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 September 28,
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 November 12, 2003, an aggregate of 25,810,731 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.......................................... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk ... 15
Item 4. Controls and Procedures....................................... 15
Part II - Other Information:
Item 1. Legal Proceedings............................................. 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)
September 28, December 29,
2003 2002
------------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 9,300 $ 12,214
Accounts receivable........................................................ 9,358 11,270
Inventories................................................................ 11,142 10,716
Prepaid expenses........................................................... 7,169 5,500
Deposit for redeemable preferred stock redemption.......................... 2,795
Deferred tax asset......................................................... 804 1,319
--------- ---------
Total current assets.................................................... 40,568 41,019
--------- ---------
Property and equipment, net................................................... 519,792 493,533
--------- ---------
Notes receivable from related parties......................................... 3,825
---------
Other assets.................................................................. 1,957 1,326
--------- ---------
$ 562,317 $ 539,703
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.......................................... $ 161 $ 143
Accounts payable and accrued liabilities................................... 61,508 43,002
Redeemable preferred stock................................................. 2,795
--------- ---------
Total current liabilities............................................... 64,464 43,145
--------- ---------
Long-term debt, less current portion.......................................... 66,925 62,349
--------- ---------
Deferred rent................................................................. 4,740 4,086
--------- ---------
Deferred tax liability........................................................ 45,754 38,156
--------- ---------
Other liabilities............................................................. 4,750 4,750
--------- ---------
Commitments and contingencies
Redeemable preferred stock.................................................... 2,549
--------- ---------
Shareholders' equity:
Common stock, $.10 par value; authorized 100,000,000 shares; 35,777,417
and 35,669,773 shares issued, respectively ............................. 3,578 3,567
Capital in excess of par value............................................. 205,060 201,936
Retained earnings ......................................................... 367,124 308,277
Accumulated other comprehensive income (loss) ............................. 577 (91)
Less treasury shares of 10,467,645 and 8,409,169, respectively, at cost.... (200,655) (129,021)
--------- ---------
375,684 384,668
--------- ---------
$ 562,317 $ 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
-----------------------------
Sep. 28, 2003 Sep. 29, 2002
------------- -------------
Food and beverage revenues................................................... $ 112,286 $ 97,561
Games and merchandise revenues............................................... 56,886 50,518
Franchise fees and royalties................................................. 962 731
Interest income, including related party income of $108 in 2002 ............. 4 111
--------- ---------
170,138 148,921
--------- ---------
Costs and expenses:
Cost of sales............................................................. 75,027 65,598
Selling, general and administrative expenses.............................. 25,158 18,105
Depreciation and amortization............................................. 11,381 9,978
Interest expense.......................................................... 503 332
Other operating expenses.................................................. 30,553 27,837
--------- ---------
142,622 121,850
--------- ---------
Income before income taxes................................................... 27,516 27,071
Income taxes................................................................. 10,676 10,532
--------- ---------
Net income .................................................................. 16,840 16,539
Other comprehensive loss, net of tax:
Foreign currency translation................................................. (275) (98)
--------- ---------
Comprehensive income......................................................... $ 16,565 $ 16,441
========= =========
Earnings per share:
Basic:
Net income ............................................................. $ .65 $ .60
========= =========
Weighted average shares outstanding..................................... 25,887 27,564
========= =========
Diluted:
Net income ............................................................ $ .64 $ .59
========= =========
Weighted average shares outstanding..................................... 26,499 27,987
========= =========
See notes to consolidated financial statements.
CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE INCOME
(Unaudited)
(Thousands, except per share data)
Nine Months Ended
-----------------------------
Sep. 28, 2003 Sep. 29, 2002
------------- -------------
Food and beverage revenues................................................... $ 334,363 $ 307,680
Games and merchandise revenues............................................... 170,150 153,723
Franchise fees and royalties................................................. 2,620 2,434
Interest income, including related party income of $282 in 2002............. 16 293
--------- ---------
507,149 464,130
--------- ---------
Costs and expenses:
Cost of sales............................................................. 221,419 203,301
Selling, general and administrative expenses.............................. 65,793 56,530
Depreciation and amortization............................................. 33,338 28,651
Interest expense.......................................................... 967 881
Other operating expenses.................................................. 89,214 78,762
--------- ---------
410,731 368,125
--------- ---------
Income before income taxes................................................... 96,418 96,005
Income taxes................................................................. 37,410 37,346
--------- ---------
Net income .................................................................. 59,008 58,659
Other comprehensive income, net of tax:
Foreign currency translation................................................. 668 41
--------- ---------
Comprehensive income......................................................... $ 59,676 $ 58,700
========= =========
Earnings per share:
Basic:
Net income ............................................................. $ 2.20 $ 2.11
========= =========
Weighted average shares outstanding..................................... 26,707 27,742
========= =========
Diluted:
Net income ............................................................ $ 2.18 $ 2.06
========= =========
Weighted average shares outstanding..................................... 27,056 28,322
========= =========
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................................. 2,435 96
Tax benefit from exercise of options.................... 344
Stock issued under 401(k) plan............................. 356 11
--------- -------
Balance, September 28, 2003............................. 208,638 35,777
--------- =======
Retained earnings:
Balance, beginning of year.............................. 308,277
Net income.............................................. 59,008
Redeemable preferred stock accretion.................... (49)
Redeemable preferred stock dividend, $2.40 per share.... (112)
---------
Balance, September 28, 2003............................. 367,124
---------
Accumulated other comprehensive income (loss):
Balance, beginning of year.............................. (91)
Foreign currency translation............................ 668
---------
Balance, September 28, 2003............................. 577
---------
Treasury shares:
Balance, beginning of year.............................. (129,021) 8,409
Treasury stock acquired................................. (71,634) 2,059
--------- -------
Balance, September 28, 2003............................. (200,655) 10,468
--------- =======
Total shareholders' equity................................. $ 375,684
=========
See notes to consolidated financial statements.
CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands)
Nine Months Ended
-------------------------------
Sep. 28, 2003 Sep. 29, 2002
------------- -------------
Operating activities:
Net income .......................................................... $ 59,008 $ 58,659
Adjustments to reconcile net income to cash
provided by operations:
Depreciation and amortization........................................ 33,338 28,651
Deferred income tax expense.......................................... 8,485 15,362
Tax benefit from exercise of stock options........................... 344 3,015
Other ............................................................... 2,032 863
Net change in receivables, inventories, prepaids, payables and
accrued liabilities................................................ 21,978 11,109
--------- ---------
Cash provided by operations.................................... 125,185 117,659
--------- ---------
Investing activities:
Purchases of property and equipment.................................. (60,202) (83,326)
Additions to notes receivable........................................ (3,921)
Payments received on notes receivable................................ 918
Increase in assets held for resale................................... (102)
Increase in other assets............................................. (753) (164)
--------- ---------
Cash used in investing activities.............................. (60,955) (86,595)
--------- ---------
Financing activities:
Proceeds (payments) on debt and line of credit....................... 4,594 (10,479)
Exercise of stock options ........................................... 2,435 5,676
Redeemable preferred stock dividends................................. (112) (168)
Purchase of treasury stock .......................................... (71,634) (22,444)
Deposit for redeemable preferred stock redemption.................... (2,795)
Other ............................................................... 368 338
--------- ---------
Cash used in financing activities.............................. (67,144) (27,077)
--------- ---------
Increase (decrease) in cash and cash equivalents ....................... (2,914) 3,987
Cash and cash equivalents, beginning of period.......................... 12,214 3,682
--------- ---------
Cash and cash equivalents, end of period................................ $ 9,300 $ 7,669
========= =========
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 September 28, 2003 and September 29, 2002 reflect all adjustments
(consisting only of normal recurring adjustments except as discussed in Note 5)
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 September 28, 2003 and September 29, 2002
are not necessarily indicative of the results for the year.
