Back to GetFilings.com
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 27, 2004.
|_| 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 2, 2004, an aggregate of 36,643,833 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:
Condensed Consolidated Balance Sheets ................................. 3
Condensed Consolidated Statements of Earnings and Comprehensive Income. 4
Condensed Consolidated Statement of Shareholders' Equity .............. 6
Condensed Consolidated Statements of Cash Flows ....................... 7
Notes to Condensed 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 ...... 14
Item 4. Controls and Procedures ......................................... 14
Part II - Other Information:
Item 1. Legal Proceedings .............................................. 15
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities ..................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders ............. 15
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.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands, except share data)
June 27, December 28,
2004 2003
--------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 11,069 $ 8,067
Accounts receivable ......................................................... 12,313 13,103
Inventories ................................................................. 11,326 12,491
Prepaid expenses ............................................................ 8,641 7,608
Deferred tax asset .......................................................... 1,487 1,487
--------- ---------
Total current assets ..................................................... 44,836 42,756
--------- ---------
Property and equipment, net .................................................... 546,410 536,124
--------- ---------
Other assets ................................................................... 1,415 1,471
--------- ---------
$ 592,661 $ 580,351
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ........................................... $ 168 $ 168
Accounts payable ............................................................ 26,561 30,126
Accrued liabilities ......................................................... 35,891 28,610
--------- ---------
Total current liabilities ................................................ 62,620 58,904
--------- ---------
Long-term debt, less current portion ........................................... 63,100 64,581
--------- ---------
Deferred rent .................................................................. 5,798 5,153
--------- ---------
Deferred tax liability ......................................................... 58,054 50,714
--------- ---------
Accrued insurance .............................................................. 8,500 8,500
--------- ---------
Shareholders' equity:
Common stock, $.10 par value; authorized 100,000,000 shares; 54,997,150
and 54,481,913 shares issued, respectively ............................... 5,500 5,448
Capital in excess of par value .............................................. 229,910 219,071
Retained earnings ........................................................... 426,586 378,911
Accumulated other comprehensive income ...................................... 557 695
Less treasury shares of 17,601,868 and 16,042,418, respectively, at cost .... (267,964) (211,626)
--------- ---------
394,589 392,499
--------- ---------
$ 592,661 $ 580,351
========= =========
See notes to condensed consolidated financial statements.
CEC ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE INCOME
(Unaudited)
(Thousands, except per share data)
Three Months Ended
-----------------------------
June 27, 2004 June 29, 2003
------------- -------------
Food and beverage revenues ....................... $ 108,739 $ 101,233
Games and merchandise revenues ................... 55,826 50,856
Franchise fees and royalties ..................... 852 793
Interest income .................................. 7 3
--------- ---------
165,424 152,885
--------- ---------
Costs and expenses:
Cost of sales:
Food, beverage and related supplies ........ 21,307 18,245
Games and merchandise ...................... 7,218 6,965
Labor ...................................... 47,688 43,754
--------- ---------
76,213 68,964
Selling, general and administrative expenses .. 20,495 19,444
Depreciation and amortization ................. 12,730 11,052
Interest expense .............................. 287 181
Other operating expenses ...................... 30,855 29,124
--------- ---------
140,580 128,765
--------- ---------
Income before income taxes ....................... 24,844 24,120
Income taxes ..................................... 9,514 9,359
--------- ---------
Net income ....................................... 15,330 14,761
Other comprehensive income (loss), net of tax:
Foreign currency translation .................. (124) 660
--------- ---------
Comprehensive income ............................. $ 15,206 $ 15,421
========= =========
Earnings per share:
Basic:
Net income ................................. $ .41 $ .36
========= =========
Weighted average shares outstanding ........ 37,507 40,485
========= =========
Diluted:
Net income ................................. $ .40 $ .36
========= =========
Weighted average shares outstanding ........ 38,604 40,983
========= =========
See notes to condensed consolidated financial statements.
