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 April 3, 2005.
--------------
|_| 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 001-13587
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 May 6, 2005, an aggregate of 35,132,607 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................ 5
Condensed Consolidated Statements of Cash Flows ........................ 6
Notes to Condensed Consolidated Financial Statements.................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk ...... 13
Item 4. Controls and Procedures.......................................... 13
Part II - Other Information:
Item 1. Legal Proceedings................................................ 14
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities.................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders.............. 14
Item 6. Exhibits and Reports on Form 8-K................................. 14
Signatures................................................................... 15
Certifications............................................................... 16
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CEC ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands, except share data)
ASSETS
April 3, January 2,
2005 2005
----------- ----------
(unaudited)
Current assets:
Cash and cash equivalents.................................................... $ 11,763 $ 11,798
Accounts receivable.......................................................... 14,204 13,482
Inventories.................................................................. 11,407 12,171
Prepaid expenses............................................................. 9,133 7,444
Deferred tax asset........................................................... 1,763 1,763
--------- ---------
Total current assets...................................................... 48,270 46,658
--------- ---------
Property and equipment, net..................................................... 564,602 563,081
--------- ---------
Other assets.................................................................... 1,950 2,278
--------- ---------
$ 614,822 $ 612,017
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................................ $ 53,563 $ 78,279
Accounts payable............................................................. 20,918 24,294
Accrued liabilities.......................................................... 53,486 36,329
--------- ---------
Total current liabilities................................................. 127,967 138,902
--------- ---------
Long-term debt, less current portion............................................ 11,782 11,673
--------- ---------
Deferred rent................................................................... 55,996 53,427
--------- ---------
Deferred tax liability.......................................................... 35,019 36,429
--------- ---------
Accrued insurance............................................................... 10,750 10,856
--------- ---------
Shareholders' equity:
Common stock, $.10 par value; authorized 100,000,000 shares; 55,711,874
and 55,556,857 shares issued, respectively ............................... 5,571 5,556
Capital in excess of par value............................................... 250,029 245,991
Retained earnings ........................................................... 465,521 433,267
Accumulated other comprehensive income ...................................... 1,341 1,476
Less treasury shares of 19,847,868 and 19,210,568, respectively, at cost..... (349,154) (325,560)
--------- ---------
373,308 360,730
--------- ---------
$ 614,822 $ 612,017
========= =========
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
-------------------------------
April 3, 2005 March 28, 2004
------------- --------------
Food and beverage revenues................................... $ 139,044 $ 136,339
Games and merchandise revenues............................... 74,242 69,741
Franchise fees and royalties................................. 795 861
Interest income ............................................. 5 7
--------- ---------
214,086 206,948
--------- ---------
Costs and expenses:
Cost of sales:
Food, beverage and related supplies..................... 25,568 24,478
Games and merchandise................................... 8,324 8,643
Labor................................................... 53,825 53,238
--------- ---------
87,717 86,359
Selling, general and administrative expenses.............. 25,417 23,832
Depreciation and amortization............................. 14,397 13,378
Interest expense.......................................... 723 483
Other operating expenses.................................. 33,555 31,951
--------- ---------
161,809 156,003
--------- ---------
Income before income taxes................................... 52,277 50,945
Income taxes................................................. 20,023 19,512
--------- ---------
Net income .................................................. 32,254 31,433
Other comprehensive loss, net of tax:
Foreign currency translation.............................. (135) (14)
--------- ---------
Comprehensive income......................................... $ 32,119 $ 31,419
========= =========
Earnings per share:
Basic:
Net income ............................................. $ .89 $ .82
========= =========
Weighted average shares outstanding..................... 36,205 38,310
========= =========
Diluted:
Net income ............................................ $ .86 $ .79
========= =========
Weighted average shares outstanding..................... 37,451 39,607
========= =========
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................................... $ 251,547 55,557
Stock options exercised...................................... 3,100 144
Tax benefit from exercise of options .......................... 497
Stock issued under 401(k) plan................................. 456 11
--------- -------
Balance, April 3, 2005......................................... 255,600 55,712
--------- =======
Retained earnings:
Balance, beginning of year................................... 433,267
Net income................................................... 32,254
---------
Balance, April 3, 2005....................................... 465,521
---------
Accumulated other comprehensive income (loss):
Balance, beginning of year................................... 1,476
Foreign currency translation................................. (135)
---------
Balance, April 3, 2005....................................... 1,341
---------
Treasury shares:
Balance, beginning of year................................... (325,560) 19,211
Treasury stock acquired...................................... (23,594) 637
--------- -------
Balance, April 3, 2005....................................... (349,154) 19,848
--------- =======
Total shareholders' equity...................................... $ 373,308
=========
See notes to condensed consolidated financial statements.
