UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 2002.
|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____________ to
_______________.
Commission File Number 0-15782
CEC ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
Kansas 48-0905805
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4441 West Airport Freeway
Irving, Texas 75062
(Address of principal executive offices,
including zip code)
(972) 258-8507
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or 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 |_|
At June 30, 2002, an aggregate of 27,659,543 shares of the registrant's
Common Stock, par value of $.10 each (being the registrant's only class of
common stock), were outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CEC ENTERTAINMENT, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Consolidated balance sheets....................................... 3
Consolidated statements of earnings and comprehensive income...... 4
Consolidated statement of shareholders' equity.................... 6
Consolidated statements of cash flows ............................ 7
Notes to consolidated financial statements........................ 8
CEC ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(Thousands, except share data)
ASSETS
June 30, December 30,
2002 2001
----------- ------------
(unaudited)
Current assets:
Cash and cash equivalents.................................................. $ 7,854 $ 3,682
Accounts receivable........................................................ 6,490 11,603
Inventories................................................................ 9,853 9,556
Prepaid expenses........................................................... 5,226 4,794
Current portion of deferred tax asset...................................... 1,234 1,234
--------- ---------
Total current assets.................................................... 30,657 30,869
--------- ---------
Property and equipment, net................................................... 455,937 423,267
--------- ---------
Other assets:
Assets held for resale..................................................... 2,329 2,231
Notes receivable from related parties, less current portion................ 3,901 2,055
Other ..................................................................... 1,122 1,063
--------- ---------
7,352 5,349
--------- ---------
$ 493,946 $ 459,485
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.......................................... $ 131 $ 121
Accounts payable and accrued liabilities................................... 42,787 39,738
--------- ---------
Total current liabilities............................................... 42,918 39,859
--------- ---------
Long-term debt, less current portion.......................................... 41,373 51,942
--------- ---------
Deferred rent................................................................. 3,632 3,401
--------- ---------
Deferred tax liability........................................................ 27,683 19,825
--------- ---------
Other accrued liabilities..................................................... 4,750 4,750
--------- ---------
Commitments and contingencies
Redeemable preferred stock, $60 par value, redeemable for $2,822 in 2005...... 2,516 2,472
--------- ---------
Shareholders' equity:
Common stock, $.10 par value; authorized 100,000,000 shares; 35,610,349
and 35,325,273 shares issued, respectively ............................. 3,561 3,533
Capital in excess of par value............................................. 200,703 192,041
Retained earnings ......................................................... 281,032 239,070
Accumulated other comprehensive loss ...................................... (39) (178)
Less treasury shares of 7,950,806 and 7,586,106, respectively, at cost..... (114,183) (97,230)
--------- ---------
371,074 337,236
--------- ---------
$ 493,946 $ 459,485
========= =========
See notes to consolidated financial statements.
CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE INCOME
(Unaudited)
(Thousands, except per share data)
Three Months Ended
----------------------------
June 30, 2002 July 1, 2001
------------- ------------
Food and beverage revenues................................................... $ 95,278 $ 85,693
Games and merchandise revenues............................................... 46,255 40,979
Franchise fees and royalties................................................. 777 694
Interest income, including related party income of $100 and $41,
respectively.............................................................. 106 51
--------- ---------
142,416 127,417
--------- ---------
Costs and expenses:
Cost of sales............................................................. 64,012 58,215
Selling, general and administrative expenses.............................. 18,589 17,187
Depreciation and amortization............................................. 9,520 8,303
Interest expense.......................................................... 256 597
Other operating expenses.................................................. 24,959 22,901
--------- ---------
117,336 107,203
--------- ---------
Income before income taxes................................................... 25,080 20,214
Income taxes................................................................. 9,757 7,883
--------- ---------
Net income .................................................................. 15,323 12,331
Other comprehensive income, net of tax:
Foreign currency translation................................................. 139 25
--------- ---------
Comprehensive income......................................................... $ 15,462 $ 12,356
========= =========
Earnings per share:
Basic:
Net income ............................................................. $ .55 $ .44
========= =========
Weighted average shares outstanding..................................... 27,800 27,945
========= =========
Diluted:
Net income ............................................................ $ .54 $ .43
========= =========
Weighted average shares outstanding..................................... 28,456 28,785
========= =========
See notes to consolidated financial statements.
CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE INCOME
(Unaudited)
(Thousands, except per share data)
Six Months Ended
----------------------------
June 30, 2002 July 1, 2001
------------- ------------
Food and beverage revenues................................................... $ 210,119 $ 196,515
Games and merchandise revenues............................................... 103,205 92,356
Franchise fees and royalties................................................. 1,703 1,620
Interest income, including related party income of $174 and $83,
respectively.............................................................. 182 134
--------- ---------
315,209 290,625
--------- ---------
Costs and expenses:
Cost of sales............................................................. 137,703 126,682
Selling, general and administrative expenses.............................. 38,425 38,485
Depreciation and amortization............................................. 18,673 16,589
Interest expense.......................................................... 549 1,307
Other operating expenses.................................................. 50,925 46,062
--------- ---------
246,275 229,125
--------- ---------
Income before income taxes................................................... 68,934 61,500
Income taxes................................................................. 26,815 23,985
--------- ---------
Net income .................................................................. 42,119 37,515
Other comprehensive income (loss), net of tax:
Foreign currency translation................................................. 139 (54)
--------- ---------
Comprehensive income......................................................... $ 42,258 $ 37,461
========= =========
Earnings per share:
Basic:
Net income ............................................................. $ 1.51 $ 1.34
========= =========
Weighted average shares outstanding..................................... 27,827 27,845
========= =========
Diluted:
Net income ............................................................ $ 1.47 $ 1.30
========= =========
Weighted average shares outstanding..................................... 28,503 28,672
========= =========
See notes to consolidated financial statements.
CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
(Thousands, except per share data)
Amounts Shares
--------- -------
Common stock and capital in excess of par value:
Balance, beginning of year..................................... $ 195,574 35,325
Stock options exercised........................................ 5,463 278
Net tax benefit from exercise of stock options................. 2,930
Stock issued under 401(k) plan................................. 297 7
--------- -------
Balance, June 30, 2002......................................... 204,264 35,610
--------- =======
Retained earnings:
Balance, beginning of year..................................... 239,071
Net income..................................................... 42,119
Redeemable preferred stock accretion........................... (45)
Redeemable preferred stock dividend, $2.40 per share........... (113)
---------
Balance, June 30, 2002......................................... 281,032
---------
Accumulated other comprehensive loss:
Balance, beginning of year..................................... (178)
Foreign currency translation................................... 139
---------
Balance, June 30, 2002......................................... (39)
---------
Treasury shares:
Balance, beginning of year..................................... (97,230) 7,586
Treasury stock acquired........................................ (16,953) 365
--------- -------
Balance, June 30, 2002......................................... (114,183) 7,951
--------- =======
Total shareholders' equity........................................ $ 371,074
=========
See notes to consolidated financial statements.
CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands)
Six Months Ended
----------------------------
June 30, 2002 July 1, 2001
Operating activities:
Net income ............................................................... $ 42,119 $ 37,515
Adjustments to reconcile net income to cash
provided by operations:
Depreciation and amortization............................................. 18,673 16,589
Deferred income tax expense............................................... 7,858 2,521
Tax benefit from exercise of stock options................................ 2,930 3,827
Other ................................................................... 476 401
Net change in receivables, inventories, prepaids, payables and
accrued liabilities..................................................... 7,433 2,496
--------- ---------
Cash provided by operations......................................... 79,489 63,349
--------- ---------
Investing activities:
Purchases of property and equipment....................................... (51,377) (54,451)
Additions to notes receivable............................................. (2,535) (796)
Payments received on notes receivable..................................... 689 833
(Purchase)/sale of assets held for resale................................. (98) 2,055
Change in other assets.................................................... (107) 6
--------- ---------
Cash used in investing activities.................................. (53,428) (52,353)
--------- ---------
Financing activities:
Payments on debt and line of credit....................................... (10,559) (8,466)
Exercise of stock options ................................................ 5,462 9,679
Redeemable preferred stock dividends...................................... (113) (116)
Acquisition of treasury stock ............................................ (16,953) (16,052)
Other .................................................................... 274 126
--------- ---------
Cash used in financing activities................................... (21,889) (14,829)
--------- ---------
Increase (decrease) in cash and cash equivalents ............................ 4,172 (3,833)
Cash and cash equivalents, beginning of period............................... 3,682 7,300
--------- ---------
Cash and cash equivalents, end of period..................................... $ 7,854 $ 3,467
========= =========
See notes to consolidated financial statements.