CEC ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE INCOME
(Unaudited)
(Thousands, except per share data)
Six Months Ended
-----------------------------
June 27, 2004 June 29, 2003
------------- -------------
Food and beverage revenues ....................... $ 245,078 $ 222,077
Games and merchandise revenues ................... 125,567 113,264
Franchise fees and royalties ..................... 1,713 1,658
Interest income .................................. 14 12
--------- ---------
372,372 337,011
--------- ---------
Costs and expenses:
Cost of sales:
Food, beverage and related supplies ........ 45,785 40,215
Games and merchandise ...................... 15,860 14,489
Labor ...................................... 100,927 91,688
--------- ---------
162,572 146,392
Selling, general and administrative expenses .. 44,747 40,635
Depreciation and amortization ................. 24,959 21,957
Interest expense .............................. 574 464
Other operating expenses ...................... 62,252 58,661
--------- ---------
295,104 268,109
Income before income taxes ....................... 77,268 68,902
Income taxes ..................................... 29,593 26,734
--------- ---------
Net income ....................................... 47,675 42,168
Other comprehensive income (loss), net of tax:
Foreign currency translation .................. (138) 943
--------- ---------
Comprehensive income ............................. $ 47,537 $ 43,111
========= =========
Earnings per share:
Basic:
Net income ................................. $ 1.26 $ 1.03
========= =========
Weighted average shares outstanding ........ 37,910 40,667
========= =========
Diluted:
Net income ................................. $ 1.22 $ 1.02
========= =========
Weighted average shares outstanding ........ 39,107 41,036
========= =========
See notes to condensed consolidated financial statements.
CEC ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
(Thousands)
Amounts Shares
--------- ------
Common stock and capital in excess of par value:
Balance, beginning of year ........................ $ 224,519 54,482
Stock options exercised ........................... 8,677 503
Net tax benefit from exercise of options .......... 1,844
Stock issued under 401(k) plan .................... 397 13
Payment for fractional shares ..................... (27)
--------- -------
Balance, June 27, 2004 ............................ 235,410 54,998
--------- -------
Retained earnings:
Balance, beginning of year ........................ 378,911
Net income ........................................ 47,675
---------
Balance, June 27, 2004 ............................ 426,586
---------
Accumulated other comprehensive income (loss):
Balance, beginning of year ........................ 695
Foreign currency translation ...................... (138)
---------
Balance, June 27, 2004 ............................ 557
---------
Treasury shares:
Balance, beginning of year ........................ (211,626) 16,042
Treasury stock acquired ........................... (56,338) 1,560
--------- -------
Balance, June 27, 2004 ............................ (267,964) 17,602
--------- =======
Total shareholders' equity ........................... $ 394,589
=========
See notes to condensed consolidated financial statements.
CEC ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands)
Six Months Ended
------------------------------
June 27, 2004 June 29, 2003
------------- -------------
Operating activities:
Net income ......................................................... $ 47,675 $ 42,168
Adjustments to reconcile net income to cash
provided by operations:
Depreciation and amortization ...................................... 24,959 21,957
Deferred income tax expense ........................................ 7,340 6,063
Tax benefit from exercise of stock options ......................... 1,844 132
Other .............................................................. 1,294 1,434
Net change in receivables, inventories, prepaids, payables and
accrued liabilities ............................................. 4,638 14,383
-------- --------
Cash provided by operations .................................. 87,750 86,137
-------- --------
Investing activities:
Purchases of property and equipment ................................ (36,003) (42,136)
Increase in other assets ........................................... (87) (338)
-------- --------
Cash used in investing activities ............................ (36,090) (42,474)
-------- --------
Financing activities:
Payments on debt and line of credit ................................ (1,481) (30,769)
Exercise of stock options .......................................... 8,677 645
Redeemable preferred stock dividends ............................... (113)
Purchase of treasury stock ......................................... (56,338) (16,807)
Other .............................................................. 484 544
-------- --------
Cash used in financing activities ............................ (48,658) (46,500)
-------- --------
Increase (decrease) in cash and cash equivalents ...................... 3,002 (2,837)
Cash and cash equivalents, beginning of period ........................ 8,067 12,214
-------- --------
Cash and cash equivalents, end of period .............................. $ 11,069 $ 9,377
======== ========
See notes to condensed consolidated financial statements.
