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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 26, 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 November 1, 2004, an aggregate of 36,338,978 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 ....... 15
Item 4. Controls and Procedures.......................................... 15
Part II - Other Information:
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities...................................................... 16
Item 6. Exhibits and Reports on Form 8-K................................. 17
Signatures................................................................... 17
Exhibits..................................................................... 18
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CEC ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands, except share data)
Sept. 26, December 28,
2004 2003
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 13,311 $ 8,067
Accounts receivable........................................................ 10,398 13,103
Inventories................................................................ 11,611 12,491
Prepaid expenses........................................................... 7,763 7,608
Deferred tax asset......................................................... 1,487 1,487
--------- ---------
Total current assets.................................................... 44,570 42,756
--------- ---------
Property and equipment, net................................................... 549,613 536,124
--------- ---------
Other assets.................................................................. 1,319 1,471
--------- ---------
$ 595,502 $ 580,351
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.......................................... $ 190 $ 168
Accounts payable........................................................... 22,701 30,126
Accrued liabilities........................................................ 41,336 28,610
--------- ---------
Total current liabilities............................................... 64,227 58,904
--------- ---------
Long-term debt, less current portion.......................................... 82,035 64,581
--------- ---------
Deferred rent................................................................. 6,125 5,153
--------- ---------
Deferred tax liability........................................................ 61,447 50,714
--------- ---------
Accrued insurance............................................................. 8,518 8,500
--------- ---------
Shareholders' equity:
Common stock, $.10 par value; authorized 100,000,000 shares; 55,168,260
and 54,481,913 shares issued, respectively ............................. 5,517 5,448
Capital in excess of par value............................................. 233,582 219,071
Retained earnings ......................................................... 448,614 378,911
Accumulated other comprehensive income .................................... 982 695
Less treasury shares of 18,959,168 and 16,042,418, respectively, at cost... (315,545) (211,626)
--------- ---------
373,150 392,499
--------- ---------
$ 595,502 $ 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
--------------------------------
Sept. 26, 2004 Sept. 28, 2003
-------------- --------------
Food and beverage revenues............................. $ 120,416 $ 112,286
Games and merchandise revenues......................... 62,394 56,886
Franchise fees and royalties........................... 807 962
Interest income ....................................... 5 4
--------- ---------
183,622 170,138
--------- ---------
Costs and expenses:
Cost of sales:
Food, beverage and related supplies.............. 22,152 21,222
Games and merchandise............................ 7,922 7,483
Labor............................................ 49,928 46,322
--------- ---------
80,002 75,027
Selling, general and administrative expenses........ 21,828 25,158
Depreciation and amortization....................... 13,070 11,381
Interest expense.................................... 401 503
Other operating expenses............................ 32,618 30,553
--------- ---------
147,919 142,622
--------- ---------
Income before income taxes............................. 35,703 27,516
Income taxes........................................... 13,675 10,676
--------- ---------
Net income ............................................ 22,028 16,840
Other comprehensive income (loss), net of tax:
Foreign currency translation........................ 425 (275)
--------- ---------
Comprehensive income................................... $ 22,453 $ 16,565
========= =========
Earnings per share:
Basic:
Net income ...................................... $ .60 $ .43
========= =========
Weighted average shares outstanding.............. 36,834 38,831
========= =========
Diluted:
Net income ..................................... $ .58 $ .42
========= =========
Weighted average shares outstanding.............. 37,970 39,749
========= =========
See notes to condensed consolidated financial statements.
