UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 29, 2003.
--------------
|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____________ to
_______________.
Commission File Number 0-15782
CEC ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
Kansas 48-0905805
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4441 West Airport Freeway
Irving, Texas 75062
(Address of principal executive offices,
including zip code)
(972) 258-8507
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [_]
At August 12, 2003, an aggregate of 25,745,412 shares of the registrant's
Common Stock, par value of $.10 each (being the registrant's only class of
common stock), were outstanding.
CEC ENTERTAINMENT, INC.
TABLE OF CONTENTS
Page
Part I - Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheets.......................................... 3
Consolidated Statements of Earnings and Comprehensive Income......... 4
Consolidated Statement of Shareholders' Equity....................... 6
Consolidated Statements of Cash Flows ............................... 7
Notes to Consolidated Financial Statements........................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk .... 13
Item 4. Controls and Procedures........................................ 14
Part II - Other Information:
Item 1. Legal Proceedings.............................................. 15
Item 2. Changes in Securities.......................................... 15
Item 3. Defaults Upon Senior Securities................................ 15
Item 4. Submission of Matters to a Vote of Securities Holders.......... 15
Item 5. Other Information.............................................. 16
Item 6. Exhibits and Reports on Form 8-K............................... 16
Signatures.................................................................. 17
Certifications.............................................................. 18
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CEC ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(Thousands, except share data)
June 29, December 29,
2003 2002
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 9,377 $ 12,214
Accounts receivable........................................................ 7,197 11,270
Inventories................................................................ 11,521 10,716
Prepaid expenses........................................................... 7,016 5,500
Deferred tax asset......................................................... 804 1,319
--------- ---------
Total current assets.................................................... 35,915 41,019
--------- ---------
Property and equipment, net................................................... 513,478 493,533
--------- ---------
Other assets:
Notes receivable from related parties, less current portion................ 3,825
Other ..................................................................... 1,583 1,326
--------- ---------
1,583 5,151
--------- ---------
$ 550,976 $ 539,703
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.......................................... $ 155 $ 143
Accounts payable and accrued liabilities................................... 52,175 43,002
--------- ---------
Total current liabilities............................................... 52,330 43,145
--------- ---------
Long-term debt, less current portion.......................................... 31,568 62,349
--------- ---------
Deferred rent................................................................. 4,450 4,086
--------- ---------
Deferred tax liability........................................................ 43,337 38,156
--------- ---------
Other liabilities............................................................. 4,750 4,750
--------- ---------
Commitments and contingencies
Redeemable preferred stock, $60 par value, redeemable for $2,797 in 2005...... 2,598 2,549
--------- ---------
Shareholders' equity:
Common stock, $.10 par value; authorized 100,000,000 shares; 35,713,321
and 35,669,773 shares issued, respectively ............................. 3,571 3,567
Capital in excess of par value............................................. 203,064 201,936
Retained earnings ......................................................... 350,284 308,277
Accumulated other comprehensive income (loss) ............................. 852 (91)
Less treasury shares of 8,947,898 and 8,409,169, respectively, at cost..... (145,828) (129,021)
--------- ---------
411,943 384,668
--------- ---------
$ 550,976 $ 539,703
========= =========
See notes to consolidated financial statements.
CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE INCOME
(Unaudited)
(Thousands, except per share data)
Three Months Ended
------------------------------
June 29, 2003 June 30, 2002
------------- -------------
Food and beverage revenues................................................... $ 101,233 $ 95,278
Games and merchandise revenues............................................... 50,856 46,255
Franchise fees and royalties................................................. 793 777
Interest income, including related party income of $100 in 2002 ............. 3 106
--------- ---------
152,885 142,416
--------- ---------
Costs and expenses:
Cost of sales............................................................. 68,964 64,012
Selling, general and administrative expenses.............................. 19,444 18,589
Depreciation and amortization............................................. 11,052 9,520
Interest expense.......................................................... 181 256
Other operating expenses.................................................. 29,124 24,959
--------- ---------
128,765 117,336
--------- ---------
Income before income taxes................................................... 24,120 25,080
Income taxes................................................................. 9,359 9,757
--------- ---------
Net income .................................................................. 14,761 15,323
Other comprehensive income, net of tax:
Foreign currency translation................................................. 660 139
--------- ---------
Comprehensive income......................................................... $ 15,421 $ 15,462
========= =========
Earnings per share:
Basic:
Net income ............................................................ $ .54 $ .55
========= =========
Weighted average shares outstanding.................................... 26,990 27,800
========= =========
Diluted:
Net income ........................................................... $ .54 $ .54
========= =========
Weighted average shares outstanding.................................... 27,322 28,456
========= =========
See notes to consolidated financial statements.
CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE INCOME
(Unaudited)
(Thousands, except per share data)
Six Months Ended
------------------------------
June 29, 2003 June 30, 2002
------------- -------------
Food and beverage revenues................................................... $ 222,077 $ 210,119
Games and merchandise revenues............................................... 113,264 103,205
Franchise fees and royalties................................................. 1,658 1,703
Interest income, including related party income of $174 in 2002............. 12 182
--------- ---------
337,011 315,209
--------- ---------
Costs and expenses:
Cost of sales............................................................. 146,392 137,703
Selling, general and administrative expenses.............................. 40,635 38,425
Depreciation and amortization............................................. 21,957 18,673
Interest expense.......................................................... 464 549
Other operating expenses.................................................. 58,661 50,925
--------- ---------
268,109 246,275
--------- ---------
Income before income taxes................................................... 68,902 68,934
Income taxes................................................................. 26,734 26,815
--------- ---------
Net income .................................................................. 42,168 42,119
Other comprehensive income, net of tax:
Foreign currency translation................................................. 943 139
--------- ---------
Comprehensive income......................................................... $ 43,111 $ 42,258
========= =========
Earnings per share:
Basic:
Net income ............................................................ $ 1.55 $ 1.51
========= =========
Weighted average shares outstanding.................................... 27,111 27,827
========= =========
Diluted:
Net income ........................................................... $ 1.54 $ 1.47
========= =========
Weighted average shares outstanding.................................... 27,357 28,503
========= =========
See notes to consolidated financial statements.
CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
(Thousands, except per share data)
Amounts Shares
--------- ---------
Common stock and capital in excess of par value:
Balance, beginning of year.............................................. $ 205,503 35,670
Stock options exercised................................................. 645 32
Net tax benefit from exercise of options and stock grants............... 132
Stock issued under 401(k) plan.......................................... 355 11
--------- ---------
Balance, June 29, 2003.................................................. 206,635 35,713
--------- =========
Retained earnings:
Balance, beginning of year.............................................. 308,277
Net income.............................................................. 42,168
Redeemable preferred stock accretion.................................... (48)
Redeemable preferred stock dividend, $2.40 per share.................... (113)
---------
Balance, June 29, 2003.................................................. 350,284
---------
Accumulated other comprehensive income (loss):
Balance, beginning of year.............................................. (91)
Foreign currency translation............................................ 943
---------
Balance, June 29, 2003.................................................. 852
---------
Treasury shares:
Balance, beginning of year.............................................. (129,021) 8,409
Treasury stock acquired................................................. (16,807) 539
--------- ---------
Balance, June 29, 2003.................................................. (145,828) 8,948
--------- =========
Total shareholders' equity................................................. $ 411,943
=========
See notes to consolidated financial statements.
CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands)
Six Months Ended
------------------------------
June 29, 2003 June 30, 2002
------------- -------------
Operating activities:
Net income ............................................................... $ 42,168 $ 42,119
Adjustments to reconcile net income to cash
provided by operations:
Depreciation and amortization............................................. 21,957 18,673
Deferred income tax expense............................................... 6,063 7,858
Tax benefit from exercise of stock options................................ 132 2,930
Other .................................................................... 1,434 476
Net change in receivables, inventories, prepaids, payables and
accrued liabilities.................................................... 14,383 7,433
--------- ---------
Cash provided by operations......................................... 86,137 79,489
--------- ---------
Investing activities:
Purchases of property and equipment....................................... (42,136) (51,377)
Additions to notes receivable............................................. (2,535)
Payments received on notes receivable..................................... 689
Increase in other assets.................................................. (338) (205)
--------- ---------
Cash used in investing activities................................... (42,474) (53,428)
--------- ---------
Financing activities:
Payments on debt and line of credit....................................... (30,769) (10,559)
Exercise of stock options ................................................ 645 5,462
Redeemable preferred stock dividends...................................... (113) (113)
Purchase of treasury stock ............................................... (16,807) (16,953)
Other .................................................................... 544 274
--------- ---------
Cash used in financing activities................................... (46,500) (21,889)
--------- ---------
Increase (decrease) in cash and cash equivalents ............................ (2,837) 4,172
Cash and cash equivalents, beginning of period............................... 12,214 3,682
--------- ---------
Cash and cash equivalents, end of period..................................... $ 9,377 $ 7,854
========= =========
See notes to consolidated financial statements.