CEC ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Interim financial statements:
In the opinion of management, the accompanying condensed consolidated
financial statements for the periods ended June 27, 2004 and June 29, 2003
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 condensed 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 28,
2003. Results of operations for the periods ended June 27, 2004 and June 29,
2003 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 applicable to
common shares has been adjusted for redeemable preferred stock accretion and
dividends for the applicable periods. Earnings per common and potential common
shares were computed as follows (thousands, except per share data):
Three Months Ended Six Months Ended
--------------------- ---------------------
June 27, June 29, June 27, June 29,
2004 2003 2004 2003
-------- -------- -------- --------
Net income ............................................ $ 15,330 $ 14,761 $ 47,675 $ 42,168
Accretion of redeemable preferred stock ............... (22) (48)
Redeemable preferred stock dividends .................. (54) (113)
-------- -------- -------- --------
Adjusted income applicable to common shares ........... $ 15,330 $ 14,685 $ 47,675 $ 42,007
======== ======== ======== ========
Basic:
Weighted average common shares outstanding ......... 37,507 40,485 37,910 40,667
======== ======== ======== ========
Earnings per common share .......................... $ .41 $ .36 $ 1.26 $ 1.03
======== ======== ======== ========
Diluted:
Weighted average common shares outstanding ......... 37,507 40,485 37,910 40,667
Potential common shares for stock options .......... 1,097 498 1,197 369
-------- -------- -------- --------
Weighted average shares outstanding ................ 38,604 40,983 39,107 41,036
======== ======== ======== ========
Earnings per common and potential
common share .................................... $ .40 $ .36 $ 1.22 $ 1.02
======== ======== ======== ========
CEC ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Stock based compensation:
The Company accounts for its stock based compensation under the intrinsic
value method of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations ("APB 25"), and has
adopted the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"). Under
APB 25, no stock based compensation costs is reflected in net income for grants
of stock options to employees because the Company grants stock options with an
exercise price equal to the market value of the stock on the date of grant. 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 SFAS No. 123, the Company's pro forma net income
and earnings per share would have been as follows (thousands, except per share
data):
Three Months Ended Six Months Ended
--------------------- ---------------------
June 27, June 29, June 27, June 29,
2004 2003 2004 2003
-------- -------- -------- --------
Net income,as reported ................................ $ 15,330 $ 14,761 $ 47,675 $ 42,168
Fair value based compensation expense, net of taxes ... (1,451) (1,629) (2,886) (3,253)
-------- -------- -------- --------
Pro-forma net income .................................. 13,879 13,132 44,789 38,915
Accretion and dividends of redeemable
preferred stock, as reported ....................... (76) (161)
-------- -------- -------- --------
Pro-forma net income applicable to common shares ...... $ 13,879 $ 13,056 $ 44,789 $ 38,754
======== ======== ======== ========
Earnings per Share:
Basic:
As reported ........................................ $ .41 $ .36 $ 1.26 $ 1.03
Pro forma .......................................... $ .37 $ .32 $ 1.18 $ .95
Diluted:
As reported ........................................ $ .40 $ .36 $ 1.22 $ 1.02
Pro forma .......................................... $ .36 $ .32 $ 1.15 $ .94
4. Stock split:
All share and per share information have been retroactively adjusted for
the effects of a three for two stock split in the form of a special stock
dividend effected and distributed on March 15, 2004.
Item 2: 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 is shown below.