CEC ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands)
Three Months Ended
--------------------------------
April 3, 2005 March 28, 2004
------------- --------------
Operating activities:
Net income ............................................................... $ 32,254 $ 31,433
Adjustments to reconcile net income to cash
provided by operations:
Depreciation and amortization........................................... 14,397 13,378
Deferred income taxes................................................... (1,410) 4,414
Tax benefit from exercise of stock options.............................. 497 1,235
Other................................................................... 2,862 3,111
Net change in receivables, inventory, prepaids, payables and
accrued liabilities................................................... 12,134 20,310
-------- --------
Cash provided by operations......................................... 60,734 73,881
-------- --------
Investing activities:
Purchases of property and equipment....................................... (15,709) (16,434)
Decrease in other assets.................................................. 280 60
-------- --------
Cash used in investing activities....................................... (15,429) (16,374)
-------- --------
Financing activities:
Payments on debt and line of credit ...................................... (25,134) (27,552)
Exercise of stock options ................................................ 3,100 3,982
Repurchase of common stock ............................................... (23,594) (29,834)
Other ................................................................... 288 294
-------- --------
Cash used in financing activities....................................... (45,340) (53,110)
-------- --------
Increase (decrease) in cash and cash equivalents ............................ (35) 4,397
Cash and cash equivalents, beginning of period............................... 11,798 8,067
-------- --------
Cash and cash equivalents, end of period..................................... $ 11,763 $ 12,464
======== ========
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 financial
statements for the periods ended April 3, 2005 and March 28, 2004 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 January 2, 2005.
Results of operations for the periods ended April 3, 2005 and March 28, 2004 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 net income
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. Earnings per common and potential common share were
computed as follows (thousands, except per share data):
Three Months Ended
----------------------
April 3, March 28,
2005 2004
-------- --------
Net income ............................................ $ 32,254 $ 31,433
======== ========
Basic:
Weighted average common shares outstanding.......... 36,205 38,310
======== ========
Earnings per common share........................... $ .89 $ .82
======== ========
Diluted:
Weighted average common shares outstanding.......... 36,205 38,310
Potential common shares for stock options........... 1,246 1,297
-------- --------
Weighted average shares outstanding................. 37,451 39,607
======== ========
Earnings per common and potential
common share..................................... $ .86 $ .79
======== ========
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 cost 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 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
---------------------
April 3, March 28,
2005 2004
-------- ---------
Net income, as reported................................ $ 32,254 $ 31,433
Fair value based compensation expense, net of taxes.... (1,671) (1,436)
-------- --------
Pro-forma net income .................................. $ 30,583 $ 29,997
======== ========
Earnings per Share:
Basic:
As reported......................................... $ .89 $ .82
Pro-forma........................................... $ .84 $ .78
Diluted:
As reported......................................... $ .86 $ .79
Pro-forma........................................... $ .82 $ .76
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
First Quarter 2005 Compared to First Quarter 2004
A summary of the results of operations of the Company as a percentage of
revenues for the first quarters of 2005 and 2004 is shown below.
Three Months Ended
-------------------------------
April 3, 2005 March 28, 2004
------------- --------------
Revenue...................................... 100.0% 100.0%
------ ------
Costs and expenses:
Cost of sales:
Food, beverage and related supplies.... 11.9 11.8
Games and merchandise.................. 3.9 4.2
Labor.................................. 25.1 25.7
------ ------
40.9 41.7
Selling, general and administrative....... 11.9 11.5
Depreciation and amortization............. 6.7 6.5
Interest expense.......................... .4 .2
Other operating expenses.................. 15.7 15.4
------ ------
75.6 75.3
------ ------
Income before income taxes................... 24.4 24.7
Income tax expense .......................... 9.3 9.4
------ ------
Net income .................................. 15.1% 15.3%
====== ======
Revenues
Revenues increased 3.4% to $214.1 million in the first quarter of 2005 from
$206.9 million in the first quarter of 2004 due to an increase in the number of
Company-operated restaurants. Comparable store sales decreased 1.8% between the
periods. First quarter comparable store sales were negatively impacted by the
shift of the seasonally strong first week of the year into the fourth quarter of
2004. On a same week basis, calculated by comparing the 13 weeks included in the
first quarter of 2005 to the same 13 weeks in fiscal year 2004, comparable store
sales growth was 0.2%. The shift of the Easter holiday into the first quarter of
2005 also negatively impacted sales. However, this negative impact was offset by
the benefit of a large percentage of spring breaks falling in March 2005 versus
April 2004. During the full year of 2004, the Company opened 29 new restaurants,
acquired three restaurants from franchisees and closed one restaurant. During
the first three months of 2005, the Company opened four new restaurants and has
453 Company-operated restaurants at April 3, 2005. Menu prices increased
approximately 3.6% between the first quarter of 2004 and the first quarter of
2005.
