FORM 10-K
|X| Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 29, 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 jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4441 West Airport Freeway
Irving, Texas 75062
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 258-8507
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.10 each
(Title of Class)
Class A Preferred Stock, par value $60.00 each
(Title of Class)
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 |_|
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's knowledge, 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. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12-b-2) Yes |X| No |_|
At February 10, 2003, an aggregate of 27,270,006 shares of the registrant's
Common Stock, par value of $.10 each (being the registrant's only class of
common stock), were outstanding.
At June 30, 2002, the aggregate market value held by non-affiliates of the
registrant was $1,127,973,871.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement, to be filed
pursuant to Section 14(a) of the Act in connection with the registrant's 2003
annual meeting of shareholders, have been incorporated by reference in Part III
of this report.
P A R T I
Item 1. Business
General
CEC Entertainment, Inc. (the "Company"), was incorporated in the state of
Kansas in 1980 and is engaged in the family restaurant/entertainment center
business. The Company considers this to be its sole industry segment. Our
principal executive offices are located at 4441 W. Airport Freeway, Irving ,
Texas 75062. The Company's Annual Report on Form 10-K, Quarterly Reports on Form
10-Q and Current Reports on Form 8-K are available on our website at
WWW.CHUCKECHEESE.COM when such reports are available on the Securities and
Exchange Commission website.
The Company operated, as of February 10, 2003, 386 Chuck E. Cheese's (R)
("Chuck E. Cheese's") restaurants. In addition, as of February 10, 2003,
franchisees of the Company operated 50 Chuck E. Cheese's restaurants.
Chuck E. Cheese's Restaurants
Business Development
Chuck E. Cheese's restaurants offer a variety of pizza, a salad bar,
sandwiches, appetizers and desserts and feature musical and comic entertainment
by, robotic and animated characters, family oriented games, rides and
arcade-style activities. The restaurants are intended to appeal to families with
children between the ages of 2 and 12. The Company opened its first restaurant
in March 1980.
The Company and its franchisees operate in a total of 47 states and four
countries. The Company owns and operates Chuck E. Cheese's restaurants in 40
states and Canada. See "Item 2. Properties."
The following table sets forth certain information with respect to the
Chuck E. Cheese's restaurants owned by the Company (excludes franchised
restaurants and one TJ Hartford's Grille and Bar).
2002 2001 2000
---- ---- ----
Average annual revenues
per restaurant (1) $1,641,000 $1,634,000 $1,576,000
Number of restaurants open at end
of period 384 350 324
Percent of total restaurant revenues:
Food and beverage sales 66.7% 68.0% 66.8%
Game sales 30.8% 29.5% 30.4%
Merchandise sales 2.5% 2.5% 2.8%
- -------
(1) In computing these averages, only restaurants which were open for a period
greater than one year at the beginning of each respective year were
included (300, 275 and 254 restaurants in 2002, 2001 and 2000,
respectively). All fiscal years presented consisted of 52 weeks.
The revenues from Chuck E. Cheese's restaurants are seasonal in nature. The
restaurants tend to generate more revenues during the first and third fiscal
quarters as compared to the second and fourth fiscal quarters.
Each Chuck E. Cheese's restaurant generally employs a general manager, one
or two managers, an electronic specialist who is responsible for repair and
maintenance of the robotic characters and games, and 45 to 75 food preparation
and service employees, most of whom work part-time.
To maintain a unique and exciting environment in the restaurants, the
Company believes it is essential to reinvest capital through the evolution of
its games, rides and entertainment packages and continuing enhancement of the
facilities. In 2000, the Company initiated a Phase III upgrade program which
generally includes a new toddler play area, skill games and rides, kiddie games
and rides, Sky-Tubes(R) enhancements, and prize area enhancements with ticket
counting machines. The Company completed Phase III upgrades in 28, 105 and 123
restaurants in 2000, 2001 and 2002 respectively and plans to complete the Phase
III upgrade program with the upgrade of an additional 52 restaurants in 2003. In
2003, the Company also plans to initiate a game rotation plan which will have a
capital cost of approximately $50,000 per store. The primary components of this
initiative are to provide new and transferred games and rides and enhanced
consumer marketing materials including a new menu board. The Company also plans
a major remodel or reconfiguration in a select number of restaurants that are
believed to have the greatest opportunity to significantly increase sales and
provide a high return on investment. The primary components of a reconfiguration
include a relocation of the dining and playroom areas, expansion of the space
allocated to the game room, an increase in the number of games and new exterior
signage.
The Company has expanded the customer areas of 88 restaurants since 1995,
including restaurants with increased seating capacity due to an enhanced
showroom package. In 2002, the Company expanded a total of four restaurants. The
Company plans to continue its strategy of expanding the customer areas and
seating capacity of selected restaurants in 2003. The customer area of expanded
restaurants, other than restaurants with increased seating capacity due to an
enhanced showroom package, is typically increased by an average of 1,000 to
4,000 square feet per store.
The Company has added 35, 30 and 31 Company-operated Chuck E. Cheese's
restaurants in 2002, 2001 and 2000, respectively, including restaurants acquired
from franchisees. The Company anticipates adding approximately 35 to 40 new
restaurants in 2003 through a combination of opening new restaurants and
acquiring existing franchise restaurants. The Company has identified
approximately 150 additional market areas for traditional restaurants. In
smaller demographic markets, the Company plans to open restaurants with less
retail space and lower capital costs than traditional restaurants. The Company
believes its smaller market strategy increases potential development
opportunities by approximately 200 restaurants resulting in an identified
development potential of 350 restaurants. The Company periodically reevaluates
the site characteristics of its restaurants. In the event certain site
characteristics considered essential for the success of a restaurant
deteriorate, the Company will consider relocating the restaurant to a more
desirable site.
The Company believes its ownership of trademarks to the names and character
likenesses featured in the operation of its restaurants to be an important
competitive advantage.
Restaurant Design and Entertainment
Chuck E. Cheese's restaurants are typically located in shopping centers or
in free-standing buildings near shopping centers and generally occupy 8,000 to
14,000 square feet in area. Chuck E. Cheese's restaurants are typically divided
into three areas: a kitchen and related area (cashier and prize area, salad bar,
manager's office, technician's office, restrooms, etc.) occupies approximately
35% of the space, a dining area occupies approximately 25% of the space and a
playroom area occupies approximately 40% of the space.
The dining area of each Chuck E. Cheese's restaurant features a variety of
comic and musical entertainment by computer-controlled robotic characters,
together with video monitors and animated props, located on various stage type
settings. The dining area typically provides table and chair seating for 250 to
375 customers.
Each Chuck E. Cheese's restaurant typically contains a family oriented
playroom area offering approximately 45 coin and token-operated attractions,
including arcade-style games, kiddie rides, a toddler play area, video games,
skill oriented games and other similar entertainment. Most games dispense
tickets that can be redeemed by guests for prize merchandise such as toys and
dolls. Also included in the playroom area are tubes and tunnels suspended from
or reaching to the ceiling ("SkyTubes(R)") or other free attractions for young
children, with booth and table seating for the entire family. The playroom area
normally occupies approximately 60% of the restaurant's customer area. A limited
number of free tokens are furnished with food orders. Additional tokens may be
purchased. Tokens are used to play the games and rides in the playroom.
Food and Beverage Products
Each Chuck E. Cheese's restaurant offers varieties of pizza, a salad bar,
sandwiches, appetizers and desserts. Soft drinks, coffee and tea are also
served, along with beer and wine primarily where permitted by local laws. The
Company believes that the quality of its food compares favorably with that of
its competitors.
The majority of food, beverages and other supplies used in the
Company-operated restaurants is currently distributed under a system-wide
agreement with a major food distributor. The Company believes that this
distribution system creates certain cost and operational efficiencies for the
Company.
Marketing
The primary customer base for the Company's restaurants consists of
families having children between 2 and 12 years old. The Company conducts
advertising campaigns targeted at families with young children that feature the
family entertainment experiences available at Chuck E. Cheese's restaurants and
are primarily aimed at increasing the frequency of customer visits. The primary
advertising medium continues to be television, due to its broad access to family
audiences and its ability to communicate the Chuck E. Cheese's experience. The
television advertising campaigns are supplemented by promotional offers in
newspapers.
Franchising
The Company began franchising its restaurants in October 1981 and the first
franchised restaurant opened in June 1982. At February 10, 2003, 50 Chuck E.
Cheese's restaurants were operated by a total of 32 different franchisees, as
compared to 52 of such restaurants at February 11, 2002. Expansion rights have
been granted to open 12 franchised restaurants. The Company is not granting
additional United States franchises.
The Chuck E. Cheese's standard franchise agreements grant to the franchisee
the right to construct and operate a restaurant and use the associated
trademarks within the standards and guidelines established by the Company. The
franchise agreement presently offered by the Company has an initial term of 15
years and includes a 10-year renewal option. The standard agreement provides the
Company with a right of first refusal should a franchisee decide to sell a
restaurant. The earliest expiration dates of outstanding Chuck E. Cheese's
franchises are in 2003.