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Interim financial statements:
In the opinion of management, the accompanying financial statements for the
periods ended June 29, 2003 and June 30, 2002 reflect all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the Company's financial condition, results of operations and cash flows in
accordance with generally accepted accounting principles.
Certain information and footnote disclosures normally included in the
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been omitted. The unaudited consolidated financial
statements referred to above should be read in conjunction with the financial
statements and notes thereto included in the Company's Form 10-K filed with the
Securities and Exchange Commission for the year ended December 29, 2002. Results
of operations for the periods ended June 29, 2003 and June 30, 2002 are not
necessarily indicative of the results for the year.
2. 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 using the treasury stock method. Net income available per
common share has been adjusted for redeemable preferred stock accretion and
dividends. Earnings per common and potential common share were computed as
follows (thousands, except per share data):
Three Months Ended Six Months Ended
---------------------- ----------------------
June 29, June 30, June 29, June 30,
2003 2002 2003 2002
-------- -------- -------- --------
Net income ............................................ $ 14,761 $ 15,323 $ 42,168 $ 42,119
Accretion of redeemable preferred stock................ (22) (23) ( 48) (45)
Redeemable preferred stock dividends................... (54) (57) (113) (113)
-------- -------- -------- --------
Net income applicable to common shares................. $ 14,685 $ 15,243 $ 42,007 $ 41,961
======== ======== ======== ========
Basic:
Weighted average common shares outstanding......... 26,990 27,800 27,111 27,827
======== ======== ======== ========
Earnings per common share.......................... $ .54 $ .55 $ 1.55 $ 1.51
======== ======== ======== ========
Diluted:
Weighted average common shares outstanding......... 26,990 27,800 27,111 27,827
Potential common shares for stock options.......... 332 656 246 676
-------- -------- -------- --------
Weighted average shares outstanding................ 27,322 28,456 27,357 28,503
======== ======== ======== ========
Earnings per common and potential
common share................................... $ .54 $ .54 $ 1.54 $ 1.47
======== ======== ======== ========
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Stock based compensation:
The Company uses the intrinsic value method under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations to account for its stock based compensation. The exercise prices
of all stock options granted to the employees are at no less than the fair
market value of the common stock at the grant date. 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 method
at the grant date for awards under those plans consistent with the method
prescribed by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation", the Company's pro forma net income and earnings
per share would have been as follows:
Three Months Ended Six Months Ended
---------------------- ----------------------
June 29, June 30, June 29, June 30,
2003 2002 2003 2002
-------- -------- -------- --------
Net income,as reported ................................ $ 14,761 $ 15,323 $ 42,168 $ 42,119
Fair value based compensation expense, net of taxes.... (1,629) (1,608) (3,253) (3,217)
-------- -------- -------- --------
Pro forma net income................................... $ 13,132 $ 13,715 $ 38,915 $ 38,902
======== ======== ======== ========
Earnings per Share:
Basic:
As reported........................................ $ .54 $ .55 $ 1.55 $ 1.51
Pro forma.......................................... $ .48 $ .49 $ 1.43 $ 1.40
Diluted:
As reported........................................ $ .54 $ .54 $ 1.54 $ 1.47
Pro forma.......................................... $ .48 $ .48 $ 1.42 $ 1.36
4. Consolidation of Variable Interest Entities:
The Company has adopted the Financial Accounting Standards Board's
Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46).
Accordingly, at the beginning of 2003, the Company has consolidated the
financial statements of the International Association of CEC Entertainment, Inc.