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Interim financial statements:
In the opinion of management, the accompanying financial statements for the
periods ended June 30, 2002 and July 1, 2001 reflect all adjustments (consisting
only of normal recurring adjustments) necessary to present fairly the Company's
financial condition, results of operations and cash flows in accordance with
generally accepted accounting principles.
Certain information and footnote disclosures normally included in the
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been omitted. The unaudited consolidated financial
statements referred to above should be read in conjunction with the financial
statements and notes thereto included in the Company's Form 10-K filed with the
Securities and Exchange Commission for the year ended December 30, 2001. Results
of operations for the periods ended June 30, 2002 and July 1, 2001 are not
necessarily indicative of the results for the year.
2. Earnings per common share:
Earnings per common share were computed based on the weighted average
number of common and potential common shares outstanding during the period. Net
income available per common share has been adjusted for the items indicated
below, and earnings per common and potential common share were computed as
follows (thousands, except per share data):
Three Months Ended Six Months Ended
---------------------- ----------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
-------- -------- -------- ---------
Net income ......................................... $ 15,323 $ 12,331 $ 42,119 $ 37,515
Accretion of redeemable preferred stock............. (23) (25) ( 45) (51)
Redeemable preferred stock dividends................ (57) (57) (113) (116)
-------- -------- -------- --------
Net income applicable to common shares.............. $ 15,243 $ 12,249 $ 41,961 $ 37,348
======== ======== ======== ========
Basic:
Weighted average common shares outstanding...... 27,800 27,945 27,827 27,845
======== ======== ======== ========
Earnings per common share....................... $ .55 $ .44 $ 1.51 $ 1.34
======== ======== ======== ========
Diluted:
Weighted average common shares outstanding...... 27,800 27,945 27,827 27,845
Potential common shares for stock options
and stock grants............................ 656 840 676 827
-------- -------- -------- --------
Weighted average shares outstanding............. 28,456 28,785 28,503 28,672
======== ======== ======== ========
Earnings per common and potential
common share................................ $ .54 $ .43 $ 1.47 $ 1.30
======== ======== ======== ========
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Second Quarter 2002 Compared to Second Quarter 2001
- ---------------------------------------------------
A summary of the results of operations of the Company as a percentage of
revenues for the second quarters of 2002 and 2001 is shown below.
Three Months Ended
---------------------------
June 30, 2002 July 1, 2001
------------- ------------
Revenues....................................... 100.0% 100.0%
----- -----
Costs and expenses:
Cost of sales............................... 44.9 45.7
Selling, general and administrative......... 13.1 13.5
Depreciation and amortization............... 6.7 6.5
Interest expense............................ .2 .5
Other operating expenses.................... 17.5 17.9
----- -----
82.4 84.1
----- -----
Income before income taxes..................... 17.6 15.9
Income taxes...... ............................ 6.9 6.2
----- -----
Net income .................................... 10.7% 9.7%
===== =====
Revenues
Revenues increased 11.8% to $142.4 million in the second quarter of 2002
from $127.4 million in the second quarter of 2001 due primarily to an increase
in the number of Company-operated restaurants and an increase of 3.9% in
comparable store sales of the Company's Chuck E. Cheese's restaurants which were
open during all of the second quarters of 2002 and 2001. During 2001, the
Company opened 28 new restaurants, acquired two restaurants from a franchisee
and closed four restaurants. During the first six months of 2002, the Company
opened 13 new stores, acquired three restaurants from a franchisee and closed
one restaurant. Management believes that the primary factors impacting the
comparable store sales increase was the impact of remodel initiatives and the
shift in the Easter holiday into the first quarter of this year. Menu prices
increased 0.6% between the periods.