The Company and its franchisees created The International Association of
CEC Entertainment, Inc., (the "Association"), to discuss and consider matters of
common interest relating to the operation of corporate and franchised Chuck E.
Cheese's restaurants, to serve as an advisory council to CEC Entertainment, Inc.
and to plan and approve contributions to and expenditures from the Advertising
Fund [a fund established and managed by the Association which pays the costs of
system-wide advertising] and the Entertainment Fund [a fund established and
managed by the Association to further develop and improve entertainment
attractions]. Routine business matters of the Association are conducted by a
Board of Directors of the Association, composed of five (5) members appointed by
the Company and five (5) members elected by the franchisees.
The franchise agreements governing existing franchised Chuck E. Cheese's
restaurants in the United States currently require each franchisee to pay: (i)
to the Company, in addition to an initial franchise fee of $50,000, a continuing
monthly royalty fee equal to 3.8% of gross sales; (ii) to the Advertising Fund
of the Association an amount equal to 2.9% of gross sales; and (iii) to the
Entertainment Fund an amount equal to 0.2% of gross sales. The Chuck E. Cheese's
franchise agreements also require franchisees to expend at least 1% of gross
sales for local advertising. Under the Chuck E. Cheese's franchise agreements,
the Company is required, with respect to Company-operated restaurants, to spend
for local advertising and to contribute to the Advertising Fund and the
Entertainment Fund at the same rates as franchisees. The Company and its
franchisees could be required to make additional contributions to the
Association to fund any cash deficits which may be incurred by the Association.
Competition
The restaurant and entertainment industries are highly competitive, with a
number of major national and regional chains operating in the restaurant or
family entertainment business. Although other restaurant chains presently
utilize the combined family restaurant / entertainment concept, these
competitors primarily operate on a regional, market-by-market basis.
The Company believes that it will continue to encounter competition in the
future. Major national and regional chains, some of which may have capital
resources as great or greater than the Company, are competitors of the Company.
The Company believes that the principal competitive factors affecting Chuck E.
Cheese's restaurants are established brand recognition, the relative quality of
food and service, quality and variety of offered entertainment, and location and
attractiveness of the restaurants as compared to its competitors in the
restaurant or entertainment industries.
TJ Hartford's
In 2001, the Company opened a full service casual dining restaurant named
TJ Hartford's Grille and Bar aimed at a broad demographic target offering medium
priced, high quality food, including alcoholic beverages in a relaxed upscale
entertaining atmosphere.
Trademarks
The Company, through a wholly owned subsidiary, owns various trademarks,
including "Chuck E. Cheese" and "T.J. Hartford's" that are used in connection
with the restaurants and have been registered with the United States Patent and
Trademark Office. The duration of such trademarks is unlimited, subject to
continued use. The Company believes that it holds the necessary rights for
protection of the marks considered essential to conduct its present restaurant
operations.
Government Regulation
The development and operation of Chuck E. Cheese's restaurants are subject
to various federal, state and local laws and regulations, including but not
limited to those that impose restrictions, levy a fee or tax, or require a
permit or license on the service of alcoholic beverages and the operation of
games and rides. The Company is subject to the Fair Labor Standards Act, the
Americans With Disabilities Act, and Family Medical Leave Act mandates. A
significant portion of the Company's restaurant personnel are paid at rates
related to the minimum wage established by federal and state law. Increases in
such minimum wage result in higher labor costs to the Company, which may be
partially offset by price increases and operational efficiencies.
Working Capital Practices
The Company attempts to maintain only sufficient inventory of supplies in
the restaurants which it operates to satisfy current operational needs. The
Company's accounts receivable consist primarily of credit card receivables and
franchise royalties.
Employees
The Company's employment varies seasonally, with the greatest number being
employed during the summer months. On February 10, 2003, the Company employed
approximately 15,201 employees, including 14,831 in the operation of Chuck E.
Cheese's and TJ Hartford's restaurants and 370 employed by the Company in the
Company's executive offices. None of the Company's employees are members of any
union or collective bargaining group. The Company considers its employee
relations to be good.
Item 2. Properties
The following table sets forth certain information regarding the Chuck E.
Cheese's restaurants operated by the Company as of February 10, 2003.
Chuck E.
Domestic Cheese's
-------- --------
Alabama 5
Arkansas 4
California 58
Colorado 6
Connecticut 6
Delaware 2
Florida 22
Georgia 15
Idaho 1
Illinois 20
Indiana 8
Iowa 4
Kansas 4
Kentucky 2
Louisiana 7
Maryland 12
Maine 1
Massachusetts 11
Michigan 15
Minnesota 5
Mississippi 2
Missouri 7
Nevada 4
Nebraska 2
New Hampshire 2
New Jersey 14
New Mexico 1
New York 15
North Carolina 6
Ohio 17
Oklahoma 3
Pennsylvania 17
Rhode Island 1
South Carolina 4
South Dakota 1
Tennessee 10
Texas 49
Virginia 10
Washington 2
Wisconsin 8
----
383
----
International
-------------
Canada 3
----
386
====
Of the 386 Chuck E. Cheese's restaurants owned by the Company as of
February 10, 2003, 338 occupy leased premises and 48 occupy owned premises. The
leases of these restaurants will expire at various times from 2003 to 2028, as
described in the table below.
Year of Number of Range of Renewal
Expiration Restaurants Options (Years)
---------- ----------- ----------------
2003 12 None to 5
2004 32 None to 15
2005 30 None to 10
2006 29 None to 15
2007 and thereafter 235 None to 20
The leases of Chuck E. Cheese's restaurants contain terms which vary from
lease to lease, although a typical lease provides for a primary term of 10
years, with two additional five-year options to renew, and provides for annual
minimum rent payments of approximately $4.00 to $32.00 per square foot, subject
to periodic adjustment. The restaurant leases require the Company to pay the
cost of repairs, insurance and real estate taxes and, in many instances, provide
for additional rent equal to the amount by which a percentage (typically 6%) of
gross revenues exceeds the minimum rent.
Item 3. 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 (the
"State Court"). On July 27, 2000, the lawsuit was removed to the United States
District Court for the Central District of California (the "Federal Court"). 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 Federal
Court denied the Plaintiff's motion for class certification. The Federal Court
subsequently granted Plaintiff's motion to amend the complaint by adding a
second party to the lawsuit. On June 5, 2002, the Federal Court denied
Plaintiff's motion for class certification based upon the amended complaint. On
June 25, 2002, the Federal Court granted Plaintiff's motion for reconsideration
of its two orders denying class certification. On August 15, 2002, the Federal
Court denied Plaintiff's motion to reconsider the two prior orders denying class
certification. On September 24, 2002, Plaintiff filed a motion to remand the
case back to the State Court. On October 28, 2002, the Federal Court granted
Plaintiff's motion to remand the case back to State Court. The Company believes
the lawsuit is without merit and intends to vigorously defend against it and
believes 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 24, 2002, a purported class action lawsuit against the Company,
entitled Michelle Sajetowski v. CEC Entertainment, Inc., et al., Case No.
CV02473781 ("Sajetowski"), was filed in the Court of Common Pleas, Cayahoga
County, Ohio. On August 2, 2002, the lawsuit was removed to the United States
District Court for the Northern District of Ohio, Eastern Division. (Case No.
1:02BV1510). On August 26, 2002, Plaintiff filed an amended complaint adding
allegations of violations of the Federal Fair Labor Standards Act. The lawsuit
was filed by one former restaurant manager purporting to represent restaurant
managers of the Company in Ohio. The lawsuit alleges violations of state and
federal wage and hour laws involving unpaid overtime wages and seeks an
unspecified amount in damages. On December 23, 2002, the parties agreed to
settle this litigation for a de minimus amount subject to the filing of an
amended complaint and approval by the court. On January 20, 2003, Plaintiff
filed a second amended complaint deleting the class action allegations and
reducing the claimants in the lawsuit to one restaurant manager.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter of 2002.
P A R T I I
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
As of February 10, 2003, there were an aggregate of 27,270,006 shares of
the Company's Common Stock outstanding and approximately 3,215 stockholders of
record.
The Company's Common Stock is listed on the New York Stock Exchange under
the symbol "CEC". The following table sets forth the highest and lowest prices
per share of the Common Stock during each quarterly period within the two most
recent years, as reported on the New York Stock Exchange:
High Low
---- ---
2002
- 1st quarter $ 49.95 $ 41.83
- 2nd quarter 49.37 40.00
- 3rd quarter 42.43 32.90
- 4th quarter 35.80 23.90
2001
- 1st quarter $ 44.42 $ 30.31
- 2nd quarter 55.50 39.75
- 3rd quarter 49.49 30.70
- 4th quarter 44.79 31.95
The Company may not pay any dividends to holders of its Common Stock
(except in shares of Common Stock) unless an amount equal to all dividends then
accrued on its Class A Preferred Stock par value $60.00 per share ("the
Preferred Stock") has been paid or set aside to be paid. A dividend to holders
of record of Preferred Stock as of December 29, 2002 in the amount of $1.20 per
share will be paid on March 28, 2003.