Three Months Ended Six Months Ended
----------------------------- ----------------------------
Jun. 27, 2004 Jun. 29, 2003 Jun. 27, 2004 Jun. 29,2003
------------- ------------- ------------- ------------
Revenues .................................... 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Costs and expenses:
Cost of sales:
Food, beverage and related supplies ... 12.9 11.9 12.3 12.0
Games and merchandise ................. 4.4 4.6 4.3 4.3
Labor ................................. 28.8 28.6 27.1 27.2
----- ----- ----- -----
46.1 45.1 43.7 43.5
Selling, general and administrative ...... 12.4 12.8 12.0 12.1
Depreciation and amortization ............ 7.7 7.2 6.7 6.5
Interest expense ......................... .2 .1 .2 .1
Other operating expenses ................. 18.6 19.0 16.7 17.4
----- ----- ----- -----
85.0 84.2 79.3 79.6
----- ----- ----- -----
Income before income taxes .................. 15.0 15.8 20.7 20.4
Income tax expense .......................... 5.7 6.1 7.9 7.9
----- ----- ----- -----
Net income .................................. 9.3% 9.7% 12.8% 12.5%
===== ===== ===== =====
Number of Company-owned stores:
Beginning of period ...................... 420 388 418 384
New ...................................... 10 4 12 8
Closed ................................... (1) (1)
----- ----- ----- -----
End of period ............................ 430 391 430 391
===== ===== ===== =====
Number of franchise stores:
Beginning of period ...................... 48 50 48 50
New ...................................... 1 1 1 1
----- ----- ----- -----
End of period ............................ 49 51 49 51
===== ===== ===== =====
Second Quarter 2004 Compared to Second Quarter 2003
Revenues
Revenues increased 8.2% to $165.4 million in the second quarter of 2004
from $152.9 million in the second quarter of 2003 due to an increase in the
number of Company-operated restaurants. During the full year of 2003, the
Company opened 32 new restaurants, acquired three restaurants from a franchisee
and closed one restaurant. During the first six months of 2004, the Company
opened 12 new restaurants and has 430 Company-operated restaurants at June 27,
2004. Comparable store sales increased 0.1% in the second quarter of 2004. Menu
prices increased approximately 0.5% between the quarters.
Costs and Expenses
Costs and expenses as a percentage of revenues increased to 85.0% in the
second quarter of 2004 from 84.2% in the second quarter of 2003.
Cost of sales increased as a percentage of revenues to 46.1% in the second
quarter of 2004 from 45.1% in the comparable period of 2003. Cost of food,
beverage and related supplies as a percentage of revenues increased to 12.9% in
the second quarter of 2004 from 11.9% in the second quarter of 2003 primarily
due to a 71% increase in average cheese prices paid in the second quarter of
2004 compared to the same quarter of the prior year. This increase negatively
impacted food cost by approximately $2.1 million. Cost of games and merchandise
as a percentage of revenues decreased to 4.4% in the second quarter of 2004 from
4.6% in the second quarter of 2003 due primarily to higher costs in the prior
year associated with the initial rollout of a guest value program. Store labor
expenses as a percentage of revenues increased slightly to 28.8% in the second
quarter of 2004 from 28.6% in the second quarter of 2003.
Selling, general and administrative expenses as a percentage of revenues
decreased to 12.4% in the second quarter of 2004 from 12.8% in the second
quarter of 2003 due primarily to a decrease in advertising expense as a
percentage of revenues.
Depreciation and amortization expense as a percentage of revenues increased
to 7.7% in the second quarter of 2004 from 7.2% in the second quarter of 2003
primarily due to capital invested in new stores and remodels.
Interest expense as a percentage of revenues increased to 0.2% in the
second quarter of 2004 from 0.1% in the second quarter of 2003 due to an
increase in outstanding debt.
Other operating expenses decreased as a percentage of revenues to 18.6% in
the second quarter of 2004 from 19.0% in the second quarter of 2003 primarily
due to a decrease in insurance expense and asset write-offs.
The Company's effective income tax rate was 38.3% in the second quarter of
2004 compared to 38.8% in the second quarter of 2003 due to lower estimated
state tax rates.
Net Income
The Company had net income of $15.3 million in the second quarter of 2004
compared to $14.8 million in the second quarter of 2003 due to the changes in
revenues and expenses discussed above. The Company's diluted earnings per share
increased 11.1% to $.40 per share in the second quarter of 2004 from $.36 in the
second quarter of 2003 due to the 3.9% increase in net income discussed above
and a 5.8% decrease in the number of weighted average shares outstanding.