CEC ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE INCOME
(Unaudited)
(Thousands, except per share data)
Nine Months Ended
--------------------------------
Sept. 26, 2004 Sept. 28, 2003
-------------- --------------
Food and beverage revenues............................. $ 365,494 $ 334,363
Games and merchandise revenues......................... 187,961 170,150
Franchise fees and royalties........................... 2,520 2,620
Interest income........................................ 19 16
--------- ---------
555,994 507,149
--------- ---------
Costs and expenses:
Cost of sales:
Food, beverage and related supplies.............. 67,937 61,437
Games and merchandise............................ 23,782 21,972
Labor............................................ 150,855 138,010
--------- ---------
242,574 221,419
Selling, general and administrative expenses........ 66,575 65,793
Depreciation and amortization....................... 38,029 33,338
Interest expense.................................... 975 967
Other operating expenses............................ 94,870 89,214
--------- ---------
443,023 410,731
--------- ---------
Income before income taxes............................. 112,971 96,418
Income taxes........................................... 43,268 37,410
--------- ---------
Net income ............................................ 69,703 59,008
Other comprehensive income, net of tax:
Foreign currency translation........................ 287 668
--------- ---------
Comprehensive income................................... $ 69,990 $ 59,676
========= =========
Earnings per share:
Basic:
Net income ...................................... $ 1.86 $ 1.47
========= =========
Weighted average shares outstanding.............. 37,551 40,061
========= =========
Diluted:
Net income ..................................... $ 1.80 $ 1.45
========= =========
Weighted average shares outstanding.............. 38,726 40,584
========= =========
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........................... 11,920 674
Net tax benefit from exercise of options.......... 2,290
Stock issued under 401(k) plan...................... 397 13
Payment for fractional shares..................... (27) (1)
--------- -------
Balance, September 26, 2004....................... 239,099 55,168
--------- =======
Retained earnings:
Balance, beginning of year........................ 378,911
Net income........................................ 69,703
---------
Balance, September 26, 2004....................... 448,614
---------
Accumulated other comprehensive income:
Balance, beginning of year........................ 695
Foreign currency translation...................... 287
---------
Balance, September 26, 2004....................... 982
---------
Treasury shares:
Balance, beginning of year........................ (211,626) 16,042
Treasury stock acquired........................... (103,919) 2,917
--------- -------
Balance, September 26, 2004....................... (315,545) 18,959
--------- =======
Total shareholders' equity........................... $ 373,150
=========
See notes to condensed consolidated financial statements.
CEC ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands)
Nine Months Ended
----------------------------------
Sept. 26, 2004 Sept. 28, 2003
-------------- --------------
Operating activities:
Net income ....................................................... $ 69,703 $ 59,008
Adjustments to reconcile net income to cash
provided by operations:
Depreciation and amortization..................................... 38,029 33,338
Deferred income tax expense....................................... 10,733 8,485
Tax benefit from exercise of stock options........................ 2,290 344
Other ............................................................ 1,920 2,032
Net change in receivables, inventories, prepaids, payables and
accrued liabilities............................................ 8,731 21,978
--------- ---------
Cash provided by operations................................. 131,406 125,185
--------- ---------
Investing activities:
Purchases of property and equipment............................... (52,870) (60,202)
Disposition of property and equipment............................. 791
Increase in other assets.......................................... (21) (753)
--------- ---------
Cash used in investing activities........................... (52,100) (60,955)
--------- ---------
Financing activities:
Proceeds from debt and line of credit............................. 17,476 4,594
Exercise of stock options ........................................ 11,920 2,435
Redeemable preferred stock dividends.............................. (112)
Purchase of treasury stock ....................................... (103,919) (71,634)
Deposit for redeemable preferred stock redemption................. (2,795)
Other ............................................................ 461 368
--------- ---------
Cash used in financing activities........................... (74,062) (67,144)
--------- ---------
Increase (decrease) in cash and cash equivalents .................... 5,244 (2,914)
Cash and cash equivalents, beginning of period....................... 8,067 12,214
--------- ---------
Cash and cash equivalents, end of period............................. $ 13,311 $ 9,300
========= =========
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 September 26, 2004 and September 28,
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 September 26, 2004 and
September 28, 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 Nine Months Ended
--------------------- ---------------------