2. Earnings per common share:
Basic earnings per common share ("EPS") are 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 Nine Months Ended
--------------------- ---------------------
Sep. 28, Sep. 29, Sep. 28, Sep. 29,
2003 2002 2003 2002
-------- -------- -------- --------
Net income ........................................ $ 16,840 $ 16,539 $ 59,008 $ 58,659
Accretion of redeemable preferred stock (a)........ (22) ( 49) (67)
Redeemable preferred stock dividends (a)........... (55) (112) (168)
-------- -------- -------- --------
Net income applicable to common shares............. $ 16,840 $ 16,462 $ 58,847 $ 58,424
======== ======== ======== ========
Basic:
Weighted average common shares outstanding..... 25,887 27,564 26,707 27,742
======== ======== ======== ========
Earnings per common share...................... $ .65 $ .60 $ 2.20 $ 2.11
======== ======== ======== ========
Diluted:
Weighted average common shares outstanding..... 25,887 27,564 26,707 27,742
Potential common shares for stock options
and stock grants........................... 612 423 349 580
-------- -------- -------- --------
Weighted average shares outstanding............ 26,499 27,987 27,056 28,322
======== ======== ======== ========
Earnings per common and potential
common share............................... $ .64 $ .59 $ 2.18 $ 2.06
======== ======== ======== ========
(a) Beginning in the three months ended September 28, 2003, redeemable preferred stock accretion
and dividends are included in interest expense under SFAS 150 (Note 6).
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 (thousands, except per share data):
Three Months Ended Nine Months Ended
--------------------- ---------------------
Sep. 28, Sep. 29, Sep. 28, Sep. 29,
2003 2002 2003 2002
-------- -------- -------- --------
Net income, as reported ............................... $ 16,840 $ 16,539 $ 59,008 $ 58,659
Fair value based compensation expense, net of taxes.... (1,626) (1,606) (4,879) (4,823)
-------- -------- -------- --------
Pro forma net income................................... $ 15,214 $ 14,933 $ 54,129 $ 53,836
======== ======== ======== ========
Earnings per Share:
Basic:
As reported........................................ $ .65 $ .60 $ 2.20 $ 2.11
Pro forma.......................................... $ .59 $ .54 $ 2.02 $ 1.93
Diluted:
As reported........................................ $ .64 $ .59 $ 2.18 $ 2.06
Pro forma.......................................... $ .57 $ .53 $ 1.99 $ 1.89
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 costs and
cash.
5. Significant transactions:
In September 2003, the Company recorded a charge to selling, general and
administrative expense of $4.25 million related to the settlement agreed to on
September 29, 2003, subject to court approval, in a class action wage and hour
lawsuit filed in the State of California.
In September 2003, the Company committed to reacquire for approximately
$2.8 million all of its outstanding redeemable preferred stock. Final settlement
of the obligation occurred on October 31, 2003. Accordingly, the carrying value
of the redeemable preferred stock is included in current liabilities as of
September 28, 2003.
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Recent accounting pronouncements:
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS 150
requires the Company to classify the redeemable preferred stock as a liability
and the related dividend preferences as interest cost effective at the beginning
of the three-month period ended September 28, 2003. In this period, redeemable
preferred stock accretion and dividends of $77,000 is included in interest
expense; comparable amounts in prior periods are reported in shareholders'
equity. Also, in this period the increase of $163,000 in the carrying value of
the redeemable preferred stock to the redemption amount is included in interest
expense.
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Third Quarter 2003 Compared to Third Quarter 2002
A summary of the results of operations of the Company as a percentage of
revenues for the third quarters of 2003 and 2002 is shown below.