Costs and Expenses
Costs and expenses as a percentage of revenues decreased to 82.4% in the
second quarter of 2002 from 84.1% in the second quarter of 2001.
Cost of sales decreased as a percentage of revenues to 44.9% in the second
quarter of 2002 from 45.7% in the comparable period of 2001. Cost of food,
beverage and related supplies as a percentage of revenues decreased to 12.3% in
the second quarter of 2002 from 12.9% in the second quarter of 2001 primarily
due to lower cheese costs. Cost of games and merchandise decreased to 4.1% in
the second quarter of 2002 from 4.5% in the second quarter of 2001 due primarily
to buying efficiencies. Store labor expenses as a percentage of revenues
increased to 28.5% in the second quarter of 2002 from 28.3% in the second
quarter of 2001 primarily due to the enactment of higher minimum wage rate
standards in certain states and overall increases in wage rates.
Selling, general and administrative expenses as a percentage of revenues
decreased to 13.1% in the second quarter of 2002 from 13.5% in the second
quarter of 2001 due primarily to a decrease in advertising expense.
Depreciation and amortization expenses as a percentage of revenues
increased to 6.7% in the second quarter of 2002 from 6.5% in the second quarter
of 2001 primarily due to increased capital expenditures.
Interest expense as a percentage of revenues decreased to 0.2% in the
second quarter of 2002 from 0.5% in the second quarter of 2001 due to a
reduction in outstanding debt and reduced interest rates.
Other operating expenses decreased as a percentage of revenues to 17.5% in
the second quarter of 2002 from 17.9% in the second quarter of 2001 primarily
due to lower utility and rent costs that were partially offset by higher
insurance costs.
The Company's effective income tax rate was 38.9% in the second quarter of
2002 compared to 39.0% in the second quarter of 2001.
Net Income
The Company had net income of $15.3 million in the second quarter of 2002
compared to $12.3 million in the second quarter of 2001 due to the changes in
revenues and expenses discussed above. The Company's diluted earnings per share
increased to $.54 per share in the second quarter of 2002 from $.43 per share in
the second quarter of 2001.
First Six Months of 2002 Compared to First Six Months of 2001
- -------------------------------------------------------------
A summary of the results of operations of the Company as a percentage of
revenues for the first six months of 2002 and 2001 is shown below.
Six Months Ended
---------------------------
June 30, 2002 July 1, 2001
------------- ------------
Revenues................................... 100.0% 100.0%
----- -----
Costs and expenses:
Cost of sales.......................... 43.6 43.6
Selling, general and administrative.... 12.2 13.2
Depreciation and amortization.......... 5.9 5.7
Interest expense....................... .2 .4
Other operating expenses............... 16.2 15.9
----- -----
78.1 78.8
----- -----
Income before income taxes................. 21.9 21.2
Income taxes...... ........................ 8.5 8.3
----- -----
Net income ................................ 13.4% 12.9%
===== =====
Revenues
Revenues increased 8.5% to $315.2 million in the first six months of 2002
from $290.6 million in the first six months of 2001 primarily due an increase in
the number of Company-operated stores and an increase of 0.5% in comparable
store sales of the Company's Chuck E. Cheese's restaurants which were open
during all of the first six months of both 2002 and 2001. During 2001, the
Company opened 28 new restaurants, acquired two restaurants from franchisees and
closed four restaurants. During the first six months of 2002, the Company opened
13 new restaurants, acquired three restaurants from a franchisee and closed one
restaurant. Menu prices increased approximately 0.8% between the periods.