Sept. 26, Sept. 28, Sept. 26, Sept. 28,
2004 2003 2004 2003
-------- -------- -------- --------
Net income ...................................... $ 22,028 $ 16,840 $ 69,703 $ 59,008
Accretion of redeemable preferred stock.......... (49)
Redeemable preferred stock dividends............. (112)
-------- -------- -------- --------
Adjusted income applicable to common shares...... $ 22,028 $ 16,840 $ 69,703 $ 58,847
======== ======== ======== ========
Basic:
Weighted average common shares outstanding.... 36,834 38,831 37,551 40,061
======== ======== ======== ========
Earnings per common share..................... $ .60 $ .43 $ 1.86 $ 1.47
======== ======== ======== ========
Diluted:
Weighted average common shares outstanding.... 36,834 38,831 37,551 40,061
Potential common shares for stock options..... 1,136 918 1,175 523
-------- -------- -------- --------
Weighted average shares outstanding........... 37,970 39,749 38,726 40,584
======== ======== ======== ========
Earnings per common and potential
common share............................... $ .58 $ .42 $ 1.80 $ 1.45
======== ======== ======== ========
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 are 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 Nine Months Ended
--------------------- ---------------------
Sept. 26, Sept. 28, Sept. 26, Sept. 28,
2004 2003 2004 2003
-------- -------- -------- --------
Net income,as reported ................................ $ 22,028 $ 16,840 $ 69,703 $ 59,008
Fair value based compensation expense, net of taxes.... (1,444) (1,626) (4,330) (4,879)
-------- -------- -------- --------
Pro-forma net income................................... 20,584 15,214 65,373 54,129
Accretion and dividends of redeemable
preferred stock, as reported........................ (161)
-------- -------- -------- --------
Pro-forma adjusted income applicable to common
shares.............................................. $ 20,584 $ 15,214 $ 65,373 $ 53,968
======== ======== ======== ========
Earnings per Share:
Basic:
As reported......................................... $ .60 $ .43 $ 1.86 $ 1.47
Pro forma........................................... $ .56 $ .39 $ 1.74 $ 1.35
Diluted:
As reported......................................... $ .58 $ .42 $ 1.80 $ 1.45
Pro forma........................................... $ .54 $ .38 $ 1.69 $ 1.33
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 Nine Months Ended
------------------------------- -------------------------------
Sept. 26, 2004 Sept. 28, 2003 Sept. 26, 2004 Sept. 28, 2003
-------------- -------------- -------------- --------------
Revenues.................................... 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Costs and expenses:
Cost of sales:
Food, beverage and related supplies... 12.1 12.5 12.2 12.1
Games and merchandise................. 4.3 4.4 4.3 4.3
Labor................................. 27.2 27.2 27.1 27.2
----- ----- ----- -----
43.6 44.1 43.6 43.6
Selling, general and administrative...... 11.9 14.8 12.0 13.0
Depreciation and amortization............ 7.1 6.7 6.8 6.6
Interest expense......................... .2 .3 .2 .2
Other operating expenses................. 17.8 17.9 17.1 17.6
----- ----- ----- -----
80.6 83.8 79.7 81.0
----- ----- ----- -----
Income before income taxes.................. 19.4 16.2 20.3 19.0
Income taxes ............................... 7.4 6.3 7.8 7.4
----- ----- ----- -----
Net income ................................. 12.0% 9.9% 12.5% 11.6%
===== ===== ===== =====
Number of Company-owned stores:
Beginning of period...................... 430 391 418 384
New...................................... 8 10 20 18
Company purchased franchise stores....... 2 2
Closed................................... (1)
----- ----- ----- -----
End of period............................ 440 401 440 401
===== ===== ===== =====
Number of franchise stores:
Beginning of period...................... 49 51 48 50
New...................... 1 1
Company purchased franchise store (2) (2)
----- ----- ----- -----
End of period............................ 47 51 47 51
===== ===== ===== =====
Third Quarter 2004 Compared to Third Quarter 2003
Revenues
Revenues increased 7.9% to $183.6 million in the third quarter of 2004 from
$170.1 million in the third quarter of 2003 due primarily 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 its
franchisees and closed one restaurant. During the first nine months of 2004, the
Company opened 20 new restaurants and acquired two restaurants from a franchisee
and has 440 Company-operated restaurants at September 26, 2004. Comparable store
sales increased 0.4% in the third quarter of 2004 despite a negative impact of
approximately 0.5% to 0.6% or $800,000 to $900,000 in lost sales due to the
numerous hurricanes in the Southeast. Menu prices increased approximately 3.0%
between the quarters.
Costs and Expenses
Costs and expenses as a percentage of revenues decreased to 80.6% in the
third quarter of 2004 from 83.8% in the third quarter of 2003.
Cost of sales decreased as a percentage of revenues to 43.6% in the third
quarter of 2004 from 44.1% in the comparable period of 2003. Cost of food,
beverage and related supplies as a percentage of revenues decreased to 12.1% in
the third quarter of 2004 from 12.5% in the third quarter of 2003 primarily due
to a 3% increase in menu prices implemented in June 2004. Cost of games and
merchandise as a percentage of revenues decreased to 4.3% in the third quarter
of 2004 from 4.4% in the third quarter of 2003 due primarily to the menu price
increase. Store labor expenses as a percentage of revenues were 27.2% in both
the third quarter of 2004 and the third quarter of 2003.
