Ceconomy
Annual Report 2018

Plain-text annual report

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, 2018OR¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934For the transition period from to Commission File Number: 1-13687 _____________________________________________________________________________________________________________________________________________________________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.)1707 Market Place Blvd, Suite 200Irving, Texas 75063(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 registeredNone None 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 1934 during the preceding 12months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 the best of registrant’sknowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growthcompany. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company”in Rule 12b-2 of the Exchange Act:Large accelerated filer ¨ Accelerated filer ¨Non-accelerated filer x Smaller reporting company ¨Emerging growth company £ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financialaccounting standards provided pursuant to Section 13(a) of the Exchange Act ¨Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No xAs of July 1, 2018, the last business day of the registrant’s most recently completed second fiscal quarter, no voting or non-voting common equity of the registrant was held bynon-affiliates.As of February 25, 2019, an aggregate of 200 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.DOCUMENTS INCORPORATED BY REFERENCENoneCEC ENTERTAINMENT, INC.TABLE OF CONTENTS Page Cautionary Statement Regarding Forward-Looking Statements3 PART I ITEM 1.Business5ITEM 1A.Risk Factors10ITEM 1B.Unresolved Staff Comments20ITEM 2.Properties20ITEM 3.Legal Proceedings23ITEM 4.Mine Safety Disclosures23 PART II ITEM 5.Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities24ITEM 6.Selected Financial Data25ITEM 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations29ITEM 7A.Quantitative and Qualitative Disclosures About Market Risk46ITEM 8.Financial Statements and Supplementary Data47ITEM 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure89ITEM 9A.Controls and Procedures89ITEM 9B.Other Information89 PART III ITEM 10.Directors, Executive Officers and Corporate Governance90ITEM 11.Executive and Director Compensation93ITEM 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters93ITEM 13.Certain Relationships and Related Transactions, and Director Independence94ITEM 14.Principal Accountant Fees and Services95 PART IV ITEM 15.Exhibits and Financial Statement Schedules96 SIGNATURES EXHIBIT INDEX 2As used in this report, the terms “CEC Entertainment,” “we,” “Company,” “us,” and “our” refer to CEC Entertainment, Inc. and its subsidiaries.Cautionary Statement Regarding Forward-Looking StatementsThis report contains forward-looking statements, which involve risks and uncertainties. These forward-looking statements are generally identified bythe use of forward-looking terminology, including the terms “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan, “potential,”“predict,” “project,” “should,” “target,” “will,” “would” and, in each case, their negative or other various or comparable terminology. All statements otherthan statements of historical facts contained in this report, including statements regarding our strategy, future operations, future financial position, futurerevenue, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. The forward-lookingstatements are contained principally in Part I, Item 1. “Business”, Part 1, Item 1A. “Risk Factors” and Part II, Item 7. “Management’s Discussion and Analysisof Financial Condition and Results of Operations” of this Annual Report on Form 10-K and include, among other things, statements relating to:•our strategy, outlook and growth prospects;•our operational and financial targets and dividend policy;•our planned expansion of the venue base and the implementation of the new design in our existing venues;•general economic trends and trends in the industry and markets; and•the competitive environment in which we operate.These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance orachievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.Important factors that could cause our results to vary from expectations include, but are not limited to:•negative publicity and changes in consumer preference;•our ability to successfully expand and update our current venue base;•our ability to successfully implement our marketing strategy;•our ability to compete effectively in an environment of intense competition;•our ability to weather economic uncertainty and changes in consumer discretionary spending;•increases in food, labor and other operating costs;•our ability to successfully open international franchises and to operate under the United States and foreign anti-corruption laws that govern thoseinternational ventures;•risks related to our substantial indebtedness;•failure of our information technology systems to support our current and growing businesses;•disruptions to our commodity distribution system;•our dependence on third-party vendors to provide us with sufficient quantities of new entertainment-related equipment, prizes and merchandise atacceptable prices;•risks from product liability claims and product recalls;•the impact of governmental laws and regulations and the outcomes of legal proceedings;•potential liability under certain state property laws;•fluctuations in our financial results due to new venue openings;•local conditions, natural disasters, terrorist attacks and other events and public health issues;•the seasonality of our business;•inadequate insurance coverage;•labor shortages and immigration reform;•loss of certain personnel;•our ability to adequately protect our trademarks or other proprietary rights;•our ability to pay our fixed rental payments;•our ability to successfully integrate the operations of companies we acquire;•impairment charges for goodwill, indefinite-lived intangible assets or other long-lived assets;3•our failure to maintain adequate internal controls over our financial and management systems; and•other risks, uncertainties and factors set forth in Part I, Item 1A. “Risk Factors.”The forward-looking statements made in this report reflect our views with respect to future events as of the date of this report and are based onassumptions and subject to risks and uncertainties. Given these uncertainties, undue reliance should not be placed on these forward-looking statements.These forward-looking statements represent our estimates and assumptions only as of the date of this report and, except as required by law, we undertake noobligation to update or review publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date ofthis report. We anticipate that subsequent events and developments will cause our views to change. This report should be read completely and with theunderstanding that our actual future results may be materially different from what we expect. Our forward-looking statements do not reflect the potentialimpact of any future acquisitions, mergers, dispositions, joint ventures or investments we may undertake. We qualify all of our forward-looking statements bythese cautionary statements.4PART IITEM 1. Business.Company OverviewWe believe we are a leading family entertainment and dining company, focused on providing an exciting, fun-filled play and food experience forchildren and parents alike. We develop, operate and franchise family dining and entertainment centers (also referred to as “venues”) under the names“Chuck E. Cheese’s” (“Where A Kid Can Be A Kid”) and “Peter Piper Pizza”(“Pizza Made Fresh, Families Made Happy”). Our venues deliver a lively, kid-friendly atmosphere and feature a broad array of entertainment offerings including arcade-style and skill-oriented games, rides, live entertainment shows, andother attractions, with the opportunity for our guests to win tickets that they can redeem for prizes. We combine this memorable entertainment experiencewith a broad and creative menu that combines kid-friendly classics as well as a selection of sophisticated options for adults. We offer families a highlycompelling value proposition, where a family of four, for as little as $9 per person, can dine at Chuck E. Cheese's for food, drinks and entertainment, which webelieve to be significantly lower than comparable offerings at both casual dining and entertainment alternatives. We believe the combination of wholesomeentertainment, family dining and a strong value proposition creates a highly differentiated experience, which appeals to our diverse customer base. Weoperate 554 venues and have 196 venues operating under franchise arrangements across 47 states and 14 foreign countries and territories as of December 30,2018.In Fiscal 2018, we generated $896.1 million in revenue, $20.5 million of net loss and $175.2 million in Adjusted EBITDA. See Item 6. “SelectedFinancial Data - Non-GAAP Financial Measures” for additional information about Adjusted EBITDA, a reconciliation of net income to Adjusted EBITDAand the calculation of Adjusted EBITDA Margin.We have developed iconic brands and a highly loyal customer base through our more than 40-year commitment to being a family-fun andentertainment company. Over the last few years, we have invested in revitalizing our guest experience, revamping our menu offering, modifying ourmarketing message, and reinvigorating our corporate culture. We have made corresponding investments in technology, staff training, and our physical assets.We believe these significant investments position our Company for sustained growth in the future.Our BrandsChuck E. Cheese's: Where A Kid Can Be A Kid. Chuck E. Cheese's was founded in 1977 and is a highly recognized brand that uniquely appeals toour primary customer base of families with children between 2 and 12 years of age. Chuck E. Cheese, our iconic, energetic mouse mascot, performs music andentertainment shows along with his friends, providing free entertainment to our guests and driving strong brand recognition. Chuck E. Cheese's venuesfeature an open and bright setting, which creates an inviting atmosphere for kids and a good line of sight for parents. Showrooms include approximately 75games, rides and attractions for kids of all ages, including classic skill games, such as arcade basketball, Skee-Ball and Whack-a-Mole, as well as the TicketBlaster machine where birthday guests can grab as many tickets as possible in 30 seconds. In the third quarter of 2018 we launched All You Can Play(“AYCP”), a first-of-its-kind gaming experience that allows kids access to play every game at Chuck E. Cheese’s as many times as they want on any day,without any restrictions, in all our domestic Company-operated Chuck E. Cheese’s venues. Our menu features fresh, hand-made pizza, sandwiches, bonelessand bone-in chicken wings, desserts and beverages, including beer and wine. We also offer high-energy musical entertainment and live performancesfeaturing our iconic Chuck E. Cheese character with frequent appearances on our showroom and gameroom floor. As of December 30, 2018, there were 606Chuck E. Cheese's locations in 47 states and 14 foreign countries and territories, of which 515 are Company-operated.Peter Piper Pizza: Pizza Made Fresh, Families Made Happy. Peter Piper Pizza serves fresh, high-quality handcrafted food, craft beer and wine, andoffers state-of-the-art games for all ages. Venues feature a bold design and contemporary layout, with open kitchens revealing much of the handcrafted foodpreparation, such as fresh mozzarella being shredded off the block, vegetables being hand-chopped, wings being hand-tossed and our Certified DoughMasters crafting pizzas with made-from-scratch dough. Our large, open dining areas provide an enjoyable atmosphere for families and group events, withattentive staff dedicated to providing an enjoyable and memorable experience to each guest. As of December 30, 2018, there were 144 Peter Piper Pizzalocations in the United States (also referred to as “U.S.”) and Mexico, of which 39 are Company-operated.We believe Peter Piper Pizza is complementary to Chuck E. Cheese's, offering guests a pizza-anchored menu and entertainment in ways that createvery different experiences from Chuck E. Cheese's. Peter Piper Pizza is a food-first experience with more sophisticated food offerings (e.g., sriracha pizzas)and a décor/layout package that creates more of a neighborhood pizzeria feel for guests. While the venues offer games, the game packages target olderchildren and are generally5placed in the back of the restaurant behind a glass wall to protect the dining experience for adults. With this approach, Peter Piper Pizza is not only popularwith families, but also attracts a guest base that includes many adults without children. In addition to everyday visits for the excellent food, adults withoutfamilies are common customers for the day-time buffet on their weekday lunch break and frequently choose Peter Piper Pizza's carryout option, which canalso be ordered online.During the fiscal year ended December 30, 2018, approximately 57% and 27% of our Company-operated venue revenue for Chuck E. Cheese's andPeter Piper Pizza, respectively, was from entertainment and merchandise. For the same period, food and beverage made up 43% and 73% of company venuerevenue for Chuck E. Cheese's and Peter Piper Pizza, respectively.Our Company has benefited from the 2014 acquisition of Peter Piper Pizza through the implementation of best corporate practices and synergiesfrom both brands. Peter Piper Pizza has benefited from lower procurement costs under CEC Entertainment's ownership, as Chuck E. Cheese's is one of thelargest purchasers of arcade games in the United States. We believe the combination of Chuck E. Cheese's and Peter Piper Pizza positions our brands forsustained growth through the realization of synergies and further implementation of best corporate practices across our brands.Although these brands are complementary in many ways, we believe that these are distinct concepts that do not directly compete. Peter Piper Pizzaoperates smaller venues with a primary emphasis on food, resulting in an older customer demographic with higher frequency visits.Our Competitive StrengthsWe attribute our success in large part to our established recognized brands, our unique and differentiated experience, our value-oriented familyexperience, our diversified and resilient business model and our experienced management team. Our venues are unique in that we combine a wholesomefamily dining offering with distinctive family-oriented games, rides, activities, shows and other entertainment alternatives, all under one roof and withinconvenient driving distance from our guests’ homes. Many of our high quality entertainment offerings, including all of our live and interactive shows inChuck E. Cheese’s venues, guest Wi-Fi in all our venues, and live television in our Peter Piper Pizza venues, can be experienced free of charge. We also offerour guests packaged offerings whereby they can receive a combination of food, drinks and game credits, time blocks or tokens at discounted prices. Webelieve that we benefit from strong and consistent demand for our entertainment offerings from families who desire high quality, safe, clean, convenient andaffordable ways to spend time with their children outside of the home. Our executive management team has significant experience in the leisure, hospitality,entertainment and family dining industries and has significant expertise in operating complex, themed family entertainment businesses.Our Strategic PlanOur strategic plan is focused on increasing comparable venue sales, improving profitability and margins and expanding our venues domesticallyand internationally.Increase Comparable Venue Sales. Our core strategy to grow comparable venue sales is achieved by protecting andenhancing the service provided to children through a lively, kid-friendly atmosphere, while improving the experience for adults. During 2018, we deliveredexperience enhancements through technology investments, attractive game-play packages, new games, remodels of our venues, and menu innovation.Recent technology investments allow us to offer more compelling offerings to a wider variety of guests:•Play Pass card system: In 2018, we completed the deployment of our proprietary Play Pass card system at all Company-operated Chuck E. Cheese’svenues. Guests can purchase “points” on reloadable plastic cards and use these cards to play our games.•AYCP: In the third quarter of 2018, we completed the roll-out of AYCP at all of our domestic Company-operated Chuck E. Cheese’s venues. Thisproduct leverages our Play Pass card system and allows guests the option to play unlimited games within a specified period of time. As ofDecember 30, 2018, AYCP accounted for approximately 50% of our entertainment revenues.•More Tickets: We believe our guests enjoy the thrill of winning tickets and redeeming them for our merchandise. During the third quarter of 2018,we completed the roll-out of higher ticket payouts at our redemption games, coupled with a smaller adjustment to the ticket “prices” of ourmerchandise.•Gameplay promotions: Play Pass technology allows us to vary pricing and offerings by geography and day part within a venue. During 2018, webegan offering guests promotions that included discounts during slow school days, surge pricing on select weekends and holidays, and traffic-driving deals like discounted AYCP.6Other initiatives designed to grow sales:•Remodeling our venues to provide a modern, fresh look: In 2017, we began testing a redesigned concept at seven of our Chuck E. Cheese’s venueswhich carefully targeted areas to improve family experience and comfort. Changes included a new exterior and signage, brighter interiors, art décoron the walls, digital menu boards, a new star dance stage, and pizza windows that allow guests to view the pizza being made. In 2018, we completed25 remodels and have plans for 60 in 2019.•Refreshing and improving our marketing: We focus on connecting with kids via national television, gaming and promotional opportunities. We alsofocus on connecting with moms through national television advertising, digital advertising, cross-promotional coupons, social media, publicrelations and e-mail.•Improved menu offerings and birthday reservations: We continue to enhance the guest experience by introducing new menu items, attractivepackaging, promotional programs and simplifying our online birthday ordering system.•“More Cheese” customer loyalty program: In the first quarter of 2018, we launched our first customer loyalty program where guests can earn awardsand discounts based on purchases.Finally, we believe that we can modify pricing, couponing and packaging in select markets across the United States while still continuing to provideour guests with a strong value proposition when compared to other family dining-entertainment options.Improve Profitability and Margins. Our business model benefits from substantial operating leverage, enabling us to drive margin improvement. Wecontinuously focus on delivering financial performance through expense rationalization across all of our venues and functions. We believe that thedeployment of best corporate practices across each of our brands and our corporate functions will yield continued margin improvement. Our generalmanagers at our venues and our corporate management staff typically have revenue, profit and customer satisfaction incentives, which foster a strict focus onboth providing a high-quality experience for our guests and expense control. Additionally, we have implemented several new technology investments overthe past three years that we believe will drive continued cost savings. These investments include our enhanced labor management tool, a system-wideupgrade of our point-of-sale terminals and an improved venue inventory management system that provides additional visibility into food cost measurementsand automates our replenishment cycles. These initiatives have generated cost efficiencies in a number of key areas, including labor, supplies, food andgeneral and administrative expenses, and we expect these cost efficiencies to continue in the future.Finally, in 2018 we re-aligned the activities of our corporate office in order to more efficiently serve our operators. We expect these efforts to resultin approximately $2.5 million in annual savings.Pursue New Venue Growth Domestically and Internationally. We have a long track record of successful new venue development and will continueto pursue a disciplined venue growth strategy in both new and existing markets where we can achieve strong cash-on-cash returns. For new venue openings,we follow a rigorous due diligence and site selection process and strategically locate our venues within convenient driving distance to large metropolitanareas. Our venues generate strong cash flow and perform consistently well across geographic regions, which demonstrates the portability of our concept tonew domestic and international markets. We have a successful track record of opening new Company-operated Chuck E. Cheese's venues at attractive rates ofreturn and believe our existing markets can support additional venues.As of December 30, 2018, we have 109 international venues operating under franchise arrangements. We plan to grow internationally with existingand new franchise partners. In 2018, we opened 8 new venues collectively in five countries, with one new franchised Chuck E. Cheese venue and one newfranchised Peter Piper Pizza venue in the United States and six new franchised Chuck E. Cheese's venues in four other countries.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.Overview of OperationsFood and BeverageEach Chuck E. Cheese’s and Peter Piper Pizza venue offers a variety of pizzas, wings, appetizers, salads and desserts, as well as certain gluten-freeoptions. Soft drinks, coffee and tea are also served, along with beer and wine in many locations. Chuck E. Cheese’s venues also offer sandwiches, and mostChuck E. Cheese’s and Peter Piper Pizza venues offer lunch buffet7options with unlimited pizza, salad, breadsticks and dessert. We continuously focus on delivering a quality-driven product and believe the quality of ourfood compares favorably with that of our competitors.Food and beverage sales represented 45.3%, 47.3% and 45.8% of our Company-operated venue sales during Fiscal 2018, Fiscal 2017 and Fiscal2016, respectively.Entertainment and MerchandiseEach of our Chuck E. Cheese’s and Peter Piper Pizza venues has a gameroom area, which includes an array of amusement and entertainment options.These options range from classic arcade, redemption and skill games, such as air hockey, skee-ball and basketball, to rides, such as mini trains, motorcyclesand various driving games. At Chuck E. Cheese’s, we also offer musical and comical entertainment that features our iconic Chuck E. Cheese character withlive performances and frequent appearances on our showroom and gameroom floor, as well as ongoing entertainment featuring music videos and televisedskits. Each Peter Piper Pizza venue also offers flat-screen televisions located throughout the dining area. In the first quarter of 2018, we completed theimplementation of Play Pass, a new proprietary game card system, in all of our Chuck E. Cheese’s Company-operated venues. Play Pass is similar to a storedvalue gift card and allows guests to activate games and rides with their own personal card. In addition, in July 2018 we launched AYCP in all of our domesticChuck E. Cheese’s Company-operated venues. AYCP, a time based play option, allows guests to play unlimited games within a block of time, increasing thenumber of games, tickets and prizes over Play Pass. More Tickets provides the thrill of winning a greater number of tickets on redemption games. A number ofgames dispense tickets that can be redeemed by guests for prize merchandise such as toys and plush items. Our guests can also purchase this merchandisedirectly for cash.Entertainment and merchandise sales represented 54.7%, 52.7% and 54.2% of our Company-operated venue sales during Fiscal 2018, Fiscal 2017and Fiscal 2016, respectively.FranchisingAs of December 30, 2018, we franchised a total of 91 Chuck E. Cheese’s venues, with 26 venues located in the United States and 65 venues locatedin 14 foreign countries and territories, and a total of 105 Peter Piper Pizza venues, with 61 venues located in the United States and 44 venues located inMexico. We have 18 active development and franchise agreements to open 78 Chuck E. Cheese’s venues in 16 countries, and four signed development andfranchise agreements with rights to open another 19 Peter Piper Pizza venues in Texas and one signed development and franchise agreement with rights toopen another four venues in Mexico. See Part I, Item 1A. “Risk Factors” for more information regarding the risks associated with franchise developmentagreements.Our standard franchise agreements grant the franchisee the right to construct and operate a venue and use our associated trade names, trademarksand service marks in accordance with our standards and guidelines. Most of our existing Chuck E. Cheese’s franchise agreements have an initial term of 15 to20 years and include a 10-year renewal option. Peter Piper Pizza’s franchise agreements are for a 10-year term and include a 10-year successor agreement onPeter Piper Pizza’s then standard form of agreement. The standard franchise agreement provides us with a right of first refusal should a franchisee decide tosell a venue. We also enter into area development agreements, which grant franchisees exclusive rights to open a specified number of venues in a designatedgeographic area within a specified period of time. In addition to initial franchise and area development fees, the franchisee is charged a continuing monthlyroyalty fee equal to a percentage of its gross monthly sales, generally up to 6%, which varies by location and brand.In 1985, we and our Chuck E. Cheese’s franchisees formed the International Association of CEC Entertainment, Inc. (the “Association”) to discussand consider matters of common interest relating to the operation of Company-operated and franchised Chuck E. Cheese’s venues. Routine business mattersof the Association are conducted by a board of directors, composed of five members appointed by us and five members elected by the franchisees. TheAssociation serves as an advisory council that, among other responsibilities, oversees expenditures, including (a) the costs of development, purchasing andplacement of advertising programs, including websites; (b) the costs to develop and improve audio-visual and animated entertainment attractions, as well asthe development and implementation of new entertainment concepts; and (c) the purchase of national network television advertising.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 its gross monthly sales. Additionally, under these franchise agreements, we are required,with respect to Chuck E. Cheese’s Company-operated venues, to contribute at the same rates, or at higher rates in certain instances, as our franchisees. We andour franchisees are also required to spend minimum amounts on local advertising and could be required to make additional contributions to fund any deficitsthat may be incurred by the Association. Certain franchise agreements governing existing franchised Chuck E. Cheese’s outside of the United States currentlyrequire each franchisee to pay a certain percentage of their gross monthly sales to the Association to fund various advertising, media, and entertainment costs.8We do not currently have any advertising co-ops or a franchise advisory council with our Peter Piper Pizza franchisees, but we reserve the right torequire the formation, merger or dissolution of either or both. Franchisees are required to contribute (a) 5% of weekly gross sales to be used to develop,produce, distribute and administer specific advertising, public relations and promotional programs that promote the services offered by system franchisees;and (b) 0.5% of weekly gross sales to be used to research, develop, produce, and support creative ideas and materials for use in commercial advertisements,public relations, and promotional campaigns in the United States and Mexico. We may elect at any time not to collect or maintain all or any portion of theamount contributed to fund advertising related programs and activities and, during such time that we have made such election, the monies not collected mustbe expended by the franchisees in their own markets. In addition, we are required, with respect to Company-operated Peter Piper Pizza restaurants, tocontribute funds on the same basis as our franchisees.Royalties, franchise and area development fees and other miscellaneous franchise income represented 2.3%, 2.0% and 2.0% of our total consolidatedrevenues during Fiscal 2018, Fiscal 2017 and Fiscal 2016, respectively.Foreign OperationsAs of December 30, 2018, we operated a total of 11 Company-operated venues in Canada. Our Canadian venues generated total revenues of $15.8million, $16.6 million, and $15.6 million during the fiscal years ended December 30, 2018, December 31, 2017 and January 1, 2017, respectively,representing 1.8%, 1.9% and 1.7% of our total consolidated revenues, respectively. All of our other international venues are franchised.These foreign activities, along with our international franchisees, are subject to various risks of conducting business in a foreign country, includingfluctuations in foreign currency exchange rates, laws and regulations and economic and political stability. See “Risk Factors” for more information regardingthe risks associated with operations located in foreign markets.Third-Party SuppliersWe use a network of 15 distribution centers operated by a single company to distribute most of the food products and supplies used in our domesticChuck E. Cheese’s branded venues, five distribution centers for our Canadian Chuck E. Cheese’s branded venues, and four distribution centers for our PeterPiper Pizza branded venues. We believe that alternative third-party distributors are available for our products and supplies, but we may incur additional costsif we are required to replace our distributors or obtain the necessary products and supplies from other suppliers.We have not entered into any hedging arrangements to reduce our exposure to commodity price volatility; however, we typically 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, redemption prizes and merchandise has declined due toindustry consolidation over the past several years. See Part I, Item 1A. “Risk Factors” for more information regarding the risks associated with our third-partysuppliers.CompetitionThe family dining and entertainment industries are highly competitive, with a number of major national and regional chains operating in each ofthese markets. In this regard, we compete for customers on the basis of (a) our name recognition; (b) the price, quality, variety, and perceived value of ourfood and entertainment offerings; (c) the quality of our customer service; and (d) the convenience and attractiveness of our venues. Although there are otherconcepts that presently utilize the combined family dining and entertainment format, these competitors primarily operate on a regional or market-by-marketbasis. To a lesser extent, we also compete directly and/or indirectly with other dining and entertainment formats, including full-service and quick-servicerestaurants appealing to families with young children, the quick service pizza segment, movie theaters, themed amusement attractions, and otherentertainment facilities for children.Intellectual PropertyWe own various trademarks and proprietary rights, including Chuck E. Cheese’s®, Where A Kid Can Be A Kid®, Peter Piper Pizza® and the Chuck E.Cheese character image used in connection with our business, which have been registered with the appropriate patent and trademark offices. The duration ofsuch trademarks is unlimited, subject to continued use and renewal. We believe that we hold the necessary rights for protection of the trademarks consideredessential to conduct our business. We believe our trade names and our ownership of trademarks and proprietary rights in the names and character likenessesfeatured in the operation of our venues provide us with an important competitive advantage, and we actively seek to protect our interests in such property.9SeasonalityOur operating results fluctuate seasonally. We typically generate our highest sales volumes during the first quarter 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 oursales volumes in some operating regions differently than others. Because of the seasonality of our business, results for any quarter are not necessarilyindicative of the 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’s and Peter Piper Pizza venues. For a discussion of government regulation risks to our business, see Part I, Item 1A. “Risk Factors.”EmployeesAs of December 30, 2018, we employed approximately 16,800 employees, including approximately 16,400 in the operation of our Company-operated venues and approximately 400 in our corporate offices. Our employees do not belong to any union or collective bargaining group. We believe thatour employee relations are satisfactory, and we have not experienced any work stoppages at any of our venues.Each Chuck E. Cheese’s and Peter Piper Pizza venue typically employs a general manager, senior assistant manager, one or more assistant managers,an electronics specialist who is responsible for repair and maintenance of the show, games and rides, and approximately 25 to 45 food preparation and serviceemployees, many of whom work part-time. Our staffing requirements are seasonal, and the number of people we employ at our venues will fluctuatethroughout the year.Available InformationWe make financial information, news releases and other information available on our corporate website at www.chuckecheese.com. Our annualreports on 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”). The information onour website is not, and shall not be deemed to be, part of this report or incorporated into any other filings we make with the SEC. The reports and the otherdocuments we file with the SEC are available on the SEC’s website at www.sec.gov.ITEM 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.Risks Related to Our Business and IndustryNegative publicity concerning food quality, health, general safety or other issues, and changes in consumer preferences, could negatively affect our brandimage and reputation and adversely affect our consolidated financial results.Food service businesses can be adversely affected by litigation and complaints from guests, consumer groups, or government authorities, resultingfrom food quality, illness, injury or other health concerns, or operating issues stemming from one venue or a limited number of venues. Publicity concerningfood-borne illnesses, injuries caused by food tampering, and general safety issues could negatively affect our operations, reputation and brand. Families withyoung children may be highly sensitive to adverse publicity that may arise from an actual or perceived negative event within one or more of our venues. Wehave, from time to time, received negative publicity related to altercations and other safety-related incidents in certain of our venues. There can be noassurance that in the future we will not experience negative publicity regarding one or more of our venues, and the existence of negative publicity couldadversely affect our brand image and reputation with our guests and our consolidated financial results.The speed at which negative publicity can be disseminated has increased dramatically with electronic communication, including social media.Many social media platforms allow for users to immediately publish content without checking the accuracy of the content posted. If we are unable to quicklyand effectively respond to such10information, we may suffer declines in guest traffic, which could adversely impact our consolidated financial results.In addition, our industry is affected by consumer preferences and perceptions. Changes in prevailing health or dietary preferences and perceptionsmay cause consumers to avoid certain products we offer in favor of alternative or healthier foods. If consumer eating habits change significantly and we areunable to respond with appropriate menu offerings, it could adversely affect our brand image and consolidated financial results.Our business may also be impacted by certain public health issues including epidemics, pandemics and the rapid spread of certain illnesses andcontagious diseases. To the extent that extensive publicity relating to such events causes our guests to feel uncomfortable visiting or taking their children topublic 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 guest traffic, which could adversely affect our consolidated financial results.If we are unable to successfully open new venues or appropriately update and evolve our current venue base, our business and our consolidated financialresults could be adversely affected.Our ability to increase revenues and improve financial results depends, to a significant degree, on our ability to successfully implement and refineour long-term growth strategy. As part of our long-term growth strategy, we plan to upgrade the games, rides and entertainment in most of our existingvenues, remodel certain of our existing venues and open additional new venues in selected markets.The opening and success of new Chuck E. Cheese's and Peter Piper Pizza venues is dependent on various factors, including but not limited to theavailability of suitable sites, the negotiation of acceptable lease terms for such locations, our ability to meet construction schedules, our ability to managesuch expansion and hire and train personnel to manage the new venues, our ability to obtain, for acceptable cost, building and other permits and approvalsincluding liquor licenses, the potential cannibalization of sales at any adjacent venues located in the market, as well as general economic and businessconditions. Our ability to successfully open new venues or remodel, expand or upgrade the entertainment at existing venues will also depend upon theavailability 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 no assurance that we will be successful in opening and operating the number of anticipated new venues on atimely or profitable basis. There can be no assurance that we can continue to successfully remodel or expand our existing facilities or upgrade the games andentertainment or obtain a reasonable return on such investments.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. There can be no assurance that we will be able to successfully anticipate changes in competitive conditions orcustomer preferences or that the market will accept our business model. If revenues and/or operating results are lower than our current estimates, we may incuradditional charges for asset impairments in the future, which could adversely impact our consolidated financial results. Additionally, we incur significantcosts each time we open a new venue and other expenses when we relocate or remodel existing venues. The expenses of opening, relocating, or remodelingany of our venues may be higher than anticipated. If we are unable to open or are delayed in opening new or relocated venues, we may incur significant costs,which could adversely affect our consolidated financial results. If we are unable to remodel or are delayed in remodeling venues, we may incur significantcosts, which could adversely affect our business and our consolidated financial results.We may not be successful in the implementation of our marketing strategy, which could adversely affect our business and our consolidated financialresults.Our long-term growth is dependent on the success of strategic initiatives to effectively market and advertise our concept to our target audience. Inrecent years, we have made significant changes to our marketing and advertising strategy, including (a) the introduction of an updated Chuck E. Cheesecharacter; (b) a change in the mix of our media expenditures; (c) an increase in advertising directed to parents; and (d) promoting our brand and reasons tovisit 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 reaching customers or be accepted by customers. Ifwe are not effective in reaching our target audience with our new marketing and advertising strategy or if these changes are not accepted by guests, we mayincur additional advertising costs, and our business and our consolidated financial results could be adversely affected.The restaurant and entertainment industries are highly competitive, and that competition could harm our business and our consolidated financial results.