respectively, of which, $0.7million, $0.7 million and $1.0 million in 2012, 2011 and 2010, respectively, was included in “General and administrative expenses” in our ConsolidatedStatements of Earnings.Asset ImpairmentsIn 2012, we recognized asset impairment charges of $6.8 million relating to 18 stores, of which seven stores were previously impaired. In 2011, werecognized asset impairment charges of $2.7 million relating to six stores, none of which were previously impaired. In 2010, we recognized asset impairmentcharges of $0.9 million relating to three stores. We continue to operate all but two of these stores. These impairment charges were the result of a decline in thestores’ financial performance, primarily due to various economic factors in the markets in which the stores are located. As of December 30, 2012 andJanuary 1, 2012, the aggregate carrying value of the property and equipment at impaired stores, after the impairment charges, was $7.2 million and $1.5million, respectively. 60Table of ContentsCEC ENTERTAINMENT, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 4. Property and Equipment (continued): Asset impairments represent adjustments we recognize to write down the carrying amount of the property and equipment at our stores to their estimatedfair value, as the store’s operation is not expected to generate sufficient projected future cash flows to recover the current net book value of its long-lived assets.We estimate the fair value of a store’s long-lived assets (property and equipment) by discounting the expected future cash flows of the store over its estimatedremaining lease term using a weighted average cost of capital commensurate with the risk. Accordingly, the fair value measurement of the stores for which werecognized an impairment charge is classified within Level 3 of the fair value hierarchy. The following estimates and assumptions used in the discounted cashflow analysis impact the fair value of a store’s long-lived assets: • Discount rate based on our weighted average cost of capital and the risk-free rate of return; • Sales growth rates and cash flow margins over the expected remaining lease terms; • Strategic plans, including projected capital spending and intent to exercise renewal options, for the store; • Salvage values; and • Other risks and qualitative factors specific to the asset or conditions in the market in which the asset is located at the time the assessment wasmade.During 2012, the average discount rate, average sales growth rate and average cash flow margin rate used were 8.0%, 0.5% and 8.0%, respectively. Webelieve our assumptions in calculating the fair value of our long-lived assets are similar to those used by other marketplace participants. If actual results arenot consistent with our estimates and assumptions, we may be exposed to additional impairment charges, which could be material to our ConsolidatedStatements of Earnings.Note 5. Accrued Expenses:Accrued expenses consisted of the following: At Year End 2012 2011 (in thousands) Current: Salaries and wages $12,207 $12,505 Insurance 8,057 6,979 Taxes, other than income taxes 9,289 8,964 Other accrued operating expenses 5,964 6,183 $ 35,517 $ 34,631 Noncurrent: Insurance $11,980 $12,420 Accrued current and noncurrent insurance represents estimated claims incurred but unpaid under our self-insurance programs for general liability, workers’compensation, health benefits and certain other insured risks. 61Table of ContentsCEC ENTERTAINMENT, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Note 6. Revolving Credit Facility: At Year End 2012 2011 (in thousands) Revolving credit facility borrowings $ 389,500 $ 389,600 The revolving credit facility is a senior unsecured credit commitment of $500.0 million that expires on October 28, 2016. The revolving credit facilityalso includes an accordion feature allowing us, subject to meeting certain conditions and lender approval, to request an increase to the revolving commitment ofup to $200.0 million in borrowings at any time. Based on the type of borrowing, the revolving credit facility bears interest at the one month London InterbankOffered Rate (“LIBOR”) plus an applicable margin of 0.875% to 1.625%, determined based on our financial performance and debt levels, or alternatively, thehighest of (a) the Prime Rate; (b) the Federal Funds rate plus 0.50%; or (c) one month LIBOR plus 1.0%; plus an applicable margin up to 0.625%, determinedbased on our financial performance and debt levels. During 2012, the Prime Rate was 3.25% and the one month LIBOR rate ranged from 0.20% to 0.30%. Therevolving credit facility also requires us to pay a commitment fee on a quarterly basis, ranging from 0.15% to 0.30%, depending on our financial performanceand debt levels, on any unused portion of the revolving credit facility. All borrowings under the revolving credit facility are unsecured, but we agreed not topledge any of our existing assets to secure any other future indebtedness.As of December 30, 2012, we had $10.4 million of letters of credit, issued but undrawn under the revolving credit facility. The weighted averageeffective interest rate incurred on our borrowings under our revolving credit facility was 1.7% and 2.0% for fiscal years ended December 30, 2012 andJanuary 1, 