Selling, general and administrative expenses as a percentage of revenues
decreased to 11.9% in the third quarter of 2004 from 14.8% in the third quarter
of 2003. This decrease was primarily due to a $4.25 million legal settlement
charge recorded in the third quarter of 2003 and an increase in total revenues.
Depreciation and amortization expense as a percentage of revenues increased
to 7.1% in the third quarter of 2004 from 6.7% in the third quarter of 2003
primarily due to capital invested in new stores and remodels.
Interest expense as a percentage of revenues decreased to 0.2% in the third
quarter of 2004 from 0.3% in the third quarter of 2003 due to higher interest
expense in the third quarter of 2003 related to the Company's commitment to
reacquire its outstanding preferred stock.
Other operating expenses decreased as a percentage of revenues to 17.8% in
the third quarter of 2004 from 17.9% in the third quarter of 2003 primarily due
to a decrease in insurance expense as a percentage of revenues.
The Company's effective income tax rate was 38.3% in the third quarter of
2004 compared to 38.8% in the third quarter of 2003 due to lower estimated state
tax rates.
Net Income
The Company's net income increased 30.8% to $22.0 million in the third
quarter of 2004 compared to $16.8 million in the third quarter of 2003 due to
the changes in revenues and expenses discussed above. The Company's diluted
earnings per share increased 38.1% to $.58 per share in the third quarter of
2004 from $.42 in the third quarter of 2003 due to the 30.8% increase in net
income discussed above and a 4.5% decrease in the number of weighted average
shares outstanding.
First Nine Months of 2004 Compared to First Nine Months of 2003
Revenues
Revenues increased 9.6% to $556.0 million in the first nine months of 2004
from $507.1 million in the first nine months of 2003 primarily due to an
increase in the number of Company-operated stores and an increase of 2.0% in
comparable store sales. During the full year of 2003, the Company opened 32 new
restaurants, acquired three restaurants from franchisees and closed one
restaurant. During the first nine months of 2004, the Company opened 20 new
restaurants and acquired two restaurants from a franchisee and has 440
Company-operated restaurants at September 26, 2004. Menu prices increased on
average approximately 1.5% between the two periods.
Costs and Expenses
Costs and expenses as a percentage of revenues decreased to 79.7% in the
first nine months of 2004 from 81.0% in the first nine months of 2003.
Cost of sales as a percentage of revenues remained constant at 43.6% in the
first nine months of 2004 and 2003. Cost of food, beverage and related supplies
as a percentage of revenues increased to 12.2% in the first nine months of 2004
from 12.1% in the first nine months of 2003. Food costs were negatively impacted
approximately $3.1 million due to an increase of approximately 32% in average
cheese prices paid in the first nine months of 2004 compared to the first nine
months of 2003. This increase was partially offset by the impact of a 3%
increase in menu prices implemented in June of 2004. Cost of games and
merchandise as a percentage of revenues remained constant at 4.3% in both the
first nine months of 2004 and the first nine months of 2003. Store labor
expenses as a percentage of revenues decreased slightly to 27.1% in the first
nine months of 2004 from 27.2% in the first nine months of 2003 primarily due to
the increase in comparable store sales.
Selling, general and administrative expenses as a percentage of revenues
decreased to 12.0% in the first nine months of 2004 from 13.0% in the first nine
months of 2003 primarily due to a $4.25 million legal settlement recorded in the
third quarter of 2003 and the increase in total revenues.
Depreciation and amortization expense as a percentage of revenues increased
to 6.8% in the first nine months of 2004 from 6.6% in the first nine months of
2003 primarily due to capital invested in new stores and remodels.
Interest expense as a percentage of revenues remained constant at 0.2% in
the first nine months of 2004 and the first nine months of 2003.
Other operating expenses decreased as a percentage of revenues to 17.1% in
the first nine months of 2004 from 17.6% in the first nine months of 2003
primarily due to the increase in comparable store sales and a decrease in
insurance expense as a percentage of revenues.
The Company's effective income tax rate was 38.3% in the first nine months
of 2004 compared to 38.8% in the first nine months of 2003 due to lower
estimated state tax rates.