Costs and Expenses
Costs and expenses as a percentage of revenues increased to 75.6% in the
first quarter of 2005 from 75.3% in the first quarter of 2004.
Cost of sales decreased as a percentage of revenues to 40.9% in the first
quarter of 2005 from 41.7% in the comparable period of 2004. Cost of food,
beverage, and related supplies as a percentage of revenues increased to 11.9% in
the first quarter of 2005 from 11.8% in the first quarter of 2004, due to higher
commodity costs which were partially offset by the menu price increase. Cost of
games and merchandise as a percentage of revenues decreased to 3.9% in the first
quarter of 2005 from 4.2% in the first quarter of 2004 due primarily to the menu
price increase. Labor expense as a percentage of revenues decreased to 25.1% in
the first quarter of 2005 from 25.7% in the first quarter of 2004 primarily due
to improved operational efficiency.
Selling, general and administrative expenses as a percentage of revenues
increased to 11.9% in the first three months of 2005 from 11.5% in the first
three months of 2004. The increase was primarily due to a recognition and reward
conference for restaurant general managers held in the first quarter of 2005.
Depreciation and amortization expenses as a percentage of revenues
increased to 6.7% in the first quarter of 2005 from 6.5% in the first quarter of
2004 due to capital invested in new and existing restaurants.
Interest expense as a percentage of revenues increased to 0.4% in the first
three months of 2005 from 0.2% in the first three months of 2004 primarily due
to an increase in interest rates and outstanding debt.
Other operating expenses increased as a percentage of revenues to 15.7% in
the first quarter of 2005 from 15.4% in the first quarter of 2004 primarily due
to the decrease in comparable store sales.
The Company's effective income tax rate was 38.3% in the first quarters of
both 2005 and 2004.
Net Income
The Company had net income of $32.3 million in the first quarter of 2005
compared to $31.4 million in the first quarter of 2004 due to the changes in
revenues and expenses discussed above. The Company's diluted earnings per share
increased 8.9% to $.86 per share in the first quarter of 2005 from $.79 per
share in the first quarter of 2004 due to the 2.6% increase in net income
discussed above and a 5.4% decrease in the number of weighted average shares
outstanding.
Financial Condition, Liquidity and Capital Resources
Cash provided by operations was $60.7 million in the first quarter of 2005
compared to $73.9 million in the first quarter of 2004. Net cash outflows from
investing activities for the first quarter of 2005 were $15.4 million, primarily
related to capital expenditures. Net cash outflows from financing activities for
the first quarter of 2005 were $45.3 million, primarily related to payments to
reduce outstanding debt and the repurchase of the Company's common stock. The
Company's primary requirements for cash relate to planned capital expenditures,
the repurchase of the Company's common stock and debt service. The Company
expects that it will satisfy such requirements from cash provided by operations
and, if necessary, funds available under its line of credit.
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 decreased from $92.2 million at January 2, 2005 to $79.7 million
at April 3, 2005 due primarily to the timing of payments for various accrued
expenses and payments made on the Company's line of credit. Included in working
capital are borrowings on the Company's line of credit that is scheduled to
mature in December 2005. The Company intends to extend the maturity date on its
line of credit agreement.
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, and (d) expansions of the square
footage of existing restaurants.
In 2005, the Company plans to add 30 to 35 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 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
2005 is approximately $1.8 million per restaurant. At the beginning of 2005, the
Company identified potential development opportunities for approximately 250
restaurants including those restaurants expected to open in 2005.