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 regional11chains operating in each of these spaces. Although other restaurant brands presently utilize the concept 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 othercasual dining restaurants on a nationwide basis with respect to price, quality, and speed of service; type and quality of food; personnel; the number andlocation of restaurants; attractiveness of facilities; effectiveness of advertising; and marketing programs and new product development. To a lesser extent, ourcompetition also includes quick service restaurants with respect to pricing, service, experience, and perceived value. Within the entertainment sector, wecompete with movie theaters, bowling alleys, theme parks, and other family-oriented concepts on a nationwide basis with respect to perceived value andoverall experience. Additionally, children's interests and opportunities for entertainment continue to expand. If we are unable to successfully evolve ourconcept, including new food and entertainment offerings, we may lose market share to our competition. These competitive market conditions, including theemergence of significant new competition, could adversely affect our business and our consolidated financial results.Economic uncertainty and changes in consumer discretionary spending could reduce sales at our venues and have an adverse effect on our business andour consolidated financial results.Purchases at our venues are discretionary for consumers; therefore, our consolidated results of operations are susceptible to economic slowdowns andrecessions. We are dependent in particular upon discretionary spending by consumers living in the communities in which our venues are located. Asignificant portion of our venues are clustered in certain geographic areas. As of December 30, 2018, a total of 181 Chuck E. Cheese's venues are located inCalifornia, Texas, and Florida (178 are Company-operated and three are franchised locations), and a total of 135 Peter Piper Pizza venues are located inArizona, Texas, and Mexico (34 are Company-operated and 101 are franchised locations). A significant weakening in the local economies of thesegeographic areas, or any of the areas in which our venues are located, may cause consumers to curtail discretionary spending, which in turn could reduce ourCompany venue sales and have an adverse effect on our business and our consolidated financial results.The future performance of the United States and global economies is uncertain and is directly affected by numerous national and global financial,political and other factors that are beyond our control. Our target market of families with young children can be highly sensitive to adverse economicconditions, which may impact their desire to spend discretionary dollars, resulting in lower customer traffic levels in our venues. Increases in credit card debt,home mortgage and other borrowing costs and declines in housing values could further weaken the United States, Mexican or Canadian economies, leadingto a further decrease in discretionary consumer spending. In addition, reduced consumer confidence as a result of a recession, job losses, home foreclosures,investment losses in the financial markets, personal bankruptcies, and reduced access to credit may also result in lower levels of traffic to our venues.Moreover, our customer traffic may be impacted by major changes in United States fiscal policy. Also, while the current administration’s policies in manyareas are still uncertain at this time, certain types of policies regarding immigration, development and investment could adversely affect our business. Whilethere is currently a substantial lack of clarity and uncertainty around the likelihood, timing and details of any such policies and reforms, such policies andreforms may materially and adversely affect customer confidence and our business. We believe that consumers generally are more willing to makediscretionary purchases, including at our venues, 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 customer traffic andsales performance, which could have an adverse effect on our business and our consolidated financial results. In addition, these economic factors could affectour level of spending on planned capital initiatives at our venues, and thereby impact our future sales, and could also result in potential asset impairmentsand venue closures.Increases in food, labor, and other operating costs could adversely affect our consolidated financial results.For the 2018 fiscal year, 45.3% of company venue sales revenue came from food and beverage sales as compared to the 54.7% of company venuesales revenue resulting from entertainment and merchandise sales. As a result, the performance of our venues is affected by changes in the costs for foodproducts we purchase, including but not limited to cheese, dough, produce, chicken, and beef. The commodity prices for these food products vary throughoutthe year and may be affected by changes in supply, demand, and other factors beyond our control. We have not entered into any hedging arrangements toreduce our exposure to commodity price volatility associated with commodity prices; however, we typically enter into short-term purchasing arrangements,which may contain pricing designed to minimize the impact of commodity price fluctuations. An increase in our food costs could negatively affect our profitmargins and adversely affect our consolidated financial results.Several states and cities in which we operate venues have established a minimum wage higher than the federally-mandated minimum wage. Theremay be similar increases implemented in other jurisdictions in which we operate or seek to operate. Additionally, a number of our employees could be subjectto changes in federal or state rules and regulations concerning increases to salary and compensation levels necessary for white collar workers to be classifiedas exempt in 2019 and beyond, as well as state-specific laws governing relative pay for male and female employees and/or employees of different12races and/or ethnicities and policies to establish more predictable work schedules. Such changes in the minimum wage and other wage or salary requirementscould increase our labor costs and could have an adverse effect on our profit margins and our consolidated financial results.The performance of our venues could also be adversely affected by increases in the price of utilities on which the venues depend, such as electricityand natural gas, whether as a result of inflation, shortages or interruptions in supply, or otherwise. Our business also incurs significant costs for, among otherthings, insurance, marketing, taxes, real estate, borrowing, and litigation, all of which could increase due to inflation, rising interest rates, changes in laws,competition, or other events beyond our control, which could have an adverse effect on our consolidated financial results.Our strategy to open international franchised venues may not be successful and may subject us to unanticipated conditions in foreign markets, which couldadversely impact our business and our ability to operate effectively in those markets.Part of our growth strategy depends on our ability to attract new international franchisees and the ability of these franchisees to open and operatenew venues on a profitable basis. As we do not have a long history of significant international growth experience, there can be no assurance that we will beable to successfully execute this strategy in the future. Delays or failures in identifying desirable franchise partners and opening new franchised venues couldadversely affect our planned growth. Moreover, our franchisees depend on the availability of financing to construct and open new venues. If these franchiseesexperience difficulty in obtaining adequate financing, our growth strategy and franchise revenues could be adversely affected. Additionally, our growthstrategy depends on the ability of our international franchisees to learn and implement our business strategy, while adapting to the local culture. There can beno assurance that the Chuck E. Cheese's and Peter Piper Pizza concepts will be accepted in targeted international markets.Currently, our international franchisees operate venues in 14 countries. We and our franchisees are subject to the regulatory, economic, and politicalconditions of any foreign market in which our franchisees operate venues. Any change in the laws, regulations, and economic and political stability of theseforeign markets could adversely affect our consolidated financial results. Changes in foreign markets that could affect our consolidated financial resultsinclude, but are not limited to, taxation, inflation, currency fluctuations, political instability, economic instability, war or conflicts, increased regulations andquotas, tariffs, and other protectionist measures. Additionally, our long-term growth strategy includes adding franchisees in additional foreign markets in thefuture. To the extent unfavorable conditions exist in the foreign markets we plan to expand into or we are unable to secure intellectual property rightssufficient to operate in such foreign markets, we and our international franchise partners may not be successful in opening the number of anticipated newvenues on a timely and profitable basis. Delays or failures in opening new foreign market venue locations could adversely affect our planned growth andresult in increased attendant costs.Our business dealings with foreign franchisees and vendors are subject to United States and foreign anti-corruption law, and investigations or enforcementactions brought under such law could adversely impact our business and our ability to operate effectively in those markets.As a business that regularly enters into negotiations and contractual relationships with franchisees and vendors located in foreign countries, we aresubject to the requirements of the United States Foreign Corrupt Practices Act and other domestic and foreign laws and regulations governing such activities.Although we have a strong compliance program that includes regular training and reinforcement of our employees who represent us in dealings with foreignindividuals and entities on the laws impacting such dealings, we may be faced with investigations or enforcement actions by the United States or foreigngovernments arising from such dealings. Responding to such investigations or enforcement actions would be costly and may divert management's attentionand resources from the regular operation of our business, and together with any fines, penalties, or other actions ordered by governmental authorities, couldadversely affect our business and 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 ourreputation with customers, and incur substantial costs.The operation of our business is heavily dependent upon the implementation, integrity, security, and successful functioning of our computernetworks and information systems, including the point-of-sales systems in our venues, data centers that process transactions, the enterprise resource planningsystem, the Chuck E. Cheese and Peter Piper Pizza brand websites, the birthday reservation system, and various software applications used in our operations.In the ordinary course of our business, we also collect and store on our computer networks and information systems sensitive data, including intellectualproperty, our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of ourcustomers and employees. A failure of our systems to operate effectively as a result of a cyber-attack, damage to, interruption, or failure of any of thesesystems could result in a failure to meet our reporting obligations, material misstatements in our financial statements, or losses due to the disruption of ourbusiness operations.13These adverse situations could also lead to loss of sales or profits or cause us to incur additional development costs. While we purchase insurance coveragerelated to network security and privacy to limit the cost of any such failure or cyber-attack our coverage may not be sufficient to reimburse us for all of thecosts we may incur in the event of a cyber-attack. Despite our efforts to secure our computer networks and information systems, security could becompromised or confidential information could be misappropriated, resulting in a loss of customers' or employees' personal information, negative publicityor harm to our business and reputation that could cause us to incur costs to reimburse third parties for damages or to pay governmental fines, or cause adecrease in guest traffic.Any disruption of our commodity distribution system could adversely affect our business and our consolidated financial results.We use a network of 15 distribution centers operated by a single company to distribute most of the food products and supplies used in our domesticChuck E. Cheese's branded venues, five distribution centers for our Canadian Chuck E. Cheese’s branded venues and four distribution centers for our PeterPiper Pizza branded venues. Any failure by these distributors to adequately distribute products or supplies to our venues could increase our costs and have anadverse effect on our business and our consolidated financial results. Although we believe that alternative third-party distributors are available for ourproducts and supplies, we may incur additional costs if we are required to replace our distributors or obtain the necessary products and supplies from othersuppliers, and there can be no assurance that our business would not be disrupted.Our procurement of games, rides, entertainment-related equipment, redemption prizes, and merchandise is dependent upon a few global providers, the lossof any of which could adversely affect our business and our consolidated financial results.Our ability to continue to procure new games, rides, 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 risks of distribution delays, pricing pressure and lack of innovation, amongother things. Furthermore, some of our suppliers are located in China, and continuing and increasing tension between the United States and Chinesegovernments could also result in interruptions in our ability to procure these products, which could adversely affect our business and our consolidatedfinancial results.We face risks with respect to product liability claims and product recalls, which could adversely affect our reputation, business and consolidated financialresults.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 may in the futureassert claims or file lawsuits alleging that they have sustained injuries from third-party merchandise offered by us. There is a risk that these claims orliabilities may exceed, or fall outside of the scope of, our insurance coverage. Any of the issues mentioned above could result in damage to our reputation,diversion of development and management resources, or reduced sales and increased costs, any of which could adversely affect our business and ourconsolidated financial results.We are subject to various government regulations, which could adversely affect our business and our consolidated financial results.The development and operation of our venues 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 redemption, video, and arcade games and rides, the preparation of food and beverages, the sale and service of alcoholic beverages, andbuilding and zoning requirements. Difficulties or failure in obtaining required permits, licenses, or other regulatory approvals could delay or prevent theopening of a new venue, remodel or expansion, and the suspension of, or inability to renew, a license or permit could interrupt operations at an existingvenue.We are also subject to laws and regulations governing our relationship with our employees, including those related to minimum wage requirements,exempt status, overtime, health insurance mandates, working and safety conditions, immigration status requirements, child labor, non- discrimination, andscheduling practices. Additionally, changes in federal labor laws, including card verification regulations, could result in portions of our workforce beingsubjected to greater organized labor influence, which could result in an increase to our labor costs. A significant portion of our venue personnel are paid atminimum wage rates established by federal, state and municipal law. Increases in the minimum wage result in higher labor costs, which may be only partiallyoffset by price increases and operational efficiencies. We are also subject to certain laws and regulations that govern our handling of customers' personalinformation. A failure to protect the integrity and security of our customers' personal information could expose us to litigation and regulatory enforcementaction, as well as materially damage14our reputation.We are also subject to the rules and regulations of the Federal Trade Commission and various state laws regulating the offer and sale of franchises.The Federal Trade Commission and various state laws require that we furnish a franchise disclosure document containing certain information to prospectivefranchisees, and a number of states require registration of the franchise disclosure document with state authorities. State laws that regulate the franchisor-franchisee relationship presently exist in a substantial number of states, and bills have been introduced in Congress from time to time that would provide forfederal regulation of the franchisor-franchisee relationship. The state laws often limit, among other things, the duration and scope of non-competitionprovisions, the ability of a franchisor to terminate or refuse to renew a franchise and the ability of a franchisor to designate sources of supply. We believe thatour franchise disclosure document, together with any applicable state versions or supplements, and franchising procedures, comply in all material respectswith both the Federal Trade Commission guidelines and all applicable state laws regulating franchising in those states in which we have offered franchises.While we endeavor to comply with all applicable laws and regulations, governmental and regulatory bodies may change such laws and regulationsin the future, 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, penalties, fines and/or lawsuits, or may be required to cease operations until we achieve compliance, which could have an adverse effect on ourbusiness and our consolidated financial results.We may face litigation risks from customers, employees, franchisees and other third parties in the ordinary course of business, which could adversely affectour business and our consolidated financial results.Our business is subject to the risk of litigation by customers, current and former employees, franchisees, suppliers, governmental entities,stockholders, or others, through private actions, class actions, administrative proceedings, regulatory actions, or other litigation. The outcome of litigation,particularly class action lawsuits and regulatory actions, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very largeor indeterminate amounts, and the magnitude of the potential loss relating to such lawsuits may remain unknown for substantial periods of time. The cost todefend future litigation may be significant. There may also be adverse publicity associated with litigation that could decrease customer acceptance of ourfood or entertainment offerings, regardless of whether the allegations are valid or whether we are ultimately found liable. From time to time, we are alsoinvolved in lawsuits with respect to alleged infringement of third party intellectual property rights, as well as challenges to our intellectual property.We are also 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 venues 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. Althoughwe believe we are adequately protected against such losses by insurance, a judgment against us under a “dram shop” statute in excess of the liability coveredby insurance could have an adverse effect on our business and our consolidated financial results.We face potential liability with our gift cards and Play Pass cards under the property laws of some states.Our gift cards are used in our venues to purchase food, beverages, merchandise, game credits and time blocks, and our Play Pass cards are loadedwith game credits purchased by our guests. These cards may be considered stored value cards by certain states in accordance with their abandoned andunclaimed property laws. These laws may require us to remit cash amounts equal to all or a designated portion of the unredeemed balance of stored valuecards based on certain criteria and the length of time that the cards are inactive or dormant. Our gift cards and Play Pass cards do not expire and do not incurservice fees. We recognize income from unredeemed cards when we determine that the likelihood of the cards being redeemed is remote, and we believeremittance pursuant to abandoned and unclaimed property laws is not required.The analysis of the potential application of the abandoned and unclaimed property laws to our gift cards and Play Pass cards is complex andinvolves an analysis of constitutional issues, statutory provisions, case law and factual matters. In the event that one or more states change their existingabandoned and unclaimed property laws or successfully challenges our position on the application of its abandoned and unclaimed property laws or if theestimates that we use in projecting the likelihood of the cards being redeemed prove to be inaccurate, our liabilities for deferred revenue and revenuerecognition with respect to unredeemed gift cards and Play Pass cards may materially differ from the amounts reported in our financial statements and our netincome could be materially and adversely affected.Our business may be adversely affected by local conditions, natural disasters, terrorist attacks and other events.Certain regions in which our facilities (including our support center, venues, and warehouses) are located may be subject to adverse local conditions,natural disasters, terrorist attacks and other events. Severe weather, such as heavy snowfall,15ice, or extreme temperatures, may discourage or restrict customers in affected regions from traveling to our venues or prevent employees from performing theirwork in our facilities, which could adversely affect our sales. If severe weather conditions occur during the first quarter of the year, the adverse impact to oursales and profitability could be even greater than at other times during the year because we typically generate our highest sales and profits during the firstquarter. Natural disasters including tornadoes, hurricanes, floods and earthquakes may damage our facilities, which may adversely affect our business and ourconsolidated financial results.Our business is 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 consolidated revenues and profitability as a result of a varietyof factors, many of which are outside our control, including the timing of school vacations, holidays, and changing weather conditions. We typicallygenerate our highest sales volumes and earnings in the first quarter of each fiscal year. If there is a material decrease in the customer traffic in our venuesduring the first quarter of the year due to unusually cold or inclement weather or other circumstances outside of our control, our operating results could bematerially, adversely affected for that quarter and further, may have an adverse effect on our consolidated financial results for the fiscal year.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 illnesses andcontagious diseases. To the extent that our customers feel uncomfortable visiting public locations, particularly locations with a large number of children, dueto a perceived risk of exposure to a public health issue, we could experience a reduction in customer traffic, which could adversely affect our consolidatedfinancial results.Our current insurance policies may not provide adequate levels of coverage against all claims, and we could incur losses that are not covered by ourinsurance, which could adversely affect our business and our consolidated financial results.We have procured and maintain insurance coverage at levels that we believe are typical for a business of our type and size. However, we couldexperience a loss that either cannot be insured against or is not commercially reasonable to insure. For example, insurance covering liability for violations ofwage and hour laws is generally not available. Under certain circumstances, plaintiffs may file certain types of claims that may not be covered by insurance,or by sufficient insurance to cover the entire amount of a judgment. In some cases, plaintiffs may seek punitive damages, which may also not be covered byinsurance. Losses such as these, if they occur, could adversely affect our business and our consolidated financial results.We may face labor shortages that could slow our growth and adversely impact our ability to operate our venues.The successful operation of our business depends upon our ability to attract, motivate and retain a sufficient number of qualified executives,managers and skilled employees. From time-to-time, there may be a shortage of skilled labor in certain of the communities in which our venues are located.Shortages of skilled labor may make it increasingly difficult and expensive to attract, train and retain the services of a satisfactory number of qualifiedemployees and could delay the planned openings of new venues or adversely impact our existing venues. Any such delays, material increases in employeeturnover rates in existing venues or widespread employee dissatisfaction could have a material adverse effect on our business and results of operations.Competition for qualified employees could require us to pay higher wages, which could result in higher labor costs and could have a material adverse effecton our results of operations.Immigration reform continues to attract significant attention in the public arena and the United States Congress. If new immigration legislation isenacted, such laws may contain provisions that could increase our costs in recruiting, training and retaining employees. Also, although our hiring practicescomply with the requirements of federal law in reviewing employees' citizenship or authority to work in the United States, increased enforcement efforts withrespect to existing immigration laws by governmental authorities may disrupt a portion of our workforce or our operations at one or more of our venues,thereby negatively impacting our business.We are dependent on the service of certain key executives, and the loss of any of these personnel could harm our business.Our success significantly depends on the continued employment and performance of our key executives. We have employment agreements withcertain of our key executives. However, we cannot prevent our key executives from terminating their employment with us. Losing the services of any of ourkey executives could harm our business until a suitable replacement is hired, and such replacement may not have equal experience or capabilities.Additionally, economic conditions or concerted overtures by competitors may lead to resignations of significant numbers of members of our operationsmanagement team, which may also negatively impact our consolidated financial results in the short term.16Failure to establish and maintain effective internal control over financial reporting could have a material adverse effect on our business and operatingresults.Maintaining effective internal control over financial reporting is necessary for us to produce reliable financial reports and is important in helping toprevent mistakes in our financial statements and financial fraud. If we are unable to maintain adequate internal controls, our business and operating resultscould be harmed. Any failure to remediate deficiencies noted by our management or our independent registered public accounting firm or to implementrequired new or improved controls or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations or result inmaterial misstatements in our financial statements. Any such failure could result in a loss of investor confidence in the reliability of our financial statements,have a material adverse effect on our business, financial condition and results of operations and the fair value of our common stock.We may not be able to adequately protect our trademarks or other proprietary rights, which could have an adverse effect on our business and ourconsolidated financial results.We own certain common law trademark rights and a number of federal and international trademark and service mark registrations, internet domainname registrations and other proprietary rights relating to our operations. We believe that our trademarks and other proprietary rights are important to oursuccess and our competitive position. We therefore devote appropriate resources to the protection of our trademarks and proprietary rights. However, theprotective actions that we take may not be enough to prevent unauthorized usage or imitation by others, which could harm our image, brand, or competitiveposition, and if we commence litigation to enforce our rights, we may incur significant legal fees.There can be no assurance that third parties will not claim that our trademarks, menu offerings, or advertising claims infringe upon their proprietaryrights or constitute unfair competition. Any such claim, whether or not it has merit, may result in costly litigation, cause delays in introducing new menuitems in the future, interfere with our international development agreements, lead to delays or cancellation of pre-paid marketing campaigns, or require us toenter into royalty or licensing agreements. Additionally, we may be subject to infringement claims by purported patent holders that relate to software orsystems that are critical to our operations. As a result, any such claim could have an adverse effect on our business and our 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 buildings for our Company-operated venues, we are subject to all of the risks generally associated withowning and leasing real estate, including changes in the supply and demand for real estate in general and the supply and demand for the use of the venues.We may be compelled to continue to operate a non-profitable venue due to our obligations under lease agreements, or we may close a non-profitable venueand continue making rental payments with respect to the lease, which could adversely affect our consolidated financial results. Furthermore, economicinstability may inhibit our landlords from securing financing and maintaining good standing in their existing financing arrangements, which could result intheir inability to keep existing tenants or attract new tenants, thereby reducing customer traffic to our venues. The lease terms for our leased facilities vary,and some have only a short term remaining. Most - but not all - of our leased facilities have renewal terms. When a lease term expires, the Company may notbe able to renew such lease on reasonable economic and commercial terms, or at all. Such failure to renew leases on reasonable economic and commercialterms could adversely affect our business and consolidated financial results.We also may not be able to renew real property leases on favorable terms, or at all, which may require us to close a venue or relocate, either of whichcould have a material adverse effect on our business, results of operations or financial condition. Of the 515 Company-operated Chuck E. Cheese's venues asof December 30, 2018, 506 are leased. All of the 39 Company-operated Peter Piper Pizza venues as of December 30, 2018 are leased premises. The leasestypically provide for a base rent and, in some instances additional rent based on a percentage of the revenue generated by the venues on the leased premisesonce certain thresholds are met. A decision not to renew a lease for a venue could be based on a number of factors, including an assessment of the area inwhich the venue is located. We may choose not to renew, or may not be able to renew, certain of such existing leases if the capital investment then required tomaintain the venues at the leased locations is not justified by the return on the required investment. If we are not able to renew the leases at rents that allowsuch venues to remain profitable as their terms expire, the number of such venues may decrease, resulting in lower revenue from operations, or we mayrelocate a venue, which could subject us to construction and other costs and risks, and, in either case, could have a material adverse effect on our business,results of operations or financial condition.17Fixed rental payments account for a significant portion of our cash operating expenses, which increases our vulnerability to general adverse economicand industry conditions and could limit our operating and financial flexibility.Payments under our operating leases (excluding rental payments on our sale leaseback properties) account for a significant portion of our operatingexpenses. For example, total rental payments, including additional rental payments based on sales at some of our venues, under operating leases wereapproximately $93.9 million, or 10.5% of our Total revenues, in fiscal 2018. In addition, as of December 30, 2018, we were a party to operating leasesrequiring future minimum lease payments aggregating approximately $183.4 million through the next two years and approximately $718.2 millionthereafter. We expect that we will lease any new venues we open under operating leases. Our substantial operating lease obligations could have significantnegative consequences, including:• increasing our vulnerability to general adverse economic and industry conditions;• limiting our ability to obtain additional financing;•requiring a substantial portion of our available cash to be applied to pay our rental obligations, thus reducing cash available for otherpurposes;•limiting our flexibility in planning for or reacting to changes in our business or the industry in which we compete; and• placing us at a disadvantage with respect to our competitors.We depend on cash flow from operations to pay our lease obligations and to fulfill our other cash needs. If our business does not generate sufficientcash flow from operating activities and sufficient funds are not otherwise available to us from borrowings under the CEC revolving credit facility or fromother sources, we may not be able to service our operating lease obligations, grow our business, respond to competitive challenges or fund our other liquidityand capital needs, which would have a material adverse effect on us.We may not be successful in integrating the operations of companies we acquire, which could have an adverse effect on our business and results ofoperations.We have engaged in acquisition activity in the past and in the future we may engage in acquisitions or other strategic transactions, such asinvestments in other entities. Strategic transactions, such as the Peter Piper Pizza acquisition completed in October 2014, involve risks, including thoseassociated with integrating operations or maintaining operations as separate (as applicable); financial reporting; disparate technologies and personnel ofacquired companies; the diversion of management's attention from other business concerns; unknown risks; and the potential loss of key employees,customers, and strategic partners of acquired companies or companies in which we may make strategic investments. We may not successfully integrate anybusinesses or technologies we may acquire or strategically develop in the future and may not achieve anticipated revenue and cost benefits relating to anysuch strategic transactions. Strategic transactions may be expensive and time consuming, and may strain our resources. Strategic transactions may not beaccretive and may negatively impact our results of operations as a result of, among other things, the incurrence of debt, write-offs of goodwill andamortization expenses of other intangible assets.We are involved in litigation relating to the Merger Agreement that could divert management's attention and harm our business.As described in Part 1, Item 3 of this report, “Legal Proceedings,” following the January 16, 2014 announcement that we had entered into a mergeragreement (the ‘‘Merger Agreement’’), pursuant to which an entity controlled by Apollo Global Management, LLC (“Apollo”) and its subsidiaries mergedwith and into CEC Entertainment Inc., with CEC Entertainment Inc. surviving the merger (the ‘‘Merger’’), four putative class actions were filed by 29shareholders in the District Court of Shawnee County, Kansas, on behalf of our purported stockholders, against us, our directors, Apollo, Queso Holdings Inc.(“Parent”) and Merger Sub (as defined in the Merger Agreement), in connection with the Merger Agreement and the transactions contemplated thereby. Theseactions were consolidated into one action in March 2014. On July 21, 2015, a consolidated class action petition was filed as the operative consolidatedcomplaint, asserting claims against CEC and its former directors, adding The Goldman Sachs Group (‘‘Goldman Sachs’’) as a defendant, and removing allApollo entities as defendants (‘‘Consolidated Class Action Petition’’). The Consolidated Class Action Petition alleges that our directors breached theirfiduciary duties to our stockholders in connection with their consideration and approval of the Merger Agreement by, among other things, conducting adeficient sales process, agreeing to an inadequate tender price, agreeing to certain provisions in the Merger Agreement, and filing materially deficientdisclosures regarding the transaction. The Consolidated Class Action Petition also alleges that two members of our board who also served as our seniormanagers had material conflicts of interest and that Goldman Sachs aided and abetted the board’s breaches as a result of various conflicts of interest facingthe bank. The Consolidated Class Action Petition seeks, among other things, to recover damages, attorneys’ fees and costs. On March 23, 2016, the Courtconducted a hearing on the defendants’ Motion to Dismiss the Consolidated Class Action Petition and on March 1, 2017, the Special Master appointed18by the Court issued a report recommending to the Court that the Consolidated Class Action Petition be dismissed in its entirety. On September 9, 2018, thePlaintiff in the Consolidated Shareholder Litigation filed a notice of appeal of the District Court’s decision. Although CEC Entertainment and its formerdirectors are no longer defendants in the lawsuit, we assumed the defense of the Consolidated Shareholder Litigation on behalf of CEC’s named formerdirectors and Goldman Sachs pursuant to existing indemnity agreements, and continuing to fund Goldman Sach’s defense of this action is expensive and maydivert management’s attention and resources, which could adversely affect our business.Risks Related to Our Capital StructureOur substantial indebtedness could adversely affect our ability to raise additional capital or to fund our operations, expose us to interest rate risk to theextent of our variable rate debt, limit our ability to react to changes in the economy, and prevent us from making debt service payments.We are a highly leveraged company. As of December 30, 2018, we had $978.9 million face value of outstanding indebtedness (excluding capitallease and sale leaseback obligations), in addition to $141.0 million available for borrowing under the revolving credit facility at that date. For the fiscal yearended December 30, 2018, we made total debt service payments of $68.0 million (excluding capital leases, sale leaseback, and fees to extend our revolvingcredit facility).Our substantial indebtedness could have important consequences for us, including, but not limited to, the following:•limit, along with the financial and other restrictive covenants in our indebtedness, among other things, our ability to borrow additionalfunds or dispose of assets; limit our ability to repurchase shares and pay cash dividends;•limit our ability to borrow money for our working capital, capital expenditures, debt service requirements, strategic initiatives or otherpurposes;•make it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations ofany of our debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under theindenture and the agreements governing other indebtedness;•require us to dedicate a substantial portion of our cash flow from operations to the repayment of our indebtedness, thereby reducing fundsavailable to us for other purposes;•limit our flexibility in planning for, or reacting to, changes in our operations or business;•make us more highly leveraged than some of our competitors, which may place us at a competitive disadvantage;•impact our rent expense on leased space, which could be significant;•make us more vulnerable to downturns in our business or the economy;•restrict us from making strategic acquisitions, engaging in development activities, introducing new technologies, or exploiting businessopportunities;•cause us to make non-strategic divestitures; and•expose us to the risk of increased interest rates, as certain of our borrowings are at variable rates of interest.In addition, our credit agreement contains restrictive covenants that will limit our ability to engage in activities that may be in our long-term bestinterest. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration ofsubstantially all of our indebtedness.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 described above could intensify.We may not be able to generate sufficient cash to service all of our indebtedness, and we may be forced to take other actions to satisfy our obligationsunder our indebtedness that may not be successful.Our ability to pay principal and interest on our debt obligations will depend upon, among other things, (a) our future financial and operatingperformance (including the realization of any cost savings described herein), which will be affected by prevailing economic, industry and competitiveconditions and financial, business, legislative, regulatory and other factors, many of which are beyond our control; and (b) our future ability to borrow underour revolving credit facility, the availability of which depends on, among other things, our complying with the covenants in the credit agreement governingsuch facility.19We cannot assure you that our business will generate cash flow from operations, or that we will be able to draw under our revolving credit facility orotherwise, in an amount sufficient to fund our liquidity needs, including the payment of principal and interest on our debt. If our cash flows and capitalresources are insufficient to service our indebtedness, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital, orrestructure or refinance our indebtedness, including the senior notes (as defined in “Part II, Item 7. Management’s Discussion and Analysis of FinancialCondition and Results of Operations - Financial Condition, Liquidity and Capital Resources - Debt Financing”). These alternative measures may not besuccessful and may not permit us to meet our scheduled debt service obligations. Our ability to restructure or refinance our debt will depend on the conditionof the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to complywith more onerous covenants, which could further restrict our business operations. In addition, the terms of existing or future debt agreements may restrict usfrom adopting some of these alternatives. In the absence of such operating results and resources, we could face substantial liquidity problems and might berequired to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions forfair market value or at all. Furthermore, any proceeds that we could realize from any such dispositions may not be adequate to meet our debt serviceobligations then due. Apollo and its affiliates have no future obligation to provide us with debt or equity financing. Our inability to generate sufficient cashflow to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, could have a material adverse effect on ourbusiness, results of operations, and financial condition, and could negatively impact our ability to satisfy our debt obligations.If we cannot make scheduled payments on our indebtedness, we will be in default, and holders of our senior notes could declare all outstandingprincipal and interest to be due and payable, the lenders under the secured credit facilities could terminate their commitments to loan money, our securedlenders could foreclose against the assets securing their loans, and we could be forced into bankruptcy or liquidation.ITEM 1B. Unresolved Staff Comments.None.ITEM 2. Properties.Chuck E. Cheese’s and Peter Piper Pizza venues are typically located in densely populated locations and are predominantly situated in shoppingcenters or in free-standing buildings near shopping centers. On average, Chuck E. Cheese’s20existing venues are approximately 12,700 square feet, with table and chair seating generally averaging between 400 to 450 guests per venue, and includeapproximately 75 games, rides and attractions. On average, Peter Piper Pizza existing venues are approximately 10,100 square feet, with table and chairseating generally averaging between 350 to 400 guests per venue, and include approximately 40 games, rides and attractions.The following tables summarize information regarding the number and location of venues we and our franchisees operated as of December 30, 2018:DomesticCompany-operatedvenues Franchised venues TotalChuck E. Cheese’s504 26 530Peter Piper Pizza39 61 100 Total domestic543 87 630International Chuck E. Cheese’s11 65 76Peter Piper Pizza— 44 44 Total international11 109 120 Total venues in operation554 196 75021DomesticCompany-Owned venues Franchisedvenues TotalAlabama8 1 9Alaska1 — 1Arizona33 15 48Arkansas6 — 6California81 4 85Colorado9 — 9Connecticut4 — 4Delaware2 — 2Florida33 — 33Georgia15 — 15Hawaii— 3 3Idaho1 — 1Illinois21 — 21Indiana13 — 13Iowa4 — 4Kansas4 — 4Kentucky5 — 5Louisiana10 2 12Maryland14 — 14Massachusetts10 — 10Michigan16 — 16Minnesota8 — 8Mississippi3 2 5Missouri8 — 8Montana— 1 1Nebraska2 — 2Nevada8 — 8New Hampshire1 — 1New Jersey14 — 14New Mexico7 3 10New York21 — 21North Carolina13 2 15North Dakota— 1 1Ohio19 1 20Oklahoma6 — 6Oregon1 2 3Pennsylvania20 — 20Rhode Island1 — 1South Carolina7 — 7South Dakota2 — 2Tennessee12 — 12Texas66 46 112Utah2 — 2Virginia12 3 15Washington10 1 11West Virginia1 — 1Wisconsin9 — 9Total domestic543 87 63022 InternationalCompany-Owned venues Franchisedvenues TotalCanada11 — 11Chile— 7 7Colombia— 2 2Costa Rica— 1 1Guam— 1 1Guatemala— 2 2Honduras— 2 2Mexico— 63 63Panama— 2 2Peru— 3 3Puerto Rico— 3 3Trinidad— 2 2Saudi Arabia— 18 18United Arab Emirates— 3 3Total international11 109 120Total venues in operation554 196 750Company-operated Venue LeasesOf the 515 Company-operated Chuck E. Cheese’s venues as of December 30, 2018, nine are owned premises and 506 are leased. All of the 39Company-operated Peter Piper Pizza venues as of December 30, 2018 are leased premises.The terms of our venue 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, 2018, seven of our leases were month-to-month and 37 of our leases were set to expire in 2019. Ofthose set to expire in 2019, 12 have no available renewal options and the remainder have available renewal options expiring between 2020 and 2039. Ourremaining leases are set to expire at various dates through 2037, with available renewal options that expire at various dates through 2054.These leases generally require us to pay the cost of repairs, other maintenance costs, insurance and real estate taxes and, in some instances, mayprovide for 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 leasedpremises prior to the commencement of rent payments for the purpose of constructing leasehold improvements.Corporate Offices and Warehouse FacilitiesWe lease 55,257 square feet of space in an office building in Irving, Texas, which serves as our corporate office and support services center. Thislease expires in July 2026 with options to renew through July 2036. Peter Piper Pizza leased a 5,243 square foot office building in Phoenix, Arizona throughSeptember 2018, which served primarily as its corporate office. Upon expiration of the lease in September 2018, we relocated our Peter Piper Pizza corporateoffice to an adjoining office space located at a Peter Piper Pizza venue in Phoenix, Arizona. We also lease a 166,432 square foot warehouse building inTopeka, Kansas, which primarily serves as a storage, distribution and refurbishing facility for our venue fixtures and game equipment. The lease expires inAugust 2024 with options to renew through August 2034.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 theconduct of our business. These matters typically involve claims from customers, employees or other third parties involved in operational issues common tothe 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 ofclaims and legal proceedings pending against us.In the opinion of our management, after consultation with legal counsel, the amount of liability with respect to claims or proceedings currentlypending against us is not expected to have a material effect on our consolidated financial condition, results of operations or cash flows. All necessary lossaccruals based on the probability and estimate of loss have been recorded.Litigation Related to the Merger: Following the January 16, 2014 announcement that CEC Entertainment had entered into an agreement (“MergerAgreement”), pursuant to which an entity controlled by Apollo Global Management, LLC and its subsidiaries merged with and into CEC Entertainment, withCEC Entertainment surviving the merger (“the Merger”), four putative shareholder class actions were filed in the District Court of Shawnee County, Kansas,on behalf of purported stockholders of CEC Entertainment, against A.P. VIII Queso Holdings, L.P., CEC Entertainment, CEC Entertainment's directors,Apollo and Merger Sub (as defined in the Merger Agreement), in connection with the Merger Agreement and the transactions contemplated thereby. Theseactions were consolidated into one action (the “Consolidated Shareholder Litigation”) in March 2014, and on July 21, 2015, a consolidated class actionpetition was filed as the operative consolidated complaint, asserting claims against CEC’s former directors, adding The Goldman Sachs Group (“GoldmanSachs”) as a defendant, and removing all Apollo entities as defendants (the “Consolidated Class Action Petition”). The Consolidated Class Action Petitionalleges that CEC Entertainment’s directors breached their fiduciary duties to CEC Entertainment’s stockholders in connection with their consideration andapproval of the Merger Agreement by, among other things, conducting a deficient sales process, agreeing to an inadequate tender price, agreeing to certainprovisions in the Merger Agreement, and filing materially deficient disclosures regarding the transaction. The Consolidated Class Action Petition alsoalleges that two members of CEC Entertainment’s board who also served as the senior managers of CEC Entertainment had material conflicts of interest andthat Goldman Sachs aided and abetted the board’s breaches as a result of various conflicts of interest facing the bank. The Consolidated Class Action Petitionseeks, among other things, to recover damages, attorneys’ fees and costs. The Company assumed the defense of the Consolidated Shareholder Litigation onbehalf of CEC’s named former directors and Goldman Sachs pursuant to existing indemnity agreements. On March 23, 2016, the Court conducted a hearingon the defendants’ Motion to Dismiss the Consolidated Class Action Petition and on March 1, 2017, the Special Master appointed by the Court issued areport recommending to the Court that the Consolidated Class Action Petition be dismissed. On September 9, 2018, the Court accepted the Special Master’srecommendations and dismissed the lawsuit in its entirety. On October 8, 2018, the Plaintiff in the Consolidated Shareholder Litigation filed a notice ofappeal of the District Court’s decision. While no assurance can be given as to the ultimate outcome of the consolidated matter, we currently believe that thefinal resolution of the action will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.ITEM 4. Mine Safety Disclosures.None.23PART IIITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.Market Information and DividendsAs of December 30, 2018, all of our outstanding common stock was privately held and there was no established public trading market for ourcommon stock.We did not declare any dividends in 2016, 2017, and 2018.Our ability to pay and declare dividends is restricted by our secured credit facilities and senior notes. See further discussion of the secured creditfacilities and senior notes in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition,Liquidity and Capital Resources - Debt Financing” and Part II, Item 8. “Financial Statements and Supplementary Data - Note 10. Indebtedness and InterestExpense” of this Annual Report on Form 10-K. See Part I, Item 1A. “Risk Factors” for a discussion of factors that might affect our financial performance andcompliance with debt covenants, including covenants that affect our ability to pay dividends.Issuer Purchases of Equity SecuritiesThere were no repurchases of our common stock during Fiscal 2018.24ITEM 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” (in thousands, except percentages and venue number amounts): Fiscal Year 2018 Fiscal Year 2017 Fiscal Year 2016 Fiscal Year 2015 (1) For the 317 DayPeriod EndedDecember 28, 2014(6) For the 47 DayPeriod EndedFebruary 14, 2014(7) Successor (7) Successor (7) Successor (7) Successor (7) Successor (7) Predecessor (7) (in thousands, except percentages and venue number amounts)Statements of EarningsData: Company venue sales$875,334 $868,888 $905,314 $905,110 $712,098 $113,556Total revenues$896,066 $886,771 $923,653 $922,589 $718,581 $114,243Operating income (loss)$50,801 $47,890 $61,452 $55,131 $(32,259) $2,873Interest expense$76,283 $69,115 $67,745 $70,582 $60,952 $1,151Income taxes$(5,021) $(74,291) $(2,626) $(2,941) $(31,123) $1,018Net income (loss)$(20,461) $53,066 $(3,667) $(12,510) $(62,088) $704 Statement of Cash FlowData: Operating activities$86,790 $104,297 $118,955 $100,613 $48,091 $22,314Investing activities$(79,284) $(93,712) $(98,439) $(78,191) $(1,124,285) $(9,659)Financing activities$(11,547) $(5,030) $(10,095) $(81,599) $1,168,448 $(13,844)Non-GAAP FinancialMeasures: Adjusted EBITDA (3)$175,166 $180,800 $207,924 $220,936 $170,456 $24,967Adjusted EBITDA Margin (4)19.5 % 20.4 % 22.5% 23.9 % 23.7% 21.9%Venue-level Data: Number of venues (end ofperiod): Company-operated554 562 559 556 559 NMFranchised196 192 188 176 172 NM 750 754 747 732 731 NMComparable venues (end ofperiod) (2)526 531 529 489 485 NMComparable venue saleschange (2)(0.0 )% (4.8)% 2.8% (0.4)% NM NM As of As of As of As of As of As of December 30, 2018 December 31,2017 January 1, 2017 December 28, 2015 December 28, 2014 February 14, 2014Balance Sheet Data: Total assets$1,666,165 $1,695,044 $1,710,112 $1,733,035 $1,836,113 NMTotal debt (5)982,121 986,419 989,948 994,448 999,783 NMStockholders’ equity242,571 262,148 206,005 208,546 292,586 NMDividends declared— — — 70,000 — —_______________________(1)We operate on a 52 or 53 week fiscal year ending on the Sunday nearest December 31. Fiscal year 2015 was 53 weeks in length, which resulted in our fourth quarterconsisting of 14 weeks. All other fiscal years presented were 52 weeks.25(2)We define “comparable venue sales” as sales for our domestic owned company-operated venues that have been open for more than 18 months as of the beginning of eachrespective fiscal year or for acquired venues we have operated for at least 12 months as of the beginning of each respective fiscal year. Comparable venue sales excludessales for our domestic Company-owned venues that are expected to be temporarily closed for more than three months primarily as a result of natural disasters, fires, floodsand property damage. We define “comparable venue sales change” as the percentage change in comparable venue sales for each respective period. We believe comparablevenue sales change to be a key performance indicator within our industry; it is a critical factor in evaluating our performance, as it is indicative of acceptance of our strategicinitiatives and local economic and consumer trends. Our comparable venue sales for Fiscal 2015, and the Successor 2014 period exclude the Peter Piper Pizza venues thatwere acquired in October 2014 as we had operated them for less than 12 months at the beginning of each respective fiscal year. As a result of the 53 week fiscal year in2015, our 2016 fiscal year began one calendar week later than our 2015 fiscal year. . The comparable venue sales change in the table above is presented on a calendar weekbasis, excluding the additional week of operations in 2015. On a fiscal basis, excluding the additional week of operations in 2015, comparable venue sales change wouldhave been 3.0% in 2016.