2012, respectively. The weighted average interest rate for the year ended January 1, 2012 included the effect of an interest rate swap contract thatexpired in May 2011.The credit agreement for the revolving credit facility also contains certain restrictions and conditions that, among other things, require us to comply withspecified financial covenant ratios, including, at the end of any fiscal quarter, a consolidated fixed charge coverage ratio of not less than 1.5 to 1.0 and aconsolidated maximum leverage ratio of not greater than 3.0 to 1.0, as defined in the revolving credit facility. Additionally, the terms of the credit agreement forthe revolving credit facility do not restrict dividend payments or stock repurchases by us as long as we do not exceed a consolidated leverage ratio (as definedin the revolving credit facility) of 2.75 to 1.0 on a pro forma basis, for the four fiscal quarters then most recently ended, immediately after giving effect tosuch payments or repurchases. As of December 30, 2012, we were in compliance with all of these restrictions and covenants.Note 7. Commitments and Contingencies:LeasesWe lease certain store locations under operating and capital leases that expire at various dates through 2028, with renewal options that expire at variousdates through 2045. The leases generally require us to pay a minimum rent, property taxes, insurance, other maintenance costs and, in some instances,additional rent equal to the amount by which a percentage of the store’s revenues exceed the minimum rent. The leases generally have initial terms of 10 to 20years with various renewal options. 62Table of ContentsCEC ENTERTAINMENT, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 7. Commitments and Contingencies (continued): The annual future lease commitments under capital lease obligations and noncancelable operating leases, including reasonably assured option periodsbut excluding contingent rent, as of December 30, 2012, are as follows: Capital Operating FiscalYears (in thousands) 2013 $2,795 $78,733 2014 2,731 78,697 2015 2,675 78,928 2016 2,559 79,739 2017 2,579 78,687 Thereafter 27,117 699,640 Future minimum lease payments 40,456 $ 1,094,424 Less amounts representing interest (interest rates range from 4.9% to16.63%) (17,740) Present value of future minimum lease payments 22,716 Less current portion (1,060) Capital lease obligations, net of current portion $21,656 Rent expense, including contingent rent based on a percentage of stores’ sales, when applicable, was comprised of the following: Fiscal Year 2012 2011 2010 (in thousands) Minimum rentals $76,151 $75,711 $71,234 Contingent rentals 138 338 185 $ 76,289 $ 76,049 $ 71,419 Rent expense of $1.0 million in 2012, 2011 and 2010 related to our corporate office and warehouse facilities was included in “General andadministrative expenses” in our Consolidated Statements of Earnings.Unconditional Purchase ObligationsOur unconditional purchase obligations consist of agreements to purchase goods or services that are enforceable and legally binding on us and thatspecify all significant terms, including (a) fixed or minimum quantities to be purchased; (b) fixed, minimum or variable price provisions; and (c) theapproximate timing of the transaction. Our purchase obligations with terms in excess of one-year totaled $6.1 million at December 30, 2012 and consisted ofobligations associated with the modernization of various information technology platforms. These purchase obligations exclude agreements that are cancelablewithout significant penalty. 63Table of ContentsCEC ENTERTAINMENT, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 7. Commitments and Contingencies (continued): Legal ProceedingsFrom time to time, we are involved in various inquiries, investigations, claims, lawsuits and other legal proceedings that are incidental to the conduct ofour 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 andlegal proceedings pending against us.In the opinion of our management, after consultation with legal counsel, the amount of liability with respect to claims or proceedings currently pendingagainst us is not expected to have a material effect on our consolidated financial condition, results of operations or cash flows.Note 8. Income Taxes:The components of income tax expense are as follows: Fiscal Year 2012 2011 2010 (in thousands) Current tax expense (benefit): Federal $23,903 $9,502 $24,131 State 2,936 4,409 6,660 Foreign 77 (61) 725 26,916 13,850 31,516 Deferred tax expense (benefit): Federal (619) 20,305 9,903 State (36) (353) (1,959) Foreign (181) 340 (734) (836) 20,292 7,210 Income tax expense $ 26,080 $ 34,142 $ 38,726 A reconciliation of the federal statutory income tax rate to our effective tax rates is as follows: Fiscal Year 2012 2011 2010 Federal statutory rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 3.4 4.0 4.0 Federal income tax credits, net (0.5) (1.5) (0.6) Other (0.5) 0.8 3.3 Effective tax rate 37.4% 38.3% 41.7% Our 2010 effective income tax rate included net unfavorable adjustments of $3.0 million. This unfavorable adjustment primarily resulted fromadjustments made to our tax accounts identified as a result of an Internal Revenue Service examination of our 2006 and 2007 tax years, various return-to-provision adjustments and offsetting favorable adjustments related to California enterprise zone tax credits. 