(the "Association"), a related party. The consolidation did not have a material
impact on the Company's consolidated results of operations, financial position,
or cash flows. Notes receivable from the Association, previously reported in
prior periods, are currently eliminated in this consolidation and replaced with
the Association's assets, which are primarily prepaid advertising expenses and
cash.
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Second Quarter 2003 Compared to Second Quarter 2002
A summary of the results of operations of the Company as a percentage of
revenues for the second quarters of 2003 and 2002 is shown below.
Three Months Ended
----------------------------
June 29, 2003 June 30, 2002
------------- -------------
Revenues..................................... 100.0% 100.0%
----- -----
Costs and expenses:
Cost of sales............................. 45.1 44.9
Selling, general and administrative....... 12.8 13.1
Depreciation and amortization............. 7.2 6.7
Interest expense.......................... .1 .2
Other operating expenses.................. 19.0 17.5
----- -----
84.2 82.4
----- -----
Income before income taxes................... 15.8 17.6
Income tax expense .......................... 6.1 6.9
----- -----
Net income .................................. 9.7% 10.7%
===== =====
Revenues
Revenues increased 7.4% to $152.9 million in the second quarter of 2003
from $142.4 million in the second quarter of 2002 due to an increase in the
number of Company-operated restaurants. During 2002, the Company opened 32 new
restaurants, acquired three restaurants from a franchisee and closed one
restaurant. During the first six months of 2003, the Company opened eight new
restaurants and closed one restaurant. Comparable store sales of the Company's
Chuck E. Cheese's restaurants that were open during all of the second quarters
of both 2003 and 2002 declined 1.5%. Management believes that the primary
factors impacting the comparable store sales decrease were a difficult economic
environment, the shift in the Easter holiday to the second quarter of this year
and difficult sales comparisons to the prior year. Menu prices increased 1.0%
between the periods.
Costs and Expenses
Costs and expenses as a percentage of revenues increased to 84.2% in the
second quarter of 2003 from 82.4% in the second quarter of 2002.
Cost of sales increased as a percentage of revenues to 45.1% in the second
quarter of 2003 from 44.9% in the comparable period of 2002. Cost of food,
beverage and related supplies as a percentage of revenues decreased to 11.9% in
the second quarter of 2003 from 12.3% in the second quarter of 2002 primarily
due to lower cheese costs. Cost of games and merchandise as a percentage of
revenues increased to 4.6% in the second quarter of 2003 from 4.1% in the second
quarter of 2002 due primarily to higher prize costs resulting from a guest value
program implemented in the second quarter of 2003. Store labor expenses as a
percentage of revenues increased slightly to 28.6% in the second quarter of 2003
from 28.5% in the second quarter of 2002.
Selling, general and administrative expenses as a percentage of revenues
decreased to 12.8% in the second quarter of 2003 from 13.1% in the second
quarter of 2002 due primarily to greater scale economies.
Depreciation and amortization expense as a percentage of revenues increased
to 7.2% in the second quarter of 2003 from 6.7% in the second quarter of 2002
primarily due to capital invested in new stores and remodels and the decline in
comparable store sales.
Interest expense as a percentage of revenues decreased to 0.1% in the
second quarter of 2003 from 0.2% in the second quarter of 2002 due to a
reduction in outstanding debt and lower interest rates.
Other operating expenses increased as a percentage of revenues to 19.0% in
the second quarter of 2003 from 17.5% in the second quarter of 2002 primarily
due to higher insurance costs, repairs, property taxes, rent and losses on the
disposal of assets.
The Company's effective income tax rate was 38.8% in the second quarter of
2003 compared to 38.9% in the second quarter of 2002.
Net Income
The Company had net income of $14.8 million in the second quarter of 2003
compared to $15.3 million in the second quarter of 2002 due to the changes in
revenues and expenses discussed above. The Company's diluted earnings per share
remained constant at $.54 per share in both the second quarters of 2003 and
2002.
First Six Months of 2003 Compared to First Six Months of 2002
A summary of the results of operations of the Company as a percentage of
revenues for the first six months of 2003 and 2002 is shown below.