First Six Months of 2004 Compared to First Six Months of 2003
Revenues
Revenues increased 10.5% to $372.4 million in the first six months of 2004
from $337.0 million in the first six months of 2003 primarily due to an increase
in the number of Company-operated stores and an increase of 2.8% in comparable
store sales. During the full year of 2003, the Company opened 32 new
restaurants, acquired three restaurants from a franchisee and closed one
restaurant. During the first six months of 2004, the Company opened 12 new
restaurants and has 430 Company-operated restaurants at June 27, 2004. Menu
prices increased 0.7% between the two periods.
Costs and Expenses
Costs and expenses as a percentage of revenues decreased to 79.3% in the
first six months of 2004 from 79.6% in the first six months of 2003.
Cost of sales increased as a percentage of revenues to 43.7% in the first
six months of 2004 from 43.5% in the first six months of 2003. Cost of food,
beverage and related supplies as a percentage of revenues increased to 12.3% in
the first six months of 2004 from 12.0% in the first six months of 2003. Food
costs were negatively impacted by approximately $3.2 million due to an increase
in average cheese prices paid in the first six months of 2004 compared to the
first six months of 2003. Cost of games and merchandise as a percentage of
revenues remained constant at 4.3% in both the first six months of 2004 and the
first six months of 2003. Store labor expenses as a percentage of revenues
decreased slightly to 27.1% in the first six months of 2004 from 27.2% in the
first six months of 2003.
Selling, general and administrative expenses as a percentage of revenues
decreased to 12.0% in the first six months of 2004 from 12.1% in the first six
months of 2003 primarily due to a decrease in advertising expense as a
percentage of revenues.
Depreciation and amortization expense as a percentage of revenues increased
to 6.7% in the first six months of 2004 from 6.5% in the first six months of
2003 primarily due to capital invested in new stores and remodels.
Interest expense as a percentage of revenues was 0.2% in the first six
months of 2004 compared to 0.1% in the first six months of 2003 primarily due to
an increase in outstanding debt.
Other operating expenses decreased as a percentage of revenues to 16.7% in
the first six months of 2004 from 17.4% in the first six months of 2003
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 38.3% in the first six months
of 2004 compared to 38.8% in the first six months of 2003 due to lower estimated
state tax rates.
Net Income
The Company had net income of $47.7 million in the first six months of 2004
compared to $42.2 million in the first six months of 2003 due to the changes in
revenues and expenses discussed above. The Company's diluted earnings per share
increased 19.6% to $1.22 per share in the first six months of 2004 compared to
$1.02 per share in the first six months of 2003 due to the 13.1% increase in net
income discussed above and a 4.7% decrease in the number of weighted average
shares outstanding.
Financial Condition, Liquidity and Capital Resources
Cash provided by operations increased to $87.8 million in the first six
months of 2004 from $86.1 million in the comparable period of 2003. Cash
outflows from investing activities for the first six months of 2004 were $36.1
million, primarily related to capital expenditures. Net cash outflows from
financing activities for the first six months of 2004 were $48.7 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.
Cash provided by operations is a significant source of liquidity for the
Company. Since substantially all of the Company's sales are for cash and credit
cards, and accounts payable are generally due in five to 30 days, the Company is
able to carry current liabilities in excess of current assets. The net working
capital deficit increased from $16.1 million at December 28, 2003 to $17.8
million at June 27, 2004 due primarily to the timing of payments for various
accrued expenses.
The Company has initiated several strategies to increase revenues and
earnings over the long-term that require capital expenditures. These strategies
include: (a) new restaurant development and acquisitions of existing restaurants
from franchisees, (b) a game enhancement initiative that includes new games and
a game rotation plan (c) major remodels or reconfigurations, and (d) expansions
of the square footage of existing restaurants. In addition, the Company is
currently testing revisions to the building exterior along with interior
enhancements in conjunction with a game enhancement initiative.