64Table of ContentsCEC ENTERTAINMENT, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 8. Income Taxes (continued): Deferred income tax assets and liabilities consisted of the following: At Year End 2012 2011 (in thousands) Deferred tax assets: Accrued vacation $2,010 $1,888 Unearned revenue 4,204 3,420 Deferred rent 22,232 21,012 Stock-based compensation 2,380 2,669 Accrued insurance and employee benefit plans 7,790 8,145 Unrecognized tax benefits 1,817 2,676 Other 2,161 1,331 Gross deferred tax assets 42,594 41,141 Deferred tax liabilities: Depreciation and amortization (100,147) (100,354) Prepaid assets (1,575) (624) Other (919) (863) Gross deferred tax liabilities (102,641) (101,841) Net deferred tax liability $(60,047) $(60,700) Amounts reported on Consolidated Balance Sheets: Current deferred tax asset $2,884 $3,660 Noncurrent deferred tax liability (62,931) (64,360) Net deferred tax liability $(60,047) $(60,700) Amount represents the value of future tax benefits that would result if the liabilities for uncertain state tax positions and accrued interest related to uncertain tax positions are settled.We file numerous income tax returns in U.S. federal, state, local and foreign jurisdictions. As a matter of ordinary course, we are subject to regularexamination by various tax authorities. In general, the U.S. federal statute of limitations has expired for our federal tax returns filed for tax years ended before2009 (with the exception of adjustments included in amended returns filed in 2011 and 2012 for tax years 2006 through 2008). In addition, certain of ourfederal and state income tax returns are currently under examination and are in various stages of the audit/appeals process. In general, both state and Canadiantax returns with open statutes of limitations include tax years 2008 through 2011. 65(1)(1)Table of ContentsCEC ENTERTAINMENT, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 8. Income Taxes (continued): A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: Fiscal Year 2012 2011 2010 (in thousands) Balance at beginning of period $4,497 $4,363 $5,113 Additions for tax positions taken in the current year 511 487 550 Increases for tax positions taken in prior years 1,076 2,117 2,989 Decreases for tax positions taken in prior years (1,063) (1,440) (390) Settlement with tax authorities (1,699) (876) (3,899) Expiration of statute of limitations (399) (154) — Balance at end of period $2,923 $4,497 $4,363 At December 30, 2012, the balance of unrecognized tax benefits was $2.9 million, excluding interest and penalties. If this balance were recognized, ourtax provision for income taxes would decrease by $2.1 million. Additionally, within the next 12 months we could settle or otherwise conclude certain ongoingtax audits, and as such, it is reasonably possible that the liability for unrecognized tax positions could decrease within the next 12 months by as much as $1.3million.The total expense for interest and penalties related to unrecognized tax benefits was $0.2 million, $1.0 million and $1.4 million in 2012, 2011 and 2010,respectively. The total accrued interest and penalties related to unrecognized tax benefits was $2.6 million and $3.1 million in 2012 and 2011, respectively.Note 9. Earnings Per Share:Basic earnings per share (“EPS”) represents net income divided by the weighted average number of common shares outstanding during the period.Common shares outstanding consist of shares of our common stock and certain unvested shares of restricted stock containing nonforfeitable dividend rights.Diluted EPS represents net income divided by the basic weighted average number of common shares and, if dilutive, potential common shares outstandingduring the period. Potential common shares represent the incremental common shares issuable upon the vesting of unvested shares of restricted stock. Thedilutive effect of potential common shares is determined using the treasury stock method, whereby unamortized stock-based compensation cost of unvestedrestricted stock, and any associated excess tax benefits are assumed to be used to repurchase our common stock at the average market price during the period. 66Table of ContentsCEC ENTERTAINMENT, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 9. Earnings Per Share (continued): The following table sets forth the computation of basic and diluted EPS: Fiscal Year 2012 2011 2010 (in thousands, except per share data) Numerator: Net income $ 43,590 $ 54,962 $ 54,034 Denominator: Basic weighted average common shares outstanding 17,545 19,072 21,163 Potential common shares for restricted stock and stock options 73 49 41 Diluted weighted average common shares outstanding 17,618 19,121 21,204 Earnings Per Share: Basic $2.48 $2.88 $2.55 Diluted $2.47 $2.88 $2.55 Stock options to purchase 37,500 shares and 102,816 shares of our common stock were not included in the diluted EPS computations in 2011 and2010, respectively, because the exercise prices of these options were greater than the average market price of our common shares and, therefore, their effectwould be antidilutive. All of the outstanding stock options expired in March 2012.Note 10. Stockholders’ Equity:We have one class of