The Company has not paid any cash dividends on its Common Stock and has no
present intention of paying cash dividends thereon in the future. The Company
plans to retain any earnings to finance anticipated capital expenditures,
repurchase the Company's common stock and reduce its long-term debt. Future
dividend policy with respect to the Common Stock will be determined by the Board
of Directors of the Company, taking into consideration factors such as future
earnings, capital requirements, potential loan agreement restrictions and the
financial condition of the Company.
Item 6. Selected Financial Data.
2002 2001 2000 1999 1998
----- ----- ----- ----- -----
(Thousands, except per share and store data)
Operating results (1):
Revenues ............................................. $602,201 $562,227 $506,111 $440,904 $379,427
Costs and expenses.................................... 488,541 457,023 415,377 368,578 324,395
-------- -------- -------- -------- --------
Income before income taxes ......................... 113,660 105,204 90,734 72,326 55,032
Income taxes.......................................... 44,134 41,029 35,379 27,954 21,302
-------- -------- -------- -------- --------
Net income............................................ $ 69,526 $ 64,175 $ 55,355 $ 44,372 $ 33,730
======== ======== ======== ======== ========
Per Share (2):
Basic:
Net income ..................................... $ 2.50 $ 2.30 $ 2.04 $ 1.63 $ 1.23
Weighted average shares outstanding.............. 27,674 27,816 26,999 27,004 27,093
Diluted:
Net income ...................................... $ 2.46 $ 2.24 $ 1.98 $ 1.58 $ 1.20
Weighted average shares outstanding.............. 28,175 28,514 27,839 27,922 27,810
Cash flow data:
Cash provided by operations........................ $133,344 $119,497 $ 94,085 $ 78,528 $ 68,614
Cash used in investing activities.................. (109,860) (108,807) (85,933) (100,344) (65,622)
Cash provided by (used in) financing activities.... (14,952) (14,308) (3,583) 21,337 (7,057)
Balance sheet data:
Total assets....................................... $539,703 $459,485 $389,375 $325,168 $252,228
Long-term obligations (including current portion
and redeemable preferred stock).................. 69,791 59,285 57,288 63,369 31,911
Shareholders' equity............................... 384,668 337,236 282,272 221,228 183,949
Number of restaurants at year end:
Company operated................................. 384 350 324 294 271
Franchise........................................ 50 52 55 55 54
-------- -------- -------- -------- --------
434 402 379 349 325
======== ======== ======== ======== ========
- ----------------------
(1) All fiscal years presented were 52 weeks in length.
(2) No cash dividends on common stock were paid in any of the years presented.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
Of Operations.
Results of Operations
A summary of the results of operations of the Company as a percentage of
revenues for the last three fiscal years is shown below.
2002 2001 2000
-------- -------- --------
Revenues ................................... 100.0% 100.0% 100.0%
------ ------ ------
Costs and expenses:
Cost of sales........................... 44.2% 44.5% 44.6%
Selling, general and administrative..... 12.7% 13.4% 14.2%
Depreciation and amortization........... 6.5% 6.1% 6.6%
Interest expense........................ .2% .4% .7%
Other operating expenses................ 17.5% 16.9% 16.0%
------ ------ ------
81.1% 81.3% 82.1%
------ ------ ------
Income before income taxes.................. 18.9% 18.7% 17.9%
====== ====== ======
2002 Compared to 2001
Revenues
Revenues increased 7.1% to $602.2 million in 2002 from $562.2 million in
2001 due to new restaurants. The Company opened 32 new restaurants, acquired
three restaurants from franchisees and closed one restaurant in 2002. Sales of
the Company's Chuck E. Cheese's restaurants which were open during all of 2002
and 2001 ("comparable store sales") decreased 1.0%. The Company completed Phase
III upgrades in 105 restaurants in 2001 and 123 restaurants in 2002. Average
annual revenues per restaurant increased to approximately $1,641,000 in 2002
from approximately $1,634,000 in 2001. Menu prices increased 0.4% between the
two years.
Revenues from franchise fees and royalties were $3.2 million in both 2002
and 2001. One new franchise restaurant opened and three franchise restaurants
were acquired by the Company during 2002. Franchise comparable store sales
decreased 0.4% in 2002.
Costs and Expenses
Costs and expenses as a percentage of revenues decreased to 81.1% in 2002
from 81.3% in 2001.
Cost of sales as a percentage of revenues decreased to 44.2% in 2002 from
44.5% in 2001. Cost of food, beverage, and related supplies as a percentage of
revenues decreased to 12.2% in 2002 from 12.8% in 2001 primarily due to lower
cheese costs. Cost of games and merchandise decreased to 4.2% in 2002 from 4.4%
in 2001 due to buying efficiencies. Restaurant labor expenses as a percentage of
revenues increased to 27.8% in 2002 from 27.3% in 2001 primarily due to the
decrease in comparable store sales and higher average wage rates.
Selling, general and administrative expenses as a percentage of revenues
declined to 12.7% in 2002 from 13.4% in 2001 primarily due to scale efficiencies
in advertising expense and corporate overhead costs.
Depreciation and amortization expense as a percentage of revenues increased
to 6.5% in 2002 from 6.1% in 2001 primarily due to increased capital
expenditures and the decrease in comparable store sales.
Interest expense as a percentage of revenues was 0.2% in 2002 compared to
0.4% in 2001 primarily due to a reduction in interest rates.
Other operating expenses increased as a percentage of revenues to 17.5% in
2002 from 16.9% in 2001 primarily due to higher insurance costs. Insurance
expense increased approximately $5.3 million in 2002 compared to 2001 due to
several factors including higher premiums, claim loss experience and medical
costs.
The Company's effective income tax rate was 38.8% in 2002 and 39.0% in 2001
due to lower estimated state tax rates.
Net Income
The Company had net income of $69.5 million in 2002 compared to $64.2
million in 2001 due to the changes in revenues and expenses discussed above. The
Company's diluted earnings per share increased to $2.46 per share in 2002
compared to $2.24 per share in 2001.
2001 Compared to 2000
Revenues
Revenues increased 11.1% to $562.2 million in 2001 from $506.1 million in
2000 primarily due to new restaurants and an increase of 2.6% in sales of the
Company's Chuck E. Cheese's restaurants which were open during all of 2001 and
2000 ("comparable store sales"). The Company opened 28 new restaurants, acquired
two restaurants from franchisees and closed four restaurants in 2001. The
Company completed Phase III upgrades in 28 restaurants in 2000 and 105
restaurants in 2001. Average annual revenues per restaurant increased to
approximately $1,634,000 in 2001 from approximately $1,576,000 in 2000. Menu
prices increased 2.8% between the two years.
Revenues from franchise fees and royalties were $3.2 million in 2001
compared to $3.3 million in 2000 primarily due to the closing of two franchise
restaurants and the acquisition of two franchise restaurants by the Company in
2001. One new franchise restaurant opened during 2001. Franchise comparable
store sales increased 3.9% in 2001.
Costs and Expenses
Costs and expenses as a percentage of revenues decreased to 81.3% in 2001
from 82.1% in 2000.
Cost of sales as a percentage of revenues decreased to 44.5% in 2001 from
44.6% in 2000. Cost of food, beverage, and related supplies as a percentage of
revenues increased to 12.8% in 2001 from 12.7% in 2000. The impact of higher
cheese costs was largely offset by the increase in menu prices. Cost of games
and merchandise decreased to 4.4% in 2001 from 5.0% in 2000 due to adjusted
ticket price categories. Restaurant labor expenses as a percentage of revenues
increased slightly to 27.3% in 2001 from 26.9% in 2000 primarily due to higher
average wage rates.
Selling, general and administrative expenses as a percentage of revenues
declined to 13.4% in 2001 from 14.2% in 2000 primarily due to a reduction in
corporate overhead expenses.
Depreciation and amortization expense as a percentage of revenues declined
to 6.1% in 2001 from 6.6% in 2000 primarily due to a change in selected
depreciable lives. At the beginning of 2001, the estimated useful lives of
certain fixed asset categories were changed prospectively based on a review of
historical asset utilization. This change in estimate resulted in a reduction of
depreciation expense of approximately $2.1 million or $.05 per diluted share
after income taxes in 2001.
Interest expense as a percentage of revenues was 0.4% in 2001 compared to
0.7% in 2000 primarily due to a reduction in interest rates.
Other operating expenses increased as a percentage of revenues to 16.9% in
2001 from 16.0% in 2000 primarily due to higher insurance costs and utility
expenses. Based on an ongoing review of insurance loss claims, the Company
recognized an additional $3.1 million in insurance expense in 2001.
The Company's effective income tax rate was 39.0% in both 2001 and 2000.
Net Income
The Company had net income of $64.2 million in 2001 compared to $55.4
million in 2000 due to the changes in revenues and expenses discussed above. The
Company's diluted earnings per share increased to $2.24 per share in 2001
compared $1.98 per share in 2000.