The game enhancement initiative began in 2003 and has an average capital
cost of approximately $60,000 per restaurant. The primary components of this
plan are to provide new and transferred games and rides and, in certain stores,
enhancements to the toddler area. The major remodel or reconfiguration
initiative includes a reallocation of the 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. The typical capital cost of this initiative will range from
$225,000 to $400,000 per restaurant. Expanding the square footage of existing
restaurants can range in cost from $200,000 to $900,000 per restaurant, but
generally have an average capital cost of approximately $500,000. The exterior
and interior remodel includes a new exterior identity including a revised Chuck
E. Cheese logo and signage, colorful new awnings, and updating the exterior
design of the buildings. The interior component of this remodel includes
painting, updating decor, a new menu board and enhanced lighting. This remodel
also includes new games and rides in conjunction with the transfer of games and
rides between stores. The typical capital cost of this initiative is expected to
range from $160,000 to $175,000 per restaurant.
In 2004, the Company plans to add 33 to 37 restaurants, which includes
opening new restaurants and acquiring 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
restaurant is an in-line or freestanding building. The average capital cost of
all new restaurants expected to open in 2004 is approximately $1.2 million per
restaurant. At the beginning of 2004, the Company identified development
opportunities for approximately 300 restaurants including those restaurants
expected to open in 2004.
The Company expects the aggregate capital costs in 2004 of completing the
game enhancement initiative, major remodels or reconfigurations, and expanding
the square footage of existing restaurants to total approximately $17.5 million
and impact approximately 125 restaurants.
During the first six months of 2004, the Company opened 12 new restaurants
and impacted a total of 63 existing restaurants with capital expenditures. The
Company currently estimates that capital expenditures in 2004 will be
approximately $75 million. The Company plans to finance its capital expenditures
through cash flow from operations and, if necessary, borrowings under the
Company's line of credit.
From time to time, the Company repurchases shares of its common stock under
a plan authorized by its Board of Directors. The plan authorizes repurchases in
the open market or in private transactions. Beginning in 1993 through the first
six months of 2004, the Company has repurchased approximately 16.9 million
shares of the Company's common stock, retroactively adjusted for all stock
splits, at an aggregate purchase price of approximately $269 million. During the
first six months of 2004, the Company repurchased 1,559,450 shares at an
aggregate purchase price of approximately $56.3 million. At the end of the first
six months of 2004, approximately $21.7 million remained available for
repurchase under the current $75 million repurchase authorization approved by
the Company's Board of Directors in the first quarter of 2004. In August 2004,
the Company announced that it completed repurchases under the current plan and
announced a new plan to repurchase shares of the Company's common stock at an
aggregate purchase price of up to $100 million .
The Company has available borrowings under its line of credit agreement of
$132.5 million that is scheduled to mature in December 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 27, 2004, there were $63.0 million in borrowings
under this line of credit and outstanding letters of credit of $7.6 million. The
line of credit agreement contains certain restrictions and conditions as defined
in the agreement that require the Company to maintain net worth of $374.4
million as of June 27, 2004, a fixed charge coverage ratio at a minimum of 1.5
to 1.0 and a maximum total debt to earnings before interest, taxes,
depreciation, amortization and rent ratio of 3.25 to 1.0. Borrowings under the
line of credit agreement are unsecured but the Company has agreed to not pledge
any of its existing assets to secure future indebtedness. At June 27, 2004, the
Company was in compliance with all of the above debt covenants. The Company
intends to extend the maturity date of its line of credit agreement.
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 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
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 as of the end of the period
covered by this report. 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 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 that could
significantly affect these controls during the most recent fiscal quarter.
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), was filed in the Superior Court
of the State of California in the County of Los Angeles (the "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
was subject to approval by the Court, whereby the Company will pay $4.2 million
plus up to $50,000 for administrative fees to settle all claims of the
Plaintiffs. On June 18, 2004, the Court entered an order granting final approval
of the settlement agreement. The settlement amount has been paid in full by the
Company with the exception of administrative fees.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities.