common capital stock, our common stock, as disclosed on our Consolidated Balance Sheets. Holders of our common stock areentitled to one vote per share held on all matters submitted to a vote of the stockholders.Our articles of incorporation authorize our Board of Directors (“Board”), at its discretion, to issue up to 500,000 shares of Class B Preferred Stock(“Preferred B Stock”), par value $100.00. Shares of Preferred B Stock may be issued in one or more series and are entitled to dividends, voting powers,liquidation preferences, conversion and redemption rights and certain other rights and preferences as determined by the Board. As of December 30, 2012 andJanuary 1, 2012, there were no shares of Preferred B Stock issued or outstanding.Stock Repurchase ProgramOn July 25, 2005, our Board approved a stock repurchase program, which authorized us to repurchase from time to time up to $400.0 million of ourcommon stock, and on October 22, 2007 and October 27, 2009, our Board authorized $200.0 million increases each. During 2012, 2011 and 2010, werepurchased, under our repurchase program, 406,507 shares, 2,279,603 shares and 2,184,515 shares, respectively, of our common stock at an aggregatepurchase price of $14.4 million, $79.8 million and $77.6 million, respectively. As of December 30, 2012, $47.0 million remained available for us torepurchase shares of our common stock in the future, under our approved stock repurchase program. 67Table of ContentsCEC ENTERTAINMENT, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 10. Stockholders’ Equity (continued): Our stock repurchase program does not have an expiration date, and the pace of our repurchase activity will depend on factors such as our workingcapital needs, our debt repayment obligations, the market price of our common stock and economic and market conditions. Our share repurchases may beeffected from time to time through open market purchases, accelerated share repurchases or in privately negotiated transactions. Although there are no currentplans to modify the implementation of our stock repurchase program, our Board may elect to accelerate, expand, suspend, delay or discontinue the program atany time.Cash DividendsOur Board makes the final determination of any quarterly cash dividends declared, the amount of such dividends and establishes the record andpayment dates. On October 30, 2012, our Board approved a 9% increase in the Company’s quarterly cash dividend. We declared dividends to commonstockholders during 2012 and 2011 of $16.2 million and $15.8 million, respectively. On February 19, 2013, our Board declared a cash dividend of $0.24per share, or $4.3 million, which will be paid on April 18, 2013 to stockholders of record on March 21, 2013.Note 11. Stock-Based Compensation Plans:Our stock-based compensation plans permit us to grant awards of restricted stock to our employees and non-employee directors. Certain of these awardsare subject to performance-based criteria. The fair value of all stock-based awards on the date of grant, less estimated forfeitures, if any, is recognized asstock-based compensation expense in our Consolidated Financial Statements over the period that services are required to be provided in exchange for the award.The following table summarizes stock-based compensation expense and the associated tax benefit recognized in our Consolidated Financial Statements: Fiscal Year 2012 2011 2010 (in thousands) Total stock-based compensation cost $7,595 $7,376 $7,529 Portion capitalized as property and equipment (127) (191) (191) Stock-based compensation expense recognized $7,468 $7,185 $7,338 Tax benefit recognized from stock-based compensation awards $ 2,947 $ 2,731 $ 2,839 We capitalize the portion of stock-based compensation costs related to our design, construction, facilities and legal departments that are directly attributable to our store development projects, such as the design andconstruction of a new store and the remodeling and expansion of our existing stores. Capitalized stock-based compensation cost attributable to our store development projects is included in “Property andequipment, net” on our Consolidated Balance Sheets.As of December 30, 2012, unrecognized pre-tax stock-based compensation cost of $12.9 million related to restricted stock awards granted will berecognized over a weighted average remaining vesting period of 1.7 years.Restricted Stock PlansWe maintain a restricted stock plan for our employees under which 2,300,000 shares are authorized to be granted before December 31, 2014. Sharesawarded under the employee restricted stock plan generally provide 68(1)(1)Table of ContentsCEC ENTERTAINMENT, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 11. Stock-Based Compensation Plans (continued): for a vesting period of at least one year and no more than five years. The full award generally may not vest in less than three years, nor vest on terms that aremore favorable than pro-rata vesting over a period of three years. Although the terms and conditions of the individual agreements governing the awards mayvary, each agreement is subject to the terms, conditions and limitations of the employee restricted stock plan. The employee restricted stock plan also providesfor the granting of restricted stock units; however, as of