Significant Accounting Policies and Estimates
In preparing the Company's financial statements, management is required to
make ongoing estimates and judgments based on the information available.
Management believes the following critical accounting policies require the most
significant estimates and judgments.
The Company estimates its liability for incurred but unsettled general
liability and workers compensation related claims under its self insurance
retention programs, including reported losses in the process of settlement and
unreported losses incurred but not reported. The estimate is based on loss
development factors developed through actuarial methods using the actual claim
loss experience of the Company subject to adjustment for current trends.
Revisions to the estimated liability resulting from ongoing periodic reviews are
recognized in the period in which the differences are identified. Significant
increases in insurance losses could have a material adverse impact on future
operating results.
The Company periodically reviews the estimated useful lives of its
depreciable assets based on factors including historical experience, the
expected beneficial service period of the asset, the quality and durability of
the asset and the Company's maintenance policy including periodic upgrades.
Changes in useful lives are made on a prospective basis, unless factors indicate
the carrying amounts of the assets may not be recoverable and an impairment
write-down is necessary.
Inflation
The Company's cost of operations, including but not limited to labor,
supplies, utilities, financing and rental costs, are significantly affected by
inflationary factors. The Company pays most of its part-time employees rates
that are related to federal and state mandated minimum wage requirements.
Management anticipates that any increases in federally mandated minimum wage
would result in higher costs to the Company, which the Company expects would be
partially offset by menu price increases and increased efficiencies in
operations.
Financial Condition, Liquidity and Capital Resources
Cash provided by operations increased to $133.3 million in 2002 from $119.5
million in 2001. Cash outflow from investing activities for 2002 was $109.9
million primarily related to capital expenditures. Cash outflow from financing
activities in 2002 was $15.0 million primarily related to repurchase of the
Company's common stock net of proceeds received from the line of credit and the
exercise of stock options. 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 2003, the Company plans to add 35 to 40 restaurants including new
restaurants and the acquisition of existing restaurants from franchisees. The
Company currently anticipates its cost of opening new restaurants in large
markets to average approximately $2.4 million per store which will vary
depending upon many factors including the size of the restaurants and whether
the Company acquires land or the store is an in-line or free-standing building.
The Company has identified approximately 150 additional market areas for
traditional restaurants. In smaller demographic markets, the Company plans to
open restaurants with less retail space and lower capital costs than traditional
restaurants. The Company believes its smaller market strategy increases
potential development opportunities by approximately 200 restaurants resulting
in an identified development potential of 350 restaurants. In 2002, the Company
opened three smaller market restaurants averaging less than 6,900 square feet at
an average capital cost of approximately $700,000 per store. The Company
believes approximately 60% of the new restaurants opened in 2003 will be in
large market areas with the remaining new restaurants opened in small markets.
During 2002, the Company opened 32 new restaurants, including three smaller
market restaurants, and acquired three restaurants from a franchisee.
In addition to such new store openings, the Company has initiated several
strategies to increase revenues and earnings over the long-term. In 2003, the
Company plans to complete its Phase III upgrade program with the upgrade of an
additional 52 restaurants. The average cost of a Phase III upgrade is
approximately $205,000 to $215,000 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. In
2003, the Company also plans to initiate a game rotation plan which will have a
capital cost of approximately $50,000 per store. The primary components of this
initiative are to provide new and transferred games and rides and enhanced
consumer marketing materials including a new menu board. The Company also plans
to complete a major remodel or reconfiguration in a select number of restaurants
that are believed to have the greatest opportunity to significantly increase
sales and provide a high return on investment. The major components of a
reconfiguration include a reallocation of space between the dining and game room
areas, expansion of the space allocated to the game room, an increase in the
number of games and new exterior signage. During 2002, the Company opened 32 new
restaurants, expanded the customer area of four restaurants and completed Phase
III upgrades in 123 restaurants. The Company currently estimates that capital
expenditures in 2003, including expenditures for new store openings, existing
store expansions and equipment investments, will be approximately $90 million.
The Company plans to finance these expenditures through cash flow from
operations and, if necessary, 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. As of February
10, 2003, the Company has purchased shares of its common stock under the $25
million plan approved in July 2002 at an aggregate purchase price of
approximately $14.4 million. Beginning in 1993 through February 10, 2003, the
Company has repurchased 7.8 million shares of the Company's common stock on the
open market at an aggregate purchase price of $124.3 million.
In 2002, the Company entered into a new line of credit agreement which
provides borrowings of up to $100 million and matures in 2005. 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 .75% to 1.50%.
Currently, any borrowings under this line of credit would be at the prime rate
or LIBOR plus .875%. As of February 10, 2003, there was $42.0 million in
borrowings under this line of credit. The Company is required to comply with
certain financial ratio tests during the term of the loan agreement.
The following are contractual cash obligations of the Company as of
December 29, 2002 (thousands):
Cash Obligations Due by Year
----------------------------------------------------------------
Total 2003 2004 2005 2006 Thereafter
----- ---- ---- ---- ---- ----------
Operating leases............... $333,502 $ 49,552 $ 47,988 $ 44,685 $ 41,575 $149,702
Revolving line of credit....... 62,000 62,000
Capital lease obligations...... 624 214 214 196
Redeemable preferred stock..... 2,797 2,797
-------- -------- -------- -------- -------- --------
$398,923 $ 49,766 $ 48,202 $109,678 $ 41,575 $149,702
======== ======== ======== ======== ======== ========
In addition to the above, the Company estimates that the accrued
liabilities for group medical, general liability and workers compensation claims
of approximately $11.7 million as of December 29, 2002 will be paid as follows:
$6.9 million to be paid in 2003 and the remainder paid over the six year period
from 2004 - 2009.
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 are
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, store sales
cannibalization, 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 7A: Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to market risk in the form of interest rate risk and
foreign currency risk. Both interest rate risk and foreign currency risk are
immaterial to the Company.
Item 8. Financial Statements and Supplementary Data
CEC ENTERTAINMENT, INC.
YEARS ENDED DECEMBER 29, 2002, DECEMBER 30, 2001
AND DECEMBER 31, 2000
CONTENTS
Page
----
Independent auditors' report......................................... 15
Consolidated financial statements:
Consolidated balance sheets..................................... 16
Consolidated statements of earnings and comprehensive income.... 17
Consolidated statements of shareholders' equity................. 18
Consolidated statements of cash flows........................... 19
Notes to consolidated financial statements...................... 20
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
CEC Entertainment, Inc.
Irving, Texas
We have audited the accompanying consolidated balance sheets of CEC
Entertainment, Inc. and subsidiaries as of December 29, 2002 and December 30,
2001, and the related consolidated statements of earnings and comprehensive
income, shareholders' equity, and cash flows for each of the three years in the
period ended December 29, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of CEC Entertainment, Inc. and
subsidiaries as of December 29, 2002 and December 30, 2001, and the results of
their operations and their cash flows for each of the three years in the period
ended December 29, 2002, in conformity with accounting principles generally
accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
February 17, 2003
CEC ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(Thousands, except share data)
December 29, December 30,
2002 2001
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 12,214 $ 3,682
Accounts receivable, net................................................... 11,270 11,603
Inventories................................................................ 10,716 9,556
Prepaid expenses........................................................... 5,500 4,794
Deferred tax asset......................................................... 1,319 1,234
--------- ---------
Total current assets.................................................... 41,019 30,869
--------- ---------
Property and equipment, net................................................... 493,533 423,267
--------- ---------
Other assets:
Assets held for resale..................................................... 2,231
Notes receivable from related parties ..................................... 3,825 2,055
Other ..................................................................... 1,326 1,063
--------- ---------
5,151 5,349
--------- ---------
$ 539,703 $ 459,485
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.......................................... $ 143 $ 121
Accounts payable and accrued liabilities................................... 43,002 39,738
--------- ---------
Total current liabilities............................................... 43,145 39,859
--------- ---------
Long-term debt, less current portion.......................................... 62,349 51,942
--------- ---------
Deferred rent................................................................. 4,086 3,401
--------- ---------
Deferred tax liability........................................................ 38,156 19,825
--------- ---------
Other accrued liabilities..................................................... 4,750 4,750
--------- ---------
Commitments and contingencies
Redeemable preferred stock, $60 par value, redeemable for
$2,797 in 2005 ............................................................ 2,549 2,472
--------- ---------
Shareholders' equity:
Common stock, $.10 par value; authorized 100,000,000 shares;
35,669,773 and 35,325,273 shares issued, respectively ................... 3,567 3,533
Capital in excess of par value............................................. 201,936 192,041
Retained earnings ......................................................... 308,277 239,070
Accumulated other comprehensive loss....................................... (91) (178)
Less treasury shares of 8,409,169 and 7,586,106, respectively, at cost..... (129,021) (97,230)
--------- ---------
384,668 337,236
--------- ---------
$ 539,703 $ 459,485
========= =========
See notes to consolidated financial statements.
CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE INCOME
(Thousands, except per share data)
Fiscal Year
-----------------------------------
2002 2001 2000
--------- --------- ---------
Food and beverage revenues............................... $ 400,119 $ 380,014 $ 336,062
Games and merchandise revenues........................... 198,466 178,766 166,566
Franchise fees and royalties............................. 3,188 3,173 3,252
Interest income, including related party income
of $404, $181 and $105, respectively .................. 428 274 231
--------- --------- ---------
602,201 562,227 506,111
--------- --------- ---------
Costs and expenses:
Cost of sales....................................... 266,357 250,138 225,748
Selling, general and administrative expenses........ 76,621 75,275 71,944
Depreciation and amortization....................... 39,243 34,397 33,410
Interest expense.................................... 1,201 2,036 3,546
Other operating expenses............................ 105,119 95,177 80,729
--------- --------- ---------
488,541 457,023 415,377
--------- --------- ---------
Income before income taxes............................... 113,660 105,204 90,734
Income taxes ........................................ 44,134 41,029 35,379
--------- --------- ---------
Net income............................................... 69,526 64,175 55,355
Other comprehensive income (loss), net of tax:
Foreign currency translation........................ 87 (148) (72)
--------- --------- ---------
Comprehensive income..................................... $ 69,613 $ 64,027 $ 55,283
========= ========= =========
Earnings per share:
Basic:
Net income ........................................ $ 2.50 $ 2.30 $ 2.04
========= ========= =========
Weighted average shares outstanding................. 27,674 27,816 26,999
========= ========= =========
Diluted:
Net income ........................................ $ 2.46 $ 2.24 $ 1.98
========= ========= =========
Weighted average shares outstanding................. 28,175 28,514 27,839
========= ========= =========
See notes to consolidated financial statements.
CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Thousands, except per share data)
Fiscal Year - Amounts Fiscal Year-Shares
----------------------------------- ---------------------------
2002 2001 2000 2002 2001 2000
------ ------ ------ ------ ------ ------
Common stock and capital in
excess of par value:
Balance, beginning of year............... $ 195,574 $ 181,287 $ 169,973 35,325 34,585 33,791
Stock options exercised.................. 6,367 10,547 8,727 338 785 789
Tax benefit from exercise
of stock options and stock grants...... 3,265 4,174 2,432
Stock issued under 401(k) plan........... 297 176 155 7 5 5
Treasury stock retired and
reserved for 401(k) plan............... (610) (50)
--------- --------- --------- ------- ------- -------
Balance, end of year..................... 205,503 195,574 181,287 35,670 35,325 34,585
--------- --------- --------- ======= ======= =======
Retained earnings:
Balance, beginning of year............... 239,070 175,217 120,194
Net income............................... 69,526 64,175 55,355
Redeemable preferred stock accretion..... (95) (91) (100)
Redeemable preferred stock
dividend, $4.80 per share.............. (224) (231) (232)
--------- --------- ---------
Balance, end of year..................... 308,277 239,070 175,217
--------- --------- ---------
Deferred compensation:
Balance, beginning of year............... (759)
Amortization of deferred compensation.... 759
---------
Balance, end of year.....................
---------
Accumulated other comprehensive income:
Balance, beginning of year............... (178) (30) 42
Foreign currency translation............. 87 (148) (72)
--------- --------- ---------
Balance, end of year..................... (91) (178) (30)
--------- --------- ---------
Treasury shares:
Balance, beginning of year............... (97,230) (74,202) (68,222) 7,586 7,040 6,778
Treasury stock acquired.................. (31,791) (23,638) (5,980) 823 596 262
Treasury stock retired and
reserved for 401(k) plan............... 610 (50)
--------- --------- --------- ------- ------- -------
Balance, end of year..................... (129,021) (97,230) (74,202) 8,409 7,586 7,040
--------- --------- --------- ======= ======= =======
Total shareholders' equity.................. $ 384,668 $ 337,236 $ 282,272
========== ========= =========
See notes to consolidated financial statements.
CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
Fiscal Year
--------------------------------
2002 2001 2000
----- ----- -----
Operating activities:
Net income............................................................. $ 69,526 $ 64,175 $ 55,355
Adjustments to reconcile net income to cash provided by
operations:
Depreciation and amortization ...................................... 39,243 34,397 33,410
Deferred income tax expense ........................................ 18,246 12,088 5,112
Tax benefit from exercise of stock options and stock grants ........ 3,265 4,174 2,432
Compensation expense under stock grant plan......................... 759
Other............................................................... 1,333 836 (752)
Net change in receivables, inventories, prepaids, payables and
accrued liabilities............................................... 1,731 3,827 (2,231)
-------- -------- --------
Cash provided by operations...................................... 133,344 119,497 94,085
-------- -------- --------
Investing activities:
Purchases of property and equipment................................. (108,126) (111,202) (95,076)
Proceeds from dispositions of property and equipment................ 297 835
Payments received on notes receivable............................... 2,201 2,677 826
Additions to notes receivable....................................... (3,971) (3,206) (1,854)
Change in other assets.............................................. (426) 647 327
Sale of assets held for resale...................................... 462 1,980 9,009
-------- -------- --------
Cash used in investing activities ............................... (109,860) (108,807) (85,933)
-------- -------- --------
Financing activities:
Proceeds from debt and line of credit............................... 52,375 37,100 36,098
Payments on debt and line of credit................................. (41,946) (38,169) (42,262)
Redeemable preferred stock dividends................................ (224) (231) (233)
Acquisition of treasury stock....................................... (31,791) (23,638) (5,980)
Exercise of stock options........................................... 6,367 10,547 8,727
Other............................................................... 267 83 67
-------- -------- --------
Cash used in financing activities................................ (14,952) (14,308) (3,583)
-------- -------- --------
Increase (decrease) in cash and cash equivalents....................... 8,532 (3,618) 4,569
Cash and cash equivalents, beginning of year........................... 3,682 7,300 2,731
-------- -------- --------
Cash and cash equivalents, end of year................................. $ 12,214 $ 3,682 $ 7,300
======== ======== ========
See notes to consolidated financial statements.
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies:
Operations: CEC Entertainment, Inc. and its subsidiaries (the "Company")
operates and franchises family restaurant/entertainment centers as Chuck E.
Cheese's restaurants.
Fiscal year: The Company's fiscal year is 52 or 53 weeks and ends on the
Sunday nearest December 31. References to 2002, 2001 and 2000 are for the fiscal
years ended December 29, 2002, December 30, 2001, and December 31, 2000,
respectively. Fiscal years 2002, 2001 and 2000 each consisted of 52 weeks.
Basis of consolidation: The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Foreign currency translation: The consolidated financial statements are
presented in U.S. dollars. The assets and liabilities of the Company's Canadian
subsidiary 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
other comprehensive income.
Cash and cash equivalents: Cash and cash equivalents of the Company are
composed of demand deposits with banks and short-term cash investments with
remaining maturities of three months or less from the date of purchase by the
Company.
Inventories: Inventories of food, paper products and supplies are stated at
the lower of cost or market on a first-in, first-out basis.
Property and equipment, depreciation and amortization: Property and
equipment are stated at cost, net of accumulated depreciation and amortization.
Depreciation and amortization are provided by charges to operations over the
estimated useful lives of the assets by the straight-line method, generally
ranging from four to 20 years for furniture, fixtures and equipment and 40 years
for buildings. Leasehold improvements are amortized over the shorter of their
estimated useful lives or the related lease life, generally ranging from 10 to
20 years. All pre-opening costs are expensed as incurred.
Franchise fees and royalties: Franchise fees are recognized upon
fulfillment of all significant obligations to the franchisee. Royalties from
franchisees are accrued as earned.
Advertising costs: Production costs for commercials are expensed in the
year in which the commercials are initially aired. All other advertising costs
are expensed as incurred. The total amounts charged to advertising expense were
approximately $24.4 million, $24.0 million and $22.0 million in 2002, 2001 and
2000, respectively.
Use of estimates and assumptions: The preparation of financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Reclassifications: Certain reclassifications of 2001 and 2000 amounts have
been made to conform to the 2002 presentation.
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of significant accounting policies (continued):
Stock-Based Compensation: In December 2002, the FASB issued Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation
- -Transition and Disclosure" ("SFAS 148"), which amends SFAS No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"). SFAS 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. SFAS 148 also amends the
disclosure provisions of SFAS 123 to require prominent disclosure about the
effects on reported net income of an entity's accounting policy decisions with
respect to stock-based employee compensation, and requires disclosure about
those effects in both annual and interim financial statements. The disclosure
provisions of SFAS 148 are effective for the Company's first quarter of fiscal
2003. The Company has elected to continue to apply Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" in accounting for its
stock compensation plans and has disclosed the proforma effects of SFAS 123
(Note 15). The adoption of SFAS 148 is not expected to have an impact on the
Company's consolidated results of operations, financial position or cash flows.