The following table presents information related to repurchases of common
stock the Company made during the second quarter of 2004:
Maximum Dollar
Total Number Amount that May
Total Number of Average Price Shares Purchased Yet be Purchased
Fiscal Period Shares Purchased Paid per Share Under the Program Under the Program
Mar.29 - Apr. 25, 2004 669,700 $ 34.73 669,700 $ 24,916,806
Apr. 26 - May 23, 2004 91,900 $ 35.33 91,900 $ 21,669,805
May 24 - June 27, 2004 0 0 $ 21,669,805
-------- --------
Total 761,600 $ 34.80 761,600
======== ========
In August 2004, the Company announced completion of its previously announced program to
repurchase up to $75,000,000 of the Company's common stock and the authorization by its Board
of Directors of a new program to repurchase up to $100,000,000 of the Company's common stock.
Item 4. Submission of Matters to a Vote of Security Holders.
On May 20, 2004, at the Company's annual meeting of shareholders, the
Company's shareholders re-elected Michael H. Magusiak and Walter Tyree to serve
the Company as directors. The following votes were cast with respect to the
election of these directors:
For Withheld
Michael H. Magusiak 33,629,755 1,679,290
Walter Tyree 33,791,348 1,517,697
Richard M. Frank, Richard T. Huston, Tim T. Morris, Louis P. Neeb, Cynthia
I. Pharr Lee, and Raymond E. Wooldridge's term of office as directors of the
Company continued after the meeting.
Next, the shareholders approved the adoption of a Restricted Stock Plan.
The Restricted Stock Plan provides for the granting of Common Stock to employees
for such consideration, if any, and subject to such restrictions on transfer,
rights of first refusal, repurchase provisions, forfeiture provisions and other
terms and conditions as are established by a committee appointed by the Board of
Directors. Subject to any adjustments made as a result of various changes in the
capitalization of the Company, the aggregate number of shares of Common Stock
which may be granted under the Restricted Stock Plan shall not exceed 500,000
shares, including any shares of Common Stock previously awarded which are
forfeited or terminated. The following votes were cast with respect to the
adoption of the Restricted Stock Plan:
For Against Abstain No Vote
25,022,331 6,248,556 571,825 3,466,333
Next, the shareholders approved an amendment to the 1997 Non-Statutory
Stock Option Plan that increased the number of shares of Common Stock which may
be issued under the 1997 Non-Statutory Stock Option Plan from 10,181,250 to
10,781,250. The votes cast with respect to this proposal to authorize an
amendment to the 1997 Non-Statutory Stock Option Plan were as follows:
For Against Abstain No Vote
22,678,894 8,581,972 581,846 3,466,333
Next, the shareholders approved an amendment to the Non-Employee Directors
Stock Option Plan that would: (a) increase the number of shares subject to
options that may be granted on the day a Non-Employee Director is first elected
or appointed to the Board from 11,250 to 15,000 shares; and (b) increase the
number of shares subject to options that may be granted on the fifth Business
Day in January of each year to each Non-Employee Director who was previously
elected to the Board from 6,000 to 7,500 shares. The votes cast with respect to
this proposal to authorize an amendment to the Non-Employee Directors Stock
Option Plan were as follows:
For Against Abstain No Vote
24,223,002 7,043,881 575,829 3,466,333
Finally, the shareholders approved an amendment to the Non-Employee
Directors Stock Option Plan that increased the number of shares of Common Stock
which may be issued under the Non-Employee Directors Stock Option Plan from
337,500 to 437,500. The votes cast with respect to this proposal to authorize an
amendment to the Non-Employee Directors Stock Option Plan were as follows:
For Against Abstain No Vote
23,844,875 7,423,926 573,911 3,466,333
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 Chief 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 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
During the second quarter and to present, we filed or furnished the
following reports on Form 8-K:
A current report on Form 8-K, dated April 14, 2004, announcing first
quarter 2004 financial results.
A current report on Form 8-K, dated July 14, 2004, announcing second
quarter 2004 financial results.
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 5, 2004 By: /s/ Christopher D. Morris
-------------------------
Christopher D. Morris
Senior Vice President, Chief Financial Officer