December 30, 2012 none have been issued.Certain shares awarded under the employee plan are performance-based. The number of performance-based shares that ultimately vest ranges from zeroto 100 percent of the number of shares initially granted and are based on performance tied to our total revenues during the fiscal year granted. The totalrevenues targets are set at the beginning of each fiscal year.We have also adopted a restricted stock plan for our non-employee directors under which 215,000 shares are authorized to be granted before May 1,2020. Shares awarded under the non-employee directors’ restricted stock plan generally provide for an annual pro-rata vesting period over four years.As of December 30, 2012, a total of 1,175,438 shares remained available for future grant under our current restricted stock plans, including 1,093,623for employees and 81,815 for non-employee directors. Shares of unvested stock issued under a restricted stock award are nontransferable and subject to theforfeiture restrictions. Unvested shares that are forfeited or cancelled may be re-granted under the plans.Certain unvested shares of restricted stock awards contain nonforfeitable dividend rights, and therefore, cash dividends are accrued but not paid untilthe restricted stock vests. The following table summarizes 2012 restricted stock activity for all plans: RestrictedShares WeightedAverageGrant DateFair Value Unvested restricted stock awards, January 1, 2012 567,741 $ 32.94 Granted 240,187 $37.79 Vested (234,723) $30.74 Forfeited (26,128) $34.60 Unvested restricted stock awards, December 30, 2012 547,077 $35.94 During 2012, employees and non-employee directors tendered 70,951 shares of their common stock to satisfy tax withholding requirements on thevesting of their restricted stock at an average price per share of $37.43.In 2011 and 2010, we granted 233,562 and 244,090 shares of restricted stock at a weighted average grant date fair value of $37.95 and $35.74 pershare, respectively. The total fair value of shares that vested during 2012, 2011 and 2010 was $7.2 million, $7.6 million and $7.6 million, respectively. 69Table of ContentsCEC ENTERTAINMENT, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Note 12. Quarterly Results of Operations (Unaudited):The following table summarizes our unaudited quarterly condensed consolidated results of operations in 2012 and 2011: Quarters in Fiscal Year 2012 April 1,2012 July 1,2012 Sept. 30,2012 Dec. 30,2012 (in thousands, except per share data) Food and beverage sales $115,902 $84,882 $90,406 $81,758 Entertainment and merchandise sales 129,524 96,274 105,223 94,968 Company store sales 245,426 181,156 195,629 176,726 Franchise fees and royalties 1,332 1,259 921 1,031 Total revenues $ 246,758 $ 182,415 $ 196,550 $ 177,757 Operating income $54,777 $8,543 $14,467 $1,284 Income (loss) before income taxes $52,806 $6,460 $12,436 $(2,032) Net income (loss) $32,304 $4,079 $7,794 $(587) Earnings (loss) per share: Basic $1.82 $0.23 $0.45 $(0.03) Diluted $1.81 $0.23 $0.45 $(0.03) Quarters in Fiscal Year 2011 April 3,2011 July 3,2011 Oct. 2,2011 Jan. 1,2012 (in thousands, except per share data) Food and beverage sales $123,757 $88,379 $92,394 $84,378 Entertainment and merchandise sales 131,459 96,825 105,461 93,241 Company store sales 255,216 185,204 197,855 177,619 Franchise fees and royalties 1,186 1,012 2,142 944 Total revenues $ 256,402 $ 186,216 $ 199,997 $ 178,563 Operating income $58,349 $12,971 $20,596 $6,063 Income before income taxes $55,595 $10,685 $19,015 $3,809 Net income $34,082 $6,502 $11,650 $2,728 Earnings per share: Basic $1.71 $0.34 $0.62 $0.15 Diluted $1.71 $0.34 $0.62 $0.15 The results for the first, second, third and fourth quarters of 2012 include asset impairments of $0.3 million, $2.4 million, $0.8 million and $3.2 million, respectively. The results for the third and fourth quarters of 2011 include asset impairments of $1.3 million and $1.5 million, respectively.Quarterly operating results are not necessarily representative of operations for a full year. EPS amounts in each quarter are computed using the weightedaverage number of shares outstanding during the quarter and may not sum to EPS for the full year, which is computed using the weighted average number ofshares outstanding during the full year. 70(1)(1)(1)(2)(2)(2)(1)(2)Table of ContentsITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.None.ITEM 9A. Controls and Procedures.Evaluation of Disclosure Controls and ProceduresWe performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with theparticipation of our management, including our Chief Executive Officer and Chief Financial Officer, as of the end of the period covered by this report. Basedon that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that our disclosure controls andprocedures were effective at the reasonable assurance level as of December 30, 2012 to ensure that information required to be disclosed by us in the reports wefile or submit under the Securities Exchange Act of 1934, as amended, was (a) recorded, processed, summarized and reported within the time periodsspecified in the Securities and Exchange Commission’s rules and forms and (b) accumulated and communicated to our management, including our ChiefExecutive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how