(3)For our definition of Adjusted EBITDA, see the “Non-GAAP Financial Measures” section below.(4)Adjusted EBITDA Margin is defined by us as Adjusted EBITDA as a percentage of Total revenues.(5)Total debt includes our senior notes, our outstanding borrowings under the term loan facility and the revolving credit facility, net of deferred financing costs, capital leases,and the Predecessor Facility.(6)Results for the Successor 2014 period include the revenues and expenses for Peter Piper Pizza for the 73 day period from October 17, 2014 through December 28, 2014.(7)As a result of the Merger, we applied the acquisition method of accounting and established a new basis of accounting on February 15, 2014. The period presented for theperiod December 29, 2013 through February 14, 2014 represent the operations of the predecessor company (“Predecessor”) and the periods presented after February 14,2014 represent the operations of the successor company (“Successor”). The financial results for the period December 29, 2013 through February 14, 2014 represent the 47day Predecessor period.Non-GAAP Financial MeasuresAdjusted EBITDA, a measure used by management to assess operating performance, is defined as Net income (loss) plus interest expense, income taxexpense (benefit), depreciation and amortization expense, impairments, gains and losses on asset disposals, unrealized gains and losses on foreign exchange,and stock based compensation. In addition, Adjusted EBITDA excludes other items we consider unusual or non-recurring and other adjustments required orpermitted in calculating covenant compliance under our secured credit facilities and the indenture governing our senior notes (see discussion of our seniornotes in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Liquidity andCapital Resources - Debt Financing”).Adjusted EBITDA is presented because we believe that it provides useful information to investors regarding our operating performance and ourcapacity to incur and service debt and fund capital expenditures. We believe that Adjusted EBITDA is used by many investors, analysts and rating agenciesas a measure of performance. We also present Adjusted EBITDA because it is substantially similar to Credit Agreement EBITDA, a measure used incalculating financial ratios and other calculations under our debt agreements, except for excluding the annualized full year effect of Company-operated andfranchised venues that were opened and closed during the year. By reporting Adjusted EBITDA, we provide a basis for comparison of our business operationsbetween current, past and future periods by excluding items that we do not believe are indicative of our core operating performance.Our definition of Adjusted EBITDA allows for the exclusion of certain non-cash and other income and expense items that are used in calculating netincome from continuing operations. However, these are items that may recur, vary greatly and can be difficult to predict. They can represent the effect oflong-term strategies as opposed to short-term results. In addition, certain of these items can represent the reduction of cash that could be used for othercorporate purposes. These measures should not be considered as alternatives to operating income, cash flows from operating activities or any otherperformance measures derived in accordance with GAAP as measures of operating performance, or cash flows as measures of liquidity. These measures haveimportant limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP.Because of these limitations, we rely primarily on our U.S. GAAP results and use Adjusted EBITDA and Adjusted EBITDA Margin, only supplementally.26The following table sets forth a reconciliation of net income (loss) to Adjusted EBITDA and Adjusted EBITDA Margin for the periods presented: Fiscal 2018 Fiscal 2017 Fiscal 2016 Fiscal 2015 (1) For the 317Day PeriodEndedDecember 28,2014 For the 47Day PeriodEndedFebruary 14,2014 Successor Successor Successor Successor Successor Predecessor (in thousands, except percentages)Total revenues$896,066 $886,771 $923,653 $922,589 $718,581 $114,243 Net income (loss) as reported$(20,461) $53,066 $(3,667) $(12,510) $(62,088) $704Interest expense76,283 69,115 67,745 70,582 60,952 1,151Income tax expense (benefit)(5,021) (74,291) (2,626) (2,941) (31,123) 1,018 Depreciation andamortization100,720 109,771 119,569 119,294 118,556 9,883 Non-cash impairments, gainor loss on disposal (2)10,371 9,241 10,070 8,934 9,841 294 Unrealized gain on foreignexchange (3)1,255 — — — — — Non-cash stock-basedcompensation (4)324 606 689 838 703 12,639 Rent expense book to cash(5)6,982 5,655 7,852 9,100 10,665 (1,190) Franchise revenue, net cashreceived (6)1,632 — 113 1,217 2,585 — Impact of purchaseaccounting (7)— 817 1,380 995 1,496 — Venue pre-opening costs (8)183 904 1,591 792 1,166 131 One-time and unusual items(9)2,898 5,916 5,146 22,448 55,060 (165) Cost savings initiatives (10)— — 62 2,187 2,643 502 Adjusted EBITDA (11)$175,166 $180,800 $207,924 $220,936 $170,456 $24,967Adjusted EBITDA Margin19.5% 20.4% 22.5% 23.9% 23.7% 21.9%__________________(1)We operate on a 52 or 53 week fiscal year ending on the Sunday nearest December 31. Fiscal year 2015 was 53 weeks in length, which resulted in our fourth quarterconsisting of 14 weeks. All other fiscal years presented were 52 weeks.(2)Relates primarily to (i) the impairment of Company-operated venues or impairments of long lived assets; (ii) gains or losses upon disposal of property or equipment; and (iii)inventory obsolescence charges in 2015 outside of the ordinary course of business.(3)Relates to unrealized gains on the revaluation of our indebtedness with our Canadian subsidiary. Effective January 1, 2018, we no longer consider undistributed incomefrom our Canadian subsidiary to be permanently invested.(4)Represents non-cash equity-based compensation expense.(5)Represents (i) the removal of the non-cash portion of rent expense relating to the impact of straight-line rent and the amortization of cash incentives and allowances receivedfrom landlords, plus (ii) the actual cash received from landlords incentives and allowances in the period in which it was received.(6)Represents the actual cash received for franchise fees received in the period for post-acquisition franchise development agreements, which we do not start recognizing intorevenue until the franchise venue is opened.(7)Represents revenue related to unearned gift cards and unearned franchise fees that were removed in purchase accounting, and therefore were not recorded as revenue.(8)Relates to start-up and marketing costs incurred prior to the opening of new Company-operated venues and generally consists of payroll, recruiting, training, supplies and rentincurred prior to venue opening.(9)Represents non-recurring income and expenses primarily related to (i) accounting, investment banking, legal and other costs incurred in connection with the Merger, the saleleaseback transaction we completed on August 25, 2014 and the acquisition of Peter Piper Pizza (“PPP Acquisition”); (ii) severance expense, executive termination benefitsand executive search fees; (iii) one-time integration costs, including consulting fees, accounting service fees, IT system integration costs and travel expenses incurred inconnection with the integration of Peter Piper Pizza; (iv) legal fees, claims and settlements related to litigation in respect of the Merger; (v) legal claims and settlements relatedto employee class action lawsuits and settlements; (vi) one-time costs incurred in connection with the 2015 relocation of our corporate offices; (vii) cash landlord incentivesreceived in 2015 on our new corporate offices; (viii) sales and use tax refunds that relate to prior periods; (ix) professional fees incurred in connection with one-timestrategic corporate and tax initiatives, such as accounting and consulting service fees incurred to obtain sale and use tax refunds from prior periods, to enhance transferpricing and implement Play Pass, initial fees incurred in connection with the overseas outsourcing of our accounts payable and payroll functions, and costs related to thetransition in 2015 to new advertising agencies whereby we were under contract for duplicate advertising costs for a period of time; (x) removing the initial recognition ofgift card breakage revenue related to prior years on unredeemed Chuck E. Cheese's gift card balances sold by third parties; (xi) removing insurance recoveries relating toprior year business interruption losses at certain v27enues, primarily relating to natural disasters, fires and floods; (xii) removing proceeds received related to the early termination of a venue lease by the property landlordpursuant to a decision by the landlord to demolish the shopping mall where the venue was located; (xiii) one-time costs related to the early termination of a supplier contractin connection with the transition to a new supplier; (xiv) one-time training and travel-related costs incurred in connection with training venue employees in connection withthe implementation of our Play Pass initiative and the re-imaging effort of the venues in our Chuck E. Cheese portfolio; (xv) one-time marketing expenses related to thegrand openings of our re-imaged Chuck E. Cheese venues; and (xv) non-recoverable account balances written off outside of the ordinary course of business.(10)Relates to estimated net cost savings primarily from (i) cost savings related to our change from public to private ownership and the elimination of public equity securitiesupon the closing of the Merger, including reductions in investor relations activities, directors fees, and certain legal and other securities and filing costs; (ii) estimated full-year effect of venue-level cost savings initiatives implemented in 2013, such as the installation of advanced thermostat systems, the replacement of helium-filled balloonswith table top balloons, the consolidation of parts suppliers, and the increase in tickets required to redeem prizes; (iii) estimated effect of cost savings following the Mergerfrom participation in Sponsor-leveraged purchasing programs, including various supplies, travel, and communications purchasing categories; (iv) labor cost savingsassociated with the elimination of certain management positions in connection with the Merger; (v) the full period impact of reduced occupancy costs associated with therelocation of our corporate offices in 2015; (vi) estimated cost savings associated with the integration of Peter Piper Pizza following its acquisition in October 2014,including labor cost savings associated with headcount reductions implemented in 2015; (vii) the full year effect of cost savings associated with upgrades to our telephonecommunication systems in 2015; and (viii) the estimated incremental costs associated with the new ERP system we implemented at the beginning of Fiscal 2015, net ofsystem optimization costs, and post-Merger insurance arrangements.(11)With the continued evolution of our games business from tokens to game play credits and now towards time-based play packages following the implementation of All YouCan Play (“AYCP”) in Fiscal 2018, the impact on our financial results of the fluctuation of the deferred revenue liability related to unused credits on Play Pass cards begins tolessen in importance in understanding our Adjusted EBITDA. Customers continue to see the value of time based play and game play credits continue to decline as apercentage of overall game play. As a result, the change in the deferred revenue liability relating to unused Play Pass cards has been removed from Adjusted EBITDA for allperiods presented.28ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.As used in this report, the terms “CEC Entertainment,” “CEC”, the “Company,” “we,” “us” and “our” refer to CEC Entertainment, Inc. and itssubsidiaries.This 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 sub-sections:•Presentation of Operating Results;•Executive Summary;•Key Measures of Our Financial Performance and Key Non-GAAP Measures;•Key Income Statement Line Item Descriptions;•Results of Operations;•Financial Condition, Liquidity and Capital Resources;•Off-Balance Sheet Arrangements and Contractual Obligations;•Inflation;•Critical Accounting Policies and Estimates; and•Recently Issued Accounting Guidance.Presentation of Operating ResultsWe 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. The fiscal years ended December 30, 2018, December 31, 2017 and January 1, 2017 each consisted of 52 weeks.References to 2018, 2017 and 2016 are for the fiscal years ended December 30, 2018, December 31, 2017 and January 1, 2017, respectively.Executive SummaryGeneralWe develop, operate and franchise family entertainment and dining centers (also referred to as “venues”) under the names “Chuck E. Cheese's”(“Where A Kid Can Be A Kid”) and “Peter Piper Pizza” (“The Solution to the Family Night Out”). Our venues deliver a lively, kid-friendly atmosphere thatfeature a broad array of entertainment offerings including arcade-style and skill-oriented games, rides, live entertainment shows, and other attractions, withthe opportunity for kids to win tickets that they can redeem for prizes. We combine this memorable entertainment experience with a broad and creative menuthat combines kid-friendly classics as well as a new selection of sophisticated options for adults. We operate 554 venues and have an additional 196 venuesoperating under franchise arrangements across 47 states and 14 foreign countries and territories as of December 30, 2018.29The following table summarizes information regarding the number of Company-operated and franchised venues for the periods presented: Twelve Months Ended December 30, 2018 December 31, 2017 January 1, 2017Number of Company-operated venues: Beginning of period 562 559 556New 1 6 6Acquired from franchisee — 2 —Closed (9) (5) (3)End of period 554 562 559Number of franchised venues: Beginning of period 192 188 176New 8 8 16Acquired from franchisee — (2) —Closed (4) (2) (4)End of period 196 192 188Total number of venues: Beginning of period 754 747 732 New 9 14 22 Closed (13) (7) (7)End of period 750 754 747 __________________(1)The number of new and closed Company-operated and Total venues during 2018 included one venue that was relocated.Our Strategic PlanOur strategic plan is focused on increasing comparable venue sales, improving profitability and growing new venues domestically andinternationally. See discussion of our strategic plan included in Part I, Item 1. “Business - Our Strategic Plan.”Key Measures of Our Financial Performance and Key Non-GAAP MeasuresComparable venue sales. We define “comparable venue sales” as the sales for our domestic Company-operated venues that have been open for morethan 18 months as of the beginning of each respective fiscal year or for acquired venues we have operated for at least 12 months as of the beginning of eachrespective fiscal year. Comparable venue sales excludes sales for our domestic Company-operated venues that are expected to be temporarily closed for morethan three months primarily as a result of natural disasters, fires, floods and property damage. We define “comparable venue sales change” as the percentagechange in comparable venue sales for each respective fiscal year. We believe comparable venue sales change to be a key performance indicator used withinour industry; it is a critical factor when evaluating our performance, as it is indicative of acceptance of our strategic initiatives and local economic andconsumer trends.Average Sales per Comparable Venue. Average sales per comparable venue is calculated based on the average annual sales of our comparablevenue base. Average sales per comparable venue cannot be used to compute year-over year comparable venue sales increases or decreases due to the changein the comparable venue base. Fiscal Year Ended December 30, 2018 December 31, 2017 January 1, 2017 (in thousands, except venue number amounts)Average sales per comparable venue $1,587 $1,561 $1,636Number of venues included in our comparable venue base 526 531 52930Adjusted EBITDA and Margin. We define Adjusted EBITDA, a measure used by management to assess operating performance, as net income (loss)plus interest expense, income tax expense (benefit), depreciation and amortization expense, impairments, gains and losses on asset disposals, and stock basedcompensation. In addition, Adjusted EBITDA excludes other items we consider unusual or non-recurring and other adjustments required or permitted incalculating covenant compliance under the indenture governing our senior notes and/or secured credit facilities. Adjusted EBITDA Margin representsAdjusted EBITDA as a percentage of total revenues.Key Income Statement Line Item DescriptionsRevenues. Our primary source of revenues is sales at our Company-operated venues (“company venue sales”), which consist of the sale of food,beverages, game-play credits, unlimited game-play time blocks, and merchandise. A portion of our company venue sales are from sales of value-pricedcombination packages generally comprised of food, beverage, and through the end of the second quarter of 2018 game plays and/or time blocks, which wepromote through in-venue menu pricing, our website and coupon offerings. Beginning in the third quarter of 2018, we offer combination packages comprisedof food and beverage only (“Package Deals”), with game plays and/or time blocks available for purchase separately. Prior to the bifurcation of the “Food andbeverage sales” and “Entertainment and merchandise sales” components of combination packages, we allocated the revenues recognized from the sale ofcombination packages and coupons between “Food and beverage sales” and “Entertainment and merchandise sales” based upon the price charged for eachcomponent when it is sold separately, or in limited circumstances, our best estimate of selling price if a component is not sold on a stand-alone basis, whichwe believe approximates each component’s fair value.Food and beverage sales include all revenues recognized with respect to stand-alone food and beverage sales, and through the end of the secondquarter of 2018, the portion of revenues allocated from combination packages and coupons that relate to food and beverage sales. Entertainment andmerchandise sales include all revenues recognized with respect to stand-alone sales of game-play credits and unlimited game-play time blocks, and throughthe end of the second quarter of 2018, a portion of revenues allocated from combination packages and coupons that relate to entertainment and merchandise.Franchise fees and royalties are another source of revenues. We earn monthly royalties from our franchisees based on a percentage of each franchisevenue’s sales. We also receive development and initial franchise fees to establish new franchised venues, as well as earn revenues from the sale of equipmentand other items or services to franchisees. Historically, we recognized development and franchise fees as revenues when the franchise venue had opened andwe had substantially completed our obligations to the franchisee relating to the opening of a venue. Effective January 1, 2018, with the adoption ofAccounting Standards Update 2016-10 Revenues from Contracts with Customers (Topic 606) (“ASU 606”), we recognize initial and renewal developmentand franchise fees as revenues on a straight-line basis over the life of the franchise agreement starting when the franchise venue has opened. In addition, ournational advertising fund receipts from members of the Association are now accounted for on a gross basis as revenue from franchisees, when historically theyhave been netted against advertising expense.Company venue operating costs. Certain of our costs and expenses relate only to the operation of our Company-operated venues. These costs andexpenses are listed and described below:•Cost of food and beverage includes all direct costs of food, beverages and costs of related paper and birthday supplies, less rebates fromsuppliers;•Cost of entertainment and merchandise includes all direct costs of prizes provided and merchandise sold to our customers, and the cost ofPlay Pass and AYCP cards and writsbands, as well as the cost of tickets dispensed to customers;•Labor expenses consist of salaries and wages, bonuses, related payroll taxes and benefits for venue personnel;•Rent expense includes lease costs for Company-operated venues, excluding common occupancy costs (e.g., common area maintenance(“CAM”) charges and property taxes); and•Other venue operating expenses primarily include utilities, repair and maintenance costs, liability and property insurance, CAM charges,property taxes, credit card processing fees, licenses, preopening expenses, venue asset disposal gains and losses and all other costs directlyrelated to the operation of a venue.“Cost of food and beverage” and “Cost of entertainment and merchandise” mentioned above, as a percentage of company venue sales, areinfluenced both by the cost of products and the overall mix of our Package Deals and coupon offerings. “Entertainment and merchandise sales” have highermargins than “Food and beverage sales.”31Advertising expense. Advertising expense includes production costs for television commercials, newspaper inserts, Internet advertising, coupons,media expenses for national and local advertising, consulting fees and other forms of advertising such as social media. Historically, prior to the adoption ofASU 606 on January 1, 2018, advertising expense was partially offset by contributions from our franchisees. Contributions from franchisees are nowrecognized as revenue from 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, back-office support systems, costs of outsourced functions, andother administrative costs not directly related to the operation of our Company-operated venues.Depreciation and amortization. Depreciation and amortization includes expenses that are directly related to our Company-operated venues’property and equipment, including leasehold improvements, game and ride equipment, furniture, fixtures and other equipment, and depreciation andamortization of corporate assets and intangibles.Asset impairments. Asset impairments represent non-cash charges to reduce the carrying amount of certain long-lived assets within our venues totheir estimated fair value, when a venue’s operation is not expected to generate sufficient projected future cash flows to recover the current net book value ofthe long-lived assets within the venue. We believe our assumptions in calculating the fair value of our long-lived assets are similar to those used by othermarketplace participants.Results of OperationsThe following table summarizes our principal sources of Total company venue sales expressed in dollars and as a percentage of Total companyvenue sales for the periods presented: Fiscal Year Ended December 30, 2018 December 31, 2017 January 1, 2017 (in thousands, except percentages)Food and beverage sales $396,658 45.3% $410,609 47.3% $415,059 45.8%Entertainment and merchandise sales 478,676 54.7% 458,279 52.7% 490,255 54.2%Total company venue sales $875,334 100.0% $868,888 100.0% $905,314 100.0%32 The following table summarizes our revenues and expenses expressed in dollars and as a percentage of Total revenues (except as otherwise noted)for the periods presented: Fiscal Year Ended December 30, 2018 December 31, 2017 January 1, 2017 (in thousands, except percentages)Total company venue sales $875,334 97.7 % $868,888 98.0 % $905,314 98.0 %Franchise fees and royalties 20,732 2.3 % 17,883 2.0 % 18,339 2.0 %Total revenues 896,066 100.0 % 886,771 100.0 % 923,653 100.0 %Company venue operating costs(excluding Depreciation andamortization): Cost of food and beverage (1) 94,319 23.8 % 97,570 23.8 % 104,315 25.1 %Cost of entertainment andmerchandise (2) 36,650 7.7 % 29,948 6.5 % 32,014 6.5 %Total cost of food, beverage,entertainment andmerchandise (3) 130,969 15.0 % 127,518 14.7 % 136,329 15.1 %Labor expenses (3) 256,327 29.3 % 248,061 28.5 % 251,426 27.8 %Rent expense (3) 96,484 11.0 % 95,917 11.0 % 96,006 10.6 %Other venue operating expenses (3) 150,255 17.2 % 149,462 17.2 % 148,869 16.4 %Total Company venueoperating costs (3) 634,035 72.4 % 620,958 71.5 % 632,630 69.9 %Other costs and expenses: Advertising expense 48,198 5.4 % 48,379 5.5 % 46,142 5.0 %General and administrative expenses 54,850 6.1 % 56,482 6.4 % 61,011 6.6 %Depreciation and amortization 100,720 11.2 % 109,771 12.4 % 119,569 12.9 %Transaction, severance and relatedlitigation costs 527 0.1 % 1,448 0.2 % 1,299 0.1 %Asset impairments 6,935 0.8 % 1,843 0.2 % 1,550 0.2 %Total operating costs andexpenses 845,265 94.3 % 838,881 94.6 % 862,201 93.3 %Operating income 50,801 5.7 % 47,890 5.4 % 61,452 6.7 %Interest expense 76,283 8.5 % 69,115 7.8 % 67,745 7.3 %Loss before income taxes $(25,482) (2.8)% $(21,225) (2.4)% $(6,293) (0.7)% __________________(1)Percent amount expressed as a percentage of Food and beverage sales.(2)Percent amount expressed as a percentage of Entertainment and merchandise sales.(3)Percent amount expressed as a percentage of Company venue sales.(4)Due to rounding, percentages presented in the table above may not sum to total. The percentage amounts for the components of Cost of food and beverage and the Cost ofentertainment and merchandise may not sum to total due to the fact that Cost of food and beverage and Cost of entertainment and merchandise are expressed as a percentage ofrelated Food and beverage sales and Entertainment and merchandise sales, as opposed to Total Company venue sales.33Fiscal 2018 Compared to Fiscal 2017RevenuesCompany venue sales were $875.3 million and $868.9 million for Fiscal 2018 and Fiscal 2017, respectively. The increase in Company venue saleswas primarily attributable to the favorable impact of approximately $6.6 million in net breakage related to Play Pass for Fiscal 2018 compared to $2.2 millionof net deferral for Fiscal 2017. The favorable impact of the reduction in deferred revenue related to Play Pass was partially offset by a $3.6 million decrease inrevenue due to temporary venue closures, and a $2.6 million net decrease in revenue from venues closed in Fiscal 2018 and 2017.Franchise fees and royalties increased from $17.9 million to $20.7 million primarily due to the impact of new revenue recognition guidance in 2018which resulted in $3.5 million of national advertising fund contributions from franchisees being recorded as revenue, rather than netted against advertisingexpense (see “Advertising Expense” below), partially offset by a $0.3 million decrease in revenue recognized from franchise and development fee agreementswhich as a result of the new revenue recognition guidance are now recognized on a straight-line basis over the life of the related franchise agreementbeginning at the time a new franchised location is opened. Historically we recognized revenue from initial franchise and development fees upon the openingof a franchised location. Additionally, Franchise fees and royalties were impacted by a $0.3 million reduction in revenue from the shipment of games tofranchisees.Company Venue Operating CostsThe cost of food, beverage, entertainment and merchandise, as a percentage of Total company venue sales, was 15.0% and 14.7% for Fiscal 2018 andFiscal 2017, respectively, as a sales shift towards higher margin entertainment and merchandise sales from food and beverage sales was offset by an increasein redemptions for merchandise, primarily related to the impact of More Tickets, one of the new initiatives launched by the Company in 2018.The cost of food and beverage as a percentage of food and beverage sales, was 23.8% for both Fiscal 2018 and Fiscal 2017, as a change in sales mixand increased beverage costs in 2018 offset favorability in commodity prices and volume, primarily related to cheese and pepperoni compared to 2017.The cost of entertainment and merchandise, as a percentage of Entertainment and merchandise sales, was 7.7% and 6.5% for Fiscal 2018 and Fiscal2017, respectively. The cost of entertainment and merchandise, as a percentage of Entertainment and merchandise in 2018 compared to 2017 primarilyreflects a combination of the impact of AYCP and More Tickets which were launched nationally during the third quarter of 2018. Also impacting the cost ofentertainment and merchandise, as a percentage of Entertainment and merchandise sales, was an increase in Play Pass related supplies such as cards andwristbands, as a result of Play Pass being deployed to all of our Company-operated venues in 2018 compared to 268 at the beginning of 2017.Labor expenses, as a percentage of Total company venue sales, were 29.3% and 28.5% for Fiscal 2018 and Fiscal 2017, respectively. Increasedminimum wage rates in several states fully offset a decrease in labor hours in Fiscal 2018 compared to Fiscal 2017. Our sales per man hour improvedapproximately 1.7% in Fiscal 2018 from Fiscal 2017.Other venue operating expenses, as a percentage of Total company venue sales, were flat at 17.2% for both Fiscal 2018 and Fiscal 2017. Fiscal 2018reflects higher property taxes and common area and utility costs, as well as expenses related to the production and deployment of new menu boards andpanels in connection with the launch of AYCP. Fiscal 2017 reflects losses incurred in connection with Hurricanes Harvey and Irma, as well as higher IT andtechnology support costs related primarily to the completion in 2017 of the deployment of Play Pass in all of our domestic Company-owned venues.Advertising ExpenseAdvertising expense was $48.2 million and $48.4 million for Fiscal 2018 and Fiscal 2017, respectively. Advertising expense for Fiscal 2018 wasimpacted by the adoption of a new revenue recognition standard effective January 1, 2018 that requires us to account for our national advertising fundcontributions as revenues, rather than netted against Advertising expense. Including the impact of netting national advertising fund revenues againstAdvertising expense, Advertising expense for Fiscal 2018 would have been $45.0 million (see “Revenues” above). Advertising expense for Fiscal 2018reflects a decrease in national media costs and local venue marketing, as well as a decrease in advertising for our Peter Piper Pizza venues as we shifted awayfrom television and print advertising to digital advertising.34General and Administrative ExpensesGeneral and administrative expenses were $54.9 million and $56.5 million for Fiscal 2018 and Fiscal 2017, respectively. The decrease in Generaland administrative expenses is primarily due to cost savings initiatives implemented in 2018 and a decrease in labor related litigation, partially offset by anincrease in incentive compensation as a result of improved operating results in the latter part of the year.Depreciation and AmortizationDepreciation and amortization was $100.7 million and $109.8 million for Fiscal 2018 and Fiscal 2017, respectively. The decrease in depreciationand amortization is primarily due to the impact of certain property plant and equipment having reached the end of their depreciable lives, and impairmentsrecorded on certain venues.Transaction, Severance and Related Litigation CostsTransaction, severance and related litigation costs were $0.5 million and $1.4 million for Fiscal 2018 and Fiscal 2017, respectively. TheTransaction, severance and related litigation costs for Fiscal 2018 and Fiscal 2017 relate primarily to $0.3 million and $1.0 million, respectively, in legal feesand settlements incurred in connection with Merger related litigation, and severance payments of $0.2 million and $0.5 million, respectively.Asset ImpairmentsIn Fiscal 2018, we recognized an asset impairment charge of $6.9 million primarily related to eight venues. In Fiscal 2017 we recognized an assetimpairment charge of $1.8 million primarily related to five venues, of which two were previously impaired. We continue to operate all but two of thesevenues. The impairment charges were based on the determination that the financial performance of these venues was adversely impacted by variouscompetitive and economic factors in the market in which the venues are located.Interest ExpenseInterest expense was $76.3 million and $69.1 million for Fiscal 2018 and Fiscal 2017, respectively. Our weighted average effective interest rateunder our secured credit facilities and senior notes (including amortized debt issuance costs, amortization of original issue discount, commitment and otherfees related to the secured credit facilities and senior notes) was 6.4% and 5.6% for Fiscal 2018 and Fiscal 2017, respectively.Income TaxesOur effective income tax rates for Fiscal 2018 and Fiscal 2017 were 16.9% and 36.0%, respectively (excluding the adjustment to our deferred taxliability resulting from the decrease in the federal income tax rate from 35% to 21% enacted on December 22, 2017, as part of the Tax Cuts and Jobs Act (the“TCJA”)). Our effective income tax rate for Fiscal 2018 was favorably impacted by employment-related federal income tax credits and a one-time adjustmentto deferred tax (the tax effect of the cumulative foreign currency translation adjustment existing as of January 1, 2018) resulting from the change in our intentto no longer indefinitely reinvest monies previously loaned to our Canadian subsidiary recorded in the first quarter, offset by:(i) nondeductible litigation costs related to the Merger;(ii) nondeductible penalties;(iii) an increase in our state income tax expense for the year which in large part was caused by state tax legislation enacted during the second quarterthat increased the amount of income subject to state taxation;(iv) foreign income taxes withheld (not offset by foreign tax credits due to the foreign tax credit limitation);(v) an increase in the reserve for uncertain tax positions, and(vi) an increase in a valuation allowance for deferred tax assets associated with a carryforward of certain state tax credits and deferred tax assetsrelating to our Canadian operations that could expire before they are utilized.Our effective income tax rate for Fiscal 2018 was also favorably impacted by adjustments to the provisional estimates provided in Fiscal 2017 toaccount for the impact of the TCJA pursuant to Staff Accounting Bulletin No. 118 (“SAB 118”). Under SAB 118, we included a provisional estimate of $66.6million tax benefit in our consolidated financial statements for the fiscal year ended December 31, 2017, relating to the enactment of TJCA, which primarilyrelated to the re-measurement of our35deferred tax liability. In the second quarter of Fiscal 2018, we recorded an adjustment to the provisional estimate of $0.2 million tax benefit, and in the thirdquarter of Fiscal 2018, we recorded an incremental adjustment to the provisional estimate of $0.5 million tax benefit. The measurement period relating to theenactment of the TCJA ended during our fourth quarter, and the tax effects thereof have been completed as of the end of Fiscal 2018.Fiscal 2017 Compared to Fiscal 2016RevenuesCompany venue sales were $868.9 million and $905.3 million for Fiscal 2017 and Fiscal 2016, respectively, the decrease was primarily attributableto a 4.8% decrease in comparable venue sales, offset partially by revenue from new venue openings. Company venue sales for Fiscal 2017 were alsonegatively impacted by an increase of approximately $2.2 million in Play Pass related deferred revenue compared to Fiscal 2016.Franchise fees and royalties decreased from $18.3 million to $17.9 million due to a reduction in shipping revenue from the shipment of games tofranchisees as a result of fewer unit openings in Fiscal 2017 compared to Fiscal 2016, offset partially by an increase in sales at our franchised units, andadditional revenue from new franchise units opened in 2017, net of franchise units closed.Company Venue Operating CostsThe cost of food, beverage, entertainment and merchandise, as a percentage of Total company venue sales, was 14.7% and 15.1% for Fiscal 2017 andFiscal 2016, respectively, as food and beverage costs benefited from the implementation of our new inventory management system offset by higherEntertainment and merchandise costs related to an increase in Play Pass related supplies.The cost of food and beverage as a percentage of Food and beverage sales, was 23.8% and 25.1% for Fiscal 2017 and Fiscal 2016, respectively. Thedecrease in the cost of food and beverage on a percentage basis in Fiscal 2017 was driven by benefits realized from the implementation of our inventorymanagement system late in the third quarter of 2016, as well as price increases taken in our food and beverage menu in the fourth quarter of 2016, partiallyoffset by an increase in our commodity prices, primarily cheese, pepperoni and chicken wings.The cost of entertainment and merchandise, as a percentage of Entertainment and merchandise sales, was 6.5% for both Fiscal 2017 and Fiscal 2016.The cost of entertainment and merchandise, as a percentage of Entertainment and merchandise sales reflects an increase in Play Pass related suppliesin 2017 as a result of Play Pass being deployed to more venues compared to 2016, and an increase in the amount of revenue deferred in connection with theimplementation of our Play Pass card system. The cost of Entertainment and merchandise sales, excluding the impact of supplies and deferred revenue relatedto Play Pass, was 5.7% for Fiscal 2017 compared to 6.2% for Fiscal 2016.Labor expenses were $248.1 million and $251.4 million for Fiscal 2017 and Fiscal 2016, respectively. A decease in labor hours as a result of lowersales volumes in Fiscal 2017 compared to Fiscal 2016 mostly offset increased minimum wage rates in several states.Other venue operating expenses were $149.5 million and $148.9 million for Fiscal 2017 and Fiscal 2016, respectively, the increase was primarilydue to losses incurred in connection with Hurricanes Harvey and Irma, and an increase in IT and technology support costs related primarily to the completionin 2017 of the deployment of Play Pass in all of our domestic Company-owned venues, partially offset by a decrease in start up and marketing costs related tonew venue openings.Advertising ExpensesAdvertising expenses were $48.4 million and $46.1 million for Fiscal 2017 and Fiscal 2016, respectively. As a percentage of Total revenues,advertising expenses were 5.5% and 5.0%, respectively, for Fiscal 2017 and Fiscal 2016. Fiscal 2017 reflects an increase in radio advertising and digital andsocial media costs.General and Administrative ExpensesGeneral and administrative expenses were $56.5 million and $61.0 million for Fiscal 2017 and Fiscal 2016, respectively. General and administrativeexpenses in Fiscal 2017 reflect a decrease in incentive compensation as a result of lower sales and operating performance and a decrease in labor relatedlitigation costs, partially offset by an increase in subscription service fees related to corporate IT initiatives.36Depreciation and AmortizationDepreciation and amortization was $109.8 million and $119.6 million for Fiscal 2017 and Fiscal 2016, respectively. The decrease in depreciationand amortization is primarily due to the impact of certain property plant and equipment having reached the end of their depreciable lives.Transaction, Severance and Related Litigation CostsTransaction, severance and related litigation costs were $1.4 million and $1.3 million for Fiscal 2017 and Fiscal 2016, respectively. TheTransaction, severance and related litigation costs for Fiscal 2017 and Fiscal 2016 relate primarily to $1.0 million and $1.2 million, respectively, in legal feesand settlements incurred in connection with Merger related litigation, and severance payments of $0.5 million and $0.1 million, respectively.Interest ExpenseInterest expense was $69.1 million and $67.7 million for Fiscal 2017 and Fiscal 2016, respectively. Our weighted average effective interest rateunder our secured credit facilities and senior notes (including amortized debt issuance costs, amortization of original issue discount, commitment and otherfees related to the secured credit facilities and senior notes) was 5.6% and 5.5% for Fiscal 2017 and Fiscal 2016, respectively.Income TaxesOur effective income tax rate for Fiscal 2017, excluding the adjustment to our deferred taxes resulting from the enactment of the TCJA, was 36.0% ascompared to 41.7% for Fiscal 2016. Our effective income tax rate for Fiscal 2017 differs from the statutory tax rate primarily due to the favorable impact ofemployment-related federal income tax credits which were partially offset by the true-up of the prior year’s estimate of employment-related tax credits versusactuals. Our effective income tax rate for Fiscal 2017 was negatively impacted by non-deductible litigation costs related to the Merger, non-deductibleCanadian interest expense, and adjustments recorded in Fiscal 2017 to state tax credit carryforwards that we estimate will expire. In addition, our Fiscal 2017effective income tax rate was favorably impacted by a reorganization of our Canadian structure, partially offset by the impact of a valuation allowancerecorded in connection with our Canadian subsidiary.The reduction in the federal corporate tax rate resulting from the TCJA significantly impacted our Fiscal 2017 income taxes. U.S. GAAP requiresdeferred tax assets and liabilities to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled, and furtherrequires the effect of a change in tax law to be recorded discretely as a component of the income tax provision related to continuing operations in the periodof enactment. This accounting requirement resulted in a $66.6 million nonrecurring reduction of our net deferred tax liability and a corresponding $66.6million benefit to deferred federal income taxes.Financial Condition, Liquidity and Capital ResourcesOverview of LiquidityWe finance our business activities through cash flows provided by our operations.The primary components of working capital are as follows:•our guests pay for their purchases in cash or credit cards at the time of the sale and the cash from these sales is typically received before ourrelated accounts payable to suppliers and employee payroll becomes due;•frequent inventory turnover and the use of fresh ingredients results in a limited investment required in inventories; and•our accounts payable are generally due within five to 30 days.As a result of these factors, our requirement for working capital is not significant and we are able to operate with a net working capital deficit(current liabilities in excess of current assets), similar to other companies in the restaurant industry.The following tables present summarized consolidated financial information that we believe is helpful in evaluating our liquidity and capitalresources as of the periods presented:37 Fiscal Year Ended December 30, 2018 December 31, 2017 January 1, 2017 (in thousands)Net cash provided by operating activities $86,790 $104,297 $118,955Net cash used in investing activities (79,284) (93,712) (98,439)Net cash used in financing activities (11,547) (5,030) (10,095)Effect of foreign exchange rate changes on cash 50 466 216Change in cash and cash equivalents $(3,991) $6,021 $10,637Cash paid for interest $72,966 $64,675 $64,614Cash paid for income taxes, net $1,054 $7,136 $10,728 December 30, 2018 December 31, 2017 (in thousands)Cash and cash equivalents $63,170 $67,200Restricted cash $151 $112Term loan facility $723,900 $731,500Senior notes $255,000 $255,000Net availability on undrawn revolving credit facility $141,000 $140,100Funds generated by our operating activities and available cash and cash equivalents continue to be our primary sources of liquidity. We believethese sources of liquidity will be sufficient to finance our strategic plan and capital initiatives for the next twelve months. However, in the event of a materialdecline in our sales trends or operating margins, there can be no assurance that we will generate sufficient cash flows at or above our current levels. Ourrevolving credit facility is also available for additional working capital needs and investment opportunities. Our ability to access our revolving credit facilityis subject to our compliance with the terms and conditions of the credit agreement governing such facility, including our compliance with certain prescribedcovenants, as more fully described below.As of December 30, 2018, we had no borrowings outstanding and a $9.0 million of letter of credit issued but undrawn under the revolving creditfacility, leaving $141.0 million in borrowing capacity under the revolving credit facility as of December 30, 2018. As of December 31, 2017, we had noborrowings outstanding and $9.9 million of letters of credit issued but undrawn under the revolving credit facility. On May 8, 2018 we extended the maturityon $95.0 million of the revolving credit facility through November 16, 2020 from February 14, 2019, whereas. The remaining $55 million matured onFebruary 14, 2019. Our primary uses for cash provided by operating activities relate to funding our ongoing business activities, planned capital expenditures, servicingour debt, and the payment of income taxes.Our strategic plan does not require that we enter into any material development or contractual purchase obligations. Therefore, we have theflexibility necessary to manage our liquidity by promptly deferring or curtailing any planned capital spending.We monitor the capital markets and our capital structure and make changes from time to time, with the goal of maintaining financial flexibility,preserving or improving liquidity and/or achieving cost efficiency. From time to time we may elect to repurchase our outstanding debt, including repurchasesof our senior notes, for cash through open market repurchases or privately negotiated transactions with certain of our debtholders, although there is noassurance we will do so.Sources and Uses of Cash - Fiscal 2018 Compared to Fiscal 2017Net cash provided by operating activities was $86.8 million in Fiscal 2018 and $104.3 million in Fiscal 2017. The decrease in net cash provided byoperating activities is primarily due to a decrease an increase in our net loss, excluding the adjustment to our deferred taxes resulting from the enactment ofthe TCJA in Fiscal 2017, and fluctuations in working capital, partially offset by a reduction in income taxes receivable.Net cash used in investing activities was $79.3 million in Fiscal 2018 and $93.7 million in Fiscal 2017. Net cash used in investing activities inFiscal 2018 and Fiscal 2017 relates primarily to capital expenditures.38Net cash used in financing activities was $11.5 million in Fiscal 2018 and primarily related to principal payments on our term loan and lease relatedobligations. Net cash used in financing activities of $5.0 million in Fiscal 2017 related primarily to principal payments on our term loan and lease relatedobligations, partially offset by sale leaseback proceeds of $4.1 million and a $1.4 million return of capital.Sources and Uses of Cash - Fiscal 2017 Compared to Fiscal 2016Net cash provided by operating activities was $104.3 million in Fiscal 2017 and $119.0 million in Fiscal 2016. The decrease in net cash providedby operating activities is primarily due to a decrease in net income, excluding the adjustment to our deferred taxes resulting from the enactment of the TCJA,and fluctuations in working capital.Net cash used in investing activities was $93.7 million in Fiscal 2017 and $98.4 million in Fiscal 2016. Net cash used in investing activities inFiscal 2017 and Fiscal 2016 relates primarily to capital expenditures.Net cash used in financing activities was $5.0 million in Fiscal 2017 and related primarily to principal payments on our term loan and lease relatedobligations, partially offset by sale leaseback proceeds of $4.1 million and a $1.4 million return of capital. Net cash used in financing activities was $10.1million in Fiscal 2016 and related primarily to principal payments on our term loan and lease related obligations.Debt FinancingSecured Credit FacilitiesOur secured credit facilities include (i) a $760.0 million term loan facility with a maturity date of February 14, 2021 (the “term loan facility”) and (ii)a $150.0 million senior secured revolving credit facility with an original maturity date of February 14, 2019, which includes a letter of credit sub-facility anda $30.0 million swingline loan sub-facility (the “revolving credit facility” and together with the term loan facility, the “secured credit facilities”). On May 8,2018 we entered into an incremental assumption agreement with certain of our revolving credit facility lenders to extend the maturity on $95.0 million of therevolving credit facility through November 16, 2020. In connection with the extension of the maturity date, we agreed to the following covenants for thebenefit of the revolving facility lenders: (a) with respect to each fiscal year (commencing with the fiscal year ending December 30, 2018), we are required tomake a mandatory prepayment of term loan principal to the extent that 75% of our excess cash flow (as defined in the secured credit facilities agreement andsubject to step-downs based on our net first lien senior secured leverage ratio) exceeds $10 million and any such required mandatory payment shall bereduced by any optional prepayments of principal that may have occurred during the fiscal year, and (b) we shall not incur additional first lien senior secureddebt in connection with certain acquisitions, mergers or consolidations unless our net first lien senior secured leverage ratio is not greater than 3.65 to 1.00on a pro forma basis. The maturity date of the amount of the revolving credit facility that was not extended remains February 14, 2019. All borrowings underour revolving credit facility are subject to the satisfaction of customary conditions, including the absence of a default and the accuracy of representations andwarranties.We may request one or more incremental term loan facilities and/or increase commitments under our revolving credit facility in an aggregate amountof up to the sum of (a) $200.0 million plus (b) such additional amount so long as, (i) in the case of loans under additional credit facilities that rank equallyand without preference with the liens on the collateral securing the secured credit facilities, our consolidated net first lien senior secured leverage ratio wouldbe no greater than 4.25 to 1.00 and (ii) in the case of loans under additional credit facilities that rank junior to the liens on the collateral securing the securedcredit facilities, our consolidated total net secured leverage ratio would be no greater than 5.25 to 1.00, subject to certain conditions, and receipt ofcommitments by existing or additional lenders.The secured credit facilities require scheduled quarterly payments on the term loan facility equal to 0.25% of the original principal amount of theterm loan facility from July 2014 to December 2020, with the balance paid at maturity, February 14, 2021. We may voluntarily repay outstanding loans underthe secured credit facilities at any time, without prepayment premium or penalty, except in connection with a repricing event subject to customary“breakage” costs with respect to London Interbank Offered Rate (“LIBOR”) loans.As of December 30, 2018, we had no borrowings outstanding and $9.0 million of letter of credit issued but undrawn under the revolving creditfacility leaving $141.0 million in borrowing capacity under the revolving credit facility as of December 30, 2018. As of December 31, 2017, we had noborrowings outstanding and $9.9 million of letter of credit issued but undrawn under the revolving credit facility.Borrowings under the secured credit facilities bear interest at a rate equal to, at our option, either (a) LIBOR determined by reference to the costs offunds for Eurodollar deposits for the interest period relevant to such borrowings, adjusted for certain additional costs, subject to a 1.00% floor in the case ofterm loans or (b) a base rate determined by reference to the highest of (i) the federal funds effective rate plus 0.50%; (ii) the prime rate of Deutsche Bank AGNew York Branch; and (iii) the one-month adjusted LIBOR plus 1.00%, in each case plus an applicable margin. The base applicable margin is 3.25%39with respect to LIBOR borrowings and 2.25% with respect to base rate borrowings under the term loan facility, and base rate borrowings and swinglineborrowings under the revolving credit facility. The applicable margin for LIBOR borrowings under the term loan facility is subject to one step-down from3.25% to 3.00%, based on our net first lien senior secured leverage ratio. The applicable margin for LIBOR borrowings under the revolving credit facility issubject to two step-downs from 3.25% to 3.00% and 2.75% based on our net first lien senior secured leverage ratio. During Fiscal 2018, the applicable marginfor LIBOR borrowings under both the term loan facility and revolving credit facility was 3.25% and during Fiscal 2017 the applicable margin was 3.00%under both the term loan facility and the revolving facility until November 16, 2017, when the applicable margin returned to its current rate of 3.25% forboth the term loan facility and revolving credit facility. During Fiscal 2018, the federal funds rate ranged from 1.34% to 2.40%, the prime rate ranged from4.50% to 5.50% and the one-month LIBOR ranged from 1.55% to 2.52%.In addition to paying interest on outstanding principal under the secured credit facilities, we are required to pay a commitment fee to the lendersunder the revolving credit facility with respect to the unutilized commitments thereunder. The base applicable commitment fee under the revolving creditfacility was 0.5% per annum and was subject to one step-down from 0.5% to 0.375% based on our net first lien senior secured leverage ratio. During Fiscal2018, the commitment fee rate was 0.5% and for Fiscal 2017, the commitment fee rate was 0.375% until November 16, 2017, when it returned to its currentrate of 0.5%. We are also required to pay customary agency fees, as well as letter of credit participation fees computed at a rate per annum equal to theapplicable margin for LIBOR rate borrowings on the dollar equivalent of the daily stated amount of outstanding letters of credit, plus such letter of creditissuer’s customary processing and fronting fees computed at a rate equal to 0.125% per annum on the daily stated amount of each letter of credit.The weighted average effective interest rate incurred on our borrowings under our secured credit facilities was 5.8% for the 2018 fiscal year, 4.7% forthe 2017 fiscal year and 4.6% for the 2016 fiscal year, which includes amortization of debt issuance costs related to our secured credit facilities, amortizationof our term loan facility original issue discount, and commitment and other fees related to our secured credit facilities.Obligations under the secured credit facilities are unconditionally guaranteed by Parent on a limited-recourse basis and each of our existing andfuture direct and indirect material, wholly-owned domestic subsidiaries, subject to certain exceptions. The obligations are secured by a pledge of our capitalstock and substantially all of our assets and those of each subsidiary guarantor, including capital stock of the subsidiary guarantors and 65.0% of the capitalstock of the first-tier foreign subsidiaries that are not subsidiary guarantors, in each case subject to exceptions. Such security interests consist of a first-prioritylien with respect to the collateral. The secured credit facilities also contain customary covenants and events of default. The covenants limit our ability to,among other things:(i) incur additional debt or issue certain preferred shares;(ii) create liens on certain assets;(iii) make certain loans or investments (including acquisitions);(iv) pay dividends on or make distributions in respect of our capital stock or make other restricted payments;(v) consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;(vi) sell assets;(vii) enter into certain transactions with our affiliates;(viii) enter into sale-leaseback transactions;(ix) change our lines of business;(x) restrict dividends from our subsidiaries or restrict liens;(xi) change our fiscal year; and(xii) modify the terms of certain debt or organizational agreements.Our revolving credit facility includes a springing financial maintenance covenant that requires our net first lien senior secured leverage ratio not toexceed 6.25 to 1.00 (the ratio of consolidated net debt secured by first-priority liens on the collateral to last twelve month’s EBITDA, as defined in the SeniorCredit Facilities). The covenant will be tested quarterly when the revolving credit facility is more than 30.0% drawn (excluding outstanding letters of credit)and will be a condition to drawings under the revolving credit facility that would result in more than 30.0% drawn thereunder.Senior Unsecured NotesOur senior unsecured notes consist of $255.0 million aggregate principal amount borrowings of 8.000% Senior Notes due 2022 (the “senior notes”)and mature on February 15, 2022. The senior notes are registered under the Securities Act, do not40bear legends restricting their transfer and are not entitled to registration rights under our registration rights agreement. As of February 15, 2017, we mayredeem some or all of the senior notes at certain redemption prices set forth in the indenture governing the senior notes (the “indenture”).Our obligations under the senior notes are fully and unconditionally guaranteed, jointly and severally, by our present and future direct and indirectwholly-owned material domestic subsidiaries that guarantee our secured credit facilities.The indenture contains restrictive covenants that limit our ability to, among other things: (i) incur additional debt or issue certain preferred shares;(ii) create liens on certain assets; (iii) make certain loans or investments (including acquisitions); (iv) pay dividends on or make distributions in respect of ourcapital stock or make other restricted payments; (v) consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; (vi) sell assets; (vii)enter into certain transactions with our affiliates; and (viii) restrict dividends from our subsidiaries.The weighted average effective interest rate incurred on borrowings under our senior notes was 8.2% for the 2018, 2017 and 2016 fiscal years, whichincludes amortization of debt issuance costs and other fees related to our senior notes.Capital ExpendituresWe intend to continue to focus our future capital expenditures on reinvestment into our existing Company-operated Chuck E. Cheese’s and PPPvenues through various planned capital initiatives and the development or acquisition of additional Company-operated venues. During Fiscal 2018, wecompleted 268 game enhancements and 31 major remodels, of which 25 related to the re-imaging effort to update Chuck E. Cheese locations to a new lookand feel.We have funded and expect to continue to fund our capital expenditures through existing cash flows from operations. Capital expenditures in 2018totaled approximately $79.8 million.The following table reconciles the approximate total capital spend by initiative to our Consolidated Statements of Cash Flows for the periodspresented: Fiscal Year Ended December 30, 2018 December 31, 2017 January 1, 2017 Growth capital spend (1) $31,269 $51,079 $55,200Maintenance capital spend (2) 44,656 35,678 33,838IT capital spend 3,919 7,309 10,058Total Capital Spend $79,844 $94,066 $99,096__________________(1)Growth capital spend includes our Play Pass initiative, major remodels, venue expansions, major attractions and new venue development, including relocations and franchiseacquisitions.(2)Maintenance capital spend includes game enhancements, general venue capital expenditures and corporate capital expenditures.We currently estimate our capital expenditures in 2019 will total approximately $95 million to $105 million, inclusive of maintenance capital,growth capital and IT related capital.41Off-Balance Sheet Arrangements and Contractual ObligationsAs of December 30, 2018, 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 obligations as of December 30, 2018: Payments Due by Period Total Less than1 Year 1-3Years 4-5Years More than5 Years (in thousands)Operating leases (1)$901,598 $92,435 $179,897 $171,989 $457,277Secured credit facilities723,900 7,600 716,300 — —Sale leaseback obligations257,017 14,083 29,001 30,196 183,737Senior notes255,000 — — 255,000 —Interest obligations (2)162,399 60,001 92,198 10,200 —Purchase Obligations (3)40,486 31,310 8,233 943 —Capital leases24,002 2,182 4,415 4,139 13,266Uncertain tax positions (4)343 343 — — —$2,364,745 $207,954 $1,030,044 $472,467 $654,280 __________________(1)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 andobligations to pay property taxes, insurance and maintenance on the leased assets.(2)Interest obligations represent an estimate of future interest payments under our secured credit facilities and senior notes. We calculated the estimate based on the terms of thesecured credit facilities and senior notes. Our estimate uses interest rates in effect during Fiscal 2018 and assumes we will not have any amounts drawn on our revolvingcredit facility.(3)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 be purchased; (b) fixed, minimum or variable price provisions; and (c) the approximate timing of the transaction. Our purchaseobligations primarily consist of obligations for the purchase of merchandise and entertainment inventory, obligations under fixed price purchase agreements and contractswith “spot” market prices primarily relating to food and beverage products, obligations for the purchase of commercial airtime, and obligations associated with themodernization of various information technology platforms. The above purchase obligations exclude agreements that are cancelable without significant penalty.(4)Due to the uncertainty related to the settlement of uncertain tax positions, only the current portion of the liability for unrecognized tax benefits (including accrued interestand penalties) has been provided in the table above. The non-current portion of $5.1 million is excluded from the table above.As of December 30, 2018, unpaid obligations related to capital expenditures totaling $2.4 million were outstanding and included in accountspayable. These amounts are expected to be paid in less than one year.The total estimate of accrued liabilities for our self-insurance programs was $14.7 million as of December 30, 2018. We estimate that $4.8 million ofthese liabilities will be paid in fiscal 2018 and the remainder paid in fiscal 2019 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, 2018, we had $9.0 million of letters of credit issued but undrawn under the revolving credit facility. We utilize letters of creditprimarily for our self-insurance programs. These letters of credit do not represent additional obligations of the Company since the underlying liabilities arealready recorded in accrued liabilities. However, if we were unable to pay insurance claims when due, our insurance carrier could demand for paymentpursuant to these letters of credit.In addition, see further discussion of our indebtedness and future debt obligations above under “Financial Condition, Liquidity and CapitalResources - Debt Financing.”We enter into various purchase agreements in the ordinary course of business and have fixed price agreements and contracts with “spot” marketprices primarily relating to food and beverage products. Other than the purchase obligations included in the above table, we do not have any materialcontracts (either individually or in the aggregate) in place committing us to a minimum or fixed level of purchases or that are cancelable subject tosignificant penalty.42InflationOur cost of operations, including but not limited to labor, food products, supplies, utilities, financing and rental costs, can be significantly affectedby inflationary factors.Critical Accounting Policies and EstimatesOur consolidated financial statements are prepared in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affectthe reported amount of our assets and liabilities at the date of our consolidated financial statements, the reported amount of revenues and expenses during thereporting period and the related disclosures of contingent assets and liabilities. The use of estimates is pervasive throughout our consolidated financialstatements and is affected by management judgment and uncertainties. Our estimates, assumptions and judgments are based on historical experience, currentmarket trends and other factors that we believe to be relevant and reasonable at the time our consolidated financial statements were prepared. We continuallyevaluate the information used to make these estimates as our business and the economic environment change. Actual results could differ materially fromthese 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 ofBusiness and Summary of Significant Accounting Policies” included in Part II, Item 8. “Financial Statements and Supplementary Data.” We consider anaccounting policy or estimate to be critical if it requires difficult, subjective or complex judgments and is material to the portrayal of our consolidatedfinancial condition, changes in financial condition or results of operations. The selection, application and disclosure of the critical accounting policies andestimates have been reviewed by the Audit Committee of our Board of Directors. Our accounting policies and estimates that our management considers mostcritical are as follows:Goodwill and Other Intangible AssetsThe excess of the purchase price over fair value of net identifiable assets and liabilities of an acquired business (“goodwill”), trademarks, tradenames and other indefinite-lived intangible assets are not amortized, but rather tested quantitatively and qualitatively for impairment, at least annually, andwhenever events or circumstances indicate that impairment may have occurred. Events or circumstances that could trigger an impairment review include, butare not limited to, a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, significant changesin competition, a loss of key personnel, significant changes in our use of the acquired assets or the strategy for our overall business, significant negativeindustry or economic trends, or significant under-performance relative to expected historical or projected future results of operations. We determined that notriggering events occurred during Fiscal 2018.Recoverability of the carrying value of goodwill is measured at the reporting unit level. In performing a quantitative analysis, we measure therecoverability of goodwill for our reporting units using a discounted cash flow model incorporating discount rates commensurate with the risks involved,which is classified as a Level 3 fair value measurement. The key assumptions used in the discounted cash flow valuation model include discount rates,growth rates, tax rates, cash flow projections and terminal value rates. Discount rates, growth rates and cash flow projections are the most sensitive andsusceptible to change as they require significant management judgment.We test indefinite-lived intangible assets utilizing the relief from royalty method to determine the estimated fair value for each indefinite-livedintangible asset, which is classified as a Level 3 fair value measurement. The relief from royalty method estimates our theoretical royalty savings fromownership of the intangible asset. Key assumptions used in this model include discount rates, royalty rates, growth rates, tax rates, sales projections andterminal value rates. Discount rates, royalty rates, growth rates and sales projections are the assumptions most sensitive and susceptible to change as theyrequire significant management judgment. Discount rates used are similar to the rates estimated by the weighted average cost of capital considering anydifferences in company-specific risk factors.We tested our goodwill, trademarks, trade names and other indefinite-lived intangible assets for impairment as of October 1, 2018. The fair value ofour goodwill, trademarks, trade names and other indefinite-lived intangible assets was in excess of the carrying value as of the date of our Fiscal 2018goodwill impairment test. No indicators of impairment were identified from the date of our impairment test through the end of Fiscal 2018.Impairment of Long-Lived AssetsWe review our property and equipment for indicators of impairment on an ongoing basis at the lowest level of cash flows available, which is on avenue-by-venue basis, to assess if the carrying amount may not be recoverable. Such events or changes may include a significant change in the businessclimate in a particular market area (for example, due to economic downturn or natural disaster), historical negative cash flows or plans to dispose of or sell theproperty and equipment before the43end of its previously estimated useful life. If an event or change in circumstances occurs, we estimate the future cash flows expected to result from the use ofthe property and equipment and its eventual disposition. If the sum of the expected future cash flows, undiscounted and without interest, is less than the assetcarrying amount (an indication that the carrying amount may not be recoverable), we may be required to recognize an impairment loss. We estimate the fairvalue of a venue’s property and equipment by discounting the expected future cash flows of the venue over its remaining lease term using a weighted averagecost of capital commensurate with the risk.The following estimates and assumptions used in the discounted cash flow analysis impact the fair value of a venue’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 venue;•salvage values; and•other risks and qualitative factors specific to the asset or conditions in the market in which the asset islocated at the time the assessment was made.During Fiscal 2018, the average discount rate, average sales growth rate and average cash flow margin growth rate used were 8.1%, 0.0% and 0.0%,respectively. We believe our assumptions in calculating the fair value of our long-lived assets are similar to those used by other marketplace participants. Ifactual results are not consistent with our estimates and assumptions, we may be exposed to additional impairment charges, which could be material to ourConsolidated Statements of Earnings.Estimation of ReservesThe liabilities 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 historical 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, general liability, property, and company-sponsoredemployee health plans. Liabilities associated with risks retained by the Company are estimated primarily using historical claims experience, current claimsdata, demographic and severity factors, other factors deemed relevant by us, as well as information provided by independent third-party actuaries. To limitour exposure for certain losses, we purchase stop-loss or high-deductible insurance coverage through third-party insurers. Our stop-loss limit or deductiblesfor workers’ compensation, general liability, property, and company-sponsored employee health plans, generally range from $0.2 million to $0.5 million peroccurrence. As of December 30, 2018, our total estimate of accrued liabilities for our self-insurance and high deductible plan programs was $14.7 million. Weestimate approximately $4.8 million of these liabilities will be paid in fiscal 2019 and the remainder paid in fiscal 2020 and beyond. If actual claims trends orother factors differ from our estimates, our financial results could be significantly impacted.Income tax reserves. We are subject to audits from multiple domestic and foreign tax authorities. We maintain reserves for federal, state and foreignincome taxes when we believe a position may not be fully sustained upon review by taxing authorities. Although we believe that our tax positions are fullysupported by the applicable tax laws and regulations, there are matters for which the ultimate outcome is uncertain. We recognize the benefit from anuncertain tax position in our consolidated financial statements when the position is more-likely-than-not (a greater than 50 percent chance of beingsustained). The amount recognized is measured using a probability weighted approach and is the largest amount of benefit that is greater than 50 percentlikelihood of being realized upon settlement or ultimate resolution with the taxing authority. We routinely assess the adequacy of the estimated liability forunrecognized tax benefits, which may be affected by changing interpretations of laws, rulings by tax authorities and administrative policies, certain changesand/or developments with respect to audits and expirations of the statute of limitations. Depending on the nature of the tax issue, the ultimate resolution ofan uncertain tax position may not be known for a number of years; therefore, the estimated reserve balances could be included on our Consolidated BalanceSheets for multiple years. To the extent that new information becomes available that causes us to change our judgment regarding the adequacy of a reservebalance, such a change will affect our income tax expense or benefit in the period in which the determination is made and the reserve is adjusted. Significantjudgment is required to estimate our provision for income taxes and liability for unrecognized tax benefits. At December 30, 2018, the reserve for uncertaintax positions (unrecognized tax benefits) was $4.3 million and the related interest and penalties was $1.1 million. Although we believe our approach isappropriate, there can be no assurance that the final outcome resulting from a tax44authority’s review will not be materially different than the amounts reflected in our estimated tax provision and tax reserves. If the results of any auditmaterially differ from the liabilities we have established for taxes, there would be a corresponding impact to our consolidated financial statements, includingthe liability for unrecognized tax benefits, current tax provision, effective tax rate, net after tax earnings and cash flows, in the period of resolution.Accounting for LeasesThe majority of our venues are leased. The terms of our venue leases vary in length from lease to lease, although a typical lease provides for aninitial primary 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 renewaloptions, in addition to the initial non-cancelable lease term, if the renewal is reasonably assured. Generally, “reasonably assured” relates to our contractualright to renew and the existence of an economic penalty that would preclude the abandonment of the lease at the end of the initial non-cancelable leaseterm. The expected term is used in the determination of whether a lease is a capital or operating lease and in the calculation of straight-line rentexpense. Additionally, the useful life of leasehold improvements is limited by the expected lease term or the economic life of the asset, whichever isshorter. If significant expenditures are made for leasehold improvements late in the expected term of a lease and renewal is reasonably assured, the useful lifeof the leasehold improvement is limited to the end of 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 ofa venue’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.With the adoption of the new Accounting Standards Update 2016-02, Leases (Topic 842), effective December 31, 2018, we will be required torecognize lease assets and lease liabilities on the balance sheet. The determination of the lease liabilities will require us to estimate the present value of ourfuture lease commitments over their reasonably assured remaining lease term using a weighted average incremental borrowing rate commensurate with therate of interest we would have to pay to borrow on a collateralized basis over a similar term an amount equal to our future lease payments in a similareconomic environment.Recently Issued Accounting GuidanceRefer to Note 1. “Description of Business and Summary of Significant Accounting Policies” to our consolidated financial statements included inPart II, Item 8. “Financial Statements and Supplementary Data” of this Annual Report for a description of recently issued accounting guidance.45ITEM 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 fluctuation.Interest Rate RiskWe are exposed to market risk from changes in the variable interest rates related to borrowings under our secured credit facilities. All of ourborrowings outstanding under the secured credit facilities, $723.9 million as of December 30, 2018, accrue interest at variable rates. Assuming the revolvingcredit facility remains undrawn, each 1% change in assumed interest rates, excluding the impact of our 1% interest rate floor, would result in a $7.2 millionchange in annual interest expense on indebtedness under the secured credit facilities.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,which can vary throughout the year due to changes in supply, demand and other factors. We have not entered into any hedging arrangements to reduce ourexposure to commodity price volatility associated with such commodity prices; however, we typically enter into short-term purchasing contracts, which maycontain pricing arrangements designed to minimize the impact of commodity price fluctuations, and derivative instruments such as futures contracts tomitigate our exposure to commodity price fluctuations. For Fiscal 2018 and Fiscal 2017, our average cost of a block of cheese was $1.75 and $1.79,respectively. The estimated increase in our food costs from a hypothetical 10% increase in our average cost of a block of cheese would have been $1.0million and $1.2 million for Fiscal 2018 and Fiscal 2017, respectively. For Fiscal 2018 and Fiscal 2017, the average cost of dough per pound was $0.48 and$0.45, respectively. The estimated increase in our food costs from a hypothetical 10% increase in the average cost of dough per pound would have been $0.5million for both Fiscal 2018 and Fiscal 2017.Foreign Currency RiskWe are exposed to foreign currency fluctuation risk associated with changes in the value of the Canadian dollar relative to the U.S. dollar as weoperate a total of 11 Company-operated venues in Canada. For Fiscal 2018, our Canadian venues generated an operating loss of $0.9 million compared to ourconsolidated operating income of $50.8 million.Changes in the currency exchange rate result in cumulative translation adjustments and are included in “Accumulated other comprehensive income(loss)” on our Consolidated Balance Sheets and potentially result in transaction gains or losses, which are included in our earnings. The low and highcurrency exchange rates for a Canadian dollar into a U.S. dollar for the fiscal year ended December 30, 2018 were $0.7326 and $0.8143, respectively. Ahypothetical 10% devaluation in the average quoted U.S. dollar-equivalent of the Canadian dollar exchange rate during Fiscal 2018 would have increasedour reported consolidated operating results by $0.1 million.46ITEM 8. Financial Statements.REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Stockholder and the Board of Directors of CEC Entertainment, Inc.Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of CEC Entertainment, Inc. (the "Company") as of December 30, 2018and December 31, 2017, the related consolidated statements of earnings, comprehensive income (loss), changes in stockholder’sequity, and cash flows, for each of the three years in the period ended December 30, 2018, and the related notes (collectively referredto as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position ofthe Company as of December 30, 2018 and December 31, 2017, and the results of its operations and its cash flows for each of the threeyears in the period ended December 30, 2018, in conformity with accounting principles generally accepted in the United States ofAmerica.Change in Accounting PrincipleAs discussed in Note 1 to the financial statements, the Company has changed its method of accounting for revenue in 2018 due to theadoption of Accounting Standards Codification No. 606, Revenue from Contracts with Customers.Basis for OpinionThese financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on theCompany's financial statements based on our audits. We are a public accounting firm registered with the Public Company AccountingOversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. TheCompany is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part ofour audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressingan opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to erroror fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidenceregarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles usedand significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believethat our audits provide a reasonable basis for our opinion./s/ Deloitte & Touche LLPDallas, TexasMarch 11, 2019We have served as the Company's auditor since 1987.47CEC ENTERTAINMENT, INC.CONSOLIDATED BALANCE SHEETS(in thousands, except share information)December 30, 2018December 31, 2017ASSETSCurrent assets:Cash and cash equivalents$63,170$67,200Restricted cash 151 112Accounts receivable24,02020,061Income taxes receivable 10,160 10,960Inventories23,80722,000Prepaid expenses25,42420,398Total current assets146,732140,731Property and equipment, net539,185570,021Goodwill484,438484,438Intangible assets, net477,085480,377Other noncurrent assets18,72519,477Total assets$1,666,165$1,695,044LIABILITIES AND STOCKHOLDER’S EQUITY Current liabilities: Bank indebtedness and other long-term debt, current portion$7,600$7,600Capital lease obligations, current portion677596Accounts payable31,41031,374Accrued expenses36,03036,616Unearned revenues18,12421,050Accrued interest7,4638,277Other current liabilities5,2784,776Total current liabilities106,582110,289Capital lease obligations, less current portion12,33013,010Bank indebtedness and other long-term debt, net of deferred financing costs, less current portion961,514965,213Deferred tax liability, net107,058114,186Accrued insurance9,8618,311Other noncurrent liabilities226,249221,887Total liabilities1,423,5941,432,896Stockholder’s equity: Common stock, $0.01 par value; authorized 1,000 shares; 200 shares issued as of December 30, 2018and December 31, 2017——Capital in excess of par value359,570359,233Accumulated deficit(115,660)(95,199)Accumulated other comprehensive loss(1,339)(1,886)Total stockholder’s equity242,571262,148Total liabilities and stockholder’s equity$1,666,165$1,695,044The accompanying notes are an integral part of these Consolidated Financial Statements.48CEC ENTERTAINMENT, INCCONSOLIDATED STATEMENTS OF EARNINGS(in thousands) Fiscal Year EndedDecember 30, 2018December 31, 2017January 1, 2017REVENUES:Food and beverage sales$396,658$410,609$415,059Entertainment and merchandise sales478,676458,279490,255Total company venue sales875,334868,888905,314Franchise fees and royalties20,73217,88318,339Total revenues896,066886,771923,653OPERATING COSTS AND EXPENSES: Company venue operating costs (excluding Depreciation andamortization): Cost of food and beverage94,31997,570104,315Cost of entertainment and merchandise36,65029,94832,014Total cost of food, beverage, entertainment andmerchandise130,969127,518136,329Labor expenses256,327248,061251,426Rent expense96,48495,91796,006Other venue operating expenses150,255149,462148,869Total company venue operating costs634,035620,958632,630Other costs and expenses: Advertising expense48,19848,37946,142General and administrative expenses54,85056,48261,011Depreciation and amortization100,720 109,771 119,569Transaction, severance and related litigation costs5271,4481,299Asset impairments6,9351,8431,550Total operating costs and expenses845,265838,881862,201Operating income50,80147,89061,452Interest expense76,28369,11567,745Loss before income taxes(25,482)(21,225)(6,293)Income tax benefit(5,021)(74,291)(2,626)Net income (loss)$(20,461)$53,066$(3,667)The accompanying notes are an integral part of these Consolidated Financial Statements.49CEC ENTERTAINMENT, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)(in thousands) Fiscal Year Ended December 30, 2018 December 31, 2017 January 1, 2017Net income (loss) $(20,461) $53,066 $(3,667)Components of other comprehensive income (loss), net of tax: Foreign currency translation adjustments 547 1,010 420Comprehensive income (loss) $(19,914) $54,076 $(3,247)The accompanying notes are an integral part of these Consolidated Financial Statements.50CEC ENTERTAINMENT, INC.CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY(in thousands, except share amounts)Common Stock Capital InExcess ofPar Value AccumulatedDeficit AccumulatedOtherComprehensiveIncome (Loss) Shares Amount Total (in thousands, except share information)Balance at January 3, 2016200 $— $356,460 $(144,598) $(3,316) $208,546Net loss— — — (3,667) — (3,667)Other comprehensive income— — — — 420 420Stock-based compensation costs— — 702 — — 702Tax benefit recognized from stock-based compensation awards— — 4 — — 4Balance at January 1, 2017200 $— $357,166 $(148,265) $(2,896) $206,005Net income— — — 53,066 — 53,066Other comprehensive income— — — — 1,010 1,010Stock-based compensation costs— — 620 — — 620Return of capital— — 1,447 — — 1,447Balance at December 31, 2017200 $— $359,233 $(95,199) $(1,886) $262,148Net loss— — — (20,461) — (20,461)Other comprehensive income— — — — 547 547Stock-based compensation costs— — 337 — — 337Balance at December 30, 2018200 $— $359,570 $(115,660) $(1,339) $242,571The accompanying notes are an integral part of these Consolidated Financial Statements.51CEC ENTERTAINMENT, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS, CONT'D(in thousands)CEC ENTERTAINMENT, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Fiscal Year EndedDecember 30, 2018 December 31, 2017 January 1, 2017CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)$(20,461) $53,066 $(3,667)Adjustments to reconcile net income (loss) to net cash provided byoperating activities: Depreciation and amortization100,720 109,771 119,569Deferred income taxes(8,182) (71,875) (15,521)Stock-based compensation expense324 606 689Amortization of lease-related liabilities(993) (632) (448)Amortization of original issue discount and deferred financingcosts4,344 4,546 4,546Loss on asset disposals, net3,436 7,398 8,520Asset impairments6,935 1,843 1,550 Non-cash rent expenses5,372 4,884 6,873Other adjustments768 322 (70)Changes in operating assets and liabilities: Accounts receivable(4,532) (809) 2,657Inventories(1,833) (3,964) (3,413)Prepaid expenses(686) 3,173 (4,012)Accounts payable(2,172) 3,110 (7,601)Accrued expenses2,534 (4,744) 1,733Unearned revenues(2,917) 5,647 5,167Accrued interest(569) (70) (1,454)Income taxes (receivable) payable2,107 (9,554) 2,169Deferred landlord contributions2,595 1,579 1,668Net cash provided by operating activities86,790 104,297 118,955CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment(77,088) (90,958) (88,680)Development of internal use software(2,756) (3,243) (10,455)Proceeds from sale of property and equipment560 489 696Net cash used in investing activities(79,284) (93,712) (98,439)CASH FLOWS FROM FINANCING ACTIVITIES: Repayments on senior term loan(7,600) (7,600) (7,600)Repayments on note payable— (13) (50)Proceeds from sale leaseback transaction— 4,073 —Payment of debt financing costs(442) — —Payments on capital lease obligations(595) (467) (421)Payments on sale leaseback obligations(2,910) (2,470) (2,028)Excess tax benefit realized from stock-based compensation— — 4Return of Capital—1,447 —Net cash used in financing activities(11,547)(5,030) (10,095)Effect of foreign exchange rate changes on cash50466 216Change in cash, cash equivalents and restricted cash(3,991)6,021 10,637Cash, cash equivalents and restricted cash at beginning of period67,31261,291 50,654Cash, cash equivalents and restricted cash at end of period$63,321$67,312 $61,291 52CEC ENTERTAINMENT, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS, CONT'D(in thousands)December 30, 2018 December 31, 2017 January 1, 2017SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest$72,966$64,675 $64,614Cash paid for income taxes, net$1,054$7,136 $10,728NON-CASH INVESTING AND FINANCING ACTIVITIES: Accrued construction costs$2,402$1,007 $1,651The accompanying notes are an integral part of these Consolidated Financial Statements.53CEC ENTERTAINMENT, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 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 and Peter PiperPizza family dining and entertainment centers (also referred to as “venues”) in a total of 47 states and 14 foreign countries and territories. As of December 30,2018 we and our franchisees operated a total of 750 venues, of which 554 were Company-operated venues located in 44 states and Canada. Our franchiseesoperated a total of 196 venues located in 15 states and 13 foreign countries and territories, including Chile, Colombia, Guam, Guatemala, Honduras, Mexico,Panama, Peru, Puerto Rico, Saudi Arabia, Trinidad & Tobago, and the United Arab Emirates. As of December 30, 2018, a total of 181 Chuck E. Cheese'svenues are located in California, Texas, and Florida (178 are Company-operated and three are franchised locations), and a total of 135 Peter Piper Pizzavenues are located in Arizona, Texas, and Mexico (34 are Company-operated and 101 are franchised locations). The use of the terms “CEC Entertainment,”“we,” “us” and “our” throughout these Notes to Consolidated Financial Statements refer to the Company.All of our venues utilize a consistent restaurant-entertainment format that features both family dining and entertainment areas with the same generalmix of food, beverages, entertainment and merchandise. The economic characteristics, products and services, preparation processes, distribution methods andtypes of customers are substantially similar for each of our venues. Therefore, we aggregate each venue’s operating performance into one reportable segmentfor financial reporting purposes.Basis of Presentation: All intercompany accounts and transactions have been eliminated in consolidation.The Company has a controlling financial interest in International Association of CEC Entertainment, Inc. (the “Association”), a VIE. TheAssociation primarily administers the collection and disbursement of funds (the “Association Funds”) used for advertising, entertainment and mediaprograms that benefit both us and our Chuck E. Cheese’s franchisees. We and our franchisees are required to contribute a percentage of gross sales to thesefunds and could be required to make additional contributions to fund any deficits that may be incurred by the Association. We include the Association in ourConsolidated Financial Statements, as we concluded that we are the primary beneficiary of its variable interests because we (a) have the power to direct themajority of its significant operating activities; (b) provide it unsecured lines of credit; and (c) own the majority of the venues that benefit from theAssociation’s advertising, entertainment and media expenditures. We eliminate the intercompany portion of transactions with VIE’s from our financialresults. The assets, liabilities and operating results of the Association are not material to our Consolidated Financial Statements.The Association Funds are required to be segregated and used for specified purposes. Cash balances held by the Association are restricted for use inour advertising, entertainment and media programs, and are recorded as “Restricted cash” on our Consolidated Balance Sheets. Contributions to theadvertising, entertainment and media funds from our franchisees were $2.2 million and $2.1 million for the year ended December 30, 2018 and December 31,2017, respectively. Cash balances held by the Association are restricted for use in our advertising, entertainment and media programs, and are recorded as“Restricted cash” on our Consolidated Balance Sheets.