Costs and Expenses
Costs and expenses as a percentage of revenues decreased to 78.1% in the
first six months of 2002 from 78.8% in the first six months of 2001.
Cost of sales remained constant as a percentage of revenues at 43.6% in
both the first six months of 2002 and 2001. Cost of food, beverage and related
supplies as a percentage of revenues decreased to 12.4% in the first six months
of 2002 from 12.6% in the second quarter of 2001 due to lower cheese costs. Cost
of games and merchandise decreased to 4.1% in the first six months of 2002 from
4.5% in the first six months of 2001 due to buying efficiencies. Store labor
expenses as a percentage of revenues increased to 27.1% in the second quarter of
2002 from 26.5% in the first six months of 2001 primarily due to the enactment
of higher minimum wage rate standards in certain states and overall increases in
wage rates.
Selling, general and administrative expenses as a percentage of revenues
decreased to 12.2% in the first six months of 2002 from 13.2% in the first six
months of 2001 due to a reduction in advertising expense and corporate overhead
costs.
Depreciation and amortization expenses as a percentage of revenues
increased to 5.9% in the first six months of 2002 from 5.7% in the first six
months of 2001 primarily due to increased capital expenditures.
Interest expense as a percentage of revenues was 0.2% in the first six
months of 2002 compared to 0.4% in the first six months of 2001 primarily due to
a reduction in debt outstanding and reduced interest rates.
Other operating expenses increased as a percentage of revenues to 16.2% in
the first six months of 2002 from 15.9% in the first six months of 2001
primarily due to higher insurance costs. Insurance expense increased
approximately $3.2 million in the first six months of 2002 compared to the first
six months of 2001 due to several factors including higher premiums, claim loss
experience and medical costs.
The Company's effective income tax rate was 38.9% in the first six months
of 2002 compared to 39.0% in the first six months of 2001.
Net Income
The Company had net income of $42.1 million in the first six months of 2002
compared to $37.5 million in the first six months of 2001 due to the changes in
revenues and expenses discussed above. The Company's diluted earnings per share
increased 13.1% to $1.47 per share in the first six months of 2002 compared to
$1.30 per share in the first six months of 2001.
Financial Condition, Liquidity and Capital Resources
Cash provided by operations increased to $79.5 million in the first six
months of 2002 from $63.3 million in the comparable period of 2001. Cash
outflows from investing activities for the first six months of 2002 were $53.4
million primarily related to capital expenditures. Cash outflows from financing
activities for the first six months of 2002 were $21.9 million primarily related
to repayment of borrowings on the Company's line of credit and the repurchase of
the Company's common stock. The Company's primary requirements for cash relate
to planned capital expenditures, the repurchase of the Company's common stock
and debt service. The Company expects that it will satisfy such requirements
from cash provided by operations and, if necessary, funds available under its
line of credit.
In 2002, the Company plans to add 32 to 36 stores including new stores and
acquisitions of existing stores from franchisees. The Company currently
anticipates its cost of opening such new stores to average approximately $2.1
million per store which will vary depending upon many factors including the size
of the stores and whether the Company acquires land or the store is an in-line
or freestanding building. In smaller demographic markets, the Company plans to
open stores with less retail space and lower capital costs than traditional
stores. The Company believes its smaller market strategy could increase the
number of development opportunities by at least 200 stores. In June 2002, the
Company opened its first smaller market store with approximately 6,100 square
feet in Waco, Texas at a capital cost of approximately $770,000. During the
first six months of 2002, the Company opened 13 new restaurants and acquired
three restaurants from a franchisee.
In addition to such new store openings, the Company plans to complete Phase
III upgrades in 125 to 130 stores this year at an average cost of approximately
$200,000 per store. A Phase III upgrade generally includes a new toddler play
area, skill games and rides, kiddie games and rides, sky-tube enhancements,
prize area enhancements and kid check enhancements. The Company plans to
initiate a Phase IV upgrade plan in the last half of 2002 in the Chicago market.