welldesigned and operated, can provide only a reasonable assurance of achieving the desired control objectives.Management’s Annual Report on Internal Control over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officerand effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting andthe preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies andprocedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally acceptedaccounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of management and our directors; and(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have amaterial effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.Our management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financialreporting as of December 30, 2012 based on the criteria established in “Internal Control – Integrated Framework” issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on our management’s assessment, we have concluded that, as of December 30, 2012 our internal controlover financial reporting was effective based on those criteria.Deloitte & Touche LLP, the independent registered public accounting firm that audited our financial statements included in this Annual Report on Form10-K, has issued an attestation report on our internal control over financial reporting as of December 30, 2012 which is included in Part II, Item 8. “FinancialStatements and Supplementary Data” under the caption “Report of Independent Registered Public Accounting Firm.” 71Table of ContentsChanges in Internal Control over Financial ReportingDuring the quarterly period ended December 30, 2012, there has been no change in our internal control over financial reporting that has materiallyaffected, or is reasonably likely to materially affect, our internal control over financial reporting.ITEM 9B. Other Information.None. 72Table of ContentsPART IIIITEM 10. Directors, Executive Officers and Corporate Governance.The information required by this Item regarding our directors and executive officers is incorporated by reference from and will be included in ourdefinitive Proxy Statement to be filed pursuant to Regulation 14A in connection with our 2013 Annual Meeting under the captions “Proposal 1: Election ofDirectors”, “Corporate Governance”, “Additional Information Regarding the Executive Officers”, “Business Experience of Executive Officers and Directors”,“Section 16(a) Beneficial Ownership Reporting Compliance” and “Audit Committee Disclosure.”We have adopted a Code of Ethics for the Chief Executive Officer, President and Senior Financial Officers (the “Code of Ethics”) that applies to theChief Executive Officer, President, Chief Financial Officer and Principal Accounting Officer. Changes to and waivers granted with respect to the Code ofEthics related to the above named officers required to be disclosed pursuant to applicable rules and regulations will also be posted on our website atwww.chuckecheese.com.ITEM 11. Executive Compensation.The information required by this Item regarding our directors and executive officers is incorporated by reference from and will be included in ourdefinitive Proxy Statement to be filed pursuant to Regulation 14A in connection with our 2013 Annual Meeting under the captions “Meetings and Committees ofthe Boards of Directors”, “Compensation Discussion and Analysis”, “Compensation Committee Report”, “Executive Compensation” and “DirectorCompensation.”ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.The information required by this Item is incorporated by reference from and will be included in our definitive Proxy Statement to be filed pursuant toRegulation 14A in connection with our 2013 Annual Meeting under the captions “Executive Compensation – Equity Compensation Plan Information” and“Security Ownership.”ITEM 13. Certain Relationships and Related Transactions, and Directors Independence.The information required by this Item is incorporated by reference from and will be included in our definitive Proxy Statement to be filed pursuant toRegulation 14A in connection with our 2013 Annual Meeting under the captions “Certain Relationships and Related Transactions” and “Meetings andCommittees of the Board of Directors.”ITEM 14. Principal Accountant Fees and Services.The information required by this Item is incorporated by reference from and will be included in our definitive Proxy Statement to be filed pursuant toRegulation 14A in connection with our 2013 Annual Meeting under the caption “Audit Committee Disclosure – Service Fees Billed in 2012 and 2011 by theIndependent Registered Public Accounting Firm.” 73Table of ContentsPART IVITEM 15. Exhibits and Financial Statement Schedules. (a)Documents filed as a part of this report: (1)Financial Statements.The financial statements and related notes included in Part II, Item 8. “Financial Statements and Supplementary Data” are filed as a part ofthis Annual Report on Form 10-K. See “Index to Consolidated Financial Statements.” (2)Financial Statement Schedules.There are no financial statement schedules filed as a part of this Annual Report on Form 10-K, since the circumstances requiring inclusionof such schedules are not present. (3)Exhibits.The exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index, which Exhibit Index is