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, exceptfor a 53 week year when the fourth quarter has 14 weeks. The fiscal years ended December 30, 2018, December 31, 2017 and January 1, 2017 each consistedof 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 and liabilitiesand disclosure of contingent assets and liabilities at the date of our Consolidated Financial Statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.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 theUnited States 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 consideredremote.54Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)Inventories: Inventories of food, beverages, merchandise, paper products and other supplies needed for our food service and entertainmentoperations are stated at the lower of cost on a first-in, first-out basis or net realizable value. Our cost consists of amounts paid to third party suppliers.Property and Equipment: Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation andamortization are charged to operations using the straight-line method over the assets’ estimated useful lives, which are as follows:Buildings40 yearsGame and ride equipment4 to 12 yearsNon-technical play equipment15 to 20 yearsFurniture, fixtures and other equipment4 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 relatedassets. We use a consistent lease period (generally, the initial non-cancelable lease term plus renewal option periods provided for in the lease that can bereasonably assured of being exercised) when estimating the depreciable lives of leasehold improvements, in determining classification of our leases as eitheroperating or capital and in recognizing straight-line rent expense. Interest costs incurred during the construction period are capitalized and depreciated basedon the estimated useful life of the underlying asset.We review our property and equipment for indicators of impairment on an ongoing basis at the lowest level of cash flows available, which is on avenue-by-venue basis, to assess if the carrying amount may not be recoverable. Potential indicators of impairment may include a significant change in thebusiness climate in a particular market area (for example, due to economic downturn or natural disaster), historical negative cash flows or plans to dispose ofor sell the property and equipment before the end of its previously estimated useful life. If an event or change in circumstances occurs, we estimate the futurecash flows expected to result from the use of the property and equipment and its eventual disposition. If the sum of the expected future cash flows,undiscounted and without interest, is less than the asset carrying amount (an indication that the carrying amount may not be recoverable), we may be requiredto recognize an impairment loss. We estimate the fair value of a venue’s property and equipment by discounting the expected future cash flows of the venueover its remaining lease term using a weighted average cost of capital commensurate with the risk. Any impairment loss recognized equals the amount bywhich the asset carrying amount exceeds 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 fair value are not recorded. Additionally, if it is determined that the estimated remaining useful life of the asset should bedecreased, any periodic depreciation and amortization expense is adjusted based on the new carrying value of the asset unless the asset is written down tosalvage value, at which time depreciation or amortization ceases. In Fiscal 2018, Fiscal 2017 and Fiscal 2016, we recognized asset impairment charges of$6.9 million, $1.8 million, and $1.6 million, respectively.Development of Internal Use Software: We capitalize our internal and external costs that are directly attributable to the development, testing andvalidation of internal use software, such as our enterprise resource planning (ERP) system and corporate and venue related IT system initiatives. Capitalizedinternal development costs include the compensation, benefits and various office costs primarily related to our IT department. The capitalization of costsrelated to a software development project ceases once the software is ready for its intended use and the asset is amortized according to our amortizationpolicies. In Fiscal 2018, Fiscal 2017 and Fiscal 2016, we capitalized costs of $2.8 million, $3.2 million and $10.5 million, respectively, related to thedevelopment of internal use software.Capitalized Venue Development Costs: We capitalize our external and internal department costs that are directly attributable to venue developmentprojects, such as the design and construction of a new venue and the remodeling and expansion of our existing venues. Capitalized internal department costsinclude certain compensation, benefits, travel and overhead costs related to our design, construction, facilities and legal departments. We also capitalizeinterest costs in conjunction with the construction of new venues. Venue development costs are initially accumulated in our construction in progress accountuntil a project is completed. At the time of completion, the costs accumulated to date are then reclassified to property and equipment and depreciatedaccording to our depreciation policies. In Fiscal 2018, Fiscal 2017 and Fiscal 2016, we capitalized internal costs of $4.6 million, $3.5 million, and $3.4million, respectively, related to our venue development activities.Business Combinations: We allocate the purchase price of an acquisition to the tangible and intangible assets acquired and liabilities assumedbased on their estimated fair values at the acquisition date. We recognize as goodwill the amount by which the purchase price of an acquired entity exceedsthe net of the amounts assigned to the assets acquired and55Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)liabilities assumed. Fair value measurements are applied based on assumptions that market participants would use in the pricing of the asset or liability. Weinitially perform these valuations based upon preliminary estimates and assumptions by management or independent valuation specialists under oursupervision, where appropriate, and make revisions as estimates and assumptions are finalized. We record the net assets and results of operations of anacquired entity in our Consolidated Financial Statements from the acquisition date. We expense acquisition-related costs as incurred.Goodwill and Other Intangible Assets: The excess of the purchase price over fair value of net identifiable assets and liabilities of an acquiredbusiness (“goodwill”), trademarks, trade names and other indefinite-lived intangible assets are not amortized, but rather tested for impairment, at leastannually. We assess the recoverability of the carrying amount of our goodwill and other indefinite-lived intangible assets either qualitatively orquantitatively annually at the beginning of the fourth quarter of each fiscal year, or whenever events or changes in circumstances indicate that the carryingamount of the assets may not be fully recoverable.When assessing the recoverability of goodwill and other indefinite-lived intangible assets, we may first assess qualitative factors. If an initialqualitative assessment indicates that it is more likely than not the carrying amount exceeds fair value, a quantitative analysis may be required. We may alsoelect to skip the qualitative assessment and proceed directly to the quantitative analysis.Recoverability of the carrying value of goodwill is measured at the reporting unit level. A reporting unit is an operating segment, or a business unitone level below that operating segment, for which discrete financial information is prepared and regularly reviewed by management. The Company hasdetermined that the operations of Chuck E. Cheese’s and Peter Piper Pizza represent two separate reporting units for purposes of measuring the recoverabilityof the carrying value of goodwill. In performing a quantitative analysis, we measure the recoverability of goodwill using: (i) a discounted cash flow modelincorporating discount rates commensurate with the risks involved, which is classified as a Level 3 fair value measurement, and (ii) a market approach basedupon public trading and recent transaction valuation multiples for similar companies. The key assumptions used in the discounted cash flow valuation modelinclude discount rates, growth rates, tax rates, cash flow projections and terminal value rates. Discount rates, growth rates and cash flow projections are themost sensitive and susceptible to change as they require significant management judgment and are material to the financial statements.If the calculated fair value is less than the current carrying amount, impairment of the reporting unit may exist. When the recoverability test indicatespotential impairment, we calculate an implied fair value of goodwill for the reporting unit. The implied fair value of goodwill is determined in a mannersimilar to how goodwill is calculated in a business combination. If the implied fair value of goodwill exceeds the carrying amount of goodwill assigned tothe reporting unit, there is no impairment. If the carrying amount of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, animpairment loss is recorded to write down the carrying amount.In performing a quantitative analysis, recoverability is measured by a comparison of the carrying amount of the indefinite-lived intangible asset overits fair value. Any excess of the carrying amount of the indefinite-lived intangible asset over its fair value is recognized as an impairment loss.We test indefinite-lived intangible assets utilizing the relief from royalty method to determine the estimated fair value for each indefinite-livedintangible asset, which is classified as a Level 3 fair value measurement. The relief from royalty method estimates our theoretical royalty savings fromownership of the intangible asset. Key assumptions used in this model include discount rates, royalty rates, growth rates, tax rates, sales projections andterminal value rates. Discount rates, royalty rates, growth rates and sales projections are the assumptions most sensitive and susceptible to change as theyrequire significant management judgment. Discount rates used are similar to the rates estimated by the weighted average cost of capital considering anydifferences in company-specific risk factors.Intangible assets with finite lives are amortized over their estimated useful lives and are reviewed for impairment whenever events or changes incircumstances indicate that their carrying amount may not be recoverable. Estimated weighted average useful lives are 25 years for franchise agreements and10 years for favorable lease agreements. An impairment loss would be indicated when estimated undiscounted future cash flows from the use of the asset areless than its carrying amount. An impairment loss would be measured as the difference between the fair value (based on discounted future cash flows) and thecarrying amount of the asset.56Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)Fair Value Disclosures: Fair value is defined as the price that we would expect to receive to sell an asset or pay to transfer a liability (an exit price)in an orderly transaction between market participants on the measurement date. In determining fair value, GAAP establishes a three-level hierarchy used inmeasuring fair 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 in activemarkets; or other inputs that are observable or can be corroborated by observable market data. Level 3 – inputs are unobservable and reflect our own assumptions.We may also adjust the carrying amount of certain nonfinancial assets to fair value on a non-recurring basis when they are impaired. The fair valuesof our long-lived assets held and used are determined using Level 3 inputs based on the estimated discounted future cash flows of the respective venue overits expected remaining useful life or 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 our impairment of long-lived assets disclosures and Note 10. “Fair Value of Financial Instruments” for ourfair value disclosures.Self-Insurance Accruals: We are self-insured up to certain limits for certain losses related to workers’ compensation, general liability, property andour Company sponsored employee health insurance programs. We estimate the accrued liabilities for all risk retained by the Company at the end of eachreporting period. This estimate is primarily based on historical claims experience and loss reserves, calculated with the assistance of an independent third-party actuary. Our deductibles generally range from $0.2 million to $0.5 million per occurrence. For claims that exceed the deductible amount, we record agross liability and a corresponding receivable representing expected recoveries pursuant to the stop-loss coverage, since we are not legally relieved of ourobligation 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 acharge to income and a reserve established on the Consolidated Balance Sheets. We perform regular assessments of our contingent losses and developestimates of the degree of probability for and range of possible settlement. We accrue liabilities for losses we deem probable and for which we can reasonablyestimate an amount of settlement. We do not record liabilities for losses we believe are only reasonably possible to result in an adverse outcome, but providedisclosure of the reasonably possible range of loss to the extent it is estimable. Reserve balances may be increased or decreased in the future to reflect furtherdevelopments. 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 amaterial effect on our consolidated results of operations in the period during which the underlying matters are resolved.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 (loss)” on our ConsolidatedStatements of Changes in Stockholder’s Equity and in our Consolidated Statements of Comprehensive Income (Loss). The effect of foreign currencyexchange rate changes on cash is reported in our Consolidated Statements of Cash Flows as a separate component of the change in cash and cash equivalentsduring the period.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 (“requisiteservice period”), which typically is the period over which the award vests. Stock-based compensation is recognized only for awards that vest, and we recordforfeitures as they occur. We measure the fair value of compensation cost related to stock options based on third party valuations.Stock-based compensation expense is recorded in “General and administrative expenses” in the Consolidated Statements of Earnings, which is thesame financial statement caption where the associated salary expense of employees with stock-based compensation awards is recorded. The gross benefits oftax deductions in excess of the compensation cost recognized from the vesting of stock options are tax effected and classified as cash inflows from financingactivities in our Consolidated Statements of Cash Flows.Revenue Recognition – Company Venue Activities: Food, beverage and merchandise revenues are recognized net of discounts, when sold. Gamerevenues are recognized as game-play tokens, game play credits on game cards, and game play time blocks are used by guests. Prior to the third quarter of2018, we offered value-priced combination packages, which57Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)generally were comprised of food, beverage and game credits (and in some instances, merchandise), and allocated the revenue recognized from the sale ofthese combination packages, between “Food and beverage sales” and “Entertainment and merchandise sales” based upon the price charged for eachcomponent when it is sold separately, or in limited circumstances our best estimate of selling price if a component is not sold on a stand-alone basis, whichwe believe approximates each component’s fair value. Beginning in the third quarter of 2018, we offer combination packages comprised of food andbeverage only, with game plays and/or time blocks available for purchase separately, and recognize revenue for each component at its stand-alone price.Our entertainment revenue includes customer purchases of game play credits on Play Pass game cards which allow our customers to play the gamesin our venues and earn tickets that can be redeemed for merchandise. We recognize a liability for the estimated amount of unused game play credits andunredeemed tickets, which we believe our customers will redeem or utilize in the future based on credits remaining on Play Pass cards, utilization patterns,and revenue per game play credit sold. Our total estimate of unearned revenue for unused Play Pass credits and unredeemed tickets as of December 30, 2018and December 31, 2017 was $5.6 million and $12.0 million, respectively, and is included in “Unearned revenues” in our Consolidated Balance Sheets.We sell gift cards to our customers in our venues and through certain third-party distributors, which do not expire and do not incur a service fee onunused balances. Gift card sales are recorded as deferred revenue when sold and are recognized as revenue when: (a) the gift card is redeemed by the guest or(b) the likelihood of the gift card being redeemed by the guest is remote (“gift card breakage”) and we determine that we do not have a legal obligation toremit the value of the unredeemed gift card under applicable state unclaimed property escheat statutes. Gift card breakage is determined based upon historicalredemption patterns of our gift cards.Revenue Recognition – Franchise Fees and Royalties: Revenues from franchise activities include area development and initial franchise feesreceived from franchisees to establish new venues, and once a venue is opened, a franchisee is charged monthly royalties based on a percentage of franchisedvenues’ sales. These fees are collectively referred to as “Franchise fees and royalties” in our Consolidated Statements of Earnings. We earn monthly royaltiesfrom our franchisees based on a percentage of each franchise venue’s sales. We also receive development and initial franchise fees to establish new franchisedvenues, as well as earn fees from the sale of equipment and other items or services to franchisees. Historically, we recognized development and franchise feesas revenues when the franchise venue had opened and we had substantially completed our obligations to the franchisee relating to the opening of a venue.Effective January 1, 2018, with the adoption of Accounting Standards Update 2016-10 Revenues from Contracts with Customers (Topic 606) (“ASC 606”),we recognize initial and renewal development and franchise fees as revenues on a straight-line basis over the life of the franchise agreement starting when thefranchise venue has opened. Continuing royalties and other miscellaneous sales and fees are recognized in the period earned. Continuing royalties and othermiscellaneous sales and fees of $20.7 million, $17.9 million and $17.4 million for Fiscal 2018, Fiscal 2017 and Fiscal 2016, respectively, are included in“Franchise fees and royalties” in our Consolidated Statements of Earnings.We and our franchisees are required to contribute a percentage of gross sales to administer all the national advertising programs that benefit both usand our franchisees. Effective January 1, 2018, with the adoption of ASC 606, our national advertising fund receipts from members of the InternationalAssociation of CEC Entertainment, Inc. (the “Association”) are accounted for on a gross basis as revenue from franchisees, when historically they were nettedagainst advertising expense (see Advertising Costs). Advertising contributions from our franchisees of $2.2 million for Fiscal 2018 are included in “Franchisefees 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, as well as the cost of Play Pass and AYCP cards and wristbands. These amounts exclude any allocation of other operating costsincluding labor and related costs for venue personnel and depreciation and amortization expense, which are disclosed separately.Vendor Rebates: We receive rebate payments from certain third-party vendors. Pursuant to the terms of volume purchasing and promotionalagreements entered into with the vendors, rebates are primarily provided based on the quantity of the vendors’ 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 vendors’ products, and when the related inventory issold, the allowances are recognized in “Cost of food and beverage” in our Consolidated Statements of Earnings.58Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)Rent Expense: We recognize rent expense on a straight-line basis over the lease term, including the construction period and lease renewal optionperiods provided 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 possessionand have the right to control use of the leased premises. The difference between actual rent payments and rent expense in any period is recorded as a deferredrent liability and included in “Other Noncurrent Liabilities” on our Consolidated Balance Sheets. Construction allowances received from the landlord as alease incentive intended to reimburse us for the cost of leasehold improvements (“Landlord contributions”) are accrued as deferred landlord contributions.Landlord contributions are amortized on a straight-line basis over the lease term, including lease renewal option periods provided for in the lease that can bereasonably assured at the inception of the lease, 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.We and our franchisees are required to contribute a percentage of gross sales to administer all the national advertising programs that benefit bothus and our franchisees. Prior to the adoption of ASC 606, effective January 1, 2018, our national advertising fund receipts from members the Association werenetted against advertising expense. Our advertising contributions for Chuck E. Cheese’s franchise venues are paid to the Association and are eliminated inconsolidation. Advertising contributions from our franchisees were $2.1 million in Fiscal 2017 and $2.2 million in Fiscal 2016.Income Taxes: We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets andliabilities for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts of assets andliabilities and their respective tax basis. A valuation allowance is applied against net deferred tax assets if, based on the weight of available evidence, it ismore likely than not that some or all of the deferred tax assets will not be realized.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 at least 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 thelargest amount of benefit that is greater than 50 percent likelihood of being realized upon settlement or ultimate resolution with the taxing authority. Weroutinely assess the adequacy of the estimated liability for unrecognized tax benefits, which may be affected by changing interpretations of laws, rulings bytax authorities and administrative policies, certain changes and/or developments with respect to audits and expirations of the statute of limitations. In ourConsolidated Statements of Earnings, we include interest expense related to unrecognized tax benefits in “Interest expense” and include penalties in“General and administrative expenses.” On our Consolidated Balance Sheets, we include current interest related to unrecognized tax benefits in “Accruedinterest,” current penalties in “Accrued expenses” and noncurrent accrued interest and penalties in “Other noncurrent liabilities.”Recently Issued Accounting Guidance:Accounting Guidance Adopted:Effective January 1, 2018, we adopted the following Accounting Standards Updates:(i) ASU 2016-04, Liabilities—Extinguishments of Liabilities (Subtopic 405-20). This amendment provides a narrow scope exception to Liabilities—Extinguishment of Liabilities (Subtopic 405-20) that requires breakage for those liabilities to be accounted for in accordance with the breakage guidance inASU 2014-09 Revenue From Contracts With Customers (Topic 606). Under the new guidance, if an entity expects to be entitled to a breakage amount for aliability resulting from the sale of a prepaid stored-value product, the entity shall derecognize the amount related to the expected breakage in proportion tothe pattern of rights expected to be exercised by the product holder only to the extent that it is probable that a significant reversal of the recognized breakageamount will not subsequently occur. If an entity does not expect to be entitled to a breakage amount for a prepaid stored-value product, the entity shallderecognize the amount related to the breakage when the likelihood of the product holder exercising its remaining rights becomes remote. The adoption ofthis amendment did not have a significant impact on our Consolidated Financial Statements.(ii) ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”)and ASU 2016-10, Revenue from Contracts with Customers(Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”). ASU 2014-09 replaces the historical U.S. GAAP revenue recognitionguidance and establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a pointin time, provides new and more detailed guidance on specific topics, and expands and improves disclosure about revenues. ASU 2016-10 updates the59Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)revenue guidance on identifying performance obligations and accounting for licenses of intellectual property, changing the FASB's previous proposals onright-of-use licenses and contractual restrictions. We elected the modified retrospective method to apply these standards. Under the modified retrospectivemethod, results for reporting periods beginning on or after January 1, 2018 are presented under the revenue guidance in these amendments, while prior periodamounts are not adjusted and continue to be reported in accordance with our historic accounting treatment. The cumulative impact of adopting thisamendment was not material, and as such we did not record an adjustment to our opening accumulated deficit in our Consolidated Balance Sheet as ofJanuary 1, 2018. For further details, see Note 2. “Revenue.”(iii) ASU 2016-15, Statement of Cash Flows (Topic 230) and ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash on aretrospective basis. Amounts generally described as restricted cash and restricted cash equivalents are now presented with cash and cash equivalents whenreconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Accordingly, as a result of the adoption of theseamendments, we reclassified $0.1 million of restricted cash into cash, cash equivalents and restricted cash as of December 31, 2017 for a total balance of$67.3 million, which resulted in a reduction in net cash provided by operating activities of less than $0.1 million in the Consolidated Statement of CashFlows for the year ended December 31, 2017. The adoption of these amendments did not impact net cash used in investing or financing activities for the yearended December 30, 2018.The adoption of these amendments also requires us to reconcile our cash balance on our Consolidated Statements of Cash Flows to the cash balanceon our Consolidated Balance Sheets, as well as make disclosures about the nature of restricted cash balances. A reconciliation of “Cash and cash equivalents”and “Restricted cash” as presented in our Consolidated Balance Sheets for the periods presented and “Cash, cash equivalents and restricted cash” aspresented in our Consolidated Statements of Cash Flows for the years ended December 30, 2018 and December 31, 2017 is as follows: December 30, 2018 December 31, 2017 January 1, 2017 (in thousands)Cash and cash equivalents$63,170 $67,200 $61,023Restricted cash(1)151 112 268Cash, cash equivalents and restricted cash$63,321 $67,312 $61,291__________________(1)Restricted cash represents cash balances held by the Association that are restricted for use in our advertising, entertainment and media programs (see “Basis ofPresentation” above for further discussion of the Association Funds).(iv) ASU 2017-04, Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment on a prospective basis. This amendmenteliminates Step 2 from the goodwill impairment test, which measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’sgoodwill with the carrying amount of that goodwill. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwillimpairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount bywhich the carrying amount exceeds the reporting unit’s fair value. However, the loss recognized should not exceed the total amount of goodwill allocated tothat reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unitwhen measuring the goodwill impairment loss, if applicable. We early adopted this amendment on January 1, 2018. The adoption of this amendment did nothave a significant impact on our Consolidated Financial Statements.Accounting Guidance Not Yet Adopted:In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). This newstandard introduces a new lease model that requires the recognition of lease assets and lease liabilities on the balance sheet and the disclosure of keyinformation about leasing arrangements. While this new standard retains most of the principles of the existing lessor model under U.S. GAAP, it aligns manyof those principles with Accounting Standards Codification (“ASC”) 606: Revenue from Contracts with Customers. Subsequent to ASU 2016-02, the FASBissued related ASUs, including ASU 2018-11 (“ASU 2018-11”), Leases (Topic 842): Targeted Improvements, which provides for another transition method inaddition to the modified retrospective approach required by ASU 2016-02. This option allows entities to initially apply the new leases standard at theadoption date and recognize a cumulative adjustment to the opening balance sheet of retained earnings in the period of adoption.We will adopt ASU 2016-02 on December 31, 2018, the first day of Fiscal 2019, and apply the package of practical expedients included therein,which among other things, allows us to carryforward our historical lease classification. We will also utilize the transition method included in ASU 2018-11.By applying ASU 2016-02 at the adoption date, as opposed to at the beginning of the earliest period presented, the presentation of financial information forperiods prior to December 31, 201860Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)will remain unchanged and in accordance with Leases (Topic 840). The most significant impact of adopting the new guidance will be the recognition ofRight of Use assets and lease liabilities for operating leases, while our accounting for capital leases will remain substantially unchanged. As of December 31,2018, we expect to recognize additional Right-of-Use assets related to our operating leases between $520 million and $620 million and lease liabilitiesrelated to our operating leases of between $550 million and $650 million, respectively, with the difference recognized in accumulated deficit. We do notbelieve the adoption of the standard will have a material impact on our ongoing results of operations and cash flows. In preparation for the adoption, we havedesigned internal controls and information system functionality to enable the preparation of the necessary financial information.In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on FinancialInstruments. This amendment changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that generally will result inthe earlier recognition of allowances for losses. The amendments in this update are effective for the Company for fiscal years beginning after December 15,2020, including interim periods within those fiscal years. Entities may early adopt the amendments in this update as of the fiscal years beginning afterDecember 15, 2018, including interim periods within those fiscal years. We do not expect the adoption of this amendment to have a significant impact on ourConsolidated Financial Statements.In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business (Topic 805). The amendments in this update clarify thedefinition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. Thedefinition of a business affects many areas of accounting, including acquisitions, disposals, goodwill and consolidation. This ASU will be effective for us forannual and interim reporting periods beginning on January 1, 2018. We do not expect the adoption of this amendment to have a significant impact on ourConsolidated Financial Statements.In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815). This amendment expands and refines hedge accounting forboth nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item inthe financial statements. It also includes certain targeted improvements to simplify the application of current guidance related to hedge accounting. This ASUwill be effective for us for annual and interim reporting periods beginning on December 31, 2019, with early adoption permitted. We do not expect theadoption of this amendment to have a significant impact on our Consolidated Financial Statements.In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of CertainTax Effects from Accumulated Other Comprehensive Income. This standard provides companies with an option to reclassify stranded tax effects resultingfrom enactment of the Tax Cuts and Jobs Act ("TCJA") from accumulated other comprehensive income to retained earnings. This ASU will be effective for usfor annual and interim periods beginning on December 31, 2019. Early adoption of this standard is permitted and may be applied either in the period ofadoption or retrospectively to each period in which the effect of the change in the tax rate as a result of TCJA is recognized. We do not expect the adoption ofthis ASU to have a material impact on our results of operations, financial position and cash flows.In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the DisclosureRequirements for Fair Value Measurement. This standard will require entities to disclose the amount of total gains or losses for the period recognized in othercomprehensive income that is attributable to fair value changes in assets and liabilities held as of the balance sheet date and categorized within Level 3 of thefair value hierarchy. This ASU will be effective for us for annual and interim periods beginning on December 31, 2020. Early adoption of this standard ispermitted. We do not expect the adoption of this ASU to have a material impact on our results of operations, financial position and cash flows.In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’sAccounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract . Under this standard customers will apply thesame criteria for capitalizing implementation costs as they would for an arrangement that has a software license. The adoption of this new guidance prescribesthe balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense, and additionalquantitative and qualitative disclosures. This ASU will be effective for us for annual and interim periods beginning on December 30, 2020. Early adoption ofthis standard is permitted and may be applied either prospectively to eligible costs incurred on or after the date of the new guidance or retrospectively. We donot expect the adoption of this ASU to have a material impact on our results of operations, financial position and cash flows.61Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)Note 2. Revenue:Our venues sell food, beverages, entertainment, and merchandise to customers on a stand-alone basis and through discounted packaged deals. Weconsider our performance obligations for food and beverages to be separate and distinct from our performance obligations on entertainment and merchandise.Revenues are recognized net of discounts. Net revenue from each stand-alone purchase is allocated to the performance obligation purchased. Netrevenue from each package deal is allocated to each performance obligation purchased pro-rata their stand-alone menu prices. Revenues are recognized at thetime we complete the performance obligation, generally on the day of sale. The portion of our entertainment and merchandise revenues representingpurchased and unused credits, as well as unredeemed credits, is deferred and subsequently recognized based on credits remaining and utilization patterns.We also earn revenues from our franchises. Our franchise agreements require the payment of various fixed fees as well as the payment of royaltiesthat are based on a percentage of franchisee sales. In addition, franchisees have the option to purchase games and equipment from our inventory. We considerour performance obligations for the franchise agreement to be separate and distinct from our performance obligations on sales of inventory. Revenue fromsales of our inventory is recognized when the franchisee takes possession of the games and equipment. All other payments from franchisees are allocated tothe franchise agreement, where royalties are recognized as revenue on a monthly basis and the fixed fees are recognized as revenue on a straight-line basisover the life of the franchise agreement, beginning when the first venue opens.We sell gift cards to our customers in our venues and through certain third-party distributors, which do not expire and do not incur a service fee onunused balances. Gift card sales are recorded as deferred revenue when sold and are recognized as revenue when: (a) the gift card is redeemed by the guest or(b) the likelihood of the gift card being redeemed by the guest is remote (“gift card breakage”) and we determine that we do not have a legal obligation toremit the value of the unredeemed giftcard under applicable state unclaimed property escheat statutes. Gift card breakage is determined based upon our historical redemption patterns.On January 1, 2018 we adopted the revenue guidance set forth in ASU 2016-10. Under the new guidance, there is a five-step model to apply torevenue recognition. The five-steps consist of: (i) the determination of whether a contract, an agreement between two or more parties that creates legallyenforceable rights and obligations, exists; (ii) the identification of the performance obligations in the contract; (iii) the determination of the transaction price;(iv) the allocation of the transaction price to the performance obligations in the contract; and (v) recognition of revenue when (or as) the performanceobligation is satisfied.ASU 2016-10 requires us to recognize initial and renewal franchise and development fees on a straight-line basis over the life of the related franchiseagreement or the renewal period. Historically, we recognized revenue from initial franchise and development fees upon the opening of a franchised restaurantwhen we completed all of our material obligations and initial services. Additionally, our national advertising fund receipts from Association members arenow accounted for on a gross basis as “Franchise fees and royalties,” when historically they were netted against “Advertising expense.” Revenue related toadvertising contributions from our franchisees was $3.6 million the twelve months ended December 30, 2018 and is recorded in “Franchise fees androyalties” in our Consolidated Statement of Earnings.Liabilities relating to unused game credits, unredeemed tickets, gift card liabilities and deferred franchise and development fees are included in“Unearned revenues” on our Consolidated Balance Sheets. The following table presents changes in the Company’s Unearned revenue balances during thetwelve months ended December 30, 2018: Balance at Balance at January 1, 2018 RevenueDeferred RevenueRecognized December 30,2018 (in thousands)Game credit and unredeemed ticket related deferred revenue$12,035 $58,496 $(64,970) $5,561Gift card related deferred revenue3,868 8,392 (7,007) 5,253Unearned franchise and development fees4,274 2,131 (84) 6,321Other unearned revenues873 25,918 (25,802) 989Total unearned revenue$21,050 $94,937 $(97,863) $18,12462Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)Note 3. Accounts Receivable:Accounts receivable consisted of the following at the dates presented: December 30, 2018 December 31, 2017 (in thousands)Trade receivables$11,185 $8,863Vendor rebates6,651 6,525Other accounts receivable6,184 4,673Total Accounts receivable$24,020 $20,061Trade receivables consist primarily of debit and credit card receivables due from third-party financial institutions. Vendor rebates receivable arebased on amounts purchased primarily from one supplier. The other accounts receivable balance consists primarily of lease incentives, amounts due from ourfranchisees and amounts expected to be recovered from third-party insurers.Note 4. Inventories:Inventories consisted of the following at the dates presented: December 30, 2018 December 31, 2017 (in thousands)Food and beverage$5,383 $5,440Entertainment and merchandise18,424 16,560Inventories$23,807 $22,000Food and beverage inventories include food, beverage, paper products and other supplies needed for our food service operations and are procuredfrom a single distributor. Entertainment and merchandise inventories consist primarily of novelty toy items, used as redemption prizes for certain games, solddirectly to our guests or used as part of our birthday party packages. In addition, entertainment and merchandise inventories also consist of other suppliesused in our entertainment operations.Note 5. Property and Equipment: December 30, 2018 December 31, 2017 (in thousands)Land$50,135 $50,135Buildings61,378 56,415Leasehold improvements474,210 453,167Game and ride equipment263,689 250,139Furniture, fixtures and other equipment159,560 150,505Buildings leased under capital leases15,061 15,067 1,024,033 975,428Less accumulated depreciation and amortization(495,125) (414,245)Net property and equipment in service528,908 561,183Construction in progress10,277 8,838Property and equipment, net$539,185 $570,021Buildings includes certain venues leased under capital leases. Accumulated amortization related to these assets was $5.0 million and $4.0 million asof December 30, 2018 and December 31, 2017, respectively. Amortization of assets under capital leases is included in “Depreciation and amortization” in ourConsolidated Statements of Earnings.63Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)We procure games, rides and other entertainment-related equipment from a limited number of suppliers, some of which are located in China.Asset ImpairmentsDuring Fiscal 2018, we recognized an asset impairment charge of $6.9 million primarily related to eight venues, of which one was previouslyimpaired. During Fiscal 2017 and Fiscal 2016, we recognized asset impairment charges of $1.8 million and $1.6 million, respectively, primarily related tofive venues and five venues, respectively. These impairment charges were the result of a decline in the venues’ financial performance, primarily related tovarious economic factors in the markets in which the venues are located. As of December 30, 2018, the aggregate carrying value of the property andequipment at impaired venues, after the impairment charges, was $4.5 million for venues impaired in 2018.Note 6. Goodwill and Intangible Assets, Net:The following table presents changes in the carrying value of goodwill for the periods ended December 30, 2018 and December 31, 2017: December 30, 2018 December 31, 2017 (in thousands)Balance at beginning of period$484,438 $483,876 Goodwill assigned in acquisition of franchisee (1)— 562Balance at end of period$484,438 $484,438__________________(1)Represents goodwill related to two franchise venues the Company acquired in the second quarter of 2017. The acquisition did not have a significant impact on ourConsolidated Balance Sheet as of December 31, 2017 or on our Consolidated Statements of Earnings for Fiscal 2017.The following table presents our indefinite and definite-lived intangible assets at December 30, 2018 and December 31, 2017: December 30, 2018 December 31, 2017 WeightedAverage Life(Years) GrossCarryingAmount AccumulatedAmortization Net CarryingAmount GrossCarryingAmount AccumulatedAmortization Net CarryingAmount (in thousands)Chuck E. Cheese's tradenameIndefinite $400,000 $— $400,000 $400,000 $— $400,000Peter Piper Pizza tradenameIndefinite 26,700 — 26,700 26,700 — 26,700Favorable lease agreements (1) 10 14,880 (8,550) 6,330 14,880 (7,306) 7,574Franchise agreements25 53,300 (9,245) 44,055 53,300 (7,197) 46,103 $494,880 $(17,795) $477,085 $494,880 $(14,503) $480,377__________________(1)In connection with the Merger, as defined in Note 19 “Consolidating Guarantor Financial Information”, and the acquisition of Peter Piper Pizza (“PPP”) in October 2014 (the“PPP Acquisition”), we also recorded unfavorable lease liabilities of $10.2 million and $3.9 million, respectively, which are included in “Other current liabilities” and “Othernoncurrent liabilities” in our Consolidated Balance Sheets. Such amounts are being amortized over a weighted average life of 10 years, and are included in “Rent expense” inour Consolidated Statements of Earnings.64Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)Our estimated future amortization expense related to the favorable lease agreements and franchise agreements is set forth as follows (in thousands): Favorable Lease Agreements Franchise Agreements Fiscal 2019 $1,102 $2,049 Fiscal 2020 1,050 2,088 Fiscal 2021 846 2,049 Fiscal 2022 753 2,049 Fiscal 2023 631 2,049 Thereafter 1,948 33,771 $6,330 $44,055Amortization expense related to favorable lease agreements was $1.2 million for Fiscal 2018, $1.6 million for Fiscal 2017 and $2.0 million for Fiscal2016, respectively, and is included in “Rent expense” in our Consolidated Statements of Earnings. Amortization expense related to franchise agreements was$2.0 million for Fiscal 2018, Fiscal 2017 and Fiscal 2016, respectively, and is included in “Depreciation and amortization” in our Consolidated Statementsof Earnings.Note 7. Other Noncurrent Assets:Other noncurrent assets consisted of the following as of the dates presented: December 30, 2018 December 31, 2017 (in thousands)Internally developed software, net (1) $14,756 $17,167Deferred charges (2) 1,122 24Deposits 848 1,125Other 1,999 1,161Total other noncurrent assets $18,725 $19,477__________________(1)Relates to the costs directly attributable to the development, testing and validation of internally developed software, primarily our ERP system, Play Pass, and IT related securityinitiatives, net of accumulated amortization of $10.3 million and $6.6 million at December 30, 2018 and December 31, 2017, respectively. The assets are being amortizedover a weighted average life of 6 years. See Note 1. “Description of Business and Summary of Significant Accounting Policies - Development of Internal Use Software.”