Three Months Ended
----------------------------
Sep. 28, 2003 Sep. 29, 2002
------------- -------------
Revenues..................................... 100.0% 100.0%
----- -----
Costs and expenses:
Cost of sales............................. 44.1 44.0
Selling, general and administrative....... 14.8 12.2
Depreciation and amortization............. 6.7 6.7
Interest expense.......................... .3 .2
Other operating expenses.................. 17.9 18.7
----- -----
83.8 81.8
----- -----
Income before income taxes................... 16.2 18.2
Income tax expense .......................... 6.3 7.1
----- -----
Net income .................................. 9.9% 11.1%
===== =====
Revenues
Revenues increased 14.2% to $170.1 million in the third quarter of 2003
from $148.9 million in the third quarter of 2002 due to an increase in the
number of Company-operated restaurants and an increase of 5.3% in comparable
store sales of the Company's Chuck E. Cheese's restaurants that were open during
all of the third quarters of 2003 and 2002. During 2002, the Company opened 32
new restaurants, acquired three restaurants from a franchisee and closed one
restaurant. During the first nine months of 2003, the Company opened 18 new
restaurants and closed one restaurant. Management believes that factors
impacting the comparable store sales increase were the impact of sales and
marketing initiatives and an easier comparison with the prior year's comparable
store sales decline of 2.7%. Management also believes comparable store sales in
the third quarter of 2003 benefited from favorable weather conditions and an
improved retail environment. Menu prices increased 1.0% between the periods.
Costs and Expenses
Costs and expenses as a percentage of revenues increased to 83.8% in the
third quarter of 2003 from 81.8% in the third quarter of 2002.
Cost of sales increased as a percentage of revenues to 44.1% in the third
quarter of 2003 from 44.0% in the comparable period of 2002. Cost of food,
beverage and related supplies as a percentage of revenues increased to 12.5% in
the third quarter of 2003 from 11.9% in the third quarter of 2002 primarily due
to higher cheese costs. Cost of games and merchandise as a percentage of
revenues remained the same at 4.4% in the third quarters of 2003 and 2002. Store
labor expenses as a percentage of revenues decreased slightly to 27.2% in the
third quarter of 2003 from 27.7% in the third quarter of 2002 primarily due to
the increase in comparable store sales.
Selling, general and administrative expenses as a percentage of revenues
increased to 14.8% in the third quarter of 2003 from 12.2% in the third quarter
of 2002 due primarily to a $4.25 million charge relating to the settlement,
subject to court approval, of a class action wage and hour lawsuit filed in the
State of California.
Depreciation and amortization expense as a percentage of revenues remained
the same at 6.7% in the third quarters of 2003 and 2002.
Interest expense as a percentage of revenues increased to 0.3% in the third
quarter of 2003 from 0.2% in the third quarter of 2002 primarily due to the
Company's commitment in September 2003 to reacquire for approximately $2.8
million all of its outstanding redeemable preferred stock. Interest expense
increased by $163,000 in the third quarter of 2003 as a result of this
commitment and by $77,000 as a result of the reclassification of the redeemable
preferred stock accretion and dividends required by SFAS 150.
Other operating expenses decreased as a percentage of revenues to 17.9% in
the third quarter of 2003 from 18.7% in the third quarter of 2002 primarily due
to the increase in comparable store sales and the fact that a significant
portion of operating costs are fixed.
The Company's effective income tax rate was 38.8% in the third quarter of
2003 compared to 38.9% in the third quarter of 2002.
Net Income
The Company had net income of $16.8 million in the third quarter of 2003
compared to $16.5 million in the third quarter of 2002 due to the changes in
revenues and expenses discussed above. The Company's diluted earnings per share
increased 8.5% to $.64 per share in the third quarter of 2003 from $.59 per
share in the third quarter of 2002.
First Nine Months of 2003 Compared to First Nine Months of 2002
A summary of the results of operations of the Company as a percentage of
revenues for the first nine months of 2003 and 2002 is shown below.