Net Income
The Company's net income increased 18.1% to $69.7 million in the first nine
months of 2004 from $59.0 million in the first nine months of 2003 primarily due
to the changes in revenues and expenses discussed above. The Company's diluted
earnings per share increased 24.1% to $1.80 per share in the first nine months
of 2004 compared to $1.45 per share in the first nine months of 2003 due to the
18.1% increase in net income discussed above and a 4.6% decrease in the number
of weighted average shares outstanding.
Financial Condition, Liquidity and Capital Resources
Cash provided by operations increased to $131.4 million in the first nine
months of 2004 from $125.2 million in the comparable period of 2003. Cash
outflows from investing activities for the first nine months of 2004 were $52.1
million, primarily related to capital expenditures. Net cash outflows from
financing activities for the first nine months of 2004 were $74.1 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.
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 $19.7
million at September 26, 2004 due primarily to the timing of payments for
various accrued expenses and an increase in the number of restaurants.
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 the game enhancement initiative.
In 2004, the Company plans to add 33 to 34 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 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 $170,000 per restaurant.
The Company expects the aggregate capital costs in 2004 of completing the
game enhancement initiative, major remodels or reconfigurations, expanding the
square footage of existing restaurants and the exterior and interior remodels to
total approximately $17 to $18 million and impact approximately 125 restaurants.
During the first nine months of 2004, the Company opened 20 new
restaurants, acquired two restaurants from a franchisee and impacted a total of
95 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.
The Company has developed a preliminary capital plan for 2005 totaling $95
to $105 million including a budget for existing stores of $30 to $35 million, a
new store budget of approximately $55 to $60 million and a store maintenance and
corporate budget of approximately $10 million. This capital plan assumes the
continued success of exterior and interior remodels.
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
nine months of 2004, the Company has repurchased approximately 18.1 million
shares of the Company's common stock, retroactively adjusted for all stock
splits, at an aggregate purchase price of approximately $311 million. During the
first nine months of 2004, the Company repurchased 2,916,750 shares at an
aggregate purchase price of approximately $103.9 million. At the end of the
first nine months of 2004, approximately $74.1 million remained available for
repurchase under a current $100 million repurchase authorization approved by the
Company's Board of Directors in August 2004.
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 September 26, 2004, there were $82.0 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 $303.8 million as of September 26, 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
September 26, 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 during the most recent
fiscal quarter that could significantly affect our internal controls over
financial reporting.
PART II - OTHER INFORMATION
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 third quarter of 2004:
Cummulative Maximum Dollar
Number of Shares Amount that May
Total Number of Average Price Purchased Under Yet be Purchased
Fiscal Period Shares Purchased Paid per Share the Programs Under the Programs
------------- ---------------- -------------- ---------------- ------------------
Program approved in February 2004:
June 28 - July 25, 2004 279,500 $ 35.74 1,752,250 $ 11,680,912
July 26 - Aug. 22, 2004 (1) 323,600 36.07 2,075,850 -
Aug. 23 - Sept. 26, 2004 - - - -
--------
Total 603,100 $ 35.92
========
Program approved in August 2004:
June 28 - July 25, 2004 - - - -
July 26 - Aug. 22, 2004 (1) 267,600 $ 33.62 267,600 $ 91,002,327
Aug. 23 - Sept. 26, 2004 486,600 34.77 754,200 $ 74,080,836
--------
Total 754,200 $ 34.37
========
(1) In February 2004, the Company's Board of Directors approved a program to repurchase up to $75,000,000 of
the Company's common stock. In August 2004, this program was completed and the Company's Board of Directors
approved a new program to repurchase up to $100,000,000 of the Company's common stock.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits
Exhibit
Number Description
------- -----------
10(a) Fourth Amendment to Credit Agreement in the stated amount of
$132,500,000, dated August 10, 2004, between Bank of
America, N.A. and the Company.
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 third quarter and to present, we filed or furnished the
following reports on Form 8-K:
A current report on Form 8-K, dated July 14, 2004, announcing second
quarter 2004 financial results.
A current report on Form 8-K, dated October 13, 2004, announcing third
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: November 4, 2004 By: /s/ Christopher D. Morris
----------------------------------------------
Christopher D. Morris
Senior Vice President, Chief Financial Officer