The primary components of a Phase IV upgrade include additional games and rides
and a games rotation program between stores. The game portion of this remodel is
anticipated to have a capital cost of approximately $50,000 per store, with
other components of the remodel potentially including a new menu board, guest
order counter improvements, salad bar enhancements and decor, costing
approximately $25,000. During the first six months of 2002, the Company
completed Phase III upgrades in 68 restaurants. The Company currently estimates
that capital expenditures in 2002, including expenditures for new store
openings, existing store expansions and equipment investments, will be $105 to
$110 million. The Company plans to finance these expenditures through cash flow
from operations and borrowings under the Company's line of credit.
In July 2002, the Company announced it had completed a $25 million plan to
repurchase shares of the Company's common stock approved in July 2001 and
announced a new plan to repurchase shares of the Company's common stock on the
open market at an aggregate purchase price of up to $25 million. Beginning in
1993 through June 2002, the Company has repurchased 6.8 million shares of the
Company's common stock on the open market at an aggregate purchase price of
approximately $109.4 million.
The Company's credit facility consists of a $75 million revolving line of
credit which matures in July 2003. Interest under the line of credit is
dependent on earnings and debt levels of the Company and ranges from prime or,
at the Company's option, LIBOR plus 1% to 1.75%. Currently, any borrowings under
this line of credit would be at the prime rate or LIBOR plus 1%. As of June 30,
2002, there was $41.0 million in borrowings under this line of credit. The
Company is required to comply with certain financial ratio tests during the
terms of the loan agreements.
Certain statements in this report, other than historical information, may
be considered forward-looking statements within the meaning of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, and is
subject to various risks, uncertainties and assumptions. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may differ from those anticipated, estimated or
expected. Among the key factors that may have a direct bearing on the Company's
operating results, performance or financial condition are its ability to
implement its growth strategies, national, regional and local economic
conditions affecting the restaurant/entertainment industry, competition within
each of the restaurant and entertainment industries, success of its franchise
operations, negative publicity, fluctuations in quarterly results of operations,
including seasonality, government regulations, weather, school holidays,
commodity, insurance and labor costs.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is subject to market risk in the form of interest risk and
foreign currency risk. Both interest risk and foreign currency risk are
immaterial to the Company.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On June 2, 2000, a purported class action lawsuit against the Company,
entitled Freddy Gavarrete, et al. v. CEC Entertainment, Inc., dba Chuck E.
Cheese's, et al., Cause No. 00-08132 FMC (RZx) ("Gavarrete"), was filed in the
Superior Court of the State of California of the County of Los Angeles. On July
27, 2000, the lawsuit was removed to the United States District Court for the
Central District of California. The lawsuit was filed by one former restaurant
manager purporting to represent restaurant managers of the Company in California
from 1996 to the present. The lawsuit alleges violations of state wage and hour
laws involving unpaid overtime wages and seeks an unspecified amount in damages.
On July 31, 2001, the Court denied Plaintiff's motion for class certification.
The Court subsequently granted Plaintiff's motion to amend the complaint by
adding a second party to the lawsuit. On June 5, 2002, the Court denied
Plaintiff's motion for class certification based upon the amended complaint. On
June 25, 2002, Plaintiff filed a motion for reconsideration of the Court's two
orders denying class certification. The Company believes the lawsuit is without
merit and intends to vigorously defend against it and that based on currently
available information the lawsuit is not likely to have a material adverse
impact on the Company's financial position.
On June 26, 2002, a purported class action lawsuit against the Company,
entitled Michelle Sajetowski v. CEC Entertainment, Inc., et al., Cause No.
("Sajetowski"), was filed in the Court of Common Pleas, Cayahoga County, Ohio.
The lawsuit was filed by one former restaurant manager purporting to represent
restaurant managers of the Company in Ohio. The lawsuit alleges violations of
the state wage and hour laws involving unpaid overtime wages and seeks an
unspecified amount in damages. The Company believes the lawsuit is without merit
and intends to vigorously defend against it and that based on currently
available information the lawsuit is not likely to have a material adverse
impact on the Company's financial position.