Nine Months Ended
----------------------------
Sep. 28, 2003 Sep. 29, 2002
------------- -------------
Revenues..................................... 100.0% 100.0%
----- -----
Costs and expenses:
Cost of sales............................ 43.6 43.7
Selling, general and administrative...... 13.0 12.2
Depreciation and amortization............ 6.6 6.2
Interest expense......................... .2 .2
Other operating expenses................. 17.6 17.0
----- -----
81.0 79.3
----- -----
Income before income taxes................... 19.0 20.7
Income tax expense .......................... 7.4 8.0
----- -----
Net income .................................. 11.6% 12.7%
===== =====
Revenues
Revenues increased 9.3% to $507.1 million in the first nine months of 2003
from $464.1 million in the first nine months of 2002 primarily due to an
increase in the number of Company-operated stores and an increase of .1% in
comparable store sales of the Company's Chuck E. Cheese's restaurants that were
open during all of the first nine months of both 2003 and 2002. During 2002, the
Company opened 32 new restaurants, acquired three restaurants from a franchisee
and closed one restaurant. During the first nine months of 2003, the Company
opened 18 new restaurants and closed one restaurant. Menu prices increased 0.7%
between the two periods.
Costs and Expenses
Costs and expenses as a percentage of revenues increased to 81.0% in the
first nine months of 2003 from 79.3% in the first nine months of 2002.
Cost of sales decreased as a percentage of revenues to 43.6% in the first
nine months of 2003 from 43.7% in the first nine months of 2002. Cost of food,
beverage and related supplies as a percentage of revenues decreased to 12.1% in
the first nine months of 2003 from 12.3% in the first nine months of 2002 due to
higher menu prices. Cost of games and merchandise as a percentage of revenues
increased to 4.3% in the first nine months of 2003 from 4.2% in the first nine
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 remained the same at 27.2% in both the first nine months
of 2003 and the first nine months of 2002.
Selling, general and administrative expenses as a percentage of revenues
increased to 13.0% in the first nine months of 2003 from 12.2% in the first nine
months of 2002 primarily due to a $4.25 million charge relating to the
settlement, subject to court approval, of a class action wage and hour lawsuit
filed in the State of California.
Depreciation and amortization expense as a percentage of revenues increased
to 6.6% in the first nine months of 2003 from 6.2% in the first nine months of
2002 primarily due to capital invested in new stores and remodels.
Interest expense as a percentage of revenues was 0.2% in both the first
nine months of 2003 and the first nine months of 2002.
Other operating expenses increased as a percentage of revenues to 17.6% in
the first nine months of 2003 from 17.0% in the first nine months of 2002
primarily due to higher insurance costs, losses on disposal of assets, repairs,
property taxes and utilities.
The Company's effective income tax rate was 38.8% the first nine months of
2003 compared to 38.9% the first nine months of 2002.
Net Income
The Company had net income of $59.0 million in the first nine months of
2003 compared to $58.7 million in the first nine months of 2002 due to the
changes in revenues and expenses discussed above. The Company's diluted earnings
per share increased 5.8% to $2.18 per share in the first nine months of 2003
compared to $2.06 per share in the first nine months of 2002.
Financial Condition, Liquidity and Capital Resources
Cash provided by operations increased to $125.2 million in the first nine
months of 2003 from $117.7 million in the comparable period of 2002. Cash
outflows from investing activities for the first nine months of 2003 were $61.0
million, primarily related to capital expenditures. Cash outflows from financing
activities for the first nine months of 2003 were $67.1 million, primarily
related to 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 37 stores 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. The average capital cost of all new restaurants expected
to open in 2003 is approximately $1.7 million per restaurant. At the beginning
of 2003, the Company identified development opportunities for approximately 350
restaurants including those restaurants expected to open in 2003. This
development plan enables the Company to potentially increase the number of
Company-owned restaurants significantly from the 384 Company-owned restaurants
at the beginning of 2003.