incorporated in this AnnualReport on Form 10-K by reference. The exhibits include agreements to which the Company is a party or has a beneficial interest. The agreementshave been filed to provide investors with information regarding their respective terms. The agreements are not intended to provide any other factualinformation about the Company or its business or operations. In particular, the assertions embodied in any representations, warranties andcovenants contained in the agreements may be subject to qualifications with respect to knowledge and materiality different from those applicable toinvestors and may be qualified by information in confidential disclosure schedules not included with the exhibits. These disclosure schedulesmay contain information that modifies, qualifies and creates exceptions to the representations, warranties and covenants set forth in theagreements. Moreover, certain representations, warranties and covenants in the agreements may have been used for the purpose of allocating riskbetween the parties, rather than establishing matters as facts. In addition, information concerning the subject matter of the representations,warranties and covenants may have changed after the date of the respective agreement, which subsequent information may or may not be fullyreflected in the Company’s public disclosures. Accordingly, investors should not rely on the representations, warranties and covenants in theagreements as characterizations of the actual state of facts about the Company or its business or operations on the date hereof. 74Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized. Dated: February 21, 2013 CEC Entertainment, Inc. /s/ Michael H. Magusiak Michael H. Magusiak President and Chief Executive OfficerPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated. Signature Title Date/s/ Michael H. MagusiakMichael H. Magusiak President, Chief Executive Officer and Director(Principal Executive Officer) February 21, 2013/s/ Tiffany B. KiceTiffany B. Kice Executive Vice President, Chief Financial Officer andTreasurer (Principal Financial Officer) February 21, 2013/s/ Laurie E. PriestLaurie E. Priest Vice President and Controller (Principal AccountingOfficer) February 21, 2013/s/ Richard M. FrankRichard M. Frank Executive Chairman of the Board of Directors February 21, 2013/s/ Tommy R. Franks Director February 21, 2013Tommy R. Franks /s/ Tim T. Morris Director February 21, 2013Tim T. Morris /s/ Louis P. Neeb Director February 21, 2013Louis P. Neeb /s/ Cynthia Pharr Lee Director February 21, 2013Cynthia Pharr Lee /s/ Bruce M. Swenson Director February 21, 2013Bruce M. Swenson /s/ Walter Tyree Director February 21, 2013Walter Tyree /s/ Raymond E. Wooldridge Director February 21, 2013Raymond E. Wooldridge 75Table of ContentsEXHIBIT INDEX ExhibitNumber Description 3.1 Second Restated Articles of Incorporation of CEC Entertainment, Inc. (the “Company”) dated May 4, 2010 (incorporated by reference toExhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-13687) as filed with the Securities and Exchange Commission (the“Commission”) on May 6, 2010) 3.2 Amended and Restated Bylaws of the Company dated May 4, 2010 (incorporated by reference to Exhibit 3.2 to the Company’s Current Reporton Form 8-K (File No. 001-13687) as filed with the Commission on May 6, 2010) 4.1 Second Restated Articles of Incorporation of the Company dated May 4, 2010 (incorporated by reference to Exhibit 3.1 to the Company’sCurrent Report on Form 8-K (File No. 001-13687) as filed with the Commission on May 6, 2010) 4.2 Amended and Restated Bylaws of the Company dated May 4, 2010 (incorporated by reference to Exhibit 3.2 to the Company’s Current Reporton Form 8-K (File No. 001-13687) as filed with the Commission on May 6, 2010) 4.3 Specimen form of Certificate representing $0.10 par value Common Stock (incorporated by reference to Exhibit 4.1 to the Company’s CurrentReport on Form 10-Q (File No. 001-13687) as filed with the Commission on October 29, 2009)10.1 Third Amended and Restated Credit Agreement dated October 28, 2011, by and among CEC Entertainment Concepts, L.P., as the Borrower,CEC Entertainment, Inc., as Guarantor, Bank of America, N.A., as Administrative Agent, Swing Line Lender, and L/C Issuer, and the otherlenders party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-13687) as filedwith the Commission on November 2, 2011)10.2 § Richard M. Frank 2010 Employment Agreement dated February 23, 2010 by and between Richard M. Frank and the Company (incorporatedby reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 001-13687) as filed with the Commission on March 1,2010)10.3 § Michael H. Magusiak 2010 Employment Agreement dated February 23, 2010 by and between Michael H. Magusiak and the Company(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-13687) as filed with the Commissionon March 1, 2010)10.4 § CEC Entertainment, Inc. Third Amended and Restated 2004 Restricted Stock Plan (incorporated by reference to Exhibit 10.1 to the Company’sCurrent Report on Form 8-K (File No. 001-13687) as filed with the Commission on May 6, 2010)10.5 § Form of Restricted Stock Agreement under the Company’s Third Amended and Restated 2004 Restricted Stock Plan (incorporated byreferenced to Exhibit 10.9 to the Company’s Annual