Six Months Ended
----------------------------
June 29, 2003 June 30, 2002
------------- -------------
Revenue...................................... 100.0% 100.0%
----- -----
Costs and expenses:
Cost of sales............................. 43.5 43.6
Selling, general and administrative....... 12.1 12.2
Depreciation and amortization............. 6.5 5.9
Interest expense.......................... .1 .2
Other operating expenses.................. 17.4 16.2
----- -----
79.6 78.1
----- -----
Income before income taxes................... 20.4 21.9
Income tax expense .......................... 7.9 8.5
----- -----
Net income .................................. 12.5% 13.4%
===== =====
Revenues
Revenues increased 6.9% to $337.0 million in the first six months of 2003
from $315.2 million in the first six months of 2002 primarily due to an increase
in the number of Company-operated stores. During 2002, the Company opened 32 new
restaurants, acquired three restaurants from a franchisee and closed one
restaurant. During the first six months of 2003, the Company opened eight new
restaurants and closed one restaurant. Comparable store sales of the Company's
Chuck E. Cheese's restaurants that were open during all of the first six months
of both 2003 and 2002 declined 2.3%. Menu prices increased 0.5% between the two
periods.
Costs and Expenses
Costs and expenses as a percentage of revenues increased to 79.6% in the
first six months of 2003 from 78.1% in the first six months of 2002.
Cost of sales decreased as a percentage of revenues to 43.5% in the first
six months of 2003 from 43.6% in the first six months of 2002. Cost of food,
beverage and related supplies as a percentage of revenues decreased to 12.0% in
the first six months of 2003 from 12.4% in the second quarter of 2002 due to
lower cheese costs. Cost of games and merchandise as a percentage of revenues
increased to 4.3% in the first six months of 2003 from 4.1% in the first six
months of 2002 due primarily to higher prize costs resulting from a guest value
program implemented in the second quarter of 2003. Store labor expenses as a
percentage of revenues increased slightly to 27.2% in the first six months of
2003 from 27.1% in the first six months of 2002.
Selling, general and administrative expenses as a percentage of revenues
decreased to 12.1% in the first six months of 2003 from 12.2% in the first six
months of 2002 primarily due to lower new store pre-opening expenses in the
first six months of 2003.
Depreciation and amortization expense as a percentage of revenues increased
to 6.5% in the first six months of 2003 from 5.9% in the first six months of
2002 primarily due to capital invested in new stores and remodels and the
decline in comparable store sales.
Interest expense as a percentage of revenues was 0.1% the first six months
of 2003 compared to 0.2% the first six months of 2002 primarily due to a
reduction in outstanding debt and lower interest rates.
Other operating expenses increased as a percentage of revenues to 17.4% in
the first six months of 2003 from 16.2% in the first six months of 2002
primarily due to higher insurance costs, repairs, property taxes, rent and
losses on the disposal of assets.
The Company's effective income tax rate was 38.8% the first six months of
2003 compared to 38.9% the first six months of 2002.
Net Income
The Company had net income of $42.2 million in the first six months of 2003
compared to $42.1 million in the first six months of 2002 due to the changes in
revenues and expenses discussed above. The Company's diluted earnings per share
increased 4.8% to $1.54 per share in the first six months of 2003 compared to
$1.47 per share in the first six months of 2002.
Financial Condition, Liquidity and Capital Resources
Cash provided by operations increased to $86.1 million in the first six
months of 2003 from $79.5 million in the comparable period of 2002. Cash
outflows from investing activities for the first six months of 2003 were $42.5
million, primarily related to capital expenditures. Cash outflows from financing
activities for the first six months of 2003 were $46.5 million, primarily
related to repayment of borrowings on the Company's line of credit and the
repurchase of the Company's common stock. The Company's primary requirements for
cash relate to planned capital expenditures, the repurchase of the Company's
common stock and debt service. The Company expects that it will satisfy such
requirements from cash provided by operations and, if necessary, funds available
under its line of credit.