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 that has an
average capital cost of approximately $50,000 per store. 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
and an increase in the number of games.
During the first nine months of 2003, the Company opened 18 new
restaurants, completed Phase III upgrades in 46 restaurants, completed the game
rotation plan in 34 restaurants, completed two reconfigurations and two
expansions. The Company currently estimates that capital expenditures in 2003
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 that 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. During the first nine months of 2003, the Company
repurchased approximately 2.1 million shares of its common stock at an aggregate
purchase price of approximately $71.6 million. Beginning in 1993 through
September 28, 2003, the Company has repurchased approximately 9.9 million shares
of the Company's common stock at an aggregate purchase price of approximately
$196 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. In 2003,
available borrowings under the line of credit agreement increased to $132.5
million. 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 September 28, 2003, there was
$66.7 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.
In September 2003, the Company committed to reacquire for approximately
$2.8 million all of its outstanding redeemable preferred stock. Final settlement
of the obligation occurred on October 31, 2003.
Website Access to Company Reports
Our website address is www.chuckecheese.com. Our annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Forms 3, 4
and 5 filed by our officers, directors and stockholders holding 10% or more of
our common stock and all amendments to those reports are available free of
charge through our website, as soon as reasonably practicable after such
material is electronically filed with or furnished to the Securities and
Exchange Commission.
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 is
subject to various risks, uncertainties and assumptions. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may differ from those anticipated, estimated or
expected. Among the key factors that may have a direct bearing on the Company's
operating results, performance or financial condition are its ability to
implement its growth strategies, national, regional and local economic
conditions affecting the restaurant/entertainment industry, competition within
each of the restaurant and entertainment industries, store sales
cannibalization, success of its franchise operations, negative publicity,
fluctuations in quarterly results of operations, including seasonality,
government regulations, weather, school holidays, as well as, 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
As of the end of the period covered by this report, an evaluation was
performed under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and Acting Principal 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 Acting Principal Financial
Officer, concluded that the Company's disclosure controls and procedures were
effective as of the time of such evaluation in timely alerting them to material
information (including information relating to our consolidated subsidiaries)
required to be included in our Exchange Act filings. There have been no
significant changes in the Company's internal controls over financial reporting
or in other factors that could significantly affect these controls subsequent to
the time of such 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"). 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 September 29, 2003, the Company entered into a settlement agreement with the
Plaintiffs, which is subject to approval by the State Court, whereby the Company
will pay $4,200,000, plus up to $50,000 for administrative fees, to settle all
claims of the Plaintiff.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits
31.1 Certification of the Chief Executive Officer pursuant to
Rule 13a-14(a)/15d-14(a).
31.2 Certification of the Acting Principal Financial Officer
pursuant to Rule 13a-14(a)/15d-14(a).
32.1 Certification of the Chief Executive Officer pursuant to
18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of
The Sarbanes-Oxley Act of 2002.
32.2 Certification of the Acting 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
During the third quarter, we filed or furnished the following reports
on Form 8-K:
A current report on Form 8-K, dated October 15, 2003, containing a
press release on October 15, 2003.
A current report on Form 8-K, dated October 15, 2003, announcing third
quarter financial results.
A current report on Form 8-K, dated July 15, 2003, announcing second
quarter financial results.
A current report on Form 8-K, dated July 15, 2003, containing a
transcript of a conference call conducted by CEC Entertainment, Inc.
on July 15, 2003.
A current report on Form 8-K, dated July 15, 2003, announcing first
quarter financial results.
A current report on Form 8-K, dated July 15, 2003, containing a
transcript of a conference call conducted by CEC Entertainment, Inc.
on April 15, 2003.
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: November 12, 2003 By: s/ Michael Magusiak
--------------------------------
Michael Magusiak
President
Acting Principal Financial Officer