(2)December 30, 2018 includes a commitment to a supplier for IT related services to be paid in January 2020.Note 8. Accounts Payable:Accounts payable consisted of the following as of the dates presented: December 30, 2018 December 31, 2017 (in thousands)Trade and other amounts payable$20,685 $20,492Book overdraft10,725 10,882 Accounts Payable$31,410 $31,374Trade and other amounts payable represents amounts payable to our vendors, legal fee accruals and settlements payable. The book overdraft balancerepresents checks issued but not yet presented to banks.65Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)Note 9. Accrued Expenses:Accrued expenses consisted of the following as of the dates presented: December 30, 2018 December 31, 2017 (in thousands)Current: Salaries and wages$13,702 $11,366Insurance4,836 6,614Taxes, other than income taxes13,488 13,151Other accrued operating expenses4,004 5,485 Accrued expenses$36,030 $36,616Noncurrent: Insurance$9,861 $8,311Accrued 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.Note 10. Indebtedness and Interest Expense: Our long-term debt consisted of the following for the periods presented: December 30, 2018 December 31, 2017 (in thousands)Term loan facility$723,900 $731,500Senior notes255,000 255,000 Total debt outstanding978,900 986,500Less: Unamortized original issue discount(1,153) (1,694) Deferred financing costs, net(8,633) (11,993) Current portion(7,600) (7,600)Bank indebtedness and other long-term debt, less current portion$961,514 $965,213We were in compliance with the debt covenants in effect as of December 30, 2018 for both the secured credit facilities and the senior notes. Forfurther discussion regarding the debt covenants, see Secured Credit Facilities and Senior Unsecured Notes sections below.Secured Credit FacilitiesIn connection with the Merger on February 14, 2014, we entered into new senior secured credit facilities, which include an initial $760.0 millionterm loan facility with a maturity date of February 14, 2021 (the “term loan facility”) and a $150.0 million senior secured revolving credit facility with anoriginal maturity date of February 14, 2019, which includes a letter of credit sub-facility and a $30.0 million swingline loan sub-facility (the “revolvingcredit facility” and, together with the term loan facility, the “secured credit facilities”).As of December 30, 2018, we had no borrowings outstanding and a $9.0 million letter of credit issued but undrawn under the revolving creditfacility and no borrowings outstanding and $9.9 million of letter of credit issued but undrawn under the revolving credit facility as of December 31, 2017. OnMay 8, 2018 we entered into an incremental assumption agreement with certain of our revolving credit facility lenders to extend the maturity on $95.0million of the revolving credit facility through November 16, 2020. In connection with the extension of the maturity date, we paid fees of $0.4 million andagreed to the following covenants for the benefit of the revolving facility lenders: (a) with respect to each fiscal year (commencing with the fiscal year endingDecember 30, 2018), we are required to make a mandatory prepayment of term loan principal to the extent that 75% times our excess cash flow (as defined inthe secured credit facilities agreement and subject to step-downs based on our net first lien senior secured leverage ratio) exceeds $10 million and any suchrequired mandatory payment shall be reduced by any optional prepayments of principal that may have occurred during the fiscal year, and (b) we shall notincur additional first lien senior secured debt in connection with certain acquisitions, mergers or consolidations unless our net first lien senior securedleverage ratio is not greater than 3.65 to 1.00 on a pro forma basis. The maturity date of the amount of the66Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)revolving credit facility that was not extended remains February 14, 2019. All borrowings under our revolving credit facility are subject to the satisfaction ofcustomary conditions, including the absence of a default and the accuracy of representations and warranties.We received net proceeds from the term loan facility of $756.2 million, net of original issue discount of $3.8 million, which were used to fund aportion of the Acquisition. We paid $17.8 million and $3.8 million in debt issuance costs related to the term loan facility and revolving credit facility(including fees related to extending the maturity date), respectively, which we capitalized in “Bank indebtedness and other long-term debt, net of deferredfinancing costs” on our Consolidated Balance Sheets. The original issue discount and deferred financing costs are amortized over the lives of the facilitiesand are included in “Interest expense” on our Consolidated Statements of Earnings.We may request one or more incremental term loan facilities and/or increase commitments under our revolving credit facility in an aggregate amountof up to the sum of (a) $200.0 million plus (b) such additional amount so long as, (i) in the case of loans under additional credit facilities that rank equallyand without preference with the liens on the collateral securing the secured credit facilities, our consolidated net first lien senior secured leverage ratio wouldbe no greater than 4.25 to 1.00 and (ii) in the case of loans under additional credit facilities that rank junior to the liens on the collateral securing the securedcredit facilities, our consolidated total net secured leverage ratio would be no greater than 5.25 to 1.00, subject to certain conditions, and receipt ofcommitments by existing or additional lenders.We may voluntarily repay outstanding loans under the secured credit facilities at any time, without prepayment premium or penalty, except inconnection with a repricing event as described below, subject to customary “breakage” costs with respect to London Interbank Offered Rate (“LIBOR”) loans.The secured credit facilities require scheduled quarterly payments on the term loan equal to 0.25% of the original principal amount of the term loanfrom July 2014 to December 2020, with the remaining balance paid at maturity, February 14, 2021. The secured credit facilities include customary mandatoryprepayment requirements based on defined events, such as certain asset sales and debt issuances. In addition (as described above in more detail), we arerequired to make a mandatory prepayment of term loan principal to the extent that 75% times our excess cash flow exceeds $10.0 million.Borrowings under the secured credit facilities bear interest at a rate equal to, at our option, either (a) LIBOR determined by reference to the costs offunds for Eurodollar deposits for the interest period relevant to such borrowings, adjusted for certain additional costs, subject to a 1.00% floor in the case ofterm loans or (b) a base rate determined by reference to the highest of (i) the federal funds effective rate plus 0.50%; (ii) the prime rate of Deutsche Bank AGNew York Branch; and (iii) the one-month adjusted LIBOR plus 1.00%, in each case plus an applicable margin. The applicable margin for borrowings underthe term loan facility is subject to one step down to 3.00% based on our net first lien senior secured leverage ratio, and the applicable margin for borrowingsunder the revolving credit facility is subject to two step-downs to 3.00% and 2.75% based on our net first lien senior secured leverage ratio. During Fiscal2018, the applicable margin for LIBOR borrowings under both the term loan facility and the revolving credit facility was 3.25%.During Fiscal 2018, the federal funds rate ranged from 1.34% to 2.40%, the prime rate ranged from 4.50% to 5.50% and the one-month LIBORranged from 1.55% to 2.52%.The weighted average effective interest rate incurred on our borrowings under our secured credit facilities was 5.8% for the 2018 fiscal year, 4.7% forthe 2017 fiscal year and 4.6% for the 2016 fiscal year, which includes amortization of debt issuance costs related to our secured credit facilities, amortizationof our term loan facility original issue discount, and commitment and other fees related to our secured credit facilities.All borrowings under our revolving credit facility are subject to the satisfaction of customary conditions, including the absence of a default and theaccuracy of representations and warranties.In addition to paying interest on outstanding principal under the secured credit facilities, we are required to pay a commitment fee equal to 0.50%per annum to the lenders under the revolving credit facility in respect of the unutilized commitments thereunder. The applicable commitment fee under therevolving credit facility is subject to one step-down to 0.375% based on our net first lien senior secured leverage ratio. During Fiscal 2018, the commitmentfee rate was 0.50%. We are also required to pay customary agency fees, as well as letter of credit participation fees computed at a rate per annum equal to theapplicable margin for LIBOR rate borrowings on the dollar equivalent of the daily stated amount of outstanding letters of credit, plus such letter of creditissuer’s customary documentary and processing and fronting fees computed at a rate equal to 0.125% per annum on the daily stated amount of each letter ofcredit.Obligations under the secured credit facilities are unconditionally guaranteed by Queso Holdings Inc. (“Parent”) on a limited-recourse basis andeach of our existing and future direct and indirect material, wholly owned domestic subsidiaries, subject to certain exceptions. The obligations are secured bya pledge of our capital stock and substantially all of our assets and67Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)those of each subsidiary guarantor, including capital stock of the subsidiary guarantors and 65.0% of the capital stock of the first-tier foreign subsidiaries thatare not subsidiary guarantors, in each case subject to exceptions. Such security interests consist of a first-priority lien with respect to the collateral.The secured credit facilities also contain customary covenants and events of default. The covenants limit our ability to, among other things: (i) incuradditional debt or issue certain preferred shares; (ii) create liens on certain assets; (iii) make certain loans or investments (including acquisitions); (iv) paydividends on or make distributions in respect of our capital stock or make other restricted payments; (v) consolidate, merge, sell or otherwise dispose of all orsubstantially all of our assets; (vi) sell assets; enter into certain transactions with our affiliates; (vii) enter into sale-leaseback transactions; (viii) change ourlines of business; restrict dividends from our subsidiaries or restrict liens; (ix) change our fiscal year; and (x) modify the terms of certain debt ororganizational agreements. The PPP acquisition and the sale leaseback transactions discussed in Note 6. “Goodwill and Intangible Assets, Net” and Note 13.“Sale Leaseback Transactions” were permitted under the secured credit facilities agreement.Our revolving credit facility includes a springing financial maintenance covenant that requires our net first lien senior secured leverage ratio not toexceed 6.25 to 1.00 (the ratio of consolidated net debt secured by first-priority liens on the collateral to last twelve month’s EBITDA, as defined in the SeniorCredit Facilities). The covenant will be tested quarterly when the revolving credit facility is more than 30.0% drawn (excluding outstanding letters of credit)and will be a condition to drawings under the revolving credit facility that would result in more than 30.0% drawn thereunder.Senior Unsecured NotesOn February 19, 2014, we issued $255.0 million aggregate principal amount of 8.000% Senior Notes due 2022 which mature on February 15, 2022(the “senior notes”) in a private offering. On December 2, 2014 we completed an exchange offer whereby the original senior notes were exchanged for newnotes (the “exchange notes”) which are identical to the initial senior notes except that the issuance of the exchange notes is registered under the SecuritiesAct, the exchange notes do not bear legends restricting their transfer and they are not entitled to registration rights under our registration rights agreement.We refer to the senior notes and the exchange notes collectively as the “senior notes.” We may redeem some or all of the senior notes at certain redemptionprices set forth in the indenture governing the senior notes (the “indenture”).We paid $6.4 million in debt issuance costs related to the senior notes, which we recorded as an offset to “Bank indebtedness and other long-termdebt, net of deferred financing costs” on our Consolidated Balance Sheets. The deferred financing costs are being amortized over the life of the senior notesto “Interest expense” on our Consolidated Statements of Earnings.Our obligations under the senior notes are fully and unconditionally guaranteed, jointly and severally, by our present and future direct and indirectwholly-owned material domestic subsidiaries that guarantee our secured credit facilities.The indenture contains restrictive covenants that limit our ability to, among other things: (i) incur additional debt or issue certain preferred shares;(ii) create liens on certain assets; (iii) make certain loans or investments (including acquisitions); (iv) pay dividends on or make distributions in respect of ourcapital stock or make other restricted payments; (v) consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; (vi) sell assets; (vii)enter into certain transactions with our affiliates; and (viii) restrict dividends from our subsidiaries.The weighted average effective interest rate incurred on borrowings under our senior notes was 8.2% for the 2018, 2017, and 2016 fiscal years,which includes amortization of debt issuance costs and other fees related to our senior notes.68Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)Debt ObligationsThe following table sets forth our future debt payment obligations as of December 30, 2018 (in thousands):One year or less$7,600Two years7,600Three years708,700Four years255,000Five years— 978,900Less: debt financing costs, net(8,633)Less: unamortized discount(1,153) $969,114Interest ExpenseInterest expense consisted of the following for the periods presented: Fiscal Year Ended December 30, 2018 December 31, 2017 January 1, 2017 (in thousands)Term loan facility (1)$39,065 $31,549 $30,987Senior notes20,330 20,330 19,774Capital lease obligations1,643 1,695 1,749Sale leaseback obligations10,488 10,585 10,714Amortization of debt issuance costs3,803 4,005 4,005Other954 951 516Total interest expense$76,283 $69,115 $67,745 __________________(1) Includes amortization of original issue discountThe weighted average effective interest rate incurred on our borrowings under our secured credit facilities and senior notes (including amortizeddebt issuance costs, amortization of original issue discount, commitment and other fees related to the secured credit facilities and senior notes) was 6.4% forthe 2018 fiscal year, 5.6% for the 2017 fiscal year, and 5.5% for the 2016 fiscal year.Note 11. Fair Value of Financial Instruments:Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis forconsidering market participant assumptions in fair value measurements, a fair value hierarchy that distinguishes between market participant assumptionsbased on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy)and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy) has beenestablished.69Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)The following table presents information on our financial instruments as of the dates presented: December 30, 2018 December 31, 2017 Carrying Amount (1) Estimated Fair Value Carrying Amount(1) Estimated Fair Value (in thousands)Financial Liabilities: Bank indebtedness and other long-term debt: Current portion $7,600 $7,051 $7,600 $7,220 Long-term portion 970,147 885,212 977,206 937,662Bank indebtedness and other long-term debt: $977,747 $892,263 $984,806 $944,882__________________(1) Excluding net deferred financing costs.Our financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, our secured credit facilitiesand our senior notes. The carrying amount of cash and cash equivalents, accounts receivable and accounts payable approximates fair value because of theirshort maturities. The estimated fair value of our secured credit facilities' term loan facility and senior notes was determined by using the respective average ofthe ask and bid price of our outstanding borrowings under our term loan facility and our senior notes as of the nearest open market date preceding thereporting period end. The average of the ask and bid price are classified as Level 2 in the fair value hierarchy.Our non-financial assets, which include long-lived assets, including property, plant and equipment, goodwill and intangible assets, are reported atcarrying value and are not required to be measured at fair value on a recurring basis. However, on a periodic basis, or whenever events or changes incircumstances indicate that their carrying value may not be recoverable, we assess our long-lived assets for impairment.During Fiscal 2018 and Fiscal 2017, there were no significant transfers among level 1, 2 or 3 fair value determinations.Note 12. Other Noncurrent Liabilities:Other noncurrent liabilities consisted of the following as of the dates presented: December 30, 2018 December 31, 2017 (in thousands)Sale leaseback obligations, less current portion (1) $174,520 $177,933Deferred rent liability 31,978 27,951Deferred landlord contributions 7,603 6,282Long-term portion of unfavorable leases 3,796 5,453Long-term portion of cease use liabilities (2) 1,818 —Other 6,534 4,268Total other noncurrent liabilities $226,249 $221,887_________________(1)See Note 13 “Sale Leaseback Transaction” for further discussion on our sale leaseback obligations.(2)In connection with three Peter Piper Pizza venues in Oklahoma that were closed in 2018, we recorded cease use liabilities totaling $1.8 million related to future lease relatedobligations, net of expected future sublease income, which are included in “Other current liabilities” and “Other noncurrent liabilities” in our Consolidated Balance Sheets atDecember 30, 2018. The liabilities consisted of $0.9 million related to future rental payments, net of expected future sublease income, and $0.9 million related to futurecommon area maintenance, property tax and insurance expenses, which are included in “Rent expense” and “Other venue operating expenses”, respectively, in ourConsolidated Statements of Earnings for Fiscal 2018 .70Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)Note 13. Sale Leaseback Transactions:On August 25, 2014, we completed a sale leaseback transaction (the “Sale Leaseback”) with National Retail Properties, Inc. (“NRP”). Pursuant to theSale Leaseback, we sold 49 properties located throughout the United States to NRP, and we leased each of the 49 properties back from NRP pursuant to twoseparate master leases on a triple-net basis for their continued use as Chuck E. Cheese’s family dining and entertainment venues. On April 25, 2017, wecompleted an additional sale leaseback transaction with NADG NNN Acquisitions, Inc. (“NADG NNN”), pursuant to which we sold our property located inConyers, Georgia to NADG NNN (the “Conyers Sale Leaseback” and together with the Sale Leaseback, the “Sale Leasebacks”), and we leased the propertyback from NADG NNN pursuant to a master lease on a triple-net basis for its continued use as Chuck-E-Cheese’s family dining and entertainment venue.The leases in the Sale Leasebacks have an initial term of 20 years, with four five-year options to renew. For accounting purposes, these sale-leaseback transactions are accounted for under the financing method, rather than as completed sales. Under the financing method, we (i) include the salesproceeds received in other long-term liabilities until our continuing involvement with the properties is terminated, (ii) report the associated property asowned assets, (iii) continue to depreciate the assets over their remaining useful lives, and (iv) record the rental payments as interest expense and a reductionof the sale leaseback obligation. When and if our continuing involvement with a property terminates and the sale of that property is recognized foraccounting purposes, we expect to record a gain equal to the excess of the proceeds received over the remaining net book value of the property.The aggregate purchase price for the properties in connection with the Sale Leaseback was $183.7 million in cash, and the proceeds, net of taxes andtransaction costs, realized by the Company were $143.2 million. A portion of the proceeds from the Sale Leaseback was used for the PPP Acquisition. Weused the remaining net proceeds from the Sale Leaseback for capital expenditure needs and other general corporate purposes. The aggregate purchase pricefor the property in connection with the Conyers Sale Leaseback transaction was approximately $4.1 million in cash, and the net proceeds realized wereapproximately $3.9 million.The long-term and current portions of our obligations under the Sale Leasebacks were $174.5 million and $3.4 million, respectively, asof December 30, 2018, and are included in “Other noncurrent liabilities” and “Other current liabilities” in our Consolidated Balance Sheets. The net bookvalue of the associated assets, which is included in “Property and equipment, net” in our Consolidated Balance Sheets, was $82.4 million and $79.3million as of December 30, 2018 and December 31, 2017, respectively.Our future minimum lease commitments related to the Sale Leasebacks, as of December 30, 2018 for fiscal years 2019, 2020, 2021, 2022, 2023 andthereafter are, in thousands, $14,083, $14,360, $14,641, $14,947, $15,249 and $183,737.Note 14. Commitments and Contingencies:LeasesWe lease certain venues under operating and capital leases that expire at various dates through 2037 with renewal options that expire at variousdates through 2054. 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 venue’s revenues exceed certain thresholds as stipulated in the respective lease agreement.The leases generally have initial terms of 10 to 20 years with various renewal options.71Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)The annual future lease commitments under capital lease obligations and non-cancelable operating leases, including reasonably assured optionperiods but excluding contingent rent, as of December 30, 2018, are as follows: Capital OperatingFiscal Years(in thousands)2019$2,182 $92,43520202,214 90,98320212,201 88,91420222,184 87,18320231,956 84,806Thereafter13,266 457,277Future minimum lease payments24,003 901,598Less amounts representing interest(10,996) Present value of future minimum lease payments13,007 Less current portion(677) Capital lease obligations, net of current portion$12,330 Rent expense, including contingent rent based on a percentage of venues’ sales, when applicable, was comprised of the following: Fiscal Year 2018 2017 2016 (in thousands)Minimum rentals$97,598 $96,927 $96,953Contingent rentals43 156 217 $97,641 $97,083 $97,170Rent expense of $1.2 million related to our corporate offices and warehouse facilities was included in “General and administrative expenses” in ourConsolidated Statements of Earnings for the fiscal years ended December 30, 2018, December 31, 2017 and January 1, 2017.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 $9.2 million at December 30, 2018 and consistedprimarily of obligations associated with the modernization of various information technology platforms and information technology data security serviceagreements, and the fixed price purchase agreements relating to beverage products. These purchase obligations exclude agreements that can be canceledwithout significant penalty.Legal ProceedingsFrom time to time, we are involved in various inquiries, investigations, claims, lawsuits and other legal proceedings that are incidental to theconduct of our business. These matters typically involve claims from customers, employees or other third parties involved in operational issues common tothe 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 ofclaims and legal proceedings pending against us.In the opinion of our management, after consultation with legal counsel, the amount of liability with respect to claims or proceedings currentlypending against us is not expected to have a material effect on our consolidated financial condition, results of operations or cash flows. All necessary lossaccruals based on the probability and estimate of loss have been recorded.72Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)Litigation Related to the Merger: Following the January 16, 2014 announcement that CEC Entertainment had entered into an agreement (“MergerAgreement”), pursuant to which an entity controlled by Apollo Global Management, LLC (“Apollo”) and its subsidiaries merged with and into CECEntertainment, with CEC Entertainment surviving the merger (the “Merger”), four putative shareholder class actions were filed in the District Court ofShawnee County, Kansas, on behalf of purported stockholders of CEC Entertainment, against A.P. VIII Queso Holdings, L.P., CEC Entertainment, CECEntertainment's directors, Apollo and Merger Sub (as defined in the Merger Agreement), in connection with the Merger Agreement and the transactionscontemplated thereby. These actions were consolidated into one action (the “Consolidated Shareholder Litigation”) in March 2014, and on July 21, 2015, aconsolidated class action petition was filed as the operative consolidated complaint, asserting claims against CEC’s former directors, adding The GoldmanSachs Group (“Goldman Sachs”) as a defendant, and removing all Apollo entities as defendants (the “Consolidated Class Action Petition”). The ConsolidatedClass Action Petition alleges that CEC Entertainment’s directors breached their fiduciary duties to CEC Entertainment’s stockholders in connection withtheir consideration and approval of the Merger Agreement by, among other things, conducting a deficient sales process, agreeing to an inadequate tenderprice, agreeing to certain provisions in the Merger Agreement, and filing materially deficient disclosures regarding the transaction. The Consolidated ClassAction Petition also alleges that two members of CEC Entertainment’s board who also served as the senior managers of CEC Entertainment had materialconflicts of interest and that Goldman Sachs aided and abetted the board’s breaches as a result of various conflicts of interest facing the bank. TheConsolidated Class Action Petition seeks, among other things, to recover damages, attorneys’ fees and costs. The Company assumed the defense of theConsolidated Shareholder Litigation on behalf of CEC’s named former directors and Goldman Sachs pursuant to existing indemnity agreements. On March23, 2016, the Court conducted a hearing on the defendants’ Motion to Dismiss the Consolidated Class Action Petition and on March 1, 2017, the SpecialMaster appointed by the Court issued a report recommending to the Court that the Consolidated Class Action Petition be dismissed. On September 9, 2018,the Court accepted the Special Master’s recommendations and dismissed the lawsuit in its entirety. On October 8, 2018, the Plaintiff in the ConsolidatedShareholder Litigation filed a notice of appeal of the District Court’s decision. While no assurance can be given as to the ultimate outcome of theconsolidated matter, we currently believe that the final resolution of the action will not have a material adverse effect on our results of operations, financialposition, liquidity or capital resources.Note 15. Income Taxes:For financial reporting purposes, income (loss) before income taxes includes the following components: Fiscal Year 2018 2017 2016 (in thousands) United States $(28,731) $(25,667) $(11,002) Foreign (including U.S. Possessions) 3,249 4,442 4,709Income (loss) before income taxes $(25,482) $(21,225) $(6,293)73Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)Our income tax expense (benefit) consists of the following for the periods presented: Fiscal Year 2018 2017 2016 (in thousands)Current tax expense (benefit): Federal $1,276 $(2,668) $8,008 State 1,090 (708) 3,879 Foreign 795 960 1,008 3,161 (2,416) 12,895Deferred tax expense (benefit): Federal (8,382) (72,829) (11,848) State 24 (137) (3,274) Foreign 176 1,091 (399) (8,182) (71,875) (15,521)Income tax expense (benefit) $(5,021) $(74,291) $(2,626)A reconciliation of the federal statutory income tax rate to our effective tax rate is as follows: Fiscal Year 2018 2017 2016Federal statutory rate(21.0)% (35.0)% (35.0)%State income taxes, net of federal benefit2.0 % (4.5)% 2.5 %Federal employment related income tax credits, net(2.9)% (1.2)% (21.8)%Merger and litigation related costs0.4 % 1.6 % 5.8 %Canadian tax rate difference— % 0.4 % 2.4 %Canadian nondeductible interest— % 0.7 % 1.8 %Canadian deferred tax valuation adjustment0.7 % 5.7 % — %Canadian tax reorganization0.8 % (7.6)% — %State tax credit, valuation adjustment1.3 % 2.0 % 2.8 %Foreign taxes withheld1.4 % — % — %Other0.4 % 1.9 % (0.2)% Effective tax rate (before impact of Tax Cuts and Jobs Actof 2017 (1)(16.9)% (36.0)% (41.7)%Adjustment related to the Tax Cuts and Jobs Act of 2017 (1)(2.8)% (314.0)% — %Adjusted effective tax rate(19.7)% (350.0)% (41.7)%_________________(1) The Tax Cuts and Jobs Act of 2017 (enacted on December 22, 2017) resulted in a $66.6 million decrease of our net deferred tax liability and a corresponding benefit toour deferred federal income taxes for Fiscal 2017.Our effective income tax rates for Fiscal 2018 and Fiscal 2017 were 16.9% and 36.0%, respectively (excluding the adjustment to our deferred taxliability resulting from the decrease in the federal income tax rate from 35% to 21% enacted on December 22, 2017, as part of tax the Tax Cuts and Jobs Act(the “TCJA”)). The TCJA made broad changes to the U.S. tax code that not only effected 2017 (e.g., one-time transition tax on certain unrepatriated earningsof foreign subsidiaries and bonus depreciation that will allow for full expensing of qualified property) but also impacted 2018 and subsequent years. Changesenacted by the TCJA that impact our 2018 and subsequent years include: (1) the reduction of the U.S. federal c74Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)orporate income tax rate from 35% to 21% ; (2) bonus depreciation that will allow for full expensing of certain qualified property in the year acquired andplaced in service; (3) elimination of the corporate alternative minimum tax (AMT); (4) a new limitation on the deductibility of interest expense; (5)limitations on the deductibility of certain executive compensation; (6) limitations on the use of foreign tax credits to reduce current U.S. income tax liability;and (7) limitations on net operating losses generated after December 31, 2017, to 80 percent of taxable income.Our effective income tax rate for Fiscal 2018 was favorably impacted by employment-related federal income tax credits, offset by the negativeimpact of nondeductible litigation costs related to the Merger, nondeductible penalties, an increase in our state income tax expense for the year which inlarge part was caused by state tax legislation enacted during the second quarter that increased the amount of income subject to state taxation, foreign incometaxes withheld (not offset by a foreign tax credits due to the foreign tax credit limitation), an increase in the reserve for uncertain tax positions, an increase ina valuation allowance for deferred tax assets associated with a carryforward of certain state tax credits and deferred tax assets relating to our Canadaoperations that could expire before they are utilized, partially offset by a favorable one-time adjustment to deferred tax (the tax effect of the cumulativeforeign currency translation adjustment existing as of January 1, 2018) resulting from the change in our intent to no longer indefinitely reinvest moniespreviously loaned to our Canadian subsidiary recorded in the first quarter.Our effective income tax rate for Fiscal 2018 was also favorably impacted by adjustments to the provisional estimates provided in Fiscal 2017 toaccount for the impact of the TCJA pursuant to Staff Accounting Bulletin No. 118 (“SAB 118”). The SEC staff issued SAB 118 on December 22, 2017, whichallows a company to recognize provisional amounts during a measurement period when it does not have the necessary information available, prepared oranalyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. SAB 118 further provides that the measurementperiod for finalizing the provisional estimates should not extend beyond one year from the enactment of the TCJA and that any adjustments made to theprovisional amounts under SAB 118 should be recorded as discrete adjustments in the period identified.Pursuant to SAB 118, we included a provisional estimate of $66.6 million tax benefit in our consolidated financial statements for the fiscal yearended December 31, 2017, relating to the enactment of TJCA, which primarily related to the re-measurement of our deferred tax liability. In the secondquarter of Fiscal 2018, we recorded an adjustment to the provisional estimate of $0.2 million tax benefit, in the third quarter of Fiscal 2018, we recorded anincremental adjustment to the provisional estimate of $0.5 million tax benefit. The measurement period relating to the enactment of the TCJA ended duringour fourth quarter, and the tax effects thereof have been completed as of the end of Fiscal 2018.75Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)Deferred income tax assets and liabilities consisted of the following at the dates presented: December 30,2018 December 31,2017 (in thousands)Deferred tax assets: Accrued compensation$1,523 $1,231Unearned revenue2,360 979Deferred rent8,272 6,914Stock-based compensation730 639Accrued insurance and employee benefit plans3,328 3,516 Unrecognized tax benefits (1)377 452NOL and other carryforwards5,746 5,635Loan costs394 577Other722 552Gross deferred tax assets23,452 20,495Less: Valuation allowance (2)2,896 $2,424Net deferred tax asset20,556 18,071Deferred tax liabilities: Depreciation and amortization(5,774) (9,492)Prepaid assets(621) (672)Intangibles(117,025) (117,717)Favorable/Unfavorable Leases(172) (65)Internal use software and other(4,022) (4,311)Gross deferred tax liabilities(127,614) (132,257)Net deferred tax liability$(107,058) $(114,186)_________________(1)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 aresettled.(2)Valuation allowance for deferred tax assets relating to Canada net operating loss and other non-U.S. differences and certain state tax credits.As of December 30, 2018, we have $8.1 million of federal net operating loss carryforwards ($5.2 million expiring at the end of tax year 2037 and$2.8 million with an indefinite carryforward period), $14.5 million of state net operating loss carryforwards (expiring at the end of tax years 2022 through2037), and $2.1 million of Canadian net operating loss carryforwards (expiring at the end of tax years 2034 through 2037). In addition, as of December 30,2018, we have $12.2 million of interest carryforwards with an indefinite carryforward period, $0.5 million of Alternative Minimum Tax credit carryforwardswith an indefinite carryforward period, and state income tax credit carryforwards of $0.5 million net of their related valuation allowance (expiring at the endof 2019 through 2027).We file numerous federal, state, and local income tax returns in the U.S. and some foreign jurisdictions. As a matter of ordinary course, we are subjectto regular examination by various tax authorities. Certain of our federal and state income tax returns are currently under examination and are in various stagesof the audit/appeals process. In general, the U.S. federal statute of limitations has expired for our federal income tax returns filed for tax years ended before2014 with the exception of the Peter Piper Pizza federal income tax returns with net operating losses which have been carried forward to open tax years(whereas, adjustments can be made to these prior returns until the respective statute of limitations expire for the particular tax years the net operating lossesare utilized). In general, our state income tax statutes of limitations have expired for tax years ended before 2014. In general, the statute of limitations for ourCanada income tax returns has expired for tax years ended before 2014.76Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: Fiscal Year 2018 2017 2016 (in thousands)Balance at beginning of period$3,853 $3,119 $3,288 Additions for tax positions taken in the current year114 1,677 74 Increases for tax positions taken in prior years571 16 1,479 Decreases for tax positions taken in prior years(48) (390) (964) Settlements with tax authorities(5) (32) (558) Expiration of statute of limitations(199) (537) (200)Balance at end of period$4,286 $3,853 $3,119Our liability for uncertain tax positions (excluding interest and penalties) was $4.3 million and $3.9 million as of December 30, 2018 andDecember 31, 2017, respectively, and if recognized would decrease our provision for income taxes by $3.3 million. Within the next twelve months, we couldsettle or otherwise conclude certain ongoing income tax audits. As such, it is reasonably possible that the liability for uncertain tax positions could decreasewithin the next twelve months by as much as $3.9 million as a result of payments and/or settlements with certain taxing authorities and expiring statutes oflimitations within the next twelve months. The total accrued interest and penalties related to unrecognized tax benefits as of December 30, 2018 andDecember 31, 2017, was $1.1 million and $1.0 million, respectively. On the Consolidated Balance Sheets, we include current accrued interest related tounrecognized tax benefits in “Accrued interest,” current accrued penalties in “Accrued expenses” and non-current accrued interest and penalties in “Othernoncurrent liabilities.”Note 16. Stock-Based Compensation Arrangements:2014 Equity Incentive PlanThe 2014 Equity Incentive Plan provides Parent authority to grant equity incentive stock options, nonqualified stock options, stock appreciationrights, restricted stock, restricted stock units, stock bonus awards or performance compensation awards to certain directors, officers or employees of theCompany.During 2018, 2017 and 2016, Parent granted options to purchase 112,769 shares, 123,603 shares, and 101,110 shares, respectively, of its commonstock to certain directors, officers and employees of the Company. The options are subject to certain service and performance based vesting criteria, and weresplit evenly between Tranches A, B and C, which have different vesting requirements. The options in Tranche A are service based, and vest and becomeexercisable in equal installments on each of the first five anniversaries of the respective grant dates. The Black-Scholes model was used to estimate the fairvalue of Tranche A stock options. Tranche B and Tranche C options are performance based and vest and become exercisable when certain return thresholdsare achieved. The Monte Carlo simulation model was used to estimate the fair value of Tranche B and Tranche C stock options. Unvested Tranche A optionsare also subject to accelerated vesting and exercisability on the first anniversary of a change in control of Parent or within 12 months following such achange in control. Tranche B and C options may also vest and become exercisable if applicable hurdles are achieved in connection with an initial publicoffering. Compensation costs related to options in the Parent were recorded by the Company.77Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The weighted-average fair value of the options granted in 2018, 2017 and 2016 was estimated at $4.93, $1.93 and $0.98 per option, $3.71, $2.28and $1.28 per option and $2.99, $1.68 and $0.87 per option, respectively, for Tranches A, B and C, respectively, on the date of grant based on the followingassumptions: Fiscal Year 2018 2017 2016 February 2018 August 2017 February 2017 February2016 Dividend yield—% —% —% —%Volatility for Tranche A33% 35% 34% 30%Volatility for Tranches B and C35% 34% 33% 30%Risk-free interest rate for Tranche A2.70% 1.39% 1.38% 1.09%Risk-free interest rate for Tranches B and C2.42% 1.28% 1.16% 0.99%Expected life - years3.7 1.7 2.2 3.6A summary of the option activity under the equity incentive plan as of December 30, 2018 and the activity for 2018 is presented below: Stock OptionsWeightedAverageExercisePrice (1)Weighted AverageRemainingContractual TermAggregateIntrinsic Value ($ per share) ($ in thousands)Outstanding stock options, December 31, 2017 2,349,288$9.00 Options Granted 112,769$13.73 Options Exercised (7,745)$9.96 Options Forfeited (466,981)$10.53 Outstanding stock options, December 30, 2018 1,987,331$8.875.6$—Stock options expected to vest, December 30, 2018 1,360,557$9.085.7$—Exercisable stock options, December 30, 2018 475,603$8.215.2$310_________________(1) The weighted average exercise price reflects the original grant date fair value per option as adjusted for the dividend payment made in August 2015.As of December 30, 2018, we had $0.6 million of total unrecognized share based compensation expense related to unvested options, net ofexpected forfeitures, which is expected to be amortized over the remaining weighted average period of 3.1 years.In January 2019 and February 2019, the Parent granted additional options to purchase 314,051 shares and 110,994 shares, respectively, of itscommon stock to certain officers and employees of the Company.78Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)A summary of stock based compensation costs recognized and capitalized is presented below: Fiscal Year December 30, 2018 December 31, 2017 January 1, 2017 (in thousands)Stock-based compensation costs $337 $620 $702Portion capitalized as property and equipment (1) (13) (14) (13)Stock-based compensation expense recognized $324 $606 $689Tax benefit recognized from stock-based compensation awards $— $— $4 __________________(1)We capitalize the portion of stock-based compensation costs related to our design, construction, facilities and legal departments that are directly attributable toour venue development projects, such as the design and construction of a new venue and the remodeling and expansion of our existing venues. Capitalized stock-basedcompensation costs attributable to our venue development projects are included in “Property and equipment, net” in the Consolidated Balance Sheets.Note 17. Stockholder’s Equity:We have one class of common capital stock, as disclosed on our Consolidated Balance Sheets. All outstanding common stock is owned by QuesoHoldings Inc. As of December 30, 2018 and December 31, 2017, we have 200 shares issued and outstanding.Note 18. Related Party Transactions:CEC Entertainment reimburses Apollo Management, L.P. for certain out-of-pocket expenses incurred in connection with travel and Board ofDirectors related expenses. In addition, CEC Entertainment engages Apollo portfolio companies to provide various services, including security services to itsvenues, licensed music video content for use in its venues, and employment screening services to its recruiting functions. Included in our Total operatingcosts and expenses are $1.5 million, $1.4 million and $1.7 million for Fiscal 2018, Fiscal 2017 and Fiscal 2016, respectively.Included in our Accounts Receivable balance are amounts due from Parent totaling $2.6 million and $2.5 million at December 30, 2018 andDecember 31, 2017, respectively, primarily related to various general and administrative and transaction related expenses paid on behalf of Parent.Note 19. Consolidating Guarantor Financial Information:On February 14, 2014, CEC Entertainment, Inc. (the “Issuer”), merged with and into an entity controlled by Apollo Global Management, LLC andits subsidiaries, which we refer to as the “Merger.” The senior notes issued by the Issuer in conjunction with the Merger are our unsecured obligations and arefully and unconditionally, jointly and severally guaranteed by all of our 100% wholly-owned U.S. subsidiaries (the “Guarantors”). Our wholly-owned foreignsubsidiaries and our less-than-wholly-owned U.S. subsidiaries are not a party to the guarantees (the “Non-Guarantors”). The following schedules present thecondensed consolidating financial statements of the Issuer, Guarantors and Non-Guarantors, as well as consolidated results, for the periods presented:79Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)CEC Entertainment, Inc.Condensed Consolidating Balance SheetAs of December 30, 2018(in thousands) Issuer Guarantor Non-Guarantors Eliminations ConsolidatedCurrent assets: Cash and cash equivalents $54,775 $6,725 $1,670 $— $63,170 Restricted cash — — 151 — 151Accounts receivable 28,421 4,956 4,117 (3,314) 34,180Inventories 16,896 6,617 294 — 23,807Prepaid assets 14,264 10,562 598 — 25,424Total current assets 114,356 28,860 6,830 (3,314) 146,732Property and equipment, net 468,827 64,721 5,637 — 539,185Goodwill 433,024 51,414 — — 484,438Intangible assets, net 14,716 462,369 — — 477,085Intercompany 78,402 66,373 — (144,775) —Investment in subsidiaries 477,556 — — (477,556) —Other noncurrent assets 7,292 11,409 24 — 18,725Total assets $1,594,173 $685,146 $12,491 $(625,645) $1,666,165Current liabilities: Bank indebtedness and other long-term debt,current portion $7,600 $— $— $— $7,600Capital lease obligations, current portion 661 — 16 — 677Accounts payable and accrued expenses 56,277 34,429 2,321 — 93,027Other current liabilities 4,768 510 — — 5,278Total current liabilities 69,306 34,939 2,337 — 106,582Capital lease obligations, less current portion 12,296 — 34 — 12,330Bank indebtedness and other long-term debt, less currentportion 961,514 — — — 961,514Deferred tax liability 91,049 17,866 (1,857) — 107,058Intercompany — 119,498 28,591 (148,089) —Other noncurrent liabilities 217,437 18,191 482 — 236,110Total liabilities 1,351,602 190,494 29,587 (148,089) 1,423,594Stockholder's