In 2003, the Company plans to add 35 to 38 restaurants, most of which are
expected to open in the second half of the year, including new restaurants and
acquisitions of existing restaurants from franchisees. The Company currently
anticipates its cost of opening such new restaurants will vary depending upon
many factors including the size of the restaurants, the amount of any landlord
contribution, and whether the Company acquires land or the store is an in-line
or freestanding building. In 2003, the capital costs of restaurants in large
markets are expected to average approximately $2.2 million per restaurant. At
the beginning of 2003, the Company identified development opportunities for
approximately 150 large market restaurants. In smaller demographic markets, the
Company believes its small market strategy increases potential development
opportunities by approximately 200 restaurants resulting in an identified
development potential of 350 restaurants including those restaurants expected to
open in 2003. In 2002, the Company opened three small market in-line restaurants
averaging less than 6,900 square feet at an average capital cost, net of
landlord contributions, of approximately $700,000 per restaurant. In 2003, the
average capital cost of small market restaurants is expected to be approximately
$800,000 due to a larger building area of up to 8,000 square feet and additional
entertainment attractions including a show and a greater number of games and
rides. The Company believes approximately 60% of the new restaurants opened in
2003 will be in large markets with the remaining new restaurants opened in small
markets.
In addition to new store openings, the Company has initiated several
strategies to increase revenues and earnings over the long term that require
capital expenditures. These strategies include a Phase III upgrade program, a
games rotation plan, major remodels or reconfigurations and expansions of the
retail area of existing restaurants. In 2003, these strategies are expected to
impact approximately 95 restaurants. In 2003, the Company plans to complete its
Phase III upgrade program with the upgrade of 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 area, skill games and rides, kiddie
games and rides, sky-tube enhancements, prize area enhancements and kid check
enhancements. In 2003, the Company began a game rotation plan which has an
average capital cost of approximately $50,000 per restaurant. The primary
component of this initiative is to provide new and transferred games and rides.
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 the first six months of 2003, the Company opened eight new
restaurants all of which were in larger markets, completed Phase III upgrades in
29 restaurants, completed the game rotation plan in 34 restaurants and completed
two reconfigurations. 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 a plan to repurchase shares of the
Company's common stock on the open market at an aggregate purchase price of up
to $25 million. In June 2003, the Company completed this plan 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. In July 2003, the Company
completed the plan announced in June 2003 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 $50 million. Beginning in 1993 through June 29, 2003, the Company
has repurchased 8.4 million shares of the Company's common stock at an aggregate
purchase price of approximately $141 million.
In 2002, the Company entered into a new line of credit agreement that
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 0.75% to 1.50%.
Currently, any borrowings under this line of credit would be at the prime rate
or LIBOR plus 0.75%. As of June 29, 2003, there was $31.3 million in borrowings
under this line of credit. The Company is required to comply with certain
financial ratio tests during the terms of the loan agreement.
Forward Looking Statements
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 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is subject to market risk in the form of interest risk and
foreign currency risk. Both interest risk and foreign currency risk are
immaterial to the Company.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have evaluated, under the supervision and with the participation of the
Company's management, including the Chief Executive Officer and President
(Current Principal Financial Officer), the effectiveness of the design and
operation of the Company's disclosure controls and procedures as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the
period covered by this report. Based on that evaluation, our Chief Executive
Officer and President (Current Principal Financial Officer), concluded that, as
of the end of the period covered by this report, the Company's disclosure
controls and procedures are effective in providing them with material
information relating to the Company required to be included in our Exchange Act
filings.
Changes in Internal Controls
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 our most recent evaluation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On June 2, 2000, a purported class action lawsuit against the Company,
entitled Freddy Gavarrete, et al. v. CEC Entertainment, Inc., dba Chuck E.
Cheese's , et. al., Cause No. 00-08132 FMC (RZx) ("Gavarrete"), was filed in the
Superior Court of the State of California in 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 the 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. On June 23, 2003, the
State Court granted Plaintiff's motion to amend the complaint by adding two
additional parties to the lawsuit. The Company believes the lawsuit is without
merit and intends to vigorously defend against it and that based on currently
available information the lawsuit is not likely to have a material adverse
impact on the Company's financial position.
Item 2. Changes in Securities.
None to report during quarter for which this report is filed.
Item 3. Defaults Upon Senior Securities.
None to report during quarter for which this report is filed.
Item 4. Submission of Matters to a Vote of Security Holders
On May 29, 2003, at the Company's annual meeting of shareholders, the
Company's shareholders re-elected Richard M. Frank, Tim T. Morris, and Louis P.