Consolidation of Variable Interest Entities: In January 2003, the FASB
issued Interpretation No. 46, "Consolidation of Variable Interest Entities"
("FIN 46") which becomes effective in the third quarter of 2003. FIN 46
clarifies the application of Accounting Research Bulletin No. 51 for certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. Beginning on the first day of fiscal 2003, the
Company will consolidate the financial statements of the International
Association of CEC Entertainment, Inc. (the "Association"), a related party
(Note 3), in accordance with FIN 46. The consolidation of the Association is not
expected to have a material impact on the Company's consolidated results of
operations, financial position or cash flows.
Accounting for the Impairment or Disposal of Long-Lived Assets: The Company
has adopted Statement of Accounting Standards No.144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), dated August 2001.
This statement supercedes SFAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and
reporting provisions of Accounting Principles Board ("APB") Opinion No. 30,
"Reporting Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS 144 requires that the same accounting model be
used for long-lived assets to be disposed of by sale, whether previously held
and used or newly acquired, and it broadens the presentation of discontinued
operations to include more disposal transactions. Although adoption of SFAS 144
did not have any significant effects in fiscal 2002, store closings in the
future could be presented as discontinued operations under SFAS 144.
2. Accounts receivable:
2002 2001
------ ------
(thousands)
Trade........................................ $ 2,495 $ 2,648
Income tax receivable........................ 3,915 2,867
Vendor rebates receivable.................... 3,108 3,142
Construction allowances from landlords....... 779 831
Other........................................ 973 2,115
-------- --------
$ 11,270 $ 11,603
======== ========
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Notes receivable and related party transactions:
The Company and its franchisees contribute a percentage of revenues
("Assessments") to the Association, a related party, to develop entertainment
attractions and produce and communicate system wide advertising. The Association
has ten directors, five of whom are also employees of the Company. The Company
has granted two separate operating lines of credit to the Association. In
December 2002, the lines were renewed to provide the Association with available
borrowings of $6.0 million at interest of prime plus 2.0% (6.25% at December 29,
2002) and are due December 31, 2003. At December 29, 2002 and December 30, 2001,
approximately $3,825,000 and $2,037,000, respectively, were outstanding under
these lines of credit. The Company also had accounts payable to the Association
of $2,475,000 and $1,341,000 at December 29, 2002 and December 30, 2001 for
December and other assessments.
In addition, the Company has notes receivable from franchisees which have
various terms, but most are payable in monthly installments of principal and
interest through 2004, with interest rates of 12.0%. Notes receivable from
franchisees are fully reserved with allowances for doubtful collection of
$50,227 and $50,897 at December 29, 2002 and December 30, 2001, respectively.
4. Property and equipment:
2002 2001
------ ------
(thousands)
Land................................................... $ 36,329 $ 25,948
Leasehold improvements................................. 263,625 232,351
Buildings ............................................. 44,186 30,393
Furniture, fixtures and equipment...................... 299,251 258,661
Property leased under capital leases (Note 7).......... 449 449
--------- ---------
643,840 547,802
Less accumulated depreciation and amortization......... (169,836) (151,891)
--------- ---------
Net property and equipment in service.............. 474,004 395,911
Construction in progress............................... 7,305 11,137
Game and restaurant equipment held for future service.. 12,224 16,219
--------- ---------
$ 493,533 $ 423,267
========= =========
In 2002, the Company sold assets held for resale for approximately $462,000
and the remaining balance of $1.8 million were reclassified to property and
equipment.
5. Accounts payable and accrued liabilities:
2002 2001
------ ------
(thousands)
Current:
Accounts payable............... $ 19,933 $ 19,906
Salaries and wages............. 7,630 7,723
Insurance...................... 6,896 3,588
Taxes, other than income....... 5,488 5,708
Other.......................... 3,055 2,813
-------- --------
$ 43,002 $ 39,738
======== ========
Long-term:
Insurance...................... $ 4,750 $ 4,750
======== ========
Accrued insurance liabilities represent estimated claims incurred but
unpaid under the Company's self-insurance retention programs for general
liability, workers compensation, health benefits and certain other insurable
risks.
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Long-term debt:
2002 2001
------ ------
(thousands)
Revolving bank loan, prime or LIBOR
plus .75% to 1.5%, due December 2005 ......... $ 62,000
Revolving bank loan, prime or LIBOR
plus 1.0% to 1.75% due July 2003............... $ 51,450
Obligations under capital leases (Note 7)......... 492 613
-------- --------
62,492 52,063
Less current portion.............................. (143) (121)
-------- --------
$ 62,349 $ 51,942
======== ========
In 2002, the Company entered into a new line of credit agreement which
provides the Company with a revolving credit facility of $100 million and
matures in 2005. Proceeds from the new facility were used to pay the Company's
previous line of credit. Interest under the new line of credit is payable at
rates which are dependent on earnings and debt levels of the Company. Currently,
any borrowings under this line of credit would be at prime (4.25% at December
29, 2002) or, at the Company's option, LIBOR (1.42% at December 29, 2002) plus
0.875%. A 0.225% commitment fee is payable on any unused credit line. The
Company is required to comply with certain financial ratio tests during the
terms of the loan agreement. The weighted average interest rate on long-term
debt was 3.1% and 6.5% in 2002 and 2001, respectively. The Company capitalized
interest costs of $176,000, $306,000 and $670,000 in 2002, 2001 and 2000,
respectively.
7. Commitments and contingencies:
The Company leases certain restaurants and related property and equipment
under operating and capital leases. All leases require the Company to pay
property taxes, insurance and maintenance of the leased assets. The leases
generally have initial terms of 10 to 20 years with various renewal options.
Scheduled annual maturities of the obligations for capital and operating
leases as of December 29, 2002, are as follows:
Years Capital Operating
------- ------- ---------
(thousands)
2003............................................... $ 214 $ 49,552
2004............................................... 214 47,988
2005............................................... 196 44,685
2006............................................... 41,575
2007............................................... 36,174
2008-2028 (aggregate payments)..................... 113,528
------ ---------
Minimum future lease payments ..................... 624 $ 333,502
=========
Less amounts representing interest................. (132)
------
Present value of future minimum lease payments..... 492
Less current portion............................... (143)
------
Long-term capital lease obligation................. $ 349
======
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Commitments and contingencies (continued):
Deferred rent is provided to recognize the minimum rent expense on a
straight-line basis when rental payments are not made on such basis. Certain of
the Company's real estate leases require payment of contingent rent based on a
percentage of sales. The Company's rent expense is comprised of the following:
2002 2001 2000
------ ------ ------
(thousands)
Minimum......................... $ 51,195 $ 47,884 $ 43,019
Contingent...................... 330 452 447
-------- -------- --------
$ 51,525 $ 48,336 $ 43,466
======== ======== ========
From time to time the Company is involved in litigation, most of which is
incidental to its business. In the Company's opinion, no litigation to which the
Company currently is a party is likely to have a material adverse effect on the
Company's results of operations, financial condition or cash flows.
8. Redeemable preferred stock:
As of December 29, 2002 and December 30, 2001, the Company had 46,610 and
47,037 shares, respectively, of its redeemable preferred stock authorized and
outstanding. The stock pays dividends at $4.80 per year, subject to a minimum
cash flow test. As of December 29, 2002, one quarterly dividend, totaling
$55,932 or $1.20 per share, was accrued but not yet paid. The redeemable
preferred stock has been recorded at the net present value of the redemption
price and is being accreted on the straight-line basis, which approximates the
interest method. The Company's restated articles of incorporation provide for
the redemption of such shares at $60 per share in 2005. During the continuation
of any event of default by the Company, the preferred shareholders will be able
to elect a majority of the directors of the Company. In 2002, the Company
reacquired 427 shares of its redeemable preferred stock.
9. Franchise fees and royalties:
At December 29, 2002, 50 Chuck E. Cheese's restaurants were operated by a
total of 32 different franchisees. The standard franchise agreements grant to
the franchisee the right to construct and operate a restaurant and use the
associated trade names, trademarks and service marks within the standards and
guidelines established by the Company. Franchise fees included in revenues were
$240,000, $114,000, and $253,000 in 2002, 2001 and 2000, respectively.