equity: Common stock — — — — —Capital in excess of par value 359,570 466,114 3,241 (469,355) 359,570Retained earnings (deficit) (115,660) 28,538 (18,691) (9,847) (115,660)Accumulated other comprehensive income (loss) (1,339) — (1,646) 1,646 (1,339)Total stockholder's equity 242,571 494,652 (17,096) (477,556) 242,571Total liabilities and stockholder's equity $1,594,173 $685,146 $12,491 $(625,645) $1,666,16580Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)CEC Entertainment, Inc.Condensed Consolidating Balance SheetAs of December 31, 2017(in thousands) Issuer Guarantor Non-Guarantors Eliminations ConsolidatedCurrent assets: Cash and cash equivalents $59,948 $410 $6,842 — $67,200 Restricted cash — — 112 — 112Accounts receivable 27,098 3,283 2,563 (1,923) 31,021Inventories 17,104 4,614 282 — 22,000Prepaid assets 13,766 5,549 1,083 — 20,398Total current assets 117,916 13,856 10,882 (1,923) 140,731Property and equipment, net 496,725 66,669 6,627 — 570,021Goodwill 433,024 51,414 — — 484,438Intangible assets, net 16,764 463,613 — — 480,377Intercompany 90,937 10,770 — (101,707) —Investment in subsidiaries 462,873 — — (462,873) —Other noncurrent assets 7,913 11,359 205 — 19,477Total assets $1,626,152 $617,681 $17,714 $(566,503) $1,695,044Current liabilities: Bank indebtedness and other long-term debt,current portion $7,600 $— $— $— $7,600Capital lease obligations, current portion 586 — 10 — 596Accounts payable and accrued expenses 58,014 35,134 4,169 — 97,317Other current liabilities 4,265 511 — — 4,776Total current liabilities 70,465 35,645 4,179 — 110,289Capital lease obligations, less current portion 12,956 — 54 — 13,010Bank indebtedness and other long-term debt, less currentportion 965,213 — — — 965,213Deferred tax liability 99,083 16,697 (1,594) — 114,186Intercompany — 75,052 28,578 (103,630) —Other noncurrent liabilities 216,287 13,465 446 — 230,198Total liabilities 1,364,004 140,859 31,663 (103,630) 1,432,896Stockholder's equity: Common stock — — — — —Capital in excess of par value 359,233 466,114 3,241 (469,355) 359,233Retained earnings (deficit) (95,199) 10,708 (15,304) 4,596 (95,199)Accumulated other comprehensive income (loss) (1,886) — (1,886) 1,886 (1,886)Total stockholder's equity 262,148 476,822 (13,949) (462,873) 262,148Total liabilities and stockholder's equity $1,626,152 $617,681 $17,714 $(566,503) $1,695,04481Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)CEC Entertainment, Inc.Consolidating Statement of Comprehensive Income (Loss)Fiscal Year 2018(in thousands) Issuer Guarantor Non-Guarantors Eliminations ConsolidatedRevenues: Food and beverage sales $338,837 $52,353 $5,468 $— $396,658Entertainment and merchandise sales 432,266 36,086 10,324 — 478,676Total company venue sales 771,103 88,439 15,792 — 875,334Franchise fees and royalties 1,797 16,693 2,242 — 20,732International Association assessments and other fees 1,187 38,659 36,043 (75,889) —Total revenues 774,087 143,791 54,077 (75,889) 896,066Operating Costs and Expenses: Company venue operating costs (excluding Depreciationand amortization): Cost of food and beverage 78,458 13,925 1,936 — 94,319Cost of entertainment and merchandise 34,435 1,580 635 — 36,650Total cost of food, beverage, entertainmentand merchandise 112,893 15,505 2,571 — 130,969Labor expenses 231,727 19,657 4,943 — 256,327Rent expense 86,882 7,544 2,058 — 96,484Other venue operating expenses 170,239 16,287 3,602 (39,873) 150,255Total company venue operating costs 601,741 58,993 13,174 (39,873) 634,035Advertising expense 36,833 6,051 41,330 (36,016) 48,198General and administrative expenses 17,956 35,184 1,710 — 54,850Depreciation and amortization 88,174 10,606 1,940 — 100,720Transaction, severance and related litigation costs 277 250 — — 527Asset Impairment 2,591 4,341 3 — 6,935Total operating costs and expenses 747,572 115,425 58,157 (75,889) 845,265Operating income (loss) 26,515 28,366 (4,080) — 50,801Equity in earnings (loss) in affiliates 13,940 — — (13,940) —Interest expense 72,394 3,241 648 — 76,283Income (loss) before income taxes (31,939) 25,125 (4,728) (13,940) (25,482)Income tax expense (benefit) (11,478) 7,295 (838) — (5,021)Net income (loss) $(20,461) $17,830 $(3,890) $(13,940) $(20,461) Components of other comprehensive income (loss), net oftax: Foreign currency translation adjustments 547 — 547 (547) 547Comprehensive income (loss) $(19,914) $17,830 $(3,343) $(14,487) $(19,914)82Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)CEC Entertainment, Inc.Consolidating Statement of Comprehensive Income (Loss)Fiscal Year 2017(in thousands) Issuer Guarantor Non-Guarantors Eliminations ConsolidatedRevenues: Food and beverage sales $351,374 $52,962 $6,273 $— $410,609Entertainment and merchandise sales 406,930 41,036 10,313 — 458,279Total company venue sales 758,304 93,998 16,586 — 868,888Franchise fees and royalties 1,694 16,189 — 17,883International Association assessments and other fees 1,684 37,743 34,366 (73,793) —Total revenues 761,682 147,930 50,952 (73,793) 886,771Operating Costs and Expenses: Company venue operating costs (excluding Depreciationand amortization): Cost of food and beverage 81,420 14,137 2,013 — 97,570Cost of entertainment and merchandise 27,704 1,591 653 — 29,948Total cost of food, beverage, entertainmentand merchandise 109,124 15,728 2,666 — 127,518Labor expenses 224,176 18,791 5,094 — 248,061Rent expense 87,342 6,375 2,200 — 95,917Other venue operating expenses 168,991 15,122 4,802 (39,453) 149,462Total company venue operating costs 589,633 56,016 14,762 (39,453) 620,958Advertising expense 35,514 5,437 41,768 (34,340) 48,379General and administrative expenses 20,208 35,950 324 — 56,482Depreciation and amortization 97,789 9,900 2,082 — 109,771Transaction, severance and related litigation costs 974 474 — — 1,448Asset Impairment 1,824 14 5 — 1,843Total operating costs and expenses 745,942 107,791 58,941 (73,793) 838,881Operating income (loss) 15,740 40,139 (7,989) — 47,890Equity in earnings (loss) in affiliates 25,405 — — (25,405) —Interest expense 64,117 4,261 737 — 69,115Income (loss) before income taxes (22,972) 35,878 (8,726) (25,405) (21,225)Income tax expense (benefit) (76,038) 2,407 (660) — (74,291)Net income (loss) $53,066 $33,471 $(8,066) $(25,405) $53,066 Components of other comprehensive income (loss), net oftax: Foreign currency translation adjustments 1,010 — 1,010 (1,010) 1,010Comprehensive income (loss) $54,076 $33,471 $(7,056) $(26,415) $54,07683Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)CEC Entertainment, Inc.Consolidating Statement of Comprehensive Income (Loss)Fiscal Year 2016(in thousands) Issuer Guarantor Non-Guarantors Eliminations ConsolidatedRevenues: Food and beverage sales $361,111 $48,178 $5,770 $— $415,059Entertainment and merchandise sales 453,362 27,059 9,834 — 490,255Total company venue sales 814,473 75,237 15,604 — 905,314Franchise fees and royalties 2,011 16,328 — — 18,339International Association assessments and other fees 1,308 36,861 36,250 (74,419) —Total revenues 817,792 128,426 51,854 (74,419) 923,653Operating Costs and Expenses: Company venue operating costs (excluding Depreciationand amortization): Cost of food and beverage 89,373 12,835 2,107 — 104,315Cost of entertainment and merchandise 29,668 1,690 656 — 32,014Total cost of food, beverage, entertainmentand merchandise 119,041 14,525 2,763 — 136,329Labor expenses 230,526 15,865 5,035 — 251,426Rent expense 88,557 5,234 2,215 — 96,006Other venue operating expenses 170,385 12,134 4,545 (38,195) 148,869Total company venue operating costs 608,509 47,758 14,558 (38,195) 632,630Advertising expense 37,891 4,358 40,117 (36,224) 46,142General and administrative expenses 24,704 35,867 440 — 61,011Depreciation and amortization 109,985 7,343 2,241 — 119,569Transaction, severance and related litigation costs 1,244 55 — — 1,299Asset Impairment 1,487 — 63 — 1,550Total operating costs and expenses 783,820 95,381 57,419 (74,419) 862,201Operating income (loss) 33,972 33,045 (5,565) — 61,452Equity in earnings (loss) in affiliates 13,654 — — (13,654) —Interest expense 62,630 4,664 451 — 67,745Income (loss) before income taxes (15,004) 28,381 (6,016) (13,654) (6,293)Income tax expense (benefit) (11,337) 10,520 (1,809) — (2,626)Net income (loss) $(3,667) $17,861 $(4,207) $(13,654) $(3,667) Components of other comprehensive income (loss), net oftax: Foreign currency translation adjustments 420 — 420 (420) 420Comprehensive income (loss) $(3,247) $17,861 $(3,787) $(14,074) $(3,247)84Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)CEC Entertainment, Inc.Consolidating Statement of Cash FlowsFiscal Year 2018(in thousands)IssuerGuarantorsNon-GuarantorsEliminationsConsolidatedCash flows provided by (used in) operating activities:$68,828$21,872$(3,910)$—$86,790Cash flows from investing activities: Purchases of property and equipment(61,178)(14,646)(1,264)—(77,088) Development of internal use software(1,845)(911)——(2,756) Proceeds from sale of property and equipment560———560Cash flows provided by (used in) investing activities(62,463)(15,557)(1,264)—(79,284)Cash flows from financing activities: Repayments on senior term loan(7,600)———(7,600) Payment of debt financing costs (442) — — — (442) Payments on capital lease obligations(586)—(9)—(595) Payments on sale leaseback transactions(2,910)————(2,910)Cash flows provided by (used in) financing activities(11,538)—(9)—(11,547)Effect of foreign exchange rate changes on cash——50—50Change in cash, cash equivalents and restricted cash(5,173)6,315(5,133)—(3,991)Cash, cash equivalents and restricted cash at beginningof period59,9484106,954—67,312Cash, cash equivalents and restricted cash at end ofperiod$54,775$6,725$1,821$—$63,32185Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)CEC Entertainment, Inc.Consolidating Statement of Cash FlowsFiscal Year 2017(in thousands) Issuer Guarantors Non-Guarantors Eliminations ConsolidatedCash flows provided by (used in) operatingactivities: $73,925 $29,569 $803 $— $104,297 Cash flows from investing activities: Purchases of property and equipment (62,544) (27,061) (1,353) — (90,958) Development of internal use software — (3,243) — — (3,243) Proceeds from sale of property andequipment 489 — — — 489Cash flows provided by (used in) investingactivities (62,055)—(30,304)—(1,353)———(93,712) Cash flows from financing activities: Repayments on senior term loan (7,600) — — — (7,600) Repayments on note payable — (13) — — (13) Proceeds from financing sale-leasebacktransaction 4,073 — — — 4,073 Payments on capital lease obligations (460) — (7) — (467) Payments on sale leaseback transactions (2,470) — — — (2,470) Return of capital 1,447 — — — 1,447Cash flows provided by (used in) financingactivities (5,010) (13) (7) — (5,030)Effect of foreign exchange rate changes on cash— — 466 — 466 Change in cash and cash equivalents and restrictedcash 6,860 (748) (91) — 6,021Cash and cash equivalents and restricted cash atbeginning of period53,088 1,158 7,045 — 61,291Cash and cash equivalents and restricted cash atend of period $59,948 $410 $6,954 $— $67,31286Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)CEC Entertainment, Inc.Consolidating Statement of Cash FlowsFiscal Year 2016(in thousands) Successor Issuer Guarantors Non-Guarantors Eliminations ConsolidatedCash flows provided by (used in) operatingactivities: $73,722 $44,608 $625 $— $118,955 Cash flows from investing activities: Purchases of property and equipment (69,827) (18,439) (414) — (88,680) Development of internal use software (7,671) (2,784) — — (10,455) Proceeds from sale of property andequipment 696 — — — 696Cash flows provided by (used in) investingactivities (76,802)—(21,223)—(414)———(98,439) Cash flows from financing activities: Repayments on senior term loan (7,600) — — — (7,600) Repayments on note payable — (50) — — (50) Intercompany note 23,974 (23,974) — — — Payments on capital lease obligations (417) — (4) — (421) Payments on sale leaseback transactions (2,028) — — — (2,028) Excess tax benefit realized from stock-based compensation 4 — — — 4Cash flows provided by (used in) financingactivities 13,933 (24,024) (4) — (10,095)Effect of foreign exchange rate changes on cash — — 216 — 216 ————Change in cash and cash equivalents and restrictedcash 10,853 (639) 423 — 10,637Cash and cash equivalents and restricted cash atbeginning of period $42,235 $1,797 $6,622 $— $50,654Cash and cash equivalents and restricted cash atend of period $53,088 $1,158 $7,045 $— $61,29187Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)Note 20. Quarterly Results of Operations (Unaudited):The following table summarizes our unaudited quarterly condensed consolidated results of operations in 2018 and 2017: Quarters in Fiscal Year 2018 April 1,2018 July 1,2018 September 30,2018 December 30,2018 (in thousands)Food and beverage sales$118,377 $96,258 $94,023 $88,000Entertainment and merchandise sales131,117 115,904 121,611 110,044Company venue sales249,494 212,162 215,634 198,044Franchise fees and royalties5,410 5,196 5,311 4,815Total revenues$254,904 $217,358 $220,945 $202,859Operating income (loss)$34,713 $7,974 $7,369 $745Income (loss) before income taxes$16,156 $(11,139) $(11,700) $(18,799)Net income (loss)$12,223 $(8,965) $(9,487) $(14,232) Quarters in Fiscal Year 2017 April 2,2017 July 2,2017 October 1,2017 December 31,2017 (in thousands)Food and beverage sales$124,419 $97,411 $98,255 $90,524Entertainment and merchandise sales135,917 109,724 110,633 102,005Company venue sales260,336 207,135 208,888 192,529Franchise fees and royalties4,623 4,649 4,459 4,152Total revenues$264,959 $211,784 $213,347 $196,681Operating income (loss)$44,659 $7,814 $1,138 $(5,721)Income (loss) before income taxes$27,598 $(9,247) $(16,313) $(23,263)Net income (loss)$17,220 $(5,930) $(11,092) $52,868Quarterly operating results are not necessarily representative of operations for a full year.88ITEM 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 andwith the participation of our management, including our Chief Executive Officer and Chief Financial Officer, as of the end of the period covered by thisreport. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that our disclosurecontrols and procedures were effective at the reasonable assurance level as of December 30, 2018 to ensure that information required to be disclosed by us inthe reports we file or submit under the Securities Exchange Act of 1934, as amended, was (a) recorded, processed, summarized and reported within the timeperiods specified in the Securities and Exchange Commission’s rules and forms and (b) accumulated and communicated to our management, including ourChief Executive 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 ActRule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief FinancialOfficer and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes thosepolicies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions ofour assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of management andour directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets thatcould have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detectmisstatements.Our management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financialreporting as of December 30, 2018 based on the criteria established in “Internal Control – Integrated Framework (2013)” issued by the Committee ofSponsoring Organizations of the Treadway Commission. Based on our management’s assessment, we have concluded that, as of December 30, 2018 ourinternal control over financial reporting was effective based on those criteria.Changes in Internal Control over Financial ReportingDuring the quarterly period ended December 30, 2018, 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.89PART IIIITEM 10. Directors, Executive Officers, and Corporate Governance.Board of DirectorsAs of the date of this report, the Board consists of four members, including our Chief Executive Officer, one partner of Apollo, one principal ofApollo and one additional member.The following table provides information regarding our executive officers and the members of our Board:Name Age Position(s) Thomas Leverton 47 Chief Executive Officer and DirectorJ. Roger Cardinale 59 PresidentJames A. Howell 53 Executive Vice President and Chief Financial OfficerAndrew S. Jhawar 47 ChairmanNaveen R. Shahani 28 DirectorAllen R. Weiss 64 DirectorThomas Leverton has served as a member of our Board and Chief Executive Officer of the Company since July 2014. He served as Chief Executive Officer ofTopgolf from May 2013 until July 2014. From June 2010 to August 2012, Mr. Leverton served as Chief Executive Officer of Omniflight, an air medicaloperator. Earlier in his career, he held executive roles at FedEx Office, including Executive Vice President and Chief Development Officer. Mr. Leverton alsoserved as Chief Operating Officer of TXU Energy. He began his career at Johnson & Johnson and Bain & Company. In light of our ownership structure andMr. Leverton’s extensive executive leadership and management experience, the Board believes it is appropriate for Mr. Leverton to serve as our director.J. Roger Cardinale has served as President of the Company since June 2014. Previously, he served as Executive Vice President of Development andPurchasing of the Company since December 1999. In 2013, he was named President of the Company’s International Division. Prior to that, he served asSenior Vice President of Purchasing from March 1998 to December 1999 and Senior Vice President of Real Estate from January 1999 to December 1999.From January 1993 to March 1998, he served as Vice President of Purchasing and, from September 1990 to January 1993, he served as Director of Purchasing.Mr. Cardinale also held various other positions with the Company from November 1986 to September 1990.James A. Howell has served as Executive Vice President, Chief Financial Officer of the Company since September 2018. He served as Chief Financial Officerof Billabong International Ltd. Mr. Howell previously was Executive Vice President-Finance and Treasurer of Nordstrom, Inc., Chief Financial Officer forCAE SimuFlite, Inc., Senior Manager at PricewaterhouseCoopers LLP and Senior Vice President & Controller at Blockbuster, Inc.Andrew S. Jhawar became Chairman of our Board in December 2018. Mr. Jhawar is a Senior Partner and Head of the Consumer & Retail Industry team ofApollo Management, L.P., having joined in February 2000. Prior to Apollo Global Management, LLC, he served as an Investment Banker at Donaldson,Lufkin & Jenrette Securities Corporation and at Jefferies & Company, Inc. Mr. Jhawar has been the Chairman of The Fresh Market, Inc. since April 2016,QDOBA Restaurant Corporation since December 2018, and The Stand, LLC since August 2015. He previously served as the Chairman of Sprouts FarmersMarket, Inc. from March 2013 to August 2015 and a member of the Board from April 2011 through March 2013 and from August 2015 through February2016. In addition, Mr. Jhawar has previously been a Director of Hostess Brands, LLC from April 2013 through June 2017, Smart & Final Inc. from May 2007through December 2012, General Nutrition Centers, Inc. from December 2003 through March 2007, and Rent-A-Center, Inc. from October 2001 through June2005. Mr. Jhawar graduated with an M.B.A. from Harvard Business School and graduated, summa cum laude, with a B.S. in Economics from the WhartonSchool of the University of Pennsylvania. In light of our ownership structure and Mr. Jhawar’s extensive financial and business experience, includingexperience working with companies in the restaurant, consumer goods and retail industries, the Board believes it is appropriate for Mr. Jhawar to serve as ourChairman.90Naveen R. Shahani became a member of our Board in February 2019. Mr. Shahani is a Principal of Apollo, having joined in 2014. Prior to Apollo, he was amember of the Financial Sponsors Group in the Investment Banking Division of Credit Suisse. Mr. Shahani graduated magna cum laude with a B.S. inEconomics from the Wharton School at the University of Pennsylvania. In light of our ownership structure and his significant experience analyzing andinvesting in public and private companies, the Board believes it is appropriate for Mr. Shahani to serve as our director.Allen R. Weiss became a member of our Board in June 2014. Mr. Weiss served as President of Worldwide Operations for the Walt Disney Parks and Resortsbusiness of The Walt Disney Company, a global entertainment company listed on the NYSE, from 2005 until his retirement in November 2011. Prior to that,Mr. Weiss served in a number of roles for The Walt Disney Company beginning in 1972, including most recently as President of Walt Disney World Resort,Executive Vice President of Walt Disney World Resort and Vice President of Resort Operations Support. Mr. Weiss serves as a director of Dick’s SportingGoods, Inc. and Apollo Group, Inc. (a private education provider unaffiliated with Apollo). Mr. Weiss also serves on the board or council of a number ofcommunity and civic organizations. In light of our ownership structure and Mr. Weiss’s knowledge and understanding of the entertainment sector, includinginsight gained through his executive leadership and management experience at The Walt Disney Company, the Board believes it is appropriate for Mr. Weissto serve as our director.Corporate GovernanceCommittees of the BoardThe Board of Directors has two standing committees: Audit and Compensation. While the Audit Committee has primary responsibility for riskoversight, both our Audit Committee and our entire Board of Directors are actively involved in risk oversight on behalf of the Company and both receive areport on the Company’s risk management activities from our executive management team on a regular basis. Members of both the Audit Committee and theBoard of Directors also engage in periodic discussions with our President, Chief Executive Officer, Chief Financial Officer, General Counsel, Internal Auditand other officers of the Company as they deem appropriate to ensure that risk is being properly managed at the Company. In addition, each of thecommittees of the Board of Directors considers risks associated with its respective area of responsibility.Audit CommitteeThe Audit Committee is composed of three directors: Andrew Jhawar, Naveen Shahani and Allen Weiss. Lance Milken, who resigned as a director ofthe Company effective December 21, 2018, and Michael Diverio, who resigned as a director of the Company effective February 19, 2019, served on theAudit Committee through the dates of their respective resignations. The primary role of the Audit Committee is to provide financial oversight. Ourmanagement is responsible for preparing financial statements, and our independent registered public accounting firm is responsible for auditing thosefinancial statements. The Audit Committee does not provide any expert or special assurance or certifications as to our financial statements or as to the workof our independent registered public accounting firm. The Audit Committee is directly responsible for the selection, engagement, compensation, retentionand oversight of our independent registered public accounting firm. The Board has also determined that each member of the Audit Committee is financiallyliterate.The Audit Committee has established a procedure whereby complaints or concerns regarding accounting, internal controls or auditing matters maybe submitted anonymously to the Audit Committee by email at auditcomm@cecentertainment.com. The Audit Committee met four times in 2018.Although our Board of Directors has determined that each of the members of our Audit Committee is financially literate and has experienceanalyzing or evaluating financial statements, at this time we do not have an “audit committee financial expert” within the meaning of Item 407 of RegulationS-K under the Exchange Act serving on the Audit Committee. As a company whose stock is privately-held and given the financial sophistication and otherbusiness experience of the members of the audit committee, we do not believe that we require the services of an audit committee financial expert at this time.Compensation CommitteeThe Compensation Committee is composed of three directors: Andrew Jhawar, Naveen Shahani and Allen Weiss. Lance Milken, who resigned as adirector of the Company effective December 21, 2018, and Michael Diverio, who resigned as a director of the Company effective February 19, 2019, servedon the Audit Committee through the dates of their respective resignations. The Compensation Committee is responsible for approving the compensation,including performance bonuses, payable to the executive officers of the Company, and administering the Company’s equity compensation plans.91The Compensation Committee acts on behalf of and in conjunction with the Board of Directors to establish or recommend the compensation ofexecutive officers of the Company and to provide oversight of our overall compensation programs and philosophy. The Compensation Committee met twicein 2018.Code of EthicsWe have adopted a Code of Business Conduct and Ethics that applies to all of our officers and employees, as well as a separate Code of Ethics forour Chief Executive Officer, President and Senior Financial Officers that applies to our principal executive officer, principal financial officer and principalaccounting officer. Both documents may be accessed on our website at www.chuckecheese.com, under “Investor Relations-Governance.”92ITEM 11. Executive and Director CompensationInformation required by Item 11 will be set forth in a future amendment to this Annual Report on Form 10-K.PART III, ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERSAND MANAGEMENT AND RELATED STOCKHOLDER MATTERSThe following table sets forth information, as of March 1, 2019, relating to the beneficial ownership of the Company’s common stock by: (i) eachdirector and named executive officer; (ii) the directors and the executive officers as a group; and (iii) each person, as that term is used in the Exchange Act,known to the Company to own beneficially five percent (5%) or more of the Company’s outstanding shares of common stock. Unless otherwise indicated, tothe Company’s knowledge, each stockholder has sole voting and dispositive power with respect to the securities beneficially owned by that stockholder.Except as otherwise indicated, all stockholders set forth below have the same principal business address as the Company. On December 30, 2018, there were200 shares of the Company’s common stock outstanding.Name of Beneficial Owner Number of Shares ofCommon Stock Percentage ofOutstandingCommon StockQueso Holdings Inc. (1) 200 100%Thomas Leverton — —J. Roger Cardinale — —James A. Howell — —Andrew S. Jhawar — —Naveen R. Shahani — —Allen R. Weiss — —Directors and Executive Officers as a Group (6 persons) — —___________________________(1) AP VIII CEC Holdings, L.P. (“Queso LP”) is the sole shareholder of Queso Holdings Inc. Apollo Management VIII, L.P. (“Management VIII”) is the manager of Queso LP.AIF VIII Management, LLC (“AIF VIII LLC”) is the general partner of Management VIII. Apollo Management, L.P. (“Apollo Management”) is the sole member-manager ofAIF VIII LLC. Apollo Management GP, LLC (“Management GP”) is the general partner of Apollo Management. Apollo Management Holdings, L.P. (“ManagementHoldings”) is the sole member of Management GP. Apollo Management Holdings GP, LLC (“Management Holdings GP”) is the general partner of Management Holdings.Leon Black, Joshua Harris and Marc Rowan are the managers, as well as executive officers, of Management Holdings GP, and as such may be deemed to have voting anddispositive control with respect to the shares of our common stock held of record by Queso Holdings Inc. Each of Queso LP, Management VIII, AIF VIII LLC, ApolloManagement, Management GP, Management Holdings and Management Holdings GP, disclaims beneficial ownership of the shares of our common stock owned of record byQueso Holdings Inc., except to the extent of any pecuniary interest therein. The address of each of Queso Holdings Inc., Queso LP, Management VIII, AIF VIII LLC, ApolloManagement, Management GP, Management Holdings and Management Holdings GP, and Messrs. Black, Harris and Rowan, is 9 W. 57th Street, 43rd Floor, New York,New York 10019.93Part III, ITEM 13.CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS,AND DIRECTOR INDEPENDENCEThe Company’s Code of Business Conduct and Ethics provides that employees, officers and directors must act in the best interests of the Companyand refrain from engaging in any activity or having a personal interest that presents a “conflict of interest.” In addition, under applicable SEC rules, theCompany is required to disclose related person transactions as defined in the SEC’s rules. The Code of Business Conduct and Ethics may be accessed on theCompany’s website at www.chuckecheese.com under “Investor Relations-Governance.” We intend to disclose future amendments to or, with respect todirectors and certain executive officers, waivers from, certain provisions of the Code of Business Conduct and Ethics on our website.Related Party Transaction PolicyThe Board of Directors has adopted a Related Party Transaction Policy to set forth in writing the policies and procedures for review and approval oftransactions involving the Company and “related parties” (directors, executive officers, security holders owning five percent or greater of the Company’soutstanding voting securities, and immediate family members of the foregoing persons). The policy covers any related party transaction that meets theminimum threshold for disclosure under the relevant SEC rules, generally transactions involving amounts exceeding $120,000 in which a related party had,has or will have a direct or indirect material interest.Policy•Related party transactions must be approved by the Audit Committee or by the Chairman of the Audit Committee under authority delegated to theChairman of the Audit Committee by the Audit Committee.•A related party transaction will be approved only if the Audit Committee or the Chairman of the Audit Committee determines that it is fair to theCompany and in, or not inconsistent with, the best interests of the Company and its stockholders.•In considering the transaction, the Audit Committee or its Chairman will consider all relevant facts and circumstances of the transaction or proposedtransaction with a related party.Procedures•The affected related party will bring the matter to the attention of the General Counsel.•The General Counsel will determine whether the matter should be considered by the Audit Committee or its Chairman.•If a member of the Audit Committee is involved in the transaction, he or she will be recused from all discussions and decisions about the transaction.•The transaction must be approved in advance by the Audit Committee or its Chairman whenever practicable, and if not practicable, it may bepresented to the General Counsel for preliminary approval, or be preliminarily entered into, subject to ratification by the Audit Committee or itsChairman.•If the Audit Committee or its Chairman does not ratify the related party transaction, the Company will take all reasonable efforts or actions to amend,terminate or cancel it, as directed by the Audit Committee or its Chairman.•All related party transactions will be disclosed to the Board of Directors following their approval or ratification.Currently, there are no related party transactions which meet the requirements for review and approval under our policy.94Director IndependenceWe are not a listed issuer whose securities are listed on a national securities exchange or in an inter-dealer quotation system which has requirementsthat a majority of the Board of Directors be independent. However, if we were a listed issuer whose securities were traded on the New York Stock Exchangeand subject to such requirements, we would be entitled to rely on the controlled company exception contained in the NYSE Listing Manual, Section303A.00 for the exception from the independence requirements related to the majority of our Board of Directors and for the independence requirementsrelatedto our Compensation Committee. Pursuant to NYSE Listing Manual, Section 303A.00, a company of which more than 50% of the voting power for theelection of directors is held by an individual, a group or another company is exempt from the requirements that its Board of Directors consist of a majority ofindependent directors and that the Compensation Committee (and, if applicable, the nominating committee) of such company be comprised solely ofindependent directors. At December 30, 2018, Apollo beneficially owned 100% of the voting power of the Company which would qualify the Company as acontrolled company eligible for exemption under the rule.ITEM 14. Principal Accountant Fees and Services.The firm of Deloitte & Touche LLP was the independent registered public accounting firm for the audit of the Company’s annual consolidatedfinancial statements included in the Company’s annual report on Form 10-K, the review of the consolidated financial statements included in the Company’squarterly reports on Forms 10-Q and for services that are normally provided by accountants in connection with statutory and regulatory filings orengagements for the fiscal years ended December 30, 2018 and December 31, 2017. The following table presents fees billed or expected to be billed forprofessional services rendered by Deloitte & Touche LLP for the audit of the Company’s annual consolidated financial statements, audit-related services, taxservices and all other services rendered by Deloitte & Touche LLP for the Company’s 2018 and 2017 fiscal years: Fiscal 2018 Fiscal 2017Audit Fees (1) $585,000 $585,000Audit-related Fees (2) 10,000 7,000Tax fees (3) — 15,000All other fees (4) 3,000 2,000 Total $598,000 $609,000_______________________(1) “Audit fees” are fees billed by Deloitte & Touche LLP for professional services rendered for the audit of the Company’s annual consolidated financial statements includedin the Company’s Form 10-K, the review of the Company’s quarterly consolidated financial statements included in the Company’s Forms 10-Q, and includes fees forservices that are normally incurred in connection with statutory and regulatory filings or engagements, such as consents, comfort letters, statutory audits, attest servicesand review of documents filed with the Securities and Exchange Commission.(2) “Audit-related fees” are fees billed by Deloitte & Touche LLP for assurance services that are reasonably related to the performance of the audit or review of theCompany’s consolidated financial statements or other attestation services or consultations that are not reported under audit fees.(3) “Tax fees” are fees billed by Deloitte & Touche LLP for professional services rendered for tax compliance, tax planning and tax advice.(4) “All other fees” are fees billed by Deloitte & Touche LLP for any professional services not included in the first three categories.All audit services, audit related services, and other services were pre-approved by the Audit Committee, which concluded that the provision of suchservices by Deloitte & Touche LLP was compatible with the maintenance of that firm’s independence in the conduct of its auditing functions. The AuditCommittee’s pre-approval policy (i) identifies the guiding principles that must be considered by the audit committee in approving services to ensure thatDeloitte & Touche LLP’s independence is not impaired; (b) describes the audit, audit-related, tax and other services that may be provided and the non-auditservices that are prohibited; and (c) sets forth pre-approval requirements for all permitted services. Under the policy, all services to be provided by Deloitte &Touche LLP must be pre-approved by the Audit Committee.95PART II – OTHER INFORMATIONPART IVITEM 15. Exhibits and Financial Statement Schedules.Documents filed as part of this report: Financial Statements. The financial statements and related notes included in Part II, Item 8. “Financial Statements andSupplementary Data” are filed as a part of this Annual Report on Form 10-K. See “Index to ConsolidatedFinancial Statements.” Financial StatementSchedules. There are no financial statement schedules filed as a part of this Annual Report on Form 10-K, since thecircumstances requiring inclusion of such schedules are not present. Exhibits. The exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index, which Exhibit Indexis incorporated in this Annual Report on Form 10-K by reference. The exhibits include agreements towhich the Company is a party or has a beneficial interest. The agreements have been filed to provideinvestors with information regarding their respective terms. The agreements are not intended to provideany other factual information about the Company or its business or operations. In particular, the assertionsembodied in any representations, warranties and covenants contained in the agreements may be subject toqualifications with respect to knowledge and materiality different from those applicable to investors andmay be qualified by information in confidential disclosure schedules not included with the exhibits.These disclosure schedules may contain information that modifies, qualifies and creates exceptions to therepresentations, warranties and covenants set forth in the agreements. Moreover, certain representations,warranties and covenants in the agreements may have been used for the purpose of allocating risk betweenthe parties, rather than establishing matters as facts. In addition, information concerning the subject matterof the representations, warranties and covenants may have changed after the date of the respectiveagreement, which subsequent information may or may not be fully reflected in the Company’s publicdisclosures. 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 operationson the date hereof.96SIGNATURESPursuant 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 signedon its behalf by the undersigned, thereunto duly authorized. Dated: March 11, 2019 CEC Entertainment, Inc. /s/ Thomas Leverton Thomas Leverton Chief Executive Officer and DirectorPursuant to the requirements of the Securities and 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/ Thomas Leverton Chief Executive Officer and Director (Principal ExecutiveOfficer) March 11, 2019Thomas Leverton /s/ James A. Howell Executive Vice President and Chief Financial Officer (PrincipalFinancial Officer) March 11, 2019James A. Howell /s/ David Rappaport Vice President, Controller and Chief Accounting Officer(Principal Accounting Officer) March 11, 2019David Rappaport * Director March 11, 2019Andrew S. Jhawar * Director March 11, 2019Naveen R. Shahani * Director March 11, 2019Allen R. Weiss *By: /s/ Rodolfo Rodriguez, Jr. Executive Vice President, Chief Legal and Human ResourcesOfficer March 11, 2019Rodolfo Rodriguez, Jr. 97EXHIBIT INDEX ExhibitNumber Description2.1 Agreement and Plan of Merger, dated as of January 15, 2014, among Queso Holdings Inc., Q Merger Sub Inc., and CEC Entertainment,Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Registration Statement on Form S-4 (File No. 333-199298) as filedwith the Commission on October 14, 2014) 3.1 Third Restated Articles of Incorporation of CEC Entertainment, Inc. (incorporated by reference to Exhibit 3.1 to the Company’sRegistration Statement on Form S-4 (File No. 333-199298) as filed with the Commission on October 14, 2014) 3.2 Second Amended and Restated Bylaws of CEC Entertainment, Inc. (incorporated by reference to Exhibit 3.2 to the Company’sRegistration Statement on Form S-4 (File No. 333-199298) as filed with the Commission on October 14, 2014) 4.1 Indenture, dated as of February 19, 2014, among CEC Entertainment, Inc., the Subsidiary Guarantors party thereto from time to timeand Wilmington Trust, National Association (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement onForm S-4 (File No. 333-199298) as filed with the Commission on October 14, 2014). 4.2 Registration Rights Agreement, dated as of February 19, 2014, among CEC Entertainment, Inc., the Subsidiary Guarantors, CreditSuisse Securities (USA) LLC and Deutsche Bank Securities Inc. (incorporated by reference to Exhibit 4.2 to the Company’sRegistration Statement on Form S-4 (File No. 333-199298) as filed with the Commission on October 14, 2014) 4.3 First Supplemental Indenture, dated as of October 9, 2014, among CEC Entertainment, Inc., CEC Entertainment Leasing Company andWilmington Trust, National Association (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q(File No. 001-13687) as filed with the Commission on November 12, 2014) 4.4 Second Supplemental Indenture, dated as of November 20, 2014, among Peter Piper Holdings, Inc., CEC Entertainment, Inc., PeterPiper Inc., Peter Piper Mexico, LLC, Peter Piper Texas, LLC, Texas PP Beverage, Inc. and Wilmington Trust, National Association(incorporated by reference to Exhibit 4.4 to the Company’s Annual Report on Form 10-K (File No. 001-13687) as filed with theCommission on March 5, 2015) 4.5 Third Supplemental Indenture, dated as of March 19, 2015, among CEC Entertainment, Inc., CEC Leaseholder, LLC and WilmingtonTrust, National Association (incorporated by reference to Exhibit 4.5 to the Company’s Annual Report on Form 10-K (File No. 001-13687) as filed with the Commission on March 28, 2018. 4.6 Fourth Supplemental Indenture, dated as of November 13, 2017, among CEC Entertainment., CEC Leaseholder #2, LLC andWilmington Trust, National Association (incorporated by reference to Exhibit 4.6 to the Company’s Annual Report on Form 10-K(File No. 001-13687) as filed with the Commission on March 28, 2018. 4.7 Fifth Supplemental Indenture, dated as of January 24, 2018, among CEC Entertainment, Inc., CEC Entertainment International, LLCand Wilmington Trust, National Association (incorporated by reference to Exhibit 4.7 to the Company’s Annual Report on Form 10-K(File No. 001-13687) as filed with the Commission on March 28, 2018. 10.1 First Lien Credit Agreement, dated as of February 14, 2014, among Queso Holdings Inc., as Holdings, Q Merger Sub Inc., as Borrower,the Lenders party thereto, Deutsche Bank AG New York Branch, as Administrative Agent, Deutsche Bank Securities Inc., Credit SuisseSecurities (USA) LLC, Morgan Stanley Senior Funding, Inc. and UBS Securities LLC, as Joint Lead Arrangers and Joint Bookrunners,Credit Suisse Securities (USA) LLC, as Syndication Agent, and Morgan Stanley Senior Funding, Inc. and UBS Securities LLC, asDocumentation Agents (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-4 (File No.333-199298) as filed with the Commission on October 14, 2014) 10.2 Collateral Agreement (First Lien), dated as of February 14, 2014, among CEC Entertainment, Inc. (as successor by merger on the datethereof to Q Merger Sub Inc.), as Borrower, each Subsidiary Loan Party party thereto and Deutsche Bank AG New York Branch, asCollateral Agent (incorporated by reference to Exhibit 10.2 to the Company’s Registration Statement on Form S-4 (File No. 333-199298) as filed with the Commission on October 14, 2014) 10.3 Holdings Guarantee and Pledge Agreement, dated as of February 14, 2014, between Queso Holdings Inc., as Holdings, and DeutscheBank AG New York Branch, as Agent (incorporated by reference to Exhibit 10.3 to the Company’s Registration Statement on Form S-4(File No. 333-199298) as filed with the Commission on October 14, 2014) 10.4 Subsidiary Guarantee Agreement (First Lien), dated as of February 14, 2014, among the subsidiaries of CEC Entertainment, Inc. namedtherein and Deutsche Bank AG New York Branch, as Collateral Agent (incorporated by reference to Exhibit 10.4 to the Company’sRegistration Statement on Form S-4 (File No. 333-199298) as filed with the Commission on October 14, 2014) 10.5 Employment Agreement, dated as of July 30, 2014, between the Company and Thomas Leverton (incorporated by reference to Exhibit10.5 to the Company’s Registration Statement on Form S-4 (File No. 333-199298) as filed with the Commission on October 14, 2014) 10.6 Employment Agreement, dated as of July 30, 2014, between the Company and J. Roger Cardinale (incorporated by reference toExhibit 10.6 to the Company’s Registration Statement on Form S-4 (File No. 333-199298) as filed with the Commission on October14, 2014) 10.7 Non-Employee Director Term Sheet, dated as of July 30, 2014, between the Company and Allen R. Weiss (incorporated by reference toExhibit 10.9 to the Company’s Registration Statement on Form S-4 (File No. 333-199298) as filed with the Commission on October14, 2014) 10.8 Queso Holdings Inc. 2014 Equity Incentive Plan, as adopted on August 21, 2014 (incorporated by reference to Exhibit 10.10 to theCompany’s Registration Statement on Form S-4 (File No. 333-199298) as filed with the Commission on October 14, 2014) 10.9 Form of Queso Holdings Inc. 2014 Equity Incentive Plan Stock Option Agreement (incorporated by reference to Exhibit 10.11 to theCompany’s Registration Statement on Form S-4 (File No. 333-199298) as filed with the Commission on October 14, 2014) 10.10 Employment Agreement, dated as of November 20, 2015, between the Company and Dale R. Black (incorporated by reference toExhibit 10.13 to the Company’s Annual Report on Form 10-K (File No. 001-13687) as filed with the Commission on March 2, 2016) 10.11 Incremental Assumption Agreement (Extended Revolving Facility Commitment) dated as of May 8, 2018 (incorporated by referenceto Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q (File No. 001-13687) as filed with the Commission on August 10,2018. 10.12 Amendment to Employment Agreement, dated as of October 12, 2018, between CEC Entertainment, Inc. and Thomas Leverton(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q (File No. 001-13687) as filed with theCommission on November 9, 2018) 10.13 Amendment to Employment Agreement, dated as of October 12, 2018, between CEC Entertainment, Inc. and J. Roger Cardinale(incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q (File No. 00-13687) as filed with theCommission on November 9, 2018) 10.14* Employment Agreement, dated as of December 20, 2018 between the Company and James A. Howell 21.1* Subsidiaries of the Company 24.1* Power of attorney 31.1* Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adoptedpursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2* Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adoptedpursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1** Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-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 2002 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document__________________* Filed herewith.