Neeb to serve the Company as directors. The following votes were cast with
respect to the election of these directors:
For Withheld
Richard M. Frank 24,011,310 1,215,502
Tim T. Morris 24,079,192 1,147,620
Louis P. Neeb 24,030,103 1,196,709
Richard T. Huston, Michael H. Magusiak, Cynthia I. Pharr, Walter Tyree, and
Raymond E. Wooldridge's terms of office as directors of the Company continued
after the meeting.
The shareholders did not approve changing the Company's state of
incorporation from the state of Kansas to the state of Delaware (the
"Reincorporation"). The Reincorporation would have been accomplished by merging
the Company with and into a newly formed Delaware subsidiary, CEC-Delaware,
Inc., with CEC-Delaware, Inc. being the surviving corporation. CEC-Delaware,
Inc. would then have changed its name to CEC Entertainment, Inc. upon completion
of the merger. The affirmative vote of holders of a majority of the outstanding
shares of Common Stock and Preferred Stock, voting together as a single class,
and the affirmative vote of holders of two-thirds of the outstanding shares of
Preferred Stock, voting separately, was required to approve the Reincorporation
proposal. The Reincorporation proposal failed because it did not receive the
affirmative vote of holders of two-thirds of the outstanding shares of Preferred
Stock.
The votes cast with respect to this proposal to reincorporate the Company in
Delaware were as follows:
Common and Preferred Shares:
For Against Abstain No Vote
19,425,241 2,488,970 416,505 2,896,096
Preferred Shares Only:
For Against Abstain No Vote
24,473 563 323 21,234
The shareholders did approve an amendment to the 1997 Non-Statutory Stock Option
Plan that increased the number of shares of Common Stock which may be issued
under the Employee Plan from 5,787,500 to 6,787,500. The votes cast with respect
to this proposal to authorize an amendment to the Employees Plan were as
follows:
For Against Abstain No Vote
15,789,199 8,813,787 623,826 0
Item 5. Other Information.
None to report during quarter for which this report is filed.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits
10(a) First Amendment to Credit Agreement, in the stated amount
of $100,000,000, dated February 28, 2003, between Showbiz
Merchandising, L.P., Company, Bank of America, Bank One, U.S.
Bank National Association, Fleet National Bank, and the other
Lenders.
10(b) Second Amendment to Credit Agreement, in the stated amount
of $100,000,000, dated July 16, 2003, between Showbiz
Merchandising, L.P., Company, Bank of America, Bank One, U.S.
Bank National Association, Fleet National Bank, and the other
Lenders.
99.1 Certification of the Chief Executive Officer and Current
Principal 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
None filed during the quarter for which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CEC ENTERTAINMENT, INC.
Dated: August 13, 2003 By: s/ Michael H. Magusiak
--------------------
Michael H. Magusiak
President
(Current Principal Financial Officer)
CERTIFICATION BY CHIEF EXECUTIVE OFFICER
I, Richard M. Frank, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CEC
Entertainment, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in the Exchange Act Rules) 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
quarterly 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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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.
August 13, 2003 /s/Richard M. Frank
-----------------------
Richard M. Frank
Chief Executive Officer
CERTIFICATION BY CURRENT PRINCIPAL FINANCIAL OFFICER
I, Michael H. Magusiak, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CEC
Entertainment, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in the Exchange Act Rules) 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
quarterly 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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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.
August 13, 2003 /s/ Michael H. Magusiak
----------------------------
Michael H. Magusiak
President
(Current Principal Financial Officer)
Exhibit
Number Description
10(a) First Amendment to Credit Agreement, in the stated amount of
$100,000,000, dated February 28, 2003, between Showbiz Merchandising,
L.P., Company, Bank of America, Bank One, U.S. Bank National
Association, Fleet National Bank, and the other Lenders.
10(b) Second Amendment to Credit Agreement, in the stated amount of
$100,000,000, dated July 16, 2003, between Showbiz Merchandising,
L.P., Company, Bank of America, Bank One, U.S. Bank National
Association, Fleet National Bank, and the other Lenders.
99.1 Certification of the Chief Executive Officer and Current Principal
Financial Officer pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.