The game enhancement initiative began in 2003 and has an average capital
cost of approximately $50,000 to $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 Zone (r). The major remodel initiative
includes expansion of the space allocated to the game room, an increase in the
number of games and in some cases may include a new exterior and interior
identity. A new exterior identity includes a revised Chuck E. Cheese's logo and
signage, updating the exterior design of the buildings and, in some restaurants,
colorful new awnings. The interior component includes painting, updating decor,
a new menu board and enhanced lighting. The Company intends to complete
approximately 60 to 70 major remodels in 2005 with an average capital cost of
$250,000 to $300,000 per restaurant. Approximately one quarter of the major
remodels will also include the new exterior and interior identity depending on
the age and condition of the building exterior, signage and awnings. In
addition, the Company intends on expanding the square footage in approximately
five to seven restaurants during 2005. 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 Company expects the aggregate capital costs in 2005 of completing the
game enhancement initiative, major remodels, expanding the square footage of
existing restaurants and the exterior and interior remodels to total
approximately $30 million and impact approximately 160 restaurants.
During the first quarter of 2005, the Company opened four new restaurants,
completed six major remodels, including four remodels with a new exterior and
interior identity, and 19 game rotation upgrades. The Company currently
estimates that capital expenditures in 2005 will be $100 to $105 million,
including the $30 million the Company is expecting to invest to remodel existing
stores. 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, the Company has
repurchased approximately 19.0 million shares of the Company's common stock,
retroactively adjusted for all stock splits, at an aggregate purchase price of
approximately $344.4 million. During the first quarter of 2005, the Company
repurchased 637,300 shares at an aggregate purchase price of approximately $23.6
million. At the end of the first quarter of 2005, approximately $40.5 million
remained available for repurchase under a $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 April 3, 2005, there were $53.0 million in borrowings
under this line of credit and outstanding letters of credit of $7.5 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 $326 million
as of April 3, 2005, 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 not to pledge any of its
existing assets to secure future indebtedness. At April 3, 2005, 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.
Critical Accounting Policies and Estimates
The following discussion addresses the Company's most critical accounting
policies, which are those that require significant judgment.
Self Insurance
The Company estimates its liability for incurred but unsettled general
liability and workers compensation related claims under its self-insured
retention programs, including reported losses in the process of settlement and
losses incurred but not reported. The estimate is based on loss development
factors determined through actuarial methods using the actual claim loss
experience of the Company subject to adjustment for current trends. Revisions to
the estimated liability resulting from ongoing periodic reviews are recognized
in the period in which the differences are identified. Significant increases in
general liability and workers compensation claims could have a material adverse
impact on future operating results.
Impairment of Long-Lived Assets
The Company periodically reviews the estimated useful lives and
recoverability of its depreciable assets based on factors including historical
experience, the expected beneficial service period of the asset, the quality and
durability of the asset, and the Company's maintenance policy including periodic
upgrades. Changes in useful lives are made on a prospective basis, unless
factors indicate the carrying amounts of the assets may not be recoverable from
estimated future cash flows and an impairment write-down is necessary.
Lease Accounting
The Company uses a consistent lease period (generally, the initial
non-cancelable lease term plus renewal option periods provided for in the lease
that can be reasonably assured) when calculating depreciation of leasehold
improvements and in determining straight-line rent expense and classification of
its leases as either an operating lease or a capital lease. The lease term and
straight-line rent expense commences on the date when the Company takes
possession and has the right to control use of the leased premises. Funds
received from the lessor intended to reimburse the Company for the costs of
leasehold improvements is recorded as a deferred credit resulting from a lease
incentive and amortized over the lease term as a reduction to rent expense.
New Accounting Standards
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123 (revised 2004), "Share-Based Payment." SFAS 123(R) is a revision of SFAS No.
123, "Accounting for Stock-Based Compensation" and supersedes APB Opinion No.
25, "Accounting for Stock Issued to Employees." SFAS 123(R) requires all
share-based payments to employees including grants of employee stock options, to
be recognized in the financial statements based on their fair values. SFAS 123
(R) is effective at the beginning of the first annual period beginning after
June 15, 2005. Under APB Opinion No. 25, no stock-based compensation cost has
been reflected in the net income of the Company for grants of stock options to
employees. Beginning in the first quarter of 2006, the Company will recognize
compensation expense in its financial statements based on the fair value of all
share-based payments to employees.
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 and entertainment industries, 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.
Disclosure Controls and Procedures
In connection with the preparation of the Company's Annual Report on Form
10-K for the fiscal year ended January 2, 2005, the Company performed an
evaluation, 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. In performing this evaluation, the Company's management
considered the Company's lease accounting practices discussed below and the
Company's decision to restate certain of its previously issued financial
statements to reflect the correction in its lease accounting. 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 not effective as of January 2, 2005. The Company subsequently
remediated this deficiency in its disclosure controls and procedures by
instituting additional review procedures over the selection and monitoring of
appropriate assumptions and factors affecting its lease accounting practices.
After these remedial measures and a re-evaluation of the effectiveness and
design of its disclosure controls and procedures, the Company's management,
including the Chief Executive Officer and Chief Financial Officer, have
concluded that the Company's disclosure controls were effective as of April 3,
2005, in ensuring that material information relating to the Company, including
its consolidated subsidiaries, required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
Changes in Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rule 13a-15(f) of the
Exchange Act). During the assessment of internal control over financial
reporting performed in connection with the preparation of management's annual
report on internal control over financial reporting contained in the Company's
Annual Report on Form 10-K for the fiscal year ended January 2, 2005, management
determined that the Company's controls over the selection and monitoring of
appropriate assumptions and factors affecting lease accounting were
insufficient, and, as a result, the Company's computation of depreciation, lease
classification, straight-line rent expense and the related deferred rent
liability had been incorrect. Accordingly, the Company restated certain of its
previously issued financial statements to reflect the correction in its lease
accounting practices. Management further concluded that this control deficiency
represented a material weakness in the Company's internal control over financial
reporting as of January 2, 2005. To remediate the material weakness in internal
control over financial reporting, the Company instituted additional review
procedures over the selection and monitoring of appropriate assumptions and
factors affecting lease accounting practices during the first quarter of 2005.
Other than as described above, there have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls during the fiscal quarter to which this report relates.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time the Company is involved in litigation, most of which is
incidental to its business. In the Company's opinion, no litigation in which the
Company currently is a party is likely to have a material adverse effect on the
Company's results of operations, financial condition or cash flows.
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 first quarter of 2005 pursuant to a repurchase
program authorized by the Company's Board of Directors in August 2004 to
purchase up to $100 million in the Company's common stock:
Cummulative Maximum Dollar
Number of Shares Amount that May
Total Number of Average Price Purchased Under Yet be Purchased
Shares Purchased Paid per Share the Program Under the Program
---------------- -------------- ---------------- -----------------
Jan. 3 - Jan. 30, 2005 - - 1,005,600 $ 64,065,347
Jan. 31 - Feb. 27, 2005 - - 1,005,600 $ 64,065,347
Feb. 28 - Apr. 3, 2005 637,300 $ 37.02 1,642,900 $ 40,471,193
--------
Total 637,300 $ 37.02
========
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the first
quarter of 2005.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits
10(a) 2005 Employment Agreement dated March 29, 2005, between the
Company and Richard M. Frank (filed as Exhibit 10(a) to the
Company's Form 8-K filed on April 1, 2005, and incorporated
herein by reference).
10(b) 2005 Employment Agreement dated March 29, 2005, between the
Company and Michael H. Magusiak (filed as Exhibit 10(b) to the
Company's Form 8-K filed on April 1, 2005, and incorporated
herein by reference).
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 first quarter and to present, we filed or furnished the
following reports on Form 8-K:
A current report on Form 8-K, dated February 1, 2005, announcing
nonreliance on previously issued financial statements.
A current report on Form 8-K, dated March 2, 2005, announcing fourth
quarter 2004 financial results.
A current report on Form 8-K, dated April 1, 2005, furnishing
employment agreements between the Company and Richard M. Frank and
Michael H. Magusiak.
A current report on Form 8-K, dated April 9, 2005, announcing the
expansion of its Board of Directors by the additions of a new member.
A current report on Form 8-K, dated April 20, 2005, announcing first
quarter 2005 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: May 12, 2005 By: /s/ Richard M. Frank
----------------------------------------------
Richard M. Frank
Chairman of the Board, Chief Executive Officer
and Director
(Principal Executive Officer)
/s/ Christopher D. Morris
----------------------------------------------
Christopher D. Morris
Senior Vice President, Chief Financial Officer
(Principal Financial Officer)
/s/ James Mabry
----------------------------------------------
James Mabry
Vice President, Controller and Treasurer
(Principal Accounting Officer)