** Furnished herewith.EMPLOYMENT AGREEMENTThis EMPLOYMENT AGREEMENT, by and between CEC Entertainment, Inc., a Kansas corporation (the “Company”),and James A. Howell (“Executive”) (collectively, the “Parties”) is made as of December 20, 2018 (the “Effective Date”). WHEREAS, the Company and Executive have previously entered into an employment term sheet, dated as of August 31,2018 (the “Prior Agreement”); andWHEREAS, the Parties desire to supersede the Prior Agreement and enter into this employment agreement (the “Agreement”)pursuant to the terms, provisions and conditions set forth herein.NOW, THEREFORE, in consideration of the premises and of the mutual covenants, understandings, representations,warranties, undertakings and promises hereinafter set forth, intending to be legally bound thereby, the Parties agree as follows:1. Employment Period.Subject to earlier termination in accordance with Section 3 of this Agreement, Executive shall be employed by the Companyfor a period commencing on the Effective Date and ending on the fifth anniversary of the Effective Date (the “Employment Period”),unless the parties mutually agree to extend the term at least 90 days prior to the end of the Employment Period. Upon Executive’stermination of employment with the Company for any reason, Executive shall immediately resign all positions with the Company orany of its subsidiaries or affiliates, including any position as a member of the Company’s Board of Directors (the “Board”) and theBoard of Directors of Queso Holdings Inc., a Delaware corporation (“Holdings”).2. Terms of Employment.(a) Position. During the Employment Period, Executive shall serve as Executive Vice President and Chief Financial Officerof the Company and will perform such duties and exercise such supervision with regard to the business of the Company as areassociated with such position, including such duties as may be prescribed from time to time by the Chief Executive Officer of theCompany (the “Supervisor”). Executive shall report directly to the Supervisor, and if reasonably requested by the Supervisor,Executive hereby agrees to serve (without additional compensation) as an officer and director of the Company or any affiliate orsubsidiary thereof. (b) Duties. During the Employment Period, Executive shall have such responsibilities, duties, and authority that arecustomary for Executive’s position, subject at all times to the control of the Supervisor, and shall perform such services as customarilyare provided by an executive of a corporation with Executive’s position and such other services consistent with Executive’s position,as shall be assigned to Executive from time to time by the Supervisor. During the Employment Period, and excluding any periods ofvacation and sick leave to which Executive is entitled, Executive agrees to devote all of Executive’s business time to the business andaffairs of the Company. Executive shall be entitled to engage in charitable and educational activities and to manage Executive’spersonal and family investments, to the extent such activities are not competitive with the business of the Company, do not materiallyinterfere with the performance of Executive’s duties for the Company and are otherwise consistent with the Company’s governancepolicies.(c) Compensation.(i) Base Salary. During the Employment Period, Executive shall receive an initial annual base salary in an amountequal to $400,000, less all applicable withholdings, which shall be paid in accordance with the customary payroll practices ofthe Company and prorated for partial calendar years of employment (as in effect from time to time, the “Annual Base Salary”).The Annual Base Salary shall be subject to annual review by the Board, in its sole discretion, for possible increase and anysuch increased Annual Base Salary shall constitute “Annual Base Salary” for purposes of this Agreement.(ii) Annual Bonus. During the Employment Period, with respect to each completed fiscal year of the Company,Executive shall be eligible to receive an annual bonus (the “Bonus”) targeted at 100% of Annual Base Salary, with a maximumbonus of 150% of Annual Base Salary, contingent upon the achievement of qualitative and quantitative performance goalsapproved by the Board. The Bonus, if any, shall be paid no later than March 15th of the year following the fiscal year to whichthe Bonus relates. Executive shall be eligible for a Bonus in respect of 2018 on a pro rata basis based on the Effective Date.(iii) Equity.(A) Investment Equity. As soon as reasonably practicable following the Effective Date, Executive shall investThree Hundred Thousand Dollars ($300,000.00) in Holdings. Such investment (x) shall be in common stock ofHoldings (“Common Stock”) that is economically equivalent to the securities acquired by AP VIII Queso HoldingsL.P., a Delaware limited partnership (“Apollo”) and (y) shall be made at the Fair Market Value (as defined in thatcertain Investor Rights Agreement, dated as of August 21, 2014, by and among Holdings, Apollo, and certain otherparties thereto) of the Common Stock as of the date of such investment, without discount for lack of marketability orother factors commonly associated with privately held stock (the “Investment Price”), and (z) shall be made as follows:(1) $150,000 by check or money order made payable to Holdings and delivered to the Company withinseven (7) days of the Effective Date; and(2) Up to $150,000 of Executive’s Bonus, after deduction of taxes (“Net Bonus”), in each year ofExecutive’s employment, until the total additional amount of $150,000 has been invested. As an example, ifExecutive’s 2019 Net Bonus exceeds $150,000, then $150,000 shall be invested in the Company and anybalance shall be paid to Executive; however, if the 2019 Net Bonus is less than $150,000, then the entire NetBonus amount shall be invested.(B) Options. As soon as practicable following the Effective Date, Executive shall be granted options topurchase 0.545% of the shares of Common Stock on a fully diluted basis with an exercise price equal to the Fair MarketValue of the Common Stock on the date of grant, subject to the vesting rights and other terms of the applicable awardagreement and the Queso Holdings Inc. 2014 Equity Incentive Plan.(iv) Benefits. During the Employment Period, Executive shall be eligible to participate in all retirement, compensationand employee benefit plans, practices, policies and programs provided by the Company to the extent applicable generally toother executives of the Company (except severance plans, policies, practices, or programs) subject to the eligibility criteria setforth therein, as such may be amended or terminated from time to time, including reimbursement of up to $2,500.00 for annualexecutive physical evaluation. In addition, the Company will reimburse Executive for the COBRA benefits continuation coststhat he incurs and pays through the first sixty (60) days of his employment with the Company, upon Executive’s presentation tothe Company of receipts for all such expenses.(v) Expenses. During the Employment Period, Executive shall be entitled to receive reimbursement for all reasonablebusiness expenses incurred by Executive in the performance of Executive’s duties hereunder, provided that Executive providesall necessary documentation in accordance with the Company’s policies.(vi) Relocation Expenses. The Company shall promptly reimburse Executive for the reasonable expenses relating toExecutive’s temporary housing for up to three months, as well as up to $50,000 in relocation expenses, including, withoutlimitation, (A) reasonable travel in connection with finding a residence in Dallas, Texas, (B) packing and shipment of personaleffects, (C) transaction related costs (e.g. sales costs and commissions associated with the sale of Executive’s personalresidence), and (D) reasonable incidental expenses, upon Executive’s presentation to the Company of receipts for all suchexpenses. If Executive resigns within the first year of employment, other than for Good Reason (as defined below) he willreimburse the Company for any relocation expenses previously reimbursed by the Company under this provision other thanany temporary housing expenses.(vii) Attorneys’ Fees. Additionally, the Company shall reimburse Executive for up to $5,000 of his reasonable andnecessary attorney’s fees incurred in connection with the negotiation of this Agreement and with any other agreementsattendant to the commencement of Executive’s employment with the Company.3. Termination of Employment.(a) Death or Disability. Executive’s employment shall terminate automatically upon Executive’s death. If Executive becomessubject to a Disability (as defined below) during the Employment Period, the Company may give Executive written notice inaccordance with Sections 3(g) and 9(g) of its intention to terminate Executive’s employment. For purposes of this Agreement,“Disability” means Executive’s inability to perform Executive’s duties hereunder by reason of any medically determinable physical ormental impairment for a period of six monthsor more in any 12-month period.(b) Cause. Executive’s employment may be terminated at any time by the Company for Cause (as defined below). Forpurposes of this Agreement, “Cause” shall mean Executive’s (i) conviction, plea of no contest to, plea of nolo contendere to, orimposition of unadjudicated probation for any felony or a crime of moral turpitude, (ii) commission of an act of fraud or embezzlement,(iii) commission of an act of gross negligence or willful gross misconduct that results or could reasonably be expected to result in harmto the Company’s business or reputation, (iv) breach of any terms of Executive’s employment in any material respect (other than anysuch failure resulting from Executive’s Disability), which results or could reasonably be expected to result in harm to the Company’sbusiness or reputation, or (v) continued willful failure to substantially perform Executive’s duties under this Agreement. Executive’semployment shall not be terminated for Cause within the meaning of clauses (iv) or (v) above unless Executive has been given writtennotice by the Company stating the basis for such termination and Executive is given 30 days to cure, to the extent curable, the neglector conduct that is the basis of any such claim.(c) Termination Without Cause. The Company may terminate Executive’s employment hereunder without Cause at any time.(d) Good Reason. Executive’s employment may be terminated at any time by Executive for Good Reason (as definedbelow). For purposes of this Agreement, “Good Reason”shall mean without Executive’s written consent, (i) any reduction approved by the Board in the amount of Executive’s annual BaseSalary or Bonus opportunity provided by Section 2(c)(ii), (ii) the assignment of duties to Executive that are materially inconsistent withthe duties set forth in Section 2(b), (iii) any material breach by the Company of this Agreement, (iv) the requirement that Executive bebased in an office that is located more than 50 miles from Executive’s principal place of business as of the date of this Agreement, (v)Executive is demoted, or (vi) any requirement that the Executive report to anyone other than the Supervisor. In order for Executive toterminate his employment for Good Reason, (A) Executive must provide written notice of any alleged violation of clauses (i) through(iii) above stating the basis for such termination within 30 days following any such alleged violation, (B) the Company shall have 30days following receipt of the written notice described in clause (A) to cure the alleged violation (the “Cure Period”), and (C) if theCompany fails to cure the alleged violation, Executive must terminate his employment with the Company during the 30-day periodfollowing the Cure Period.(e) Voluntary Termination. Executive’s employment may be terminated at any time by Executive without Good Reason upon30 days’ prior written notice.(f) Termination as a Result of Expiration of the Employment Period. Unless otherwise agreed between the Parties,Executive’s employment shall automatically terminate upon the expiration of the Employment Period.(g) Notice of Termination. Any termination by the Company for Cause or without Cause, or by Executive for Good Reasonor without Good Reason, shall be communicated by Notice of Termination to the other Party hereto given in accordance with Section9(g). For purposes of this Agreement, a ‘‘Notice of Termination” means a written notice that (i) indicates the specific terminationprovision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimedto provide a basis for termination of Executive’s employment under the provision so indicated, and (iii) if the Date of Termination (asdefined below) is other than the date of receipt of such notice, specifies the termination date. The failure by Executive or the Companyto set forth in the Notice of Termination any fact or circumstance that contributes to a showing of Good Reason or Cause shall notwaive any right of Executive or the Company hereunder or preclude Executive or the Company from asserting such fact orcircumstance in enforcing Executive’s or the Company’s rights hereunder.(h) Date of Termination. For purposes of this Agreement, “Date of Termination” shall mean (i) if Executive’s employment isterminated by the Company for Cause, without Cause or by reason of Disability, or by Executive for Good Reason or without GoodReason, the date of receipt of the Notice of Termination, provided such Date of Termination is in accordance with Section 3(b),Section 3(d) or Section 3(e) or any later date specified therein pursuant to Section 3(g), as the case may be, (ii) if Executive’semployment is terminated by reason of death, the date of death, and (iii) if Executive’s employment is terminated by reason of theexpiration of the Employment Period, the date of such expiration.4. Obligations of the Company upon Termination.(a) Resignation for Good Reason; Termination without Cause. If during the Employment Period, the Company shallterminate Executive’s employment without Cause (otherthan as a result of death or Disability) or Executive shall terminate Executive’s employment for Good Reason, then the Company willprovide Executive with the following payments and/or benefits:(i) the Company shall pay to Executive as soon as reasonably practicable but no later than the 60th day following theDate of Termination the following in a lump sum, to the extent not previously paid, (A) the Annual Base Salary through theDate of Termination, (B) the Bonus earned for any fiscal year ended prior to the year in which the Date of Termination occurs,provided that Executive was employed on the last day of such fiscal year, (C) the amount of any unpaid expensereimbursements to which Executive may be entitled pursuant to Section 2(c)(v) of this Agreement, and (D) any other vestedpayments or benefits to which Executive or Executive’s estate may be entitled to receive under any of the Company’s benefitplans or applicable law, in accordance with the terms of such plans or law (clauses (A)-(D), the “Accrued Obligations”); and(ii) subject to Section 4(e) of this Agreement, on the 60th day after the Date of Termination, the Company will payExecutive a lump sum amount equal to one times the sum of (x) Executive’s Annual Base Salary as in effect as of the Date ofTermination and (y) the annual Bonus paid or to be paid with respect to the fiscal year completed most recently prior to theDate of Termination (the “Severance Payment”).(b) Death or Disability. If Executive’s employment shall be terminated by reason of Executive’s death or Disability, then theCompany will provide Executive with the Accrued Obligations. Thereafter, the Company shall have no further obligation to Executiveor Executive’s legal representatives.(c) Termination for Cause; Resignation without Good Reason. If Executive’s employment shall be terminated by theCompany for Cause or by Executive without Good Reason, then the Company shall have no further obligations to Executive otherthan for payment of the Accrued Obligations.(d) Expiration of the Employment Period. If Executive’s employment shall be terminated by reason of the expiration of theEmployment Period as a result of the Company’s or Executive’s non-extension, then the Company will provide Executive with theAccrued Obligations. Thereafter, the Company shall have no further obligation to Executive or Executive’s legal representatives.(e) Separation Agreement and General Release. The Company’s obligation to make the Severance Payment is conditioned onExecutive or Executive’s legal representatives executing a separation agreement and general release of claims related to or arising fromExecutive’s employment with the Company or the termination of employment against the Company and its affiliates (and theirrespective officers and directors) in a form reasonably determined by the Company, which shall be provided by the Company toExecutive within five days following the Date of Termination; provided that, if Executive should fail to execute (or revokes) suchrelease within 45 days following the Date of Termination, the Company shall not have any obligation to provide the SeverancePayment. If Executive executes the release within such 45-day period and does not revoke the release within seven days following theexecution of the release, the Severance Payment will be made in accordance with Section 4(a)(ii).5. Restrictive Covenants.(a) Nonsolicitation. In consideration of Executive’s employment and receipt of payments hereunder, including, withoutlimitation, the grant of options under Section 2(c), during the period commencing on the Effective Date and ending 12 months after theDate of Termination (the “Restricted Period”), Executive shall not directly, or indirectly through another person, (i) induce or attemptto induce any employee, representative, agent or consultant of the Company or any of its affiliates or subsidiaries to leave the employor services of the Company or any of its affiliates or subsidiaries, or interfere with the relationship between the Company or any of itsaffiliates or subsidiaries and any employee, representative, agent or consultant thereof, provided that Executive shall not be restrictedfrom engaging in general solicitations not directed at any such persons described in this clause (i), (ii) hire any person who was anemployee, representative, agent or consultant of the Company or any of its affiliates or subsidiaries at any time during the 12-monthperiod immediately prior to the date on which such hiring would take place, or (iii) directly or indirectly induce or attempt to induceany customer, supplier, licensee, licensor, representative, agent or other business relation of the Company or any of its affiliates orsubsidiaries to cease doing business with, or reduce the amount of business conducted with, the Company or any of its affiliates orsubsidiaries, or interfere with the relationship between any such customer, supplier, licensee, licensor, representative, agent or businessrelation.(b) Noncompetition. Executive hereby acknowledges that Executive is familiar with the Confidential Information (as definedbelow) of the Company and its subsidiaries. Executive agrees that during the Restricted Period, Executive shall not (and shall causeeach of Executive’s affiliates not to), directly or indirectly, own any interest in, manage, control, participate in (whether as an officer,director, manager, employee, partner, equity holder, member, agent, representative or otherwise), consult with, render services for, orin any other manner engage, directly or indirectly, in the restaurant related family entertainment business (excluding any fine diningrestaurant business) in the Geographic Area (as defined below); provided that nothing herein shall prohibit Executive from (i) owningor operating a restaurant with a single location or (ii) being a passive owner of not more than 2% of the outstanding stock of any classof a corporation that is publicly traded so long as none of such persons has any active participation in the business of such corporation.Executive acknowledges and agrees that the Company would be irreparably damaged if Executive were to engage in the prohibitedactivities described in the preceding sentence and that such prohibited activities would result in a significant loss of goodwill by theCompany. For purposes of this Agreement, the “Geographic Area” shall mean any market in which the Company or its subsidiaries isconducting or has taken material steps to conduct business as of the Date of Termination.(c) Nondisclosure; Confidential Information. Executive shall not disclose or use at any time, either during Executive’semployment with the Company or at any time thereafter, any Confidential Information of which Executive is or becomes aware,whether or not such information is developed by Executive, except (i) to the extent that such disclosure or use is directly related to andrequired by Executive’s performance in good faith of duties assigned to Executive by the Company, or (ii) as may be required by anorder of a court of competent jurisdiction; provided that (A) prior to any such disclosure pursuant to clause (ii), to the extent legallypermissible and reasonably possible, Executive shall notify the Company as promptly as practicable, and in any event prior to anydisclosure, of such requirement so that the Company may seek an appropriate protective order or waive compliance with the provisionsof this Section S(c), and (B) in the absence of such a protective order or the receipt of a waiver hereunder, Executive may disclose onlysuch Confidential Information to the extent necessary to comply with such requirement. Executive will take all appropriate steps tosafeguard Confidential Information in Executive’s possession and to protect it against disclosure, misuse, espionage, loss and theft.Executive shall deliver to the Company at the termination of Executive’s employment with the Company, or at any time the Companymay request, all memoranda, notes, plans, records, reports, computer tapes and software and other documents and data (and copiesthereof) relating to the Confidential Information or the Work Product (as defined below) of the business of the Company and itsaffiliates (the “Company Group”) that Executive may then possess or have under Executive’s control.Notwithstanding the foregoing, it is expressly understood and agreed that nothing in this Section 5(c) prohibits Executive fromreporting possible violations of federal law or regulation to any governmental agency or entity, including but not limited to theDepartment of Justice, the Securities and Exchange Commission, the Congress, and any agency Inspector General, or making otherdisclosures that are protected under the whistleblower provisions of federal law or regulations.(d) Proprietary Rights. Executive recognizes that the Company Group possesses a proprietary interest in all ConfidentialInformation and Work Product and has the exclusive right and privilege to use, protect by copyright, patent or trademark, or otherwiseexploit the processes, ideas and concepts described therein to the exclusion of Executive, except as otherwise agreed between theCompany Group and Executive in writing. Executive expressly agrees that any Work Product made or developed by Executive orExecutive’s agents during the course of Executive’s employment, including any Work Product that is based on or arises out of WorkProduct, shall be the property of and inure to the exclusive benefit of the Company Group. Executive further agrees that all WorkProduct developed by Executive (whether or not able to be protected by copyright, patent or trademark) during the course ofExecutive’s employment with the Company, or involving the use of the time, materials or other resources of the Company Group, shallbe promptly disclosed to the Company Group and shall become the exclusive property of the Company Group, and Executive shallexecute and deliver any and all documents necessary or appropriate to implement the foregoing.(e) Certain Definitions.(i) As used herein, the term “Confidential Information” means information that is not generally known to the public(but for purposes of clarity, Confidential Information shall never exclude any such information that becomes known to thepublic because of Executive’s unauthorized disclosure) and that is used, developed or obtained by the Company Group inconnection with its business, including, but not limited to, information, observations and data obtained by Executive whileemployed by the Company Group concerning (A) the business or affairs of the Company Group, (B) products or services, (C)fees, costs and pricing structures, (D) designs, (E) analyses, (F) drawings, photographs and reports, (G) computer software,including operating systems, applications and program listings, (H) flow charts, manuals and documentation, (I) databases, (J)accounting and business methods, (K) inventions, devices, new developments, methods and processes, whether patentable orunpatentable and whether or not reduced to practice, (L) customers and clients and customer or client lists, (M) othercopyrightable works, (N) all production methods, processes, technology and trade secrets, and (0) all similar and relatedinformation in whatever form. Confidential Information will not include any information that has been published in a formgenerally available to the public (except as a result of Executive’s unauthorized disclosure) prior to the date Executive proposesto disclose or use such information. Confidential Information will not be deemed to have been published or otherwise disclosedmerely because individual portions of the information have been separately published, but only if all material featurescomprising such information have been published in combination.(ii) As used herein, the term “Work Product” means all inventions, innovations, improvements, technical information,systems, software developments, methods, designs, analyses, drawings, reports, service marks, trademarks, trade names, logosand all similar or related information (whether patentable or unpatentable) that relates to the Company Group’s actual oranticipated business, research and development or existing or future products or services and that are conceived, developed ormade by Executive (whether or not during usual business hours and whether or not alone or in conjunction with any otherperson) while employed by the Company together with all patent applications, letters patent, trademark, trade name and servicemark applications or registrations, copyrights and reissues thereof that may be granted for or upon any of the foregoing.6. Non-Disparagement. During the Employment Period and at all times thereafter, neither Executive nor Executive’s agents, on theone hand, nor the Company Group, or its executives or board of directors, on the other hand, shall directly or indirectly issue orcommunicate any public statement, or statement likely to become public, that maligns, denigrates or disparages the other (including, inthe case of communications by Executive or Executive’s agents, the Company Group, any of Company Group’s officers, directors oremployees, Apollo Global Management, LLC or any affiliate thereof). The foregoing shall not be violated by truthful responses to (a)legal process or governmental inquiry or (b) by private statements to the Company Group or any of the Company Group’s officers,directors or employees; provided that, in the case of Executive with respect to clause (b), such statements are made in the course ofcarrying out Executive’s duties pursuant to this Agreement.For the avoidance of doubt, it is expressly understood and agreed that nothing in this Section 6 prohibits Executive fromreporting possible violations of federal law or regulation to any governmental agency or entity, including but not limited to theDepartment of Justice, the Securities and Exchange Commission, the Congress, and any agency Inspector General, or making otherdisclosures that are protected under the whistleblower provisions of federal law or regulations.7. Confidentiality of Agreement. The Parties agree that, except as may be required by law or judicial process or in connection withExecutive’s enforcement of his rights under this Agreement or any other agreement entered into by Executive with the Company orHoldings, the discussions and correspondence that led to this Agreement, and the terms and conditions of this Agreement are privateand confidential. Except as may be required by applicable law, regulation, or stock exchange requirement, neither Party may disclosethe above information to any other person or entity (other than to such Party’s advisors, attorneys, consultants, or, in the case ofExecutive, immediate family members) without the prior written approval of the other.8. Executive’s Representations. Warranties and Covenants.(a) Executive hereby represents and warrants to the Company that:(i) Executive has all requisite power and authority to execute and deliver this Agreement and to consummate thetransactions contemplated hereby, and this Agreement has been duly executed by Executive;(ii) the execution, delivery and performance of this Agreement by Executive does not and will not, with or withoutnotice or the passage of time, conflict with, breach, violate or cause a default under any agreement, contract or instrument towhich Executive is a party or any judgment, order or decree to which Executive is subject;(iii) Executive is not a party to or bound by any employment agreement, consulting agreement, noncompetitionagreement, fee for services agreement, confidentiality agreement or similar agreement with any other person, that wouldprevent or bar Executive from entering into this Agreement or performing his duties hereunder;(iv) upon the execution and delivery of this Agreement by the Company and Executive, this Agreement will be alegal, valid and binding obligation of Executive, enforceable in accordance with its terms;(v) Executive understands that the Company will rely upon the accuracy and truth of the representations andwarranties of Executive set forth herein and Executive consents to such reliance; and(vi) as of the Effective Date of this Agreement, Executive is not in breach of any of its terms, including havingcommitted any acts that would form the basis for a Cause termination if such act had occurred after the Effective Date.(b) The Company hereby represents and warrants to Executive that:(i) the Company has all requisite power and authority to execute and deliver this Agreement and to consummate thetransactions contemplated hereby, and this Agreement has been duly executed by the Company;(ii) the execution, delivery and performance of this Agreement by the Company does not and will not, with or withoutnotice or the passage of time, conflict with, breach, violate or cause a default under any agreement, contract or instrument towhich the Company is a party or any judgment, order or decree to which the Company is subject; (iii) upon the execution and delivery of this Agreement by the Company and Executive, this Agreement will be alegal, valid and binding obligation of the Company, enforceable in accordance with its terms; and(iv) the Company understands that Executive will rely upon the accuracy and truth of the representations andwarranties of the Company set forth herein and the Company consents to such reliance.9. General Provisions.(a) Severability. It is the desire and intent of the Parties hereto that the provisions of this Agreement be enforced to the fullestextent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if anyparticular provision of this Agreement shall be adjudicated by a court of competent jurisdiction to be invalid, prohibited orunenforceable under any present or future law, and if the rights and obligations of any Party under this Agreement will not bematerially and adversely affected thereby, such provision, as to such jurisdiction, shall be ineffective, without invalidating theremaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction;furthermore, in lieu of such invalid or unenforceable provision there will be added automatically as a part of this Agreement, a legal,valid and enforceable provision as similar in terms to such invalid or unenforceable provision as may be possible. Notwithstanding theforegoing, if such provision could be more narrowly drawn so as not to be invalid, prohibited or unenforceable in such jurisdiction, itshall, as to such jurisdiction, be so narrowly drawn, without invalidating the remaining provisions of this Agreement or affecting thevalidity or enforceability of such provision in any other jurisdiction.(b) Entire Agreement and Effectiveness. Effective as of the Effective Date, this Agreement, together with the Stock OptionAgreement, Management Investor Subscription Agreement, Adoption Agreement and Investor Rights Agreement entered intocontemporaneously herewith, embody the complete agreement and understanding among the Parties hereto with respect to the subjectmatter hereof and supersedes and preempts any prior understandings, agreements or representations by or among the Parties, written ororal, which may have related to the subject matter hereof in any way, including, without limitation, the Prior Agreement.(c) Successors and Assigns.(i) This Agreement is personal to Executive and without the prior written consent of the Company shall not beassignable by Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to thebenefit of and be enforceable by Executive’s legal representatives.(ii) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. Asused in this Agreement, “Company” shall mean the Company as hereinbefore defined and any successor to its business and/orassets as aforesaid that assumes and agrees to perform this Agreement by operation of law, or otherwise. (d) Governing Law. This Agreement will be governed by and construed in accordance with the laws of the State ofDelaware, without giving effect to any choice of law or conflicting provision or rule that would cause the laws of any jurisdiction otherthan the State of Delaware to be applied. In furtherance of the foregoing, the internal law of the State of Delaware will control theinterpretation and construction of this Agreement, even if under such jurisdiction’s choice of law or conflict of law analysis, thesubstantive law of some other jurisdiction would ordinarily apply.(e) Enforcement.(i) Arbitration. Except for disputes arising under Sections 5 and 6 of this Agreement (including, without limitation,any claim for injunctive relief), any controversy, dispute or claim arising out of or relating to this Agreement, or itsinterpretation, application, implementation, breach or enforcement that the Parties are unable to resolve by mutual agreement,shall be settled by submission by either Executive or the Company of the controversy, claim or dispute to binding arbitration inNew York (unless the Parties agree in writing to a different location), before a single arbitrator in accordance with theEmployment Dispute Resolution Rules of the American Arbitration Association then in effect. In any such arbitrationproceeding, the Parties agree to provide all discovery deemed necessary by the arbitrator. The decision and award made by thearbitrator shall be accompanied by a reasoned opinion, and shall be final, binding and conclusive on all Parties hereto for allpurposes, and judgment may be entered thereon in any court having jurisdiction thereof. The Company will bear the totality ofthe arbitrator’s and administrative fees and costs. Each Party shall bear its litigation costs and expenses; provided, however, thatthe arbitrator shall have the discretion to award the prevailing Party reimbursement of its or his or her reasonable attorney’s feesand costs. Upon the request of any of the Parties, at any time prior to the beginning of the arbitration hearing, the Parties mayattempt in good faith to settle the dispute by mediation administered by the American Arbitration Association. The Companywill bear the totality of the mediator’s fees and costs and any administrative fees and costs.(ii) Irreparable Harm. Executive acknowledges that the Company would be irreparably injured by a violation ofSection 5 or Section 6 of this Agreement and that it is impossible to measure in money the damages that will accrue to theCompany by reason of a failure by Executive to perform any of Executive’s obligations under Section 5 or Section 6 of thisAgreement. Accordingly, if the Company institutes any action or proceeding to enforce any of the provisions of Section 5 orSection 6 of this Agreement, to the extent permitted by applicable law, Executive hereby waives the claim or defense that theCompany has an adequate remedy at law, and Executive shall not urge in any such action or proceeding the defense that anysuch remedy exists at law. Furthermore, in addition to other remedies that may be available, the Company shall be entitled tospecific performance and other injunctive relief, without the requirement to post bond.(iii) Remedies. All remedies hereunder are cumulative, are in addition to any other remedies provided for by law andmay, to the extent permitted by law, be exercised concurrently or separately, and the exercise of any one remedy shall not bedeemed to be an election of such remedy or to preclude the exercise of any other remedy. (iv) Waiver of Jury Trial. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ALLRIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF ORRELATING TO THIS AGREEMENT.(f) Amendment and Waiver. The provisions of this Agreement may be amended and waived only with the prior writtenconsent of the Company and Executive and no course of conduct or failure or delay in enforcing the provisions of this Agreement shallbe construed as a waiver of such provisions or affect the validity, binding effect or enforceability of this Agreement or any provisionhereof.(g) Notices. Any notice provided for in this Agreement must be in writing and must be either personally delivered,transmitted via facsimile, mailed by first class mail (postage prepaid and return receipt requested) or sent by reputable overnight courierservice (charges prepaid) to the recipient at the address below indicated or at such other address or to the attention of such other personas the recipient Party has specified by prior written notice to the sending Party. Notices will be deemed to have been given hereunderand received when delivered personally, when received if transmitted via facsimile, five days after deposit in the U.S. mail and one dayafter deposit for overnight delivery with a reputable overnight courier service.If to the Company, to:CEC Entertainment, Inc.1707 Market Place Blvd., Suite 200Irving, Texas 75063 Attention: General Counselwith a copy (which shall not constitute notice) to:AP VIII Queso Holdings L.P.9 West 57 StreetNew York, NY 10019 Attention: Michael DiverioIf to Executive, to:Executive’s home address most recently on file with the Company.(h) Withholdings of Taxes. The Company may withhold from any amounts payable under this Agreement such federal, stateand local taxes as may be required to be withheld pursuant to any applicable law or regulation.(i) Survival of Representations. Warranties and Agreements. All representations, warranties and agreements contained hereinshall survive the consummation of the transactions contemplated hereby indefinitely. G) Descriptive Headings. The descriptive headings of this Agreement are inserted for convenience only and do not constitutea part of this Agreement. All references to a “Section” in this Agreement are to a section of this Agreement unless otherwise noted.(k) Construction. Where specific language is used to clarify by example a general statement contained herein, such specificlanguage shall not be deemed to modify, limit or restrict in any manner the construction of the general statement to which it relates. Thelanguage used in this Agreement shall be deemed to be the language chosen by the Parties to express their mutual intent, and no rule ofstrict construction shall be applied against any Party.(1) Counterparts. This Agreement may be executed in separate counterparts, each of which is deemed to be an original andall of which taken together constitute one and the same agreement.(m) Section 409A. Notwithstanding anything herein to the contrary, this Agreement is intended to be interpreted and appliedso that the payment of the benefits set forth herein shall either be exempt from the requirements of Section 409A of the InternalRevenue Code of 1986, as amended (the “Code”), or shall comply with the requirements of such provision. Notwithstanding anythingin this Agreement or elsewhere to the contrary, distributions upon termination of Executive’s employment may only be made upon a“separation from service” as determined under Section 409A of the Code. Each payment under this Agreement or otherwise shall betreated as a separate payment for purposes of Section 409A of the Code. In no event may Executive, directly or indirectly, designatethe calendar year of any payment to be made under this Agreement or otherwise that constitutes a “deferral of compensation” withinthe meaning of Section 409A of the Code. All reimbursements and in-kind benefits provided under this Agreement shall be made orprovided in accordance with the requirements of Section 409A of the Code. To the extent that any reimbursements pursuant to thisAgreement or otherwise are taxable to Executive, any reimbursement payment due to Executive shall be paid to Executive on or beforethe last day of Executive’s taxable year following the taxable year in which the related expense was incurred; provided that Executivehas provided the Company written documentation of such expenses in a timely fashion and such expenses otherwise satisfy theCompany’s expense reimbursement policies. Reimbursements pursuant to this Agreement or otherwise are not subject to liquidation orexchange for another benefit and the amount of such reimbursements that Executive receives in one taxable year shall not affect theamount of such reimbursements that Executive receives in any other taxable year. Notwithstanding any provision in this Agreement tothe contrary, if on the Date of Termination Executive is deemed to be a “specified employee” within the meaning of Section 409A ofthe Code and the Treasury Regulations using the identification methodology selected by the Company from time to time, or if none,the default methodology under Section 409A of the Code, any payments or benefits due upon a termination of Executive’semployment under any arrangement that constitutes a “deferral of compensation” within the meaning of Section 409A of the Codeshall be delayed and paid or provided (or commence, in the case of installments) on the first payroll date on or following the earlier of(i) the date that is six months and one day after Executive’s termination of employment for any reason other than death, and (ii) the dateof Executive’s death, and any remaining payments and benefits shall be paid or provided in accordance with the normal payment datesspecified for such payment or benefit. Notwithstanding any of the foregoing to the contrary, the Company and its respective officers,directors, employees, or agents make no guarantee that the terms of this Agreement as written comply with, or are exempt from, theprovisions of Section 409A of the Code, and none of the foregoing shall have any liability for the failure of the terms of thisAgreement as written to comply with, or be exempt from, the provisions of Section 409A of the Code.[Signature Page Follows] IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first written above.CEC ENTERTAINMENT, INC./s/ Thomas Leverton_______________________________Thomas LevertonChief Executive OfficerEXECUTIVE/s/ James Howell_______________________________James HowellExhibit 21.1Subsidiaries of CEC Entertainment, Inc. Subsidiaries Jurisdiction of Formation Percentage of Equity Interest Owned 1. CEC Entertainment Canada, ULC Canada 100% 2. CEC Entertainment Holdings, LLC Nevada 100% 3. SPT Distribution Company, Inc. Texas 100% 4. BHC Acquisition Corporation Texas 100% 5. CEC Entertainment Concepts, L.P. Texas 0.1% by CEC Entertainment, Inc.99.9% by CEC Entertainment Holdings, LLC 6. Hospitality Distribution Incorporated Texas 100% by BHC Acquisition Corporation 7. SB Hospitality Corporation Texas 100% by Hospitality Distribution Incorporated 8. CEC Entertainment Leasing Company Delaware 100%9. CEC Leaseholder, LLC Delaware 100%10. Peter Piper Holdings, Inc. Delaware 100%11. Peter Piper, Inc. Arizona 100% by Peter Piper Holdings, Inc.12. Peter Piper Texas, LLC Texas 100% by Peter Piper, Inc.13. Peter Piper Mexico, LLC Arizona 100% by Peter Piper, Inc.14. Texas PP Beverage, Inc. Texas 100% by Peter Piper Texas, LLC15. Peter Piper De Mexico, S. De R.L. De C.V. Mexico 1% by Peter Piper Mexico, LLC99% by Peter Piper, Inc.16. CEC Entertainment International, LLC Delaware 100%17. CEC Leaseholder #2, LLC Delaware 100%   EXHIBIT 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, Thomas Leverton, certify that:1.I have reviewed this annual report on Form 10-K for the fiscal year ended December 30, 2018 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 thisreport;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 oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, 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 underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements for external purposes 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; andd)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely to materially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant’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 arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting.March 11, 2019 /s/ Thomas Leverton Thomas Leverton Chief Executive Officer and DirectorEXHIBIT 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, James A. Howell, certify that:1.I have reviewed this annual report on Form 10-K for the fiscal year ended December 30, 2018 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 thisreport;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 oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, 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 underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements for external purposes 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; andd)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely to materially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant’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 arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting.March 11, 2019 /s/ James A. Howell James A. Howell Executive Vice President and Chief Financial OfficerEXHIBIT 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, 2018 asfiled with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned certifies, pursuant to 18 U.S.C. Section 1350, asadopted pursuant 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 theCompany as of, and for, the periods presented in this Report.March 11, 2019/s/ Thomas Leverton Thomas Leverton Chief Executive Officer and DirectorEXHIBIT 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, 2018 asfiled with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned certifies, pursuant to 18 U.S.C. Section 1350, asadopted pursuant 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 theCompany as of, and for, the periods presented in this Report.March 11, 2019/s/ James A. Howell James A. Howell Executive Vice President and Chief Financial Officer

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