10. Cost of sales:
2002 2001 2000
----- ----- -----
(thousands)
Food, beverage and related supplies.... $ 73,690 $ 72,006 $ 64,169
Games and merchandise.................. 25,490 24,871 25,371
Labor.................................. 167,177 153,261 136,208
--------- --------- ---------
$ 266,357 $ 250,138 $ 225,748
========= ========= =========
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Income taxes:
The significant components of income tax expense are as follows:
2002 2001 2000
------- ------- ------
(thousands)
Current expense:
Federal.................................................. $ 18,571 $ 20,957 $ 23,439
State.................................................... 4,052 3,810 4,396
Tax benefit from exercise of stock options and grants.... 3,265 4,174 2,432
-------- -------- --------
Total current expense.................................. 25,888 28,941 30,267
Deferred expense:
Temporary differences ................................... 18,246 12,088 5,112
-------- -------- --------
$ 44,134 $ 41,029 $ 35,379
======== ======== ========
Deferred income tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of assets and liabilities and their respective tax bases. The
income tax effects of temporary differences which give rise to deferred income
tax assets and liabilities are as follows:
2002 2001
------ ------
(thousands)
Current deferred tax asset:
Accrued vacation............................ $ 766 $ 676
Unearned gift certificates ................. 406 418
Other....................................... 147 140
-------- --------
$ 1,319 $ 1,234
======== ========
Non-current deferred tax asset (liability):
Deferred rent............................... $ 1,580 $ 1,311
Unearned franchise fees..................... 92 112
Depreciation................................ (39,471) (21,285)
Other....................................... (357) 37
-------- --------
$(38,156) $(19,825)
======== ========
A reconciliation of the statutory rate to taxes provided is as follows:
2002 2001 2000
----- ----- -----
Federal statutory rate............................ 35.0% 35.0% 35.0%
State income taxes, net of federal benefit........ 3.9% 3.9% 3.8%
Other............................................. (.1)% .1% .2%
----- ----- -----
Effective tax rate................................ 38.8% 39.0% 39.0%
===== ===== =====
12. Fair value of financial instruments:
The Company has certain financial instruments consisting primarily of cash
equivalents, notes receivable, notes payable and redeemable preferred stock. The
carrying amount of cash equivalents approximates fair value because of the short
maturity of those instruments. The carrying amount of the Company's notes
receivable and long-term debt approximates fair value based on the interest
rates charged on instruments with similar terms and risks. The estimated fair
value of the Company's redeemable preferred stock is $3.2 million.
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Earnings per common share:
Basic earnings per common share ("EPS") is computed by dividing earnings
applicable to common shares by the weighted average number of common shares
outstanding. Diluted EPS adjusts for the effect of potential common shares from
dilutive stock options and stock grants using the treasury stock method. Net
income applicable per common share has been adjusted for redeemable preferred
stock accretion and dividends. Earnings per common and potential common shares
were computed as follows (thousands, except per share data):
2002 2001 2000
------ ------ ------
Net income......................................................... $ 69,526 $ 64,175 $ 55,355
Accretion of redeemable preferred stock............................ (95) (91) (100)
Redeemable preferred stock dividends............................... (224) (231) (232)
-------- -------- --------
Net income applicable to common shares............................. $ 69,207 $ 63,853 $ 55,023
======== ======== ========
Basic:
Weighted average common shares outstanding...................... 27,674 27,816 26,999
======== ======== ========
Earnings per common share....................................... $ 2.50 $ 2.30 $ 2.04
======== ======== ========
Diluted:
Weighted average common shares outstanding...................... 27,674 27,816 26,999
Potential common shares for stock options and stock grants...... 501 698 840
-------- -------- --------
Weighted average shares outstanding............................. 28,175 28,514 27,839
======== ======== ========
Earnings per common and potential common shares................. $ 2.46 $ 2.24 $ 1.98
======== ======== ========
14. Supplemental cash flow information:
2002 2001 2000
------ ------ ------
(thousands)
Cash paid during the year for:
Interest....................... $ 1,216 $ 2,167 $ 3,550
Income taxes .................. 26,936 25,168 32,824
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Employee benefit plans:
The Company has employee benefit plans that include: a) incentive bonus
compensation plans based on the performance of the Company; b) non-statutory
stock option plans for its employees and non-employee directors; c) a stock
grant plan (expired December 1998) and d) a retirement and savings plan.
The Company's common stock which could be issued under its initial employee
stock option plan was 4,158,057 shares. Any shares granted under this plan had
to be granted before December 31, 1998. In 1997, the Company adopted a new
employee stock option plan under which an additional 5,787,500 shares, as
amended in 2002, may be granted before July 31, 2007. The exercise price for
options granted under both plans may not be less than the fair market value of
the Company's common stock at date of grant. Options may not be exercised until
the employee has been continuously employed at least one year after the date of
grant. Options which expire or terminate may be re-granted under the plan.
In 1995, the Company adopted a stock option plan for its non-employee
directors. The number of shares of the Company's common stock that may be issued
under this plan cannot exceed 225,000 shares and the exercise price for options
granted may not be less than the fair value of the Company's common stock at the
date of grant.
At December 29, 2002, there were 2,193,539 shares available for grant under
the employee and non-employee directors stock option plans. Stock option
transactions are summarized as follows for all plans:
Weighted Average
Number of Shares Exercise Price Per Share
------------------------------------ ------------------------
2002 2001 2000 2002 2001 2000
------ ------ ------ ----- ----- -----
Options outstanding, beginning of year 2,650,611 2,488,368 2,618,783 $25.26 $17.95 $13.66
Granted ....................... 792,299 989,957 884,329 43.45 34.09 24.59
Exercised...................... (337,656) (784,669) (788,789) 18.86 13.44 11.06
Terminated..................... (79,779) (43,045) (225,955) 29.42 21.27 18.84
---------- ---------- ----------
Options outstanding, end of year 3,025,475 2,650,611 2,488,368 30.63 25.26 17.95
========== ========== ==========
Options outstanding at December 29, 2002:
Options Outstanding Options Exercisable
- -------------------------------------------------------------------- --------------------------------
Shares Weighted Avg. Weighted Shares Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices as of 12/29/02 Contractual Life Exercise Price as of 12/29/02 Exercise Price
- --------------- -------------- ---------------- -------------- -------------- --------------
$13.67 - $19.94 643,402 2.8 $ 16.39 451,328 $ 15.91
$22.44 - $24.88 372,005 4.2 23.31 175,083 23.28
$25.08 - $29.50 288,086 4.0 25.65 51,342 25.80
$30.06 - $39.60 936,782 5.0 34.00 56,319 33.93
$40.30 - $54.27 785,200 6.1 43.56
---------- --------
$13.67 - $54.27 3,025,475 4.6 30.63 734,072 19.74
========== ========
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Employee benefit plans (continued):
Stock options expire seven years from the grant date. Stock options vest
over various periods ranging from one to four years. In January 2003, the
Company granted 1,480,302 additional options to employees at an exercise price
of $29.99 per share and 20,000 options to its non-employee directors at an
exercise price of $30.96 per share.
The number of shares of the Company's common stock which were available to
be awarded to senior executives of the Company under the Stock Grant Plan was
2,577,956 shares. The stock grant plan expired in December 1998. Compensation
expense recognized by the Company pursuant to this plan for grants made in 1997
was $759,000 in 2000. All shares vested over periods ranging from three years to
six years and are subject to forfeiture upon termination of the participant's
employment by the Company. The shares are nontransferable during the vesting
periods. The deferred compensation was amortized over the compensated periods of
service of three years.
All stock options are granted at no less than fair market value of the
common stock at the grant date. The Company applies the provisions of APB
Opinion 25 and related interpretations in accounting for its employee benefit
plans. Accordingly, no compensation cost has been recognized for its stock
option plans. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date for awards under those
plans consistent with the method prescribed by SFAS 123, the Company's proforma
net income would have been $62.8 million, $59.6 million and $52.5 million in
2002, 2001 and 2000, respectively. Proforma diluted earnings per share would
have been $2.22, $2.08 and $1.88 per share in 2002, 2001 and 2000, respectively.
For the proforma calculations above, the estimated fair value of options
granted was $14.69, $11.91 and $9.39 per share in 2002, 2001 and 2000,
respectively. The fair value of each stock option grant is estimated on the date
of grant using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants: risk free interest rate of 4.34%,
4.80% and 6.46% in 2002, 2001 and 2000, respectively; no dividend yield;
expected lives of five years; and expected volatility of 30%.
The Company has adopted the CEC 401(k) Retirement and Savings Plan, to
which it may at its discretion make an annual contribution out of its current or
accumulated earnings. Contributions by the Company may be made in the form of
its common stock or in cash. At December 29, 2002, 44,895 shares remained
available for grant under the plan. The Company made contributions of
approximately $297,000 and $176,000 in common stock for the 2001 and 2000 plan
years, respectively. The Company accrued $356,000 for contributions for the 2002
plan year which will be paid in common stock in 2003.
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Quarterly results of operations (unaudited):
The following summarizes the unaudited quarterly results of operations in
2002 and 2001 (thousands, except per share data).
Fiscal year ended December 29, 2002
------------------------------------------------
Mar. 31 June 30 Sept. 29 Dec. 29
--------- --------- --------- ---------
Revenues...................... $ 172,793 $ 142,416 $ 148,921 $ 138,071
Income before income taxes.... 43,854 25,080 27,071 17,655
Net income.................... 26,796 15,323 16,539 10,868
Earnings Per Share:
Basic ...................... $ .96 $ .55 $ .60 $ .39
Diluted .................... .94 .54 .59 .39
Fiscal year ended December 30, 2001
------------------------------------------------
April 1 July 1 Sept. 30 Dec. 30
--------- --------- --------- ---------
Revenues...................... $ 163,208 $ 127,417 $ 141,821 $ 129,781
Income before income taxes.... 41,286 20,214 26,578 17,126
Net income.................... 25,184 12,331 16,213 10,447
Earnings Per Share:
Basic ...................... $ .90 $ .44 $ .58 $ .37
Diluted .................... .88 .43 .57 .37
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
P A R T I I I
Item 10. Directors and Executive Officers of the Registrant
The information required by this item regarding the directors and executive
officers of the Company shall be included in the Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A in connection with the
Company's 2003 annual meeting of stockholders and incorporated herein by
reference thereto.