Item 2. Changes in Securities.
None to report during quarter for which this report is filed.
Item 3. Defaults Upon Senior Securities.
None to report during quarter for which this report is filed.
Item 4. Submission of Matters to a Vote of Security Holders
On May 9, 2002, at the Company's annual meeting of shareholders, the
Company's shareholders re-elected Richard T. Huston, Cynthia I. Pharr, and
Raymond E. Wooldridge to serve the Company as directors. The following votes
were cast with respect to the election of these directors:
For Withheld
Richard T. Huston 25,273,624 254,972
Cynthia I. Pharr 25,063,512 465,084
Raymond E. Wooldridge 25,063,599 464,997
Richard M. Frank, Michael H. Magusiak, Tim T. Morris, Louis P. Neeb, Walter
Tyree's terms of office as directors of the Company continued after the meeting.
The shareholders also approved an amendment to the Incentive Bonus Program
("Bonus Plan") for eligible employees of the Company (excluding field operators)
to receive a bonus as a percentage of their gross base salary during a
particular fiscal year. New hires of the Company who are below management level
must be full-time and employed by April the 1st of a particular year to be
eligible for a bonus for such year. New hires who are management level and above
will have their bonus prorated based on their hire date. If an individual is
promoted during the year, his or her bonus will be prorated based upon the time
and salary at each level. The bonuses will be an amount equal to a specified
percentage of the eligible employee's gross base salary. Under the Bonus Plan,
the Compensation Committee (which administers the Bonus Plan) will establish a
Bonus Potential for each eligible employee no later than March 15 of the fiscal
year for which the Bonus Potential is determined. For 2002 and thereafter, the
Bonus Potential may range from a high of 200% of gross base salary to a low of
2% of gross base salary.
Employees will receive a Bonus Payout if the Company's actual increases in
comparable store sales and net income reach certain target increases established
by the Compensation Committee. The Compensation Committee will determine the
target increases for the fiscal year not later than March 15. The comparable
store sales growth target will be based upon the number of Company operated
stores that were open at least 18 months at the beginning of the fiscal year.
The net income target will be based upon the after tax earnings of the Company
adjusted to exclude the after-tax expense of any interest expense incurred due
to the purchase of Company's shares during the fiscal year. The employee's Bonus
Payout will be equal to their gross base salary, times their Bonus Potential,
times a Sales Multiplier, times a Profit Multiplier. The Sales Multiplier will
be the number one if the target increase in comparable stores sales is attained.
Likewise, the Profit Multiplier will be the number one if the target increase in
net income is attained. The Sales Multiplier and Profit Multiplier will be lower
or higher than the number one if the increase in comparable store sales and net
income is lower or higher, respectively, than the targeted increase. In no event
will a bonus be paid unless certain minimum increases in comparable store sales
and net income established by the Compensation Committee are attained. The
Compensation Committee may adjust the bonus calculation for any material unusual
transactions that occur outside of the normal, regular course of business.
The votes cast with respect to this proposal to authorize an incentive
bonus program for eligible employees of the Company were as follows:
For Against Abstain No Vote
24,379,509 1,125,986 23,101 0
The shareholders also approved an amendment to the 1997 Non-Statutory Stock
Option Plan that increased the number of shares of Common Stock which may be
issued under the Employee Plan from 4,387,500 to 5,787,500. The votes cast with
respect to this proposal to authorize an amendment to the Employees Plan were as
follows:
For Against Abstain No Vote
21,966,910 3,541,702 19,984 0
Item 5. Other Information.
None to report during quarter for which this report is filed.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits
None.
b) Reports on Form 8-K
None filed during the quarter for which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CEC ENTERTAINMENT, INC.
Dated: August 13, 2002 By: /s/ Rodney Carter
-------------------------------------
Rodney Carter
Executive Vice President,
Chief Financial Officer and Treasurer