Report on Form 10-K (File No. 001-13687) as filed with the Commission on February 24,2011) 10.6 § CEC Entertainment, Inc. Second Amended and Restated Non-Employee Directors Restricted Stock Plan effective as of May 4, 2010(incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 10-Q (File No. 001-13687) as filed with the Commissionon August 5, 2010)10.7 § Form of Restricted Stock Agreement under the Company’s Second Amended and Restated Non-Employee Directors Restricted Stock Plan(incorporated by referenced to Exhibit 10.11 to the Company’s Annual Report on Form 10-K (File No. 001-13687) as filed with theCommission on February 24, 2011)10.8 § Summary of Director Compensation (incorporated by reference to the Company’s Definitive Proxy Statement (File No. 001-13687) as filedwith the Commission on March 19, 2012 under the section entitled “Director Compensation” on page 64)10.9 § Summary of Incentive Bonus Plan (incorporated by reference to the Company’s Definitive Proxy Statement (File No. 001-13687) as filed withthe Commission on March 19, 2012 under the section entitled “Compensation Discussion and Analysis – How We Determine the Amount andMaterial Terms of Each Element of Compensation – Cash Bonus – Incentive Bonus Plan” on page 29)Table of ContentsExhibitNumber Description 10.10 § Form of Indemnification Agreement for the Board of Directors and certain senior officers of the Company (incorporated by reference toExhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-13687) as filed with the Commission on December 16, 2011) 21.1 Subsidiaries of the Company (incorporated by reference to Exhibit 21.1 to the Company’s Annual Report on Form 10-K (File No. 001-13687) as filed with the Commission on February 26, 2010) 23.1 * Consent of Independent Registered Public Accounting Firm 31.1 * Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) 31.2 * Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) 32.1 ** Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleyAct 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-OxleyAct of 2002101.INS XBRL Instance Document101.SCH XBRL Taxonomy Extension Schema Document101.CAL XBRL Taxonomy Extension Calculation Linkbase Document101.DEF XBRL Taxonomy Extension Definition Linkbase Document101.LAB XBRL Taxonomy Extension Label Linkbase Document101.PRE XBRL Taxonomy Extension Presentation Linkbase Document *Filed herewith. **Furnished herewith. §Management contract or compensatory plan, contract or arrangement.EXHIBIT 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in Registration Statement Nos. 333-103572, 333-111175, 333-119218, 333-119225, 333-119232, 333-130142, 333-145612, 333-152992, 333-72878, 333-13077, 333-44434, 333-83691, 333-41039, 333-162820 and 333-168626 on Form S-8 of our report datedFebruary 21, 2013, relating to the Consolidated Financial Statements of CEC Entertainment, Inc., and the effectiveness of CEC Entertainment, Inc.’s internalcontrol over financial reporting, appearing in this Annual Report on Form 10-K of CEC Entertainment, Inc. for the year ended December 30, 2012./s/ Deloitte & Touche LLPDallas, TexasFebruary 21, 2013EXHIBIT 31.1CERTIFICATION PURSUANT TO RULE 13a – 14(a)/15d-14(a)OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002(Chief Executive Officer)I, Michael H. Magusiak, certify that: 1.I have reviewed this annual report on Form 10-K for the fiscal year ended December 30, 2012 of CEC Entertainment, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles; c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting. February 21, 2013 /s/ Michael H. Magusiak Michael H. Magusiak President and Chief Executive OfficerEXHIBIT 31.2CERTIFICATION PURSUANT TO RULE 13a – 14(a)/15d-14(a)OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002(Chief Financial Officer)I, Tiffany B. Kice, certify that: 1.I have reviewed this annual report on Form 10-K for the fiscal year ended December 30, 2012 of CEC Entertainment, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles; c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting. February 21, 2013 /s/ Tiffany B. Kice Tiffany B. Kice Executive Vice President, Chief Financial Officer and TreasurerEXHIBIT 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002(Chief Executive Officer)In connection with the Annual Report of CEC Entertainment, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 30, 2012 as filedwith the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned certifies, pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Companyas of, and for, the periods presented in this Report. February 21, 2013 /s/ Michael H. Magusiak Michael H. Magusiak President and Chief Executive OfficerEXHIBIT 32.2CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002(Chief Financial Officer)In connection with the Annual Report of CEC Entertainment, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 30, 2012 as filedwith the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned certifies, pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Companyas of, and for, the periods presented in this Report. February 21, 2013 /s/ Tiffany B. Kice Tiffany B. Kice Executive Vice President, Chief Financial Officer andTreasurer

Continue reading text version or see original annual report in PDF format above