Item 11. Executive Compensation
The information required by this item regarding the directors and executive
officers of the Company shall be included in the Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A in connection with the
Company's 2003 annual meeting of stockholders and incorporated herein by
reference thereto.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item shall be included in the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A in connection
with Company's 2003 annual meeting of stockholders and is incorporated herein by
reference thereto.
Item 13. Certain Relationships and Related Transactions
The information required by this Item regarding the directors and executive
officers of the Company shall be included in the Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A in connection with the
Company's 2003 annual meeting of stockholders and is incorporated herein by
reference thereto.
Item 14. Controls and Procedures
Within the 90 day period prior to the date of filing this report, an
evaluation was performed under the supervision and with the participation of the
Company's management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on that evaluation, the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
concluded that the Company's disclosure controls and procedures were effective
as of the time of such evaluation. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to the time of such evaluation.
P A R T I V
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as a part of this report:
(1) Financial Statements and Supplementary Data:
Independent auditors' report.
CEC Entertainment, Inc. consolidated financial statements:
Consolidated balance sheets as of December 29, 2002 and December
30, 2001.
Consolidated statements of earnings and comprehensive
income for the years ended December 29, 2002, December 30, 2001
and December 31, 2000.
Consolidated statements of shareholders' equity for the years ended
December 29, 2002, December 30, 2001 and December 31, 2000.
Consolidated statements of cash flows for the years ended December
29, 2002, December 30, 2001 and December 31, 2000.
Notes to consolidated financial statements.
(2) Exhibits:
Number Description
- ------ -----------
3(a)(1) Restated Articles of Incorporation of the Company, dated
November 26, 1996 (filed as Exhibit 3.1 to the Company's
Registration Statement on Form S-3 (No. 333-22229) and
incorporated herein by reference).
3(a)(2) Amendment to the Restated Articles of Incorporation of the
Company, dated June 25, 1998 (filed as Exhibit 3(a) to the
Company's Quarterly Report on Form 10-Q for the quarter ended
July 5, 1998, and incorporated herein by reference).
3(a)(3) Amended and Restated Articles of Incorporation of the Company
(filed as Exhibit 3(a) to the Company's Quarterly Report on
Form 10-Q for the quarter ended July 4, 1999, and incorporated
herein by reference).
3(b)(1) Restated Bylaws of the Company, dated August 16, 1994 (filed
as Exhibit 3 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994, and incorporated
herein by reference).
3(b)(2) Amendment to the Bylaws, dated May 5, 1995 (filed as Exhibit 3
to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995, and incorporated herein by reference).
4(a) Specimen form of certificate representing $.10 par value
Common Stock (filed as Exhibit 4(a) to the Company's Annual
Report on Form 10-K for the year ended December 28, 1990, and
incorporated herein by reference).
4(b) Specimen form of certificate representing $60 par value Class
A Preferred Stock (filed as Exhibit 4(b) to the Company's
Annual Report on Form 10-K for the year ended December 28,
1990, and incorporated herein by reference).
10(a) 2001 Employment Agreement dated November 13, 2000, between the
Company and Richard M. Frank (filed as Exhibit 10(a) to the
Company's Annual Report on Form 10-K for the year ended
December 30, 2000, and incorporated herein by reference).
10(b) Employment Agreement, dated May 8, 2001, between Michael H.
Magusiak and the Company (filed as Exhibit 10 (a) to the
Company's Quarterly Report on Form 10-Q for the quarter ended
April 1, 2001, and incorporated herein by reference).
10(c) Credit Agreement, in the stated amount of $100,000,000, dated
December 3, 2002, between Showbiz Merchandising, L.P.,
Company, Bank of America, Bank One, U.S. Bank National
Association, Fleet National Bank, and the other Lenders.
10(d)(1) 1988 Non-Statutory Stock Option Plan (filed as Exhibit A to
the Company's Proxy Statement for Annual Meeting of
Stockholders to be held on June 8, 1995, and incorporated
herein by reference).
10(d)(2) Specimen form of Contract under the 1988 Non-Statutory Stock
Option Plan of the Company, as amended to date (filed as
Exhibit 10 (d) to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 28, 1996, and incorporated herein
by reference).
10(e)(1) 1997 Non-Statutory Stock Option Plan (filed as Exhibit 4.1 to
Form S-8 (No. 333-41039), and incorporated herein by
reference).
10(e)(2) Specimen form of Contract under the 1997 Non-Statutory Stock
Option Plan of the Company, as amended to date (filed as
Exhibit 10(o)(2) to the Company's Annual Report on Form 10-K
for the year ended January 2, 1998, and incorporated herein by
reference).
10(f)(1) Non-Employee Directors Stock Option Plan (filed as Exhibit B
to the Company's Proxy Statement for Annual Meeting of
Stockholders to be held on June 8, 1995, and incorporated
herein by reference).
10(f)(2) Specimen form of Contract under the Non-Employee Directors
Stock Option Plan of the Company, as amended to date (filed as
Exhibit 10(s)(2) to the Company's Annual Report on Form 10-K
for the year ended December 27, 1996, and incorporated herein
by reference).
10(g)(1) Specimen form of the Company's current Franchise Agreement
(filed as Exhibit 10(r)(1) to the Company's Annual Report on
Form 10-K for the year ended January 2, 1998, and incorporated
herein by reference).
10(g)(2) Specimen form of the Company's current Development Agreement
(filed as Exhibit 10(r)(2) to the Company's Annual Report on
Form 10-K for the year ended January 2, 1998, and incorporated
herein by reference).
10(h) Rights Agreement, dated as on November 19, 1997, by and
between the Company and the Rights Agent (filed as Exhibit A
to Exhibit 1 of the Company's Registration Statement on Form
8-A (No. 001-13687) and incorporated herein by reference).
23 Consent of Independent Accountants.
99.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C.Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed in the fourth quarter of 2002.
(c) Exhibits pursuant to Item 601 of Regulation S-K:
Pursuant to Item 601(b)(4) of Regulation S-K, there have been excluded from
the exhibits filed pursuant to this report instruments defining the right
of holders of long-term debt of the Company where the total amount of the
securities authorized under each such instrument does not exceed 10% of the
total assets of the Company. The Company hereby agrees to furnish a copy of
any such instruments to the Commission upon request.
(d) Financial Statements excluded from the annual report to shareholders by
Rule 14A - 3(b):
No financial statements are excluded from the annual report to the
Company's shareholders by Rule 14a - 3(b).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 25, 2003 CEC Entertainment, Inc.
By: /s/ Richard M. Frank
----------------------------------
Richard M. Frank
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Richard M. Frank Chairman of the Board, March 25, 2003
- ----------------------------- Chief Executive Officer,
Richard M. Frank and Director (Principal
Executive Officer)
/s/ Michael H. Magusiak President and Director March 25, 2003
- -----------------------------
Michael H. Magusiak
/s/ Rodney Carter Executive Vice President, March 25, 2003
- ----------------------------- Chief Financial Officer
Rodney Carter and Treasurer,
(Principal Financial Officer and
Principal Accounting Officer)
/s/ Richard T. Huston Director March 25, 2003
- -----------------------------
Richard T. Huston
/s/ Tim T. Morris Director March 25, 2003
- -----------------------------
Tim T. Morris
/s/ Louis P. Neeb Director March 25, 2003
- -----------------------------
Louis P. Neeb
/s/ Cynthia I. Pharr Director March 25, 2003
- -----------------------------
Cynthia I. Pharr
/s/ Walter Tyree Director March 25, 2003
- -----------------------------
Walter Tyree
/s/ Raymond E. Wooldridge Director March 25, 2003
- -----------------------------
Raymond E. Wooldridge
CERTIFICATION BY CHIEF EXECUTIVE OFFICER
I, Richard M. Frank, certify that:
1. I have reviewed this annual report on Form 10-K 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 the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the period presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
March 25, 2003 /s/Richard M. Frank
-------------------------
Richard M. Frank
Chief Executive Officer
CERTIFICATION BY CHIEF FINANCIAL OFFICER
I, Rodney Carter, certify that:
1. I have reviewed this annual report on Form 10-K 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 the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the period presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
March 25, 2003 /s/ Rodney Carter
-------------------------
Rodney Carter
Chief Financial Officer
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------- --------
10(c) Credit Agreement, in the stated amount of $100,000,000, 38
dated December 3, 2002, between Showbiz Merchandising,
L.P., Company, Bank of America, Bank One, U.S. Bank
National Association, Fleet National Bank, and the
other Lenders.
23 Independent Auditor's Consent of Deloitte & Touche LLP 180
99.1 Certification of Chief Executive Officer and Chief 181
Financial